a *perhaps read* - on picking a junior gold stock

  1. dub
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    here 'tis.


    What is a high quality junior gold stock?
    Dr Richard Appel
    Financial Insights
    September 15, 2003

    The strengthening tenor of the junior exploration mining sector has been accompanied by increasing references to "high quality" junior stocks. Writers who are discussing these small companies attempt to impart to the reader the necessity of finding the few needles in the vast haystack of active junior companies. Those who are recommending a company will often refer to their picks as residing in this elite but miniscule group. In most instances I believe that the reader is left confused, and wondering what qualities he should seek in his search for the ultimate junior gold stock. I too have on occasion used this statement in my effort to help individuals single out the few juniors with the best potential. And I too have not until now actually attempted to present the reader with a working definition of this misunderstood concept. Now, after seeing this or similar phrases being utilized in an ever increasing frequency, I feel that an understanding of what it actually means is in order. Indeed, what characteristics must an unproven exploration company possess that allows it to offer the investor the greatest chance for success?

    Most investors in the mining exploration industry are experiencing their first foray into this market. I am confident that their legion will swell as the secular Bull Markets in these and all gold and silver investments unfolds. To their credit, most are seeking a way of leveraging their gold investments. Unfortunately, to their detriment, they do not fully understanding the great risks involved in their quest to maximize their gold investment profits.

    To put it bluntly, exploration companies are fraught with risk! Numerous problems can arise for these small enterprises, even if they are ultimately successful and actually make a mine. Further, if one randomly acquires companies without first thoroughly scrutinizing and understanding their individual credentials, the odds of investment success is sorely limited. Yet, we are all drawn into this market as we recognize that many fortunes will be made. These can only accrue to those who follow sound rules in selecting the companies in which they invest.

    It is said in the industry, that if an exploration geologist finds a mine it is likely that he will find others. This is due to the fact that far fewer than 5% of all exploration geologists will ever be credited with a discovery that leads to a mine. This is because those select, gifted, explorers who find numerous mines, seem to have a sixth sense that moves them to success. It is as though they have the ability to understand and relate to nature in their mine finding struggle. On the other hand, the vast majority of geologists working in the field may have a firm grip on the theory of mineral exploration. Yet, they cannot take it to the next level and unravel Mother Nature's secrets. Unfortunately, not only must the directors of a junior mining company be endowed with a true mine finder, but they must also be capable of telling their story to the investing community, as well as raising the needed working capital and properly managing their company. Thus, the first and most important ingredient of a high quality exploration company is the attributes of the people managing it.

    I could almost end my essay at this point because management is virtually everything! The longer that I am in this industry, and the more mistakes that I make and learn from, the more entrenched that I become in this belief. However, I will continue as there are a number of additional points that I believe that you must understand. This will help you meet with success while avoiding or limiting damaging losses. But, in the end, it is in the companies of the proven people in which you should put your trust.

    We have all heard about this or that great property. However, until it is drill tested, all of the geophysical and geochemical testing, the rock and soil sampling, as well as the past production figures mean little. Mother Nature has a way of creating a great body of valuable mineralized rock but later splits it apart. Then, she moves a small section of it miles away only to be found eons later by a struggling member of the mining community. Only when a promising prospect is ultimately tested by the bit of a drill, is the first hint of its potential success or failure unlocked.

    This is another area where a successful management team comes into play. I have already discussed how success begets success regarding an exploration geologist. However, this talent also comes into play when it comes to acquiring the best potential world-class projects. While there are thousands of geologists and mining company directors, the exploration community is quite small. Those who possess the better projects, including the major mining companies, will seek to vend or joint-venture them to junior companies whose management they believe have the best chance for success. This is because the owners of these desirable land holdings will primarily benefit if a mine is actually brought into production. Thus, most of the best projects are acquired by the most successful mining company directors. Anyone can wave his arms and state that he has an outstanding property that he knows will become a great mine. However, beware if an unproven management team asserts this claim.

    Money is the life's blood of any mining enterprise as mineral exploration and development are extremely capital intensive. This feature causes a company's "burn rate" to forever reduce its working capital. Thus, capital must constantly be replenish in order for them to survive, let alone to proceed . This factor necessitates the ability of a junior's management to have ready access to an ongoing stream of new funding. And, you guessed it, the most successful mining teams will have the largest pool of capital not only offered to them, but from which to choose. This is not to say that it is always easy to raise the necessary money to forward a project but, during poor markets, it at least will give the most acknowledged groups the best chance for its acquisition.

    The ability to create market awareness or to promote a project, is the last major factor needed for me to categorize as company as being of "high quality." Unfortunately, the most successful mine makers rarely have the ability or time to properly tell their story to the investment community. On the other hand, numerous promoters are endowed with the capacity to make a mediocre project appear to have the makings of the next major mine.

    Never underestimate the need for a junior company to make the market aware of their successful progress. In fact, a company that has a project of great merit may greatly suffer if it fails to let the marketplace know what it has. This ability is of utmost importance as it serves numerous purposes. First, if investors are made aware of their success or potential for same, it will help the stock rise to a price that reflects the company's real worth. This will allow them to raise working capital with the least amount of share dilution. Venture capitalists, various stock funds, or even major companies, once aware, will desire to participate in their advancement, and will willingly help finance their development. Additionally, it will attract numerous onlookers who may later benefit the company. In effect, it will place the company on the radar screens of various interested parties.

    I have interchanged the term "making a mine" in this essay with "finding a mine." This is because the majority of mines are made, not found. It requires a certain amount of creativity to first envision a mineral deposit from empirical data, and then to bring it into production. Further, to a large degree this is accomplished by developing methods to reduce the cost of building a mining complex, maximizing the mineral extraction process, and minimizing the wasted effort and operational expenses. This is truly an area of expertise in itself and often determines whether a mineralized body is economic or not. This ability, to put all of the pieces together in a cost effective fashion, is possessed by but a small number of professionals in the mining industry. And, very few junior companies possess such an individual.

    As you can see it takes a number of attributes and abilities to thrust a junior company into the spotlight of achievement. Their directors must not only be among the most successful in the industry but they must also be able to acquire the necessary working capital, have access to the best projects, and must also be capable of telling the marketplace its story. This is rarely achieved by one individual. In the end, it is the combined effort of a number of highly competent people possessing different abilities, that makes a high quality junior exploration company. These attributes are what I look for in my search for the next future take over candidate or major gold producer.

    With the above being stated there will always be individuals and companies who acquire their first taste of success in this challenging field. However, the odds greatly favor those who have already been there.

    The New York Institutional Gold Conference

    I recently returned from the Institutional Gold show in New York City. It is an annual two day event that has been one of the mainstays of the industry. This convention brings together numerous credible speakers, junior companies, investors, mining analysts as well as various fund managers. They are all seeking to uncover the best of the best in the junior gold exploration universe. Compared with last year's event, this year witnessed a virtual full house of attendees. In fact, I would not be surprised if the number of visitors to the show doubled that of the previous year. When I first entered the conference I was amazed by the size of the intent audience, listening to one of the speakers. It was truly "standing room only " as literally every seat in the large hall was occupied. During my two days visiting various companies and their directors, I could not help but be amazed by the energy and level of excitement that consumed the entire gathering. As I have been stating for the past few months not only have the juniors bottomed, and have been building on their price advances, but I believe that the best is yet to come. If it continues to grow, as I am confident that it will, it will generate substantial profits to those who possessed the discipline and patience to maintain their positions, that the past year has demanded.

    I frequently visit Vancouver and attend mining conventions for two reasons. First, I am constantly searching for junior companies that possess a combination of the right management and offer great value to those acquiring their shares. Second, these trips allow me to best gauge the current level of excitement or lack thereof of the market. To the point, I left New York City comparing this conference with the best that I have attended since 1996. This was the peak of the last gold sector major advance. However, in the present case, I believe that we are in the early stages of a great secular Bull Market, not in the late stages of what was only an impressive Bear Market rally.

    Dr Richard Appel
    September 12, 2003

    I publish Financial Insights. It is a monthly newsletter in which I discuss gold, the financial markets, as well as various junior resource stocks that I believe offer great price appreciation potential.

    Please visit my website where you will be able to view previous issues of Financial Insights, as well as the companies that I am presently following. You will also be able to learn about me and about a special subscription offer.


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