Why I Like Junior Miners & Explorers

[drbubb]

JUNIOR MINERS & EXPLORERS, the title should be

====================

 

As a starting point, look at this chart from FS

 

 

That is more than a Double since last fall. Can it continue?

 

Let's look long term...

 

 

We havent seen a breakout on the long term charts yet. If Gold keeps rising, then that may come.

However, It may not be immediate. Gold and gold shares are overbought. A pullback could come

at any time. We saw one last year from a March high, and it is normal for the gold market to pullback

in the summer. Sodo not be too eager to pile into a hot market.

 

I might be better to earmark money for the sector, and be prepared to invest if we see the usual

dull period in July-August. But a big breakout later this year is possible.

 

= =

I may be doing a presentation:

 

"WHY I invest in Canadian Junior Mining Shares",

 

SOME REASONS:

 

+ Overall Mining sector is favorable:

- After more than 20 years downturn, a cyclical upturn

- A low risk way of investing in China,

- Betting on a weaker Dollar

 

+ Why Juniors ?

 

+ Why Canada?

 

+ Examples of actual investments

 

+ An illustrative investment

 

+ Seasonal cycles, and other tips from Insiders

 

 

 

= = = = =

LINKS:

FS Junior Charts : http://www.financialsense.com/metals/fsjg.html

 

 

= = = = =

IF THERE IS a demand for it, I will go into more specifics here

[frizzers]

There's demand and keen interest from me, for one.

[drbubb]

OK.

I spend several hours a week, researching opportunities. And I look at dozens of charts each day.

 

What I like to invest in are :

 

+ Companies with a market cap below $50million (Pds.50million), and even below $25 million or $10 million, since I believe that it will not take much news or much promotion to double or triple the size of such a company,

 

+ At such a low market cap, I am investing in explorers, and those with mines underdevelopment. The exploration game is fraught with risk, and works best in a bull market. When this marlet turns bearish, some of the high-flying explorers will lose 80-90% of their market valuation. So you need to be careful, and get on the right side of a trend, diversify into AT LEAST 6-8 companies, and take your capital back out. I have a simple rule: when it doubles sell half. That gets me my original capital back, and I can enjoy the ride with with only my profits left in.

 

+ Management is the most important single factor, since a company can languish with a good project and poor management. While good management will go out and find a new and better project, if the one they have been developing fails to show good results,

 

+ I invest only about 5-10% of my capital in the UK. I find the transaction costs here appallingly high. If you buy a stock below 20p, and sell it within the same day and the price hasn't moved, you may lose 10-20% simply in the market makers spread. A an example, take a stock with a bid/offer price of: 10 - 12. In Canada, if a stock is $0.10 -$0.12, then you could lodge your bid at $0.11, and later that day maybe, sell at $0.11. In the UK, others that want to trade with you would never see your 11p bid, since the UK market makers have an exclusive monopoly on getting their prices seen by others (a complete ripoff, that I cannot believe is still legal!) So often you must buy on their offer (12p) and sell on their bid (10p). That spread means you give away a huge part of your profit, unless the stock has a huge run. Avoid these pirates. go to an honest marketplace. And, for cheap stocks, it isn't the AIM market.

 

+ In Canada, if you participate in a Private placement, you normally buy at a discount to market, and also get warrants. (I will give an example below.) This allows you to sell half of the shares after an upward move, and still retain 100% of the upside. Sure, you have to hold the placement stock for 120 days, but the discount and the warrants usually make that "hold risk" worthwhile. In the UK, you will rarely get warrants.

 

...MORE LATER...

 

= = = = =

LINKS:

Websites to look at: Advfn / Stockhouse / Stockwatch / KE Report / TFNN

[dylan]

+ Management is the most important single factor, since a company can languish with a good project and poor management. While good management will go out and find a new and better project, if the one they have been developing fails to show good results,

 

While I agree quality of management is important, isn't it an impossible task to assess this from outside the company?

[drbubb]

"based on charts, or on fundamentals?"

 

Both. But because my investment was rather small, not a huge amount of fundamental analysis.

 

Let's take a quick look under the bonnet:

 

COMPANY== Symbol : Paid. : NAV , 12moRange ShsOS MarketCap

Caledon Res. (CDN.L): 3.65p : 1.68p , 2.50 - 5.25, 332.21 Pd12.7mn

Thor Mining... (THR.L): 3.60p : 1.20p , 2.38 - 4.50, 186.67 Pd.7.00mn

 

Like alot of exploration companies, neither of these is cheap in relation to its NAV.

They are looking to create value through exploration, and puts mines into development.

[Mr_Nice]

+ In Canada, if you participate in a Private placement, you normally buy at a discount to market, and also get warrants. (I will give an example below.) This allows you to sell half of the shares after an upward move, and still retain 100% of the upside. Sure, you have to hold the placement stock for 120 days, but the discount and the warrants usually make that "hold risk" worthwhile. In the UK, you will rarely get warrants.

 

Can you elaborate on getting in on Canadian Private placements.

 

Cheers

[drbubb]

"Can you elaborate on getting in on Canadian Private Placements (PP's)"?

 

SURE.

I suppose that it is a little like being in a Property Buying club back in the old days, when it still made economic sense to buy off-plan property at a discount. Because if you participate in a PP, you are able to buy stock below market, and with warrants attached.

 

Let me give you a current example, Acadian Gold (v.ADA). Here is their press release from Friday:

 

ACADIAN GOLD ANNOUNCES BOUGHT DEAL

$10 MILLION PRIVATE PLACEMENT WITH NORTHERN SECURITIES INC.

Acadian Gold Corporation (ADA-TSX-VE) ("Acadian Gold") is pleased to announce that it has

entered into an agreement ("Agreement") with Northern Securities Inc. ("Northern") as lead

underwriter in a syndicate of underwriters which includes Canaccord Adams ("Underwriters")

pursuant to which the Underwriters have agreed to purchase, on a bought-deal private placement

basis subject to certain conditions, 18,000,000 equity units ("Units") at a price of $0.50 per Unit

and 1,538,462 flow-through shares ("Flow-Through Shares") at a price of $0.65 per Flow-

Through Share for aggregate gross proceeds of CDN$10,000,000 ("Offering"). Each Unit will

consist of one common share of Acadian Gold ("Common Share") and one-half of one common

share purchase warrant ("Warrant"). One whole Warrant will entitle the holder to subscribe for

one Common Share for $0.65 at any time until the date that is 18 months from closing.

 

My broker (Canaccord) sent me a copy by email, and I also received an email directly from the company asking me if I would like to participate. I may do so, and will need to make up my mind early next week. I already own quite few shares from a previous placement at $0.25 from December 2005, so i may have enough already.

 

I will use this example to point out some interesting points.

 

+ How is it priced?

Note that the price of this recent pp is $0.50. On thursday, the day before the pp was announced, the stock closed at $0.57, and so the pp price was a 12.3% discount. That is normal, since we often see a 10-15% discount to the market price on a pp. The other point is that there is a half warrant attached. So for every 1,000 units you buy, you get 500 warrants. The warrant is "free", since it comes as part of the units. The strike price is $0.65, which is a 14% premium (normal) to the traded price, and a 30% premium (normal) to the price of the units. The maturity on these warrants is two years, and 1-2 years is normal. But longer is not uncommon.

 

+ Can you sell immediately?

NO. The buyers of the units agree to hold them for at least 120 days. In fact, the restriction is written on the shares, and the broker will not allow them to be sold, until the restricted period has elapsed. Some people who already own the stock, will take up the placement, and sell freetrading stock that they already hold. I am considering doing this. but much of the stock that I hold is subject to a restriction until late April. So I may not.

 

+ Who manages a placement?

It depends on the type of placement. Some are "bought deals" where a broker has already pre-placed most of the stock with one or more of his clients, and so there will be few shares available. Others are "brokered placements", where brokers will phone their clients (or email them) and ask if they are interested. A third type is a "non-brokered placement", where the company will place the units by itself. In this case, the company will contact institutions and private investors that they know, and see if they are interested.

 

+ Who can participate?

Normally, you have to be an "accredited investor" and there are certain tests to determine who can take up such "risky shares" as those issued by mining exploartion companies. What are the tests? You can have "net financial assets" in excess of C$1 million. You can have income in excess of a threshold (I think it is C$200,000.) There are some other tests as well. You do not need to meet all of them. Only one will surfice normally. There are also a few loopholes. For example, you can be a "friend or family" of management of the company. My girlfriend qualifies because some issuers now allow you to be in the same household as someone else who meets the "accredited investor" tests.

 

+ How does one find out about a pp?

I find out about them through my networking. I attend several lunches or other meetings each month. And we hear about future deals in these meetings. There is also an excellent networking event run by a group called Minesite (see the "About" section for more info.) And other groups like the Association of Mining Analysts (AMA), and a group called 20/20 run their own events. Networking is important, and there is more to this business of investing in Junior companies than just sitting in front of a screen all day long.

[frizzers]

Good post. Thank you.

[Mr_Nice]

Thanks for that. Well I won't make the accredited status just yet but not so very far so maybe next year. I will look the sites of the companies that place the shares to see if they have more accommodative terms.

 

In the mean time if you had any suggestions on how lower net worth investors can get in I would be interested.

 

AIM placements are much easier to get but far less attractive!

 

 

 

 

 

 

Networking is important, and there is more to this business of investing in Junior companies than just sitting in front of a screen all day long.

 

Agreed. I once invested in a company called HIGHAMS systems and subsequently worked on a project with them and their management and was less than impressed. I quickly sold my shares and shortly after they tanked.

 

So meeting the management must give you an edge.

 

Incidentally, I had been in and out of MAW and had built up a very nice profit on the table and was about to top up again but saw a video presentation with their senior management. Quickly, changed my mind as all he kept going on about was 'getting the story' out. Well I agree that promoting the company is important but I think he had forgotten what the core of his business was.

 

Have you met them?

[drbubb]

Mr. Nice,

YES, I have met Michael Hudson, several times. He is a good guy, and knows what he is doing: building a gold resource while accumulating an interesting collection of Uranium properties in Sweden.

 

Your comment about him being "promotional" right now is not too far off the mark. But the fact is that with the current still-growing mania for Uranium, and MAW's relatively modest market cap, the quickest way for MAW to bring increases in MarketCap is by "getting the story out", so investors with an interest in uranium can see that MAW looks cheap relative to its peers. But meantime, he is using the the money raised to build a real gold deposit while increasing and advancing somewhat to Uranium portfolio.

 

If the stock leaps to $1.75 or $2.00 in the coming few weeks, it will be larger due to those promotional efforts.

 

But you must keep in mind, that riding the uranium wave comes with a two-sided coin. If the uranium hype fades, the stock price will too, unless he can build those gold assets quickly.

 

WATCH and learn the game, I would say. But only invest, if you are comfortable with the risk profile.

 

- -

 

 

GEARING IN JUNIOR MINING SHARES

=============

 

This is another reason why I like them. Here's a comment that I posted in reaction to a discussion about leverage on Singing Pig...

 

"What's wrong with gearing Doc? We invest £20k. After ALL expenses we turn £20k into £40k after only 4 months. That's 300% per annum !"

 

So what.

 

You can get gearing in gold and in mining shares too. Hence my ACTUAL return on real trading since August 2005 of 350%, which is over 500% annualised (these are actual, after expense returns, see the portfolio challenge). How are you doing in your actual property investing?

 

Now gearing in mining shares can come in different ways, that do not necessarily require you to BORROW money:

 

1/ You can borrow money. A margin of 50% is normal for shares trading over C$2.00. But this is only the first of several ways of getting gearing...

 

2/ You can buy options, which can give you 5x or 10x leverage- this is a tool that i have used in my own investing,

 

3/ You can buy juniors miners or explorers, which are often highly geared to the gold price, so a 10% rise in gold, can bring a 30% or 40% or higher rise in the price of the junior miner,

 

4/ When you participate in a private placement you often get warrants for free (normally 1 free warrant for every 2 shares you buy), this means that if the stock rises 20%, you might make a 30% gain.

 

I have used techniques #3 and #4 extensively in my own trading, but it is not possible in the Challenge portfolio, given the way that account is domiciled. So I have actually done better in recent months in other accounts, than I have done in Challenge portfolio. I friend who trades in a similar way to what I do, is up almost 50% already in 2006. My own returns have been similar in those accounts where I can invest in pp's in Juniors.

 

Property is "over", compared to mining. Don't kid yourselves.

 

Highly-geared illiquid assets are not the thing to invest in, when global interest rates are rising, thanks to inflationary pressures. The massive outperformance of gold over the past 12 months is the proof of what I have been saying for the past year or so. But I suspect that my comment will soon be proven in other, more painful ways, through actual losses in property, before this year is out. But even if it isn't, I don't mind. Gold and mining shares are providing far better returns on less risk than property does. And I will be happy so long as that remains true. No bother what some bulls here may say and do.

[chickensoup]

This is quite an old article but provides a useful introduction for investors in gold and silver mining.

 

"Why Is It So Difficult To Make Money In Gold & Silver Mining Stocks?".

 

http://www.safehaven.com/article-2378.htm

[drbubb]

At the moment Gold is moving up faster than Gold shares.

 

 

That may be signalling an impending retracement in Gold, or it may be just a pause in Gold shares.

I think it is a reflection of some seasonal weakness in Gold shares. Profits are being taken, and some of

that money is spreading out to even smaller Juniors

[drbubb]

(The Question was asked on HPC:

How do you cope with the risk of a correction in the gold price? My post was):

 

I am "riding the Junior Mining bicycle", which means:

 

+ I have some big profits on private placement shares that I bought some months ago.

Several of these are now freetrading, and I am selling signficant portions of my holdings,

and generating cash. But the cash doesn't sit in my account long, because...

 

+ I am seeking and finding opportunities in new pp's which look cheap relative to the market.

(Example: I will be investing in a pp share next week, paying 25cents for a share now trading

above 30cents.) I have to "hold" it for 4 months, but during the 4 months that I am waiting, they

will be conducting a drill programme which has the potential to raise the value substantially above

the current 30 cents.

 

+ These pp deals usually include warrants. So even if I sell ALL my shares from the pp, I will still

have an exposure to the upside on the stock. (In this new pp, the wts are at 35cents.)

 

+ My usual modus operandi, is; "When it doubles, sell half." And we have often seen a 50% or even

a 100% increase during the 4 months hold period. Thus, I can sometimes, sell half of my position after

only 4 months, and get back ALL of my original capital, and I still have the upside on the remaining shares

and the warrants.

 

RUN SOME Calculations:

 

1. Start with, say $100k, and put it into: a pp at $1.00 (that's 100K shares, and maybe 50K wts at $1.25)

 

2. 4 mos later: If the stock is at $2.00, sell half, and reinvest in another pp at $1.00/+1.25wts.

 

3. Another 4 mos later, do the same

 

Where are you after 12 months?

Assuming the stocks double during the first 4mos, and rise 50% thereafter?:

 

-- -- -- --: PP.No.1/warrants: PP.No.2/warrants: PP.No.3/warrants: Value

-- -- -- --: No. Val / No. Val : No. Val / No. Val : No. Val / No. Val :

Day 01-- : 100 100 050 000 : 000 000 000 000 : 000 000 000 000 : $100K

At 04mos: 050 100 050 038 : 100 100 050 000 : 000 000 000 000 : $238K

At 08mos: 050 150 050 063 : 050 100 050 038 : 100 100 050 000 : $451K

At 12mos: 050 150 050 063 : 050 150 050 063 : 100 200 050 038 : $664K

 

So in One year, $100K becomes $664K: a 6.6 times increase

 

The RAPID PACE of increase, justifies taking some risk of market correction

[drbubb]

I like Juniors, as you know,

 

BUT Disasters like THIS (YZC.v) happen sometimes.

 

Fortunately, I had sold all of my pp shares and had a Short position against half

of my warrants. BNut I consider myself luck on this one.

 

We must get getting near a short term top, since a number of other Junior Explorers

got bombed today

[malco]

Dr Bubb,

 

What do you make of this gold surge? My head says it must soon correct, per the season and per blatant unsustainability of the rate of rise. My heart says "maybe it's different this time".

 

What do you make of this?

 

I have been dithering for several weeks whilst the price has soared beyond anything anyone appears to have been expecting.

[Indium]

I like Juniors, as you know,

 

BUT Disasters like THIS (YZC.v) happen sometimes.

 

Fortunately, I had sold all of my pp shares and had a Short position against half

of my warrants. BNut I consider myself luck on this one.

 

We must get getting near a short term top, since a number of other Junior Explorers

got bombed today

 

Wow, that stock lot half it's value in two days? What made that happen, it looks like many people off loaded.... that would scare the pants of me. If you make 5-10% a month and the see 50% wiped out in two days

[halebop]

Wow, that stock lot half it's value in two days? What made that happen, it looks like many people off loaded.... that would scare the pants of me. If you make 5-10% a month and the see 50% wiped out in two days

 

 

what caused this to loose that much in two days?

does anyone know?

 

This is the downside to stocks you can win big but you can loose bigger!

[HollandPark]

YES. It lost 50% in two days. that is plenty.

 

But you can also say that it clawed back two months of gains in 2 days.

 

Anyone who bought 3-4 months ago is likely still in profit. This illustrates perfectly well why you have to have a portfolio of stocks, and you should sell some when a stock has a big run

 

ALSO:

This movement, and Bubb's way of trading it, shows the HUGE value of warrants.

You can sell all your stock, and wind up free-riding on the wts, with no capital at risk

[Cletus VanDamme]

Just had a thought: is a discussion about investing in mining not a little incongruous with the concept of 'green energy investing'.

 

Is there much 'green' about investing in gold, copper, uranium etc mining?

 

Should we also discuss the ethics of making money from mining companies, who may be using child/forced/bonded labour?

 

I'll get my coat ...

[Member100]

Alt-Energy uses up WATER faster than Old-Energy:

 

In Chinas?craving for oil around the world, buying up oil reserves at every opportunity, the diversion of agricultural lands for biofuels is inevitable. However in a report by John Oeilly of Davy Stockbrokers it was estimated that it would take a land mass 4 times as big as the UK to replace the UK hydrocarbon usage (excluding food production).

 

While wood-fuels are heavily used in China, India, and Southeast Asia, they are also the biofuel of choice in densely populated regions of Africa, especially the west coast and Eastern Highland countries. In contrast, agricultural residues and dung make up only 33% of biofuels in the developing world. Regions of China and India have high use of agricultural residues as biofuels where wood fuels are scarce. Agricultural waste is used in much lesser amounts in Africa and Latin America, with the exception of sugar cane residue used as agro-industrial fuel in Latin America.

 

Fresh water reserves at all time low

 

The Chinese and Indian economic growth to date has not arrived without severe natural resource cost. Agriculture accounts for 70% of the world fresh water consumption and the underground reserves have been depleted exponentially over the last 40 years. In the 1960 it was normal to be able to pump fresh water from 20 metres below the surface. Today it is not unusual to sink to 400 metres to find fresh water reserves.

 

1 ton of wheat = 1000 tonnes of water

1 ton of rice = 2000 tonnes of water

1 ton of cheese = 5000 tonnes of water

 

China has moved from self-sufficiency in grain to being an importer due to falling harvests. Many of the overgrown cities are seeing shortages of water and pollution is increasingly contributing to surface water contamination and leading to further acceleration.

 

//link: http://www.americanchronicle.com/articles/...?articleID=9422

[No6]

Dr Bubb,

 

What do you make of this gold surge? My head says it must soon correct, per the season and per blatant unsustainability of the rate of rise. My heart says "maybe it's different this time".

 

What do you make of this?

 

I have been dithering for several weeks whilst the price has soared beyond anything anyone appears to have been expecting.

 

 

I would suggest that you try not to let your heart rule your head when it comes to investment matters. Getting the head to make the right decision is difficult enough without involving the heart.

[drbubb]

It will be different: high more sustainable, i reckon.

 

BUT NOT all at once, with no corrections

[BillyPilgrim]

I found an interesting article on the life cycle of a mining share. It suggests there is an initial surge in the share price, followed by a big drop.

 

Here's a graph entitled "The Life Cycle of a Mining Share"

 

 

The full article can be found here

 

Buying Gold Coins

 

It looks like your "Sell half when it doubles" tactic is sound, DrBubb. Alas, I'm more of a "Buy and Hold" guy.

[uforia98]

Dr B.,

 

I read your and others trading in Juniors with fascination. I wonder though, if and how it is possible to invest in some of these (be it via PPs or by other means) for the average trader like myself, who might only have a few thousands (or a few ten thousands at the most) at their disposal, rather then the $100k you say one needs to take part in a PP. And what are other ways to make money with Juniors other then PPs (which from your explanation seems very difficult to get in unless you again have huge amounts of cash) ?

 

In any case, I guess my question is: how can you get exposure to Juniors even if you don't have huge amounts of cash (yet)..... ? Everyone needs to start small

[drbubb]

I think a sensible minimum to start is about C$25,000, spread over 5 shares