Reminiscent of the dot-com bubble days, Western Australia is serving up a speculative pan of small-cap mining firms with soaring market caps, that in some cases have no cash flows to speak of and others that are founded purely on hype merely with plans to begin mining. All of that doesn't seem to matter right now because of today's high commodity prices and unquenchable demand. To better explain the situation, Barta writes:
Western Australia is the base for much of the world's speculative mining activity. The vast, sparsely populated region has some of the earth's biggest reserves of mined commodities, including iron ore and gold, making it highly attractive for exploration start-ups. Also, Australia's stable economy and well-developed financial markets make the country a good incubator for mining ventures, including companies digging mostly elsewhere, like in Africa and Asia.
Australia and Canada are the favored stock exchanges for listings of many fledgling mining companies. Financials including cash flows of these firms can be hard to predict with most not yet having large producing assets. There also have been cases of outright frauds. But despite all the risks there is nothing saying a small firm cannot discover a fast field of reserves. And, Australian mining companies are outperforming the overall market both at home and against the S&P 500. It's a classic case of high-risk, high-return. The upside to small mining companies favors the near-term since commodity prices remain high and the fate of smaller companies could improve as long as prices stay high.
Comment: The good news for those with high risk tolerance and a desire to speculate in Australian mining stocks is the oversight of Australian-listed companies that requires firms meet minimum standards of financial disclosure. Due diligence is of course still a must but don't expect to find much, if any analyst coverage of the smaller firms. The article points out most investors often have to rely on word-of-mouth, adding that at this week's annual Diggers & Dealers conference in Kalgoorie, Australia, some of the firms that generated buzz include: Bendigo Mining, Nautilus Minerals, Avoca Resources, and Navigator Resources, the latter two which were recommended at the conference as "speculative" 'buys' by Patersons Securities. Relating advice from analysts, Barta says,
"... it might be worth a flier on a few of them -- so long as it is part of a broader strategy including blue-chip mining stocks as well ..."
Visit SeekingAlpha's Gold Stocks and for those blue-chips, check out Gary Dorsch's "Is it Too Late to Buy Base Metal Miners Rio Tinto and BHP Billiton?"
