At the Denver Gold Forum in late September, Rob McEwen gave a presentation that many of us have seen many times. I’ll sum it up here, but you can click on this link to see it all in 20 minutes.
His slide presentation makes a case for gold prices to move above +$850/oz by 2009-2010. Most of Wall Street’s analysts seem to agree up to a range of $700-$750/oz through 2007, and so the most speculative of McEwen’s ideas is not at all extreme.
Second, he makes the convincing case that for many years, the share prices of the senior gold producers have lagged behind the price of bullion because they built their companies with a view to buying resource ounces rather than exploration discovery, and have done so at inflated prices.
He shows that the shares of mid-range producers, which have been pushed higher by relatively important discoveries and pulled higher by take-over premiums, offer a better investment.
Then he shows how the junior exploration and developer companies have fared by far the best.
And finally, he shows his property holdings in Nevada and discusses that his drilling plan is just 5-pct complete. U.S. Gold, you see, is a pure exploration play.
I agree with McEwen’s premise that the precious metal juniors is where the best risk:reward lies, but there are thousands of exploration and penny stock companies in this space, so the question is how to choose a couple.
I look at three essential ingredients to making a decision: property, management, and promoter. I happen to believe that U.S. Gold (USGL.OB) has all three. They have an excellent property holding in Nevada adjacent to major producers. They have proven management. And McEwen, who has millions of his own money personally at stake, and the ability to raise large amounts, is the promoter.
Take note that there is a significant difference between a penny stock and a well-financed, well-managed, exploration company that holds valuable property.
To see what happens to the shares of a junior if you hold the right ones at the right time, look no further than Aurelian Resources.
I first brought the name Aurelian Resources [TSX.V] to your attention on June 21 when the stock was trading at C$23. I told you they had the property worthy of speculating on because they just had a second major strike following their discovery hole in Ecuador in March (when the stock was under C$1.00). Today the stock is C$34.70.
So, U.S. Gold has not yet hit such a discovery but they are looking in the right place, and have the money to spend for drilling and other exploration programs.
Their stock has risen to a high of US$10.30/share early this year when gold prices had reached US$730. Like most the shares have fallen off as gold prices have slipped under $600. Due to the operating leverage and capital risk involved, when bullion prices fall, the shares of companies will fall further, and the market values of the exploration companies will fall the most.
And, when the price of the precious metal complex resumes its bull phase, the share prices will rise faster than the bullion, and the juniors will move up faster than the seniors.
As I see it, now is the time to buy the juniors – at least the best quality of the juniors, such as U.S. Gold (C$4.65; US$4.16).
Over the next few days, I’ll put a few more juniors into the spotlight.
Today, the news came out that Rob McEwen lost his dispute with Goldcorp over shareholder rights and corporate governance. Although it should not impact his U.S. Gold share price, I note that UXG earlier was down -3.13 pct, while Goldcorp was up +3.30 pct. That makes UXG an ever better buy.
Both stocks have been tracking closely however. Check the recent comparative price performance of Goldcorp (in red) to U.S. Gold (in blue).
The shares of a small producer, Crystallex (KRY) have not fallen off at all, though. That’s because everybody is waiting for the final environmental permit, which is expected soon, before jumping on board the stock.
Check the recent comparative price performance of KRY (in red) to U.S. Gold (in blue).
ADDENDUM 4:10 PM: After the close today, Rob McEwen announced he would appeal the decision of Madam Justice Sarah Pepall of the Ontario Superior Court. I'm telling you, this man is like a pit bull.
And that speaks well to those of you who have decided to hold shares in his U.S. Gold.