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Is It Still Possible To Make Money On Junior Mining Stocks?

|Includes:Colorado Resources Ltd (CLASF), ESOFF, PROBF, ZENYF

The carnage on the Canadian TSX-V continues as the exchange's index is down 62% since the beginning of 2011 and 29% to date in 2013 alone. In this situation, it is curious to find whether junior stocks still offer potential for high returns and trade their good news. It is even more interesting to look in this respect at the underdog of the current markets, the mining sector.

A major factor in this analysis is stock liquidity as many TSX-V listed stocks have a liquidity problem: the trading volume on the exchange fell 45% to $23.6 billion in 2012. This is a fairly low trading volume, $10.4 million on average for a stock annually, or $41,000 daily. By my estimates, an average daily trading volume for mining stocks on TSX-V dropped from about $24,500 to in 2012 to approximately 14,600 in January-May 2013.

For my sample, I thus picked junior mining stocks which had more than $200,000 average session trading volumes. In 2012, there were 33 such mining stocks on the TSX-V exchange, while in the first five months of 2013, only 15.

In the sample of 33 stocks, with $200,000 and bigger trading volumes per average session in 2012, there were three penny stocks with prices that stayed below 50 cents for the most part of 2012 (Calibre Mining Corp, Great Western Minerals Group Ltd. and Encanto Potash Corp). In 2013, none of the stocks from this price category has so far reached this kind of trading volume. It shows that the current market hit smaller stocks the hardest.

The companies in the 2013 sample were of different sizes, with an average current market capitalization of $122 million, ranging from $48 million to $300 million. I looked at the price performance of these stocks and found that all of them since the beginning of 2013 had certain periods of largely uninterrupted growth which lasted from just a couple of days to several months. During these upward periods, 14 out of 15 stocks grew on average by 42%, with growth rates ranging from 20% to 87%. One stock jumped 974% in less than one month.

This average performance during growth stages is higher than for bigger stocks, for instance, the ones traded on the TSX exchange. This proves that junior stocks still present tempting opportunities. However, it should be duly noted that to benefit from a particular stock's growth periods and stay out of its decline periods is notoriously difficult, especially on a generally downward market. Most of the stocks in the sample, 11 out of 15, have posted negative returns in 2013 to date.

From the sample of 15 stocks with bigger trading volumes in 2013, let's consider several junior mining stocks which had more pronounced growth periods this year:

Colorado Resources Ltd (OTCPK:CLASF) went up from 16 cents per share on April 24, 2013 to $1.56 per share on May 21, 2013. This is a 974% return in less than a month. The jump was instigated by the news that the company drilled 242 m of 0.63 % copper and 0.85 g/t gold in the first hole on its North ROK Property. The stock has since subsided and now trades at around 75 cents. Its average daily trading volume exceeded $1.72 million in the last 50 days.

Since November 5, 2012, when Alpha Minerals Inc. (ESOFD.PK) and its Joint Venture partner, Fission Energy Corp (FSSIF.PK), reported on a discovery hole with high radioactivity on the Patterson Lake South project in the Athabasca Basin, the stock grew ten-fold from $0.49 to $4.92 on March 25, 2013. The growth was supported by a constant flow of successful drill results from the project which have allowed to widen the target zones. The stock price has currently subsided to around $4.00. Its average daily trading volume was almost $600,000 in the last 50 days.

Zenyatta Ventures Ltd. (OTCQX:ZENYF) grew 87% to $3.21 in less than two months, from May 16, 2013 to July 8, 2013. The growth was occurring on the back of a string of positive news starting with significant assay results from the hole #10 on the 100% owned Albany (Hydrothermal) Graphite Deposit in northeastern Ontario. The hole intersected 361 m of graphite mineralization with an average grade of 5.1% Carbon. The stock currently trades at around $3.00. Its average daily trading volume exceeded $1.00 million in the last 50 days.

Probe Mines Limited (OTCPK:PROBF) rose 62% in less than two months, from $1.1 on April 23, 2013 to $1.78 on June 19, 2013. The growth was in response to the company's update on metallurgical program for its Borden Gold Project and the strategic investment by Agnico Eagle Mines Limited (NYSE:AEM). The stock currently trades at around $1.50 with an average daily trading volume at about $195,000 in the last 50 days.

All four companies are exploration-stage junior miners and yet their stocks are up significantly over the past 12 months, and their trading volumes are the envy of most fellow juniors. Their success stories are mostly about outstanding exploration results and alliances with industry leaders. However, the analysis at the beginning of this article shows that this kind of price and trading performance is rather an exception these days on TSX-V.

Yuri Belinsky

Disclaimer: I, Yuri Belinsky, hereby state that, at the time of issuance of this article, I do not own, directly or indirectly, any shares of the companies mentioned in the article. I strongly discourage you from trading in the mentioned above or other stocks without prior thorough research and consultations with your financial advisor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.