Trying To Profit In A Resource Bear Market
Are some resource stocks making money in this bear market? Steve Todoruk says it is not all about metals prices like gold, silver and uranium - some resource stocks may still be headed up.
“Since so many junior exploration stocks are down over the past two years, the ones that have done well stand out. They are usually the juniors that have made new, high grade discoveries in the past one to three years.
“Of over 1000 mineral resource companies listed in Canada, only a few fit this bill. Among them are Alpha Minerals (AMW.CA) and Fission Uranium Corp. (FCU.CA) who jointly own Patterson Lake South - a high grade uranium discovery in Canada’s Athabasca Basin. Another is Reservoir Minerals Corp. (RMC.CA) which owns, together with Freeport McMoran (FCX.US), a high grade copper-gold discovery in Eastern Europe called Timok.
“On the other hand, some discoveries that looked good came down. We’ll look at Pretium Resources Inc. (PVG.US) as an example.
As Steve explained, the vast majority of other junior explorers’ stocks are down by a lot. So investors need to know what exactly a good discovery looks like and what problems might hinder the climb of an apparently attractive stock.
“Large mining companies always look to acquire new deposits to replace the reserves they are currently mining.
“If there is a very attractive looking new deposit available, someone will seek to acquire it.
All the companies want to be able to tell their shareholders that they own the deposit most likely to make strong profits.
“This is why Reservoir Minerals Inc. is trading at its all-time high despite a dismal market.
They have been steadily announcing high-grade copper and gold drilling results at their new find in Eastern Europe, which they are drilling with Freeport McMoran.”
When is the right time to get into these stocks? When do you recognize there could be value?
Steve says he prefers to enter a stock after at least the first drill hole results have been released, even if this means he will miss out on the first move up. Before this stage, he believes it is impossible to predict which junior might announce the next significant discover. Someone always gets lucky buying shares in a junior that eventually makes the next big discovery. Over the long term, however, it is not a sustainable strategy, he believes.
“After a company drills that first good discovery hole indicating that they may have found a significant deposit, the company does more drill holes in the surrounding area. They ‘step out’ the drill rig to see if they can hit the mineralization again. If so, they move the drill rig out a little more. They repeat again, and again, and again to see how far the ore body extends in the area surrounding the initial hole.
“If they intersect high grades of ore (which are often very profitable rock at the mining stage), the junior’s share price tends to rise, reflecting the growing value of their deposit. Recently, Reservoir Minerals announced their latest drilling results, which I believe were exceptional.
“One drill hole reported 166.0 meters with an average grade of 11.29% copper equivalent (average 6.65% copper and 7.75 grams per ton ), including 59.8 meters with an extraordinarily high average grade of 23.38% copper equivalent (average 14.17% copper and 15.35 g/t gold). A second drill hole reported 128.7 meters grading 8.41% copper equivalent (5.76% copper and 4.42 g/t gold), including 39.1 meters grading 12.68% copper equivalent (9.79% copper and 4.82 g/t gold).1 Drill holes with these widths and high grades are very rare.
“Alpha Minerals Inc. and Fission Uranium Corp. have similarly impressed investors over the past 14 months by growing their new discovery with some very high grades of uranium. They drilled 54.5 meters grading 9.08% uranium (U3O8) including 21.5 meters grading 21.76% U3O8.2
“Both of these companies’ share prices are higher today than prior to their discovery announcement last fall.
“Another example of this type of situation is Mag Silver Corp. (MVG.US). Back in 2006 Mag Silver and their joint venture partner Fresnillo Mining discovered the very high grade silver Juanacipio deposit in Mexico.
“This is one of the two most valuable undeveloped silver deposits in the world and will likely be acquired and developed into a mine.
“The Juanacipio deposit averages around 18 ounces per ton silver3 in inferred reserves, while most producing silver mines today are mining 5-8 ounce per ton grades. While Mag Silver is not a new discovery, there is a very strong catalyst that could move their share price dramatically higher. Their partner, Fresnillo, could at any time decide to take over Mag Silver to acquire full ownership of this deposit.”
Steve reminds that some companies, who own deposits that look attractive, can run into problems that can bring their share price down. Let’s take a look at one example.
“Pretium Resources Inc. initially saw its price rise thanks to its Valley of the Kings gold discovery, but has come under strain.
“Pretium announced the new discovery about three years ago. Their very high gold grades awed investors. Pretium’s share price soared in all the excitement.
"Eventually, questions began to surface about the confidence of the gold grades being reported. Without sufficient geological insight into this problem (which the vast majority of investors did not have), many investors watched their Pretium shares fall like a rock off a cliff.
“Having the geological knowledge may have allowed investors to know when to sell and move to the sidelines while the stock was considerably higher.”
Steve says his strategy is to buy into these high grade discovery plays and be aware of potential problems that can derail the story (at least temporarily) which will likely result in a strong share price decline.
“Investing in these juniors is not simply making a bet on a rising gold price,” Steve explains.
“If metal prices do rise and help us out overall in this sector, then I believe the high grade discovery plays are the most likely candidates to lead the recovery.”
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