SGR measures up pretty good IMO

The Market Right Now

With the recent sell off in the gold shares this week plenty of short sellers, weak holders and investors that bought at the top are selling and creating a real wicked sell off. I would think that Friday the 25th or Monday the 28th will be the end of this sell off and a substantial rally could develop. The market is very oversold. If the sell off continues then it just means an even better entry point is coming up and probably very soon.

The Juniors

The Junior shares have been in the doldrums for two years and here are the reasons:

• In the last three years there have been probably 3,000 new mining companies formed. Even with average $10 million market caps, this represents a $30 billion dilution to the junior market and a potential windfall to the promoters and insiders that are mostly dealing with moose pasture and geological dreams. Most gold bugs are suckers for a great gold story. So they sell 1,000 shares of a decent junior and buy a 1,000 shares of the moose pasture stock and when enough people do this the decent stock goes down and eventually the moose pasture stock collapses.
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• The Canadian mining industry was built on prospectors going out into the wilds with a mule and supplies for a season or so to explore and look for mineral traces on surface. This was high risk and speculators and investors for their grubstake were given a big piece of the action if anything ever developed. This tradition now continues but on a grander scale with the investment banks demanding cheap stock and warrants from the company for their own account and customers. The warrant kicker is now so prevalent in Canada that it has ruined the share structure of many small companies. Insiders sell the newly issued stock as soon as allowable and keep the warrant at no cost. If the deal works they have a free ride. But their selling kills most stocks.
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• Drilling rig shortages, assay backlogs and permitting etc. now can add 1-2 more years for a successful discovery to become a buy out or a mine. Time is money and these delays dilute the present value of the company.
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• Most management teams of small mining companies usually take very modest salaries. But they can own 2-3 million shares of stock at basically zero cost. They can't send their kids to college unless they sell some shares. They also can't wait 5-8 years for the mine they hope they will discover or for the ore body they actually have discovered to become a mine. When you are buying stock after a great press release the seller is most likely an insider.
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• After the last two years and lower junior stock prices people give up and start looking for larger companies. They then add selling to the market.

Unfortunately all these factors have really hurt the junior sector so if you are not an expert you should be careful. Thinking of holding on to a loser means you will most likely have your capital die a slow death.

Unless you own a junior mining company that is loaded to the gills with gold and silver reserves and resources you are in trouble. The ore body better be an economic ore body that actually without a doubt (almost) can become a profitable mine. The stock should be so undervalued that even the insiders are buying.

Most hard money investors would be well served to use these rules:

• Sell any stock that is issuing warrants with their next financing and tell your broker why and have him call the company as well.
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• Never put more than 5% of your money in exploration stocks unless it is an advanced exploration play with plenty of prior drill success.
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• Look for developmental companies that are within a year from bringing on new production. This is my favorite area for our Fund and one that you should pay attention to.
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• Make sure that even with much lower metal prices (gold at $600) the company will still sell for less than 15 times after tax cash flow per share.
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• Always look for companies with giant deposits that have economic grades. Even if the company is small, a big deposit gets attention.
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• I hate to say good management because almost all companies can make it look like they have good management. But good people make things happen not rocks.

In the coming years one of the best sectors for investors will be the mining industry for reasons you already know about. Progress in China and India, paper money, derivatives, insane governments, debt, etc. all point towards much higher metal prices for perhaps a decade. Don't shortchange yourself. Stay with the companies that have the real goods in the ground.

For other articles on gold, mining and the economy visit our archives at www.kengerbino.com.

Apr 24, 2008
Ken Gerbino