With all that shines still being golden, and the fact we are finishing up 2010 in the $1400 area for gold- the projection of $2000/oz does not seem that crazy. Whether gold corrects some this year or continues on its bullish run, finding junior gold companies can be very good investments. Keep in mind, historically there are certain times to invest in a specific junior gold company and other times when the return may not justify the risk.
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As seen in the chart above, the initial run a junior development company makes is based on turning speculation about reserves in to actual drilling results. As these results are better known, the stock reacts accordingly. At some point the idea is that the company will go find the necessary capital to go into production. As seen on the chart, this shows the long road and a price decline as much of the excitement fades or the company will simply get bought out by a much larger company and folded into them. Those that stay the course over the years and actually put their mine into production eventually are rewarded. But it is a long road with many potential road blocks. A good example of this would be the Kensington mine that Coeur d'Alene Mines (NYSE:CDE) took years in getting permitted and is finally in production.
One company which is following this chart to the letter is Canaco Resources Inc. (OTCPK:CANWF). Rising from roughly .50/share to a recent high over $6, Canaco has had a great year. Relatively unknown a year ago Canaco has spent the last year drilling in the company's Magambazi gold discovery. It is located in the Handeni region of the United Republic of Tanzania and is roughly 200 square kilometers of exploration space. Since starting its 10,000m+ diamond drilling program at Magambazi and Magambazi North, Canaco has continued to provide timely updates to investors of its very successful drilling program. This information has obviously led to the incredible return of the company's stock. Where it actually peaks will have a lot to do with actual reserves. Canaco's market cap is now roughly $900M and will continue to rise as additional drill results identify other new key deposits.
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Another company with one of the largest land holdings in Tanzania is Barrick Gold Corporations (NYSE:ABX) African spin-off African Barrick Gold (OTC:ABGLF) that currently has a $3.8B market cap. Spun off just nine months ago, the company has over 17M reserve ounces and is in the production valuation phase on the chart.
A third company that also fits on the chart is Douglas Lake Minerals Inc. (OTC:DLKM). Recent changes within the company include the changing of its Chairman of the Board and its access to four PLs (prospecting licenses). These as a whole represent one of the largest continuous and adjacent land positions in the Handeni District, and the boundary area is geologically contiguous to Canaco's Magambazi gold project and covers 800 square kilometers (see graph).
The new Chairman of the Board is Reginald Mengi who is owner and Executive Chairman of IPP Limited, one of the largest private sector holding companies in Tanzania with subsidiary companies engaged in mining, manufacturing, bottling (Coca-Cola (NYSE:KO) products and Kilimanjaro drinking water), as well as media, including television, radio and newspapers. Current market cap is around $100M.
In my mind there are two keys when looking at gold development companies. One, is do they have access to capital which will be needed in order to prove out reserves? In this case the answer is probably yes, based on the new Chairman of the Board and his vast resources. The second question is always what are the chances the company will find significant reserves? A company can own all the property in the world but if there is no gold, then it is not worth anything. In this case with its property surrounding the Canaco Resources properties on three sides, some level of understanding can be inferred from the positive Canaco drilling reports. Plus, Douglas Lake has just started early phase exploration using a fixed-wing aircraft and doing an aeromagnetic and radiometric survey to identify key target zones. This is the first step in beginning an exploration plan for an area that Canaco Resources has been proving to be very rich in reserves.
As with any early stage mining company the risks are high. Lack of funds, not being able to work with the local government and hard to get licenses can derail even the largest of companies. Not to mention proving up reserves is the ultimate goal to either eventually go into production or sell out to the highest bidder.
Disclosure: Author long DLKM.OB