Junior Miners On Sale

The precious metals rally that ended in May 2006 was a very good time for almost any investment in mining, whether it was the AMEX Gold Bugs Index (HUI), the Philadelphia Gold and Silver Sector Index (XAU), or junior mining companies. But after that rally, something changed.

After the spot gold price reached $730 in May 2006, there was a correction period that was followed by a rally to $1,030. Another correction followed and price of gold seems to be near a bottom at the current levels around $900, still up roughly 24% from its May 2006 high.

The HUI-index has now fallen to a level just below the May 2006 high at 390. The XAU Index also seems to flirt with the support level around 160, which once again corresponds with the highest level reached in May 2006.

The fact that these indices underperformed the precious metals price by more than 20% is already pretty shocking, but the picture becomes even darker when studying junior miners. The benchmark indices for Junior Mining companies, the FSO Index (see www.financialsense.com) which consists of 40 junior mining companies, is down almost 30% from its May 2006 high! Charts from Frank Barbera on a.m. website even show that the FSO/XAU ratio actually more than halved since the first quarter of 2007.

But what causes this severe underperformance of junior miners compared with large caps-- and with precious metals prices in particular? Some say that market manipulation is to blame. Market manipulation is one of those terms that always appears when precious metals or related stocks perform badly. The question is whether market manipulation is really that unrealistic.

Let's take a closer look at some mining funds in Nunavut Territory in the North of Canada.

Nunavut was established in 1999 and is thereby the youngest Canadian province. Nunavut Territory is extremely rich in natural resources and as such offers great potential for various industries, including mining, fishing and tourism. As soon as precious metals prices started to rise, the (junior) miners in Nunavut saw their share prices rise along with the precious metals rally. Some of the companies that benefited were Cumberland Resources, Miramar Mining and WMC Resources.

One thing that those four Nunavut-plays have in common is that they were all taken over by large cap mining companies that continue to look for Nunavut miners. In 2005, shareholders of Australian mining company WMC Resources had two potential buyers who were outbidding each other. Eventually, the winning bid was made by BHP Billiton at A$7.85 per share, significantly higher than Xstrata's A$7.00 per share offer. This was a significant premium over the A$5.00 share price before the battle started. UBS Securities however rated the company in a valuation range of well over A$10 per share.

Cumberland Resources was acquired by Agnico-Eagle Mines in 2007 and did well. The company's shareholders received $7.48, roughly a 25% premium over the share price before the acquisition was announced. Shareholders who bought their shares two years prior to the deal would have easily made a 400% return on investment.

Miramar Mining was bought by Newmont Mining this year for C$6.25 per share or at a 23% premium over the price before the announcement. Those who bought Miramar shares two years prior to the deal made 84%, still not bad, and certainly a good deal for the buyer.

All above-mentioned deals may be 'good deals' for the buyer, but they are certainly not bad deals for the sellers. This is a situation that could now easily change. With junior mining shares having hit rock bottom, a 50% premium is still hardly something to cheer about for investors who saw their shares drop more than 50%.
Some of the Nunavut miners that are still independent seem almost guaranteed takeover targets, but the question is whether it's really worth it.

Some deals outside Nunavut show a pretty scary picture. For instance, Aurelian Resources received sell recommendations with price targets as low as C$1.40, in addition to a tsunami of negative rumours about Ecuadorian Government's mining laws. You have to ask yourself why all the bad news and downgrades are not affecting Kinross Gold Corp's judgment of Aurelian (still considered attractive at a share price well over C$8).

The latest rumour is the Ecuadorian Government possibly bidding for Aurelian, which is the reason why the share price is still well-below the offer. This scenario is just another way to scare off investors, quite similar to news coverage of the Venezuelan mining laws affecting Gold Reserve and Crystallex. So far, it's all rumours and one has to wonder whether these countries are really going to create a tremendous job loss and harm relations with any foreign company operating locally, or whether it's all one big Jim Cramer-esque conspiracy.

Geopolitical risks, however, do not apply to the Nunavut miners, but market manipulation may be as applicable to junior miners as it is to the producing miners in 'less politically-stable" countries. The fact of the matter is that takeover candidates are no longer by definition the 'desired stocks to hold'.

One of those takeover candidates is the junior (partly-) Nunavut play Trade Winds Ventures.

Trade Winds Ventures had a high in 2004 of C$1.65. It then fell back to the current five-year low of C$0.13. And what's really changed since then? Momentum, that's really all I can think of. In their Detour Lake project (Ontario) alone, they have 800K ounces of indicated resources and 1.5M ounces of inferred resources. In addition to that, Trade Winds have projects in Nunavut, China and in B.C. The company has an institutional shareholder base, C$2.8M cash and has a market cap of only C$10M!

And this is just one example of a ridiculously cheap junior miner. There are so many players out there with ridiculous market capitalizations. The only thing you have to accept is that there is no guarantee that your investment will go down further in the short term.

Whatever you do, don't sell. In the long run, the true value of these companies will emerge. For now, all we can do is hope that no one will take them over at a 30% or even 50% premium, for there is so much more potential in these junior miners.

As for my disclosure: I hold no shares in Trade Winds Ventures, but I will buy on Tuesday the 5th as soon as Canada is open again.
Good luck to all.

Comments

[dieuwer:]

It's called rampant nakid shorting of gold stocks.

2008 Aug 05 08:18 PM

[rhj123:]

Buying non-producing gold companies is called gambling...big-time! It would be very interesting to see what has become of, say, 30 or so of the exploration, non-producing, small companies that were priced below one dollar ten years ago...? Assume purchasing 1000 shares of each, back then. Where would you stand, financially, today...? ($30,000 investment, worth what today??).

2008 Aug 06 12:58 PM

[bulletbob:]

It is all about the naked shorts. How can the SEC allow this illegal activity to continue to ruin many companies? Everybody writes about it, but we,as a group have NO power. You think this is bad, and I long many, many jrs., NXG is $2/sh with 400k of unhedged gold in 08. At $1,000/oz that is $400 MILLION. $2/sh are you kidding me. There is ONLY one explanation-naked shorts. Just as the shorts are killing, so far, the silver price. But when it ends, and it will, then we will not be able to count high enough to count all of our profits. Good luck and DON"T sell.

2008 Aug 06 02:31 PM

[bulletbob:]

Joey, if you read these comments I would appreciate your opinion of another Nunavut co. - Sabina Silver. I own lots of shares, they have lots and lots of ore, silver, etc. but the stock has done nothing in the last year or so. Do you like their new CEO? Please email me at [e-mail]. Thank you.

2008 Aug 06 02:35 PM

[dieuwer:]

SEC is in the game. It is telling that they ban naked shorting of financials. but aiding naked shorting of gold-stocks. LOL
If you don't see this, you need an eye exam.

2008 Aug 07 02:49 PM

[MoneyMine:]

Joey,

Thanks for the advice on Trade Winds Ventures. I bought it before it bottomed, but I can see that it hit the bottom now and I am buying more!

I have been researching the relationship between precious metals and mining stocks, as well as paper "money" manufactured by Uncle Bernie Clause with his Bailout Nation "Printing Pre$$e$ Gone Wild". Although the global economic slowdown has created a temporary deflationary period, supposedly bursting the so called "Commodity Bubble", it has created yet another real bubble... THE US TREASURY BOND BUBBLE!!

Historically, uncertain times create a rush to gold, as investors seek the safety of its intrinsic value. Same goes for silver, "the poor man's gold", which is currently in an extreme shortage, and actually rarer than gold as far as above ground mined supplies go. Both gold and silver paper spot prices have been artificially manipulated by naked shorting. Two major players, JP Morgan & Morgan Stanley, represent shorts of 30% of all silver. Forget the Paper Morgans (their stocks haven't performed well at all lately) and take delivery on the real money... Morgan Silver Dollars.

Trade Winds Ventures (TWD.V/TDWIF) seems to have bounced bigtime yesterday, as gold topped and remaned at the psychological barrier of $900/oz. at the end of the day. At a time when "experts" besides Peter Schiff are talking about the inevitability of inflation due to FED policy of debt monitisation through printing massive amounts of paper "money" and the US Treasury Bond Bubble, gold's surge above $900/oz is an extremely bullish indicator of things to come.

I believe that due to the critical Silver Shortage and massive naked shorting of both gold and silver, more COMEX futures traders will increasingly begin taking delivery of the actual metals, rather than converting the value at the expiration of the contracts into paper dollars. This could cause a massive default in the COMEX contracts (some call it CRIMEX due to the artificial manipulations by naked shorting), which will indeed destroy the artificial manipulation schemes, as investors suddenly realize that paper is cheaply printed, but real money is mined and minted. The news will no longer be able to be suppressed, creating what I believe will be the biggest gold/silver rush in all history.

Another cheap stock that was substantially higher just a few months ago that bounced big yesterday is Nova Gold (NG), which increased 18% at the close, the highest for major gold miners. Nova Gold is also a copper miner, and copper has taken a major beating in the bursting of the "Commodity Bubble". When copper bounced yesterday, I believe it signaled a bottom for the overall commodity market, as it is one of the last metals to bottom. The combination of gold and copper bouncing was extremely bullish for NG.

Two Silver Stocks that deserve some attention and performed extremely well as silver approached $12/oz again, from a low in the $8/oz range are Silver Standard Resources (SSRI) and Silver Wheaton (SLW). They are both sitting on mother lodes of silver, and have had the staying power to wait out the drop in silver prices to ride the upside bounce they have seen coming, which management knew was inevitable due to the current policy of debt monitisation and extreme silver shortages.

It is extremely interesting to note here that, although JP Morgan is the largest naked short holder in the world, they are also a major stock holder in SSRI. Perhaps when silver prices break out from the manipulation of all the naked short positions held, JP Morgan can mitigate their potentially astronomical losses by the massive gains they expect from their massive SSRI holdings.

How long can the USD be propped up by nothing more than "confidence" in a Bailout Nation that many still believe is "too big to fail", that may be forced to default on historically safe bonds if foreign investors and countries like China stop buying up the massive amounts of escalating debt? Everyone knows that it's beyond the point of no return and that the debt of the nation can never be repaid, except through massive debt monitisation of FED printing presses, which inevitibly leads to HYPERINFLATION, banana republic or Zimbabwe style.

Yes, the time for gold and silver to shine has certainly come... It's important to get some of the real deal in your hands and hide it well, while it can still be found, as the spot price and the premium over spot spread is widening very quickly, especially for silver coins, which are increasingly harder and harder to find if you can get them at all. I believe a good strategy is to buy up the extremely cheap mining stocks right now while they are beginning their bull run, or consider buying call options on them, which are still relatively cheap. Perhaps even consider buying call options on COMEX SILVER, and try to take delivery at the expiration of the contract, which they will not smile upon, but you have the right to do none the less. Just remember, the contracts may default.

In any case, if you are seeing the tide turning into a financial tsunami like Peter Schiff and I do, then jump on now and ride the bull rocket into the stratosphere... before it launches!! The ignition sequence has begun!!

3, 2, 1... We have LIFTOFF!!

Peter Schiff of Euro-Pacific Capital says to diversifiy out of USDollar denominated assets ASAP, as the value of them will go down with the dollar when it drops. Despite all of the controversy, he & US Rep. Ron Paul have been right on the money all along. We should all do our own homework and research, despite all the official "news" propaganda being spun like wild in a last ditch effort to prop up the US Dollar!!

The US Constitution says: A Dollar = X amount of grains of Gold/Silver.
The Federal "Reserve" Board says: Paper Dollars they Print is "money".

FIAT MONEY = FAKE MONEY. Paper is Printed. Real Money is Minted.
The FED is private & without real reserves, so what's left? Confidence??
Real Reservations about Dollar Destruction & loss of savings are arising.
Why not just print a billion dollars for ALL of US, & we're all billionaires!!!

Everyone must trust in something... What did Founding Fathers trust in?
At least all that paper the FED's printing still says: "IN GOD WE TRUST".

Jan 24 12:13 PM