Well-Financed Miners Will Survive
COMMENTARY—ProspectingJournal.com—In the current marketplace, a constant fear of recession has caused unprecedented strain on most companies, many of which are still recovering from the last crash. Yet the possibility of Recession 2 (or, really, the “re-discovery” of Recession 1) has prompted many of the dime-a-dozen juniors to make haste with a plausible business model. Without the established strength of a major, let alone the initial development of a solid junior, taking risks—the very nature and crucial importance of juniors—is now riskier than ever. A common movement since 2008 has been to diversify properties and offerings; thus, it’s not uncommon to see companies offering opportunities through a range of markets, often trying to diversify within one geographical area, such as potash and iron ore in Brazil. But for many reasons a sudden diversification is not possible for a large number of juniors, whose fear is that another crash may leave their product temporarily obsolete, with shareholders holding the bag.
This got me thinking . . . If you can’t always diversify away from trouble, what is the immediate step that companies should take to ensure the confidence of their shareholders? And, most importantly, what should potential investors look out for when considering a stock?
Although it sounds too simple to warrant attention, money is key. Ron Stewart, Head of Research at Dundee Capital Markets, recently told BNN that the biggest danger for juniors is the drying up of capital. According to Stewart, countless juniors will surely perish in the upcoming financial crunch, as many carry debt and will rely too heavily on constant financing to take speculative investors and the company into new phases. Money, management, properties, geologists and marketing are all essential, but all are useless without money.
With gold breaking new highs, riding on global fear and re-asserting itself as a historically proven hedge against inflation, a logical assumption would be that many gold miners will likely survive (and possibly even flourish) if the world economy worsens. Considering this, I find that a top priority for anyone looking to invest either now or when the market is bottoming out is in both major and junior stocks. Majors are not hard to find. Take your pick from the Barricks, GoldCorp’s, and so forth; if we see a crash, grab these stocks when they bottom out and then laugh at the suckers who sold. But picking juniors can be difficult: many offer what seem to be explosive growth opportunities, yet they’ll vanish as soon as the money gets tight . . . And take your money with them.
There are many juniors out there who warrant your attention, but for the purposes of this piece I have dug up two as an example, which should at least make their way onto a watch-list. Merrex Gold Inc. (TSXV: MXI) has a well-stocked bank account with exciting news on its drilling results for its 840 square kilometer Siribaya Gold Project (a 50/50 Merrex-IAMGOLD Corporation joint project) in Mali, West Africa, which will see a total of 30,000 metres of drilling across two substructures in 2011. Current cash on hand is just above $14 million, while drilling results have indicated strong gold mineralization within both substructures. The drill programs are well-advanced and there will be considerable drill results released in the months ahead. Combined with the Company’s solid financial backing, its development phase position puts it well-ahead of many other gold juniors.
Golden Fame Resources Corp. (TSXV: GFA) is a mining and exploration company with a focus on gold, silver and copper projects within Latin America. Its present focus is on its Algun Dia project, located close to one of the world’s biggest silver mining districts in Guanajuato, Mexico—within 26 km of Great Panther (GPR), 17 km of Endeavour Silver (EDR) and 34 km of AuRico (AUQ). The renowned management team is working with a fully financed drill and underground program for two years to expand the ore body (open at strike and to depth), and raised $7 million in a July financing. They have also budgeted $2 million in exploration expenses from now until the end of the year.
With a strong financial backing and high potential, MXI and GFA represent the two stages of junior explorers that are considered as great buy-in opportunities. GFA, while engaged in the riskier exploration stage, has a strong management team, very solid financing, and the potential of proximity in an area well-known for PMs. MXI, on the other hand, has commenced its development phase, and has stirred investor buzz with encouraging assay results from its diamond drilling. With a strong financial position, the company is set to weather any upcoming economic storms and richly reward investors.
Both companies are, of course, at the mercy of the markets, which have taken even the hardiest of investors on a gut-wrenching ride these past few weeks. But with the one product that is pulling in gains during this volatile time and a well-financed and well-run team, they represent the kind of juniors I would want to keep my eye out for as the ongoing turmoil unfolds.
Disclaimer: The author does not currently hold any shares of any of the companies mentioned in the article. However, some members of Cordova Media Inc., which owns the ProspectingJournal.com, may or may not have interests in one or more of the companies mentioned at the time of publication. Staff members from the Prospecting Journal reserve the right to acquire interests in any of the companies mentioned after 36 hours have elapsed upon initial publication of this article.