Finding the Right Junior Miners for Maximum Upside Potential

This is not an article to explain the leverage that junior exploration stocks offer to the precious metal price. Suffice to point out that last autumn’s stock market crash has left juniors offering arguably their biggest leverage to gold and silver in history.

It is always tough to buy shares at bargain prices because that means investors are either scared by recent news, or have already lost a lot of money in a price sell down. But buying junior exploration stocks is basically an option on a rising gold price that never expires. Is that not what you want in an unpredictable gold bull market?

Spreading risk

But even if you accept this argument the problem still remains which junior to buy. There are more than 2,000 of them. Buying a small basket of these stocks makes sense to spread the risk which is considerable if placed on one pick.

At the Agora financial conference in Vancouver last week I attended a presentation by Stansberry Research entitled ‘My favorite junior miners – our best chance for 1000% gains this year’.

Here are their top 10 picks: Riverside Minerals [RRZ.V]; Kaminak [KAM.V], Strategic [SMD.V]; Mirasol Resources [MRZ.V]; Eurasian Minerals [EMX.V]; Rimfire Minerals [RFM.V]; Atac Minerals [ATT.V]; Miranda Gold [MAD.V]; Almaden (AAU:Amex); and Lara Resources [LRA.V].

These are all prospect generators whose business model is to search for mineable deposits to option on to larger companies for development. But there are many other possibilities in the junior mining sector.

My stocks

Personally I own stock in Endeavour Silver (EXK) and Linux Gold (LNXGF.PK). The latter was tipped by 70s star gold analyst Joe Granville in his newsletter three years ago and holds promising claims adjacent to existing gold mines in Alaska. Its share price performance has been very poor but the assets remain unchanged and look even more undervalued now.

Endeavour Silver is a Canadian junior silver mining company with all its assets and resources in Mexico and is both a producer and explorer. Like Linux Gold the reserves and properties are impressive but this is a far more active company.

Gold price leverage

However, what I like most about juniors is the leverage that claims and potential precious metals in the ground offer to the rising gold and silver price. This is where the real investment potential comes. You do not necessarily want an ambitious young management team burning up cash prospecting for gold or silver.

The chances of finding gold and silver are always slim, and the prospect generators have the best track record for that. But in a gold price boom then exploration claims rise exponentially in value, and silver is leveraged to the gold price.

So holding some junior exploration companies – and preferably a basket of them – makes sense if you think that the price of gold and silver is going to take off soon.

Disclosure: Long in Endeavour Silver (EXK) and Linux Gold (LNXGF.PK)

Comments

[Hyperinflation:]

Very True, massive consolidation is not to far off. Even for more risk-averse investors should look at Silver Standard Resources. Although this doesn't provide quite the leverage of the aformentioned equities, the upside is enormous. The Enterprise Value is a mere 1.25 Billion for a company sporting 2 Billion ounces in resources. Although only 200m of these are proven reserves, they have been adding to this at an accelerating rate. In other words, I think SSRI , SSO.TO has both massive production growth and reserve growth which will serve as huge catalysts, pushing this stock much higher.

Jul 29 07:55 AM

[djj420:]

Only two of these have US tickers- and only one has a listed (not OTC) US ticker? Add in Hyperinflation's SSRI pick and we're up to 3 and 2. Can we get some more accessible picks for this proposed basket of junior PMM's? Why the hell isn't there an ETF for this anyway? I still remember the revelation I had a few years back when I realized GG was more volatile than NEM.

Jul 29 08:15 AM

[Tigeress:]

I own shares in RBY Rubicon Minerals and feel this is a stock worth looking at...

Jul 29 12:59 PM

[rpaulnews:]

MIGHT CONSIDER PINETREE CAPITAL---ALMOST AN ETF FOR SMALL AND SOMETIMES OBSCURE MICRO JUNIOR STOCKS IN THE COMMODITIES,OIL, ALTERNATE ENERGY, ETC. HEAVILY WEIGHTED IN THE COMMODITIES. USED TO BE $20 A SHARE OR BETTER IN CANADA, NOW LANQUISHING IN THE 1.5-2.0 RANGE(C) DOLLAR. CRASHED AROUND .5C DOLLAR. SHOWING RENEWED SIGNS OF HOPE LIKE MANY COMMODITY STOCKS. TRADES IN CANADA AND ALSO ON PINK SHEETS.(WEBSITE GOES THROUGH LIST OF ALL STOCK AND WARRANT HOLDINGS AS I RECALL.)


On Jul 29 08:15 AM djj420 wrote:

> Only two of these have US tickers- and only one has a listed (not
> OTC) US ticker? Add in Hyperinflation's SSRI pick and we're up to
> 3 and 2. Can we get some more accessible picks for this proposed
> basket of junior PMM's? Why the hell isn't there an ETF for this
> anyway? I still remember the revelation I had a few years back when
> I realized GG was more volatile than NEM.

Jul 29 02:08 PM

[Hyperinflation:]

Mag Silver - MVG (not sure what the US ticker is) - Paulson has been accumulating this, so that is worth noting. I think buyout target. I like Jaguar Mining (JAG) , Aurizon Mines (AZK) , and First Majestic Silver (not sure if it has US listing). As mentioned above Rubicon is a good play. There is also MineFinders, Northgate, Centerra , Centamin.
Hope that helped -

Jul 29 10:00 PM

[Peter Cooper:]

Yes I met Mag Silver last week in Vancouver and liked them very much - they have just fought off an undervalued bid and other groups have already approached them including one from Dubai. But you might argue that an early sale (too early?) is the last thing you want in this asset class, although it does speak volumes about the company. I would be more worried about market risk than the actual juniors at this point, however.

Jul 30 01:27 AM

[lance sjogren:]

My favorite is Sabina Silver. Market cap about $100 million US, they have something like $30 million in cash for exploration, and their resources are:

Back River: 2.3 million ounces gold at 10 gpt

Hackett River: 230 million ounces silver at 4 opt + base metals with in-situ value about equal to the silver. Most of the deposit is open-pittable.

Aggressive drilling programs are in the works.

If you convert everything into gold equivalent (assume a 60:1 gold to silver ratio) these guys have about 10 million ounces of good grade gold equivalent, and you are getting it for about $10 per ounce. In terms of silver equivalent it is about 600 million ounces or $0.16 per ounce of silver. And these are GOOD deposits too.

Main drawback is that their deposits are in a remote area in Nunavut, to develop a port needs to be built at Bathurst Inlet, estimated cost $100 million, plus a road to the deposits. Since they recently acquired the Back River deposit they have a bigger resource base to spread the capital costs over. Other players in the area may help spread the costs as well- e.g. the Chinese recentlly acquired the Izok Lake and High Lake base metals deposits from Oz Minerals. I would think there is also a possibility that Canada govt might chip in some for a port as part of their goal of solidifying their claims to the far north in competition with Russia, but that is pure speculation on my part.

2). Eastmain Resources. 1.2 million ounces high grade gold in northern Quebec. The primary deposit, Clearwater, is close to Goldcorp's Eleonore deposit. Goldcorp owns about 10% of Eastmain. If you just count their main deposit, Clearwater, they have 1 million ounces. At a fully diluted market cap of about $100 million US, you are paying about $100 per ounce of gold, which is not cheap, however, this deposit should be able to leverage Goldcorp's infrastructure at Eleonore, so it is almost equivalent to gold at at an active mine where all infrastructure is already in place. Furthermore, there is a widespread view that drill results in the last couple years could well lead to a substantial expansion of the resource when the new 43-101 comes out.

Those are my primary 2 holdings in the PMs. A couple of others I have a much lesser amount of are Golden Goose Resources (Quebec gold deposit) and Terra (10% carried interest in Hathor's high grade Uranium deposit in Athabaska)


Note: Note that I count all resource ounces whether they are measured, indicated, or inferred.

Jul 31 12:31 PM

[lance sjogren:]

By the way:

Anyone in the US who wants to invest in junior mineral companies should get used to buying pink sheet.

The vast majority of juniors listed on the Canadian exchanges have a US version but only in pink sheet form.

I have traded these for a number of years and by trial and error I found how to trade them with very little penalty for the fact that I am not trading the native Canadian version of the stock.

First of all, I found the best vehicle for trading them to be TD Ameritrade. I have long had a hunch that because of TD being Canadian, when I buy pink sheet I suspect that it is actually the Canadian stock they are trading and that somehow in their administrative system they are able to convert it into pink sheet.

However that works, it seems to work fairly well. I used to have an international account with another broker to check the real time price of the Canadian stock, but nowadays I just check the time delayed price on Yahoo, then I translate to USD, then put in a limit order on TD Ameritrade. Sometimes I'll just order a fraction of what I want to buy and if it doesn't trade I will jack up the price a half cent at a time until I get an execute, that way I get "price discovery" and then decide whether I want to buy more.

Most of the time I seem to be able to buy at the ask price or sell at the bid price or very close to it.

Some investing guides I read a couple years ago advised against these because of the propensity to wind up having to pay large penalties due to the illiquidity. I found this is not the case, with one caveat.

The one caveat being that the bid-ask spreads are often substantial. That is not a symptom of buying pink sheet but simply an inherent characteristic of many small companies that trade on the Canadian exchanges. So I often find I have to wait to trade a particular stock until it happens to be trading a little more than usual and its bid ask spread shrinks to a reasonable level.

Jul 31 12:46 PM

[lance sjogren:]

Hey, thanks for this forum.

I am constantly questioning my own investment decisions.

By motivating me to come up with a pitch for my top two holdings, I found that I was able to make what appears to me a pretty compelling case.

So, I am happy with my two main holdings.

I know there are a lot of opportunities out there that I will probably regret not having, but that is life. I like Silvercorp and have had it off and on, but since it's more liquid than my larger holdings it is a tempting one to trade in and out of to try to take advantage of the volatility in silver prices.

I also like First Majestic and Endeavor, and I recently noticed another one that looked interesting, Alexco I believe it is called (I really should remember the name since I bought a few shares)

But, what I like best is exploration-only plays (nothing can go wrong with your gold and silver when it is just sitting in the ground, except for things like being confiscated by Kleptocrats like Hugo Chavez or killed by enviro obstacles.

(Environmental obstacles are one reason I think the big blockbuster deposits of low grade such as those of Novagold, Seabridge, etc., are pretty risky. First of all if the price of oil goes sky high then they are liable to not be economic even if PM prices are strong. Secondly, mining hundreds of millions of tons of ore in pristine areas like the mountains of BC seems like something highly vulnerable to being killed by regulatory obstacles. Case in point, Northgate Minerals' Kemess North deposit.

Jul 31 01:06 PM

[Peter Cooper:]

At the Agora Financial conference in Vancouver the audience of informed investors had cooled a little towards the juniors, given the big set backs of the last year for stock prices. But these investors may just have been a little too early. If you are looking for the next 'mania' then the juniors are like the dot-com stocks of the tech boom, and in a gold price rally they will really fly. That could come as soon as this fall if inflation unexpectedly reared its head - which it might if this recovery turns out to have legs or at least further support from monetary expansion.

Aug 01 04:14 AM

[lance sjogren:]

Another thing to think about right now is Uranium.

Uranium miners have been in a big slump.

Consequently, Uranium is one of the few super bargains out there right now in the commodity space.

I have been stocking up on Hathor, a little bit of Terra, and a little Denison.

Hathor has the biggest recent discovery by a junior of high grade U in the Athabasca region. Terra has a 10% carried interest in that deposit so it is another way to play that resource, although with Terra you don't get a stake in Hathor's other promising properties.

Sep 03 11:49 AM