Here is an interesting way to look at mining companies. We have all seen variations of this chart. Simply put, the value of a metal project increases as it advances toward production. At least, that is what happens in a normal market. This is not a normal market.

Here is what is happening at this moment. Early stage exploration projects are given very little or no value. In fact, in some cases investors are giving exploration projects negative values. Some companies with exploration projects are trading for less than cash value.

It may seem attractive to buy cash at a discount, but you have to factor in salaries, rent and travel to conferences. That cash has value only to the extent that management will do something useful, like advance a metal deposit. Exploration spending has been slashed, but rent and salaries continue to be paid.

At the other end of the scale, high quality production or near production projects are trading at roughly 20 to 40 percent discount from realistic values.

Most people are saying that there is no money for junior mining companies at this time. The reality is, there is an enormous amount of money available. Various funds and private equity groups are sitting on billions of dollars of cash and are salivating over the exceptional values available in the mining industry.

The only problem is that they are focused almost entirely on the right side of that chart. They want assets at the right side of the chart, and especially they want cash flow, but they want to pay the prices on the left side of the chart.

Over time, those investors will move into that middle ground: projects that are a couple of years from production, but which can be acquired for pennies on the dollar. When those big pots of money move to earlier stage projects (prefeasibility and feasibility), the values will start to move toward rational values.

That is where investors should focus at this time: Companies with good assets which can be bought for pennies on the dollar.

Looking forward, I believe that the extremely low valuations, the recent takeover offers and the improving global economic outlook provide strong evidence for a rebound in high quality development-stage companies. In due course, “the market” will also begin to move higher. In the meantime, I will continue to present high quality companies which can generate big gains in spite of the near-term market sentiment.

By Lawrence Roulston
www.resourceopportunities.com

http://www.kitco.com/ind/Resopp/2013-06-11-This-Time-is-Different.html