Budfox-Gold and silver fever downunder

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    Article on Gold-eagle by Tony Locantro (alias Budfox).

    GOLD AND SILVER FEVER DOWNUNDER

    Whilst being geographically isolated, and somewhat ignored in terms of global investment, the precious metals fever has certainly spread to our shores. Gold and silver stocks have finally awoken from a deep slumber that took hold after our Reserve Bank announced significant gold sales, and the investment focus switched to the Dotcoms. In terms of false starts we had the Washington Agreement in late 1999, and some brief excitement in May 2001 when gold went for a quick sprint. The battle with the $300US level attracted the bulk of attention, and it was apparent that any falls below the magical level were greeted with panic selling.

    It is the Brits that tend to pay more attention to our locally produced television shows, and worship the stars that often travel to England in the off season to take to stage shows. They also have developed a healthy appetite for our mining stocks that have elected to list on the AIM. During the Dotcom frenzy it was the Germans that took a liking to our stocks, with discussion boards in both countries littered with the moves overnight on each market. So if we can attract the Brits in droves, what makes the US markets so hard to crack?

    I guess we tend to look across at our Trans Tasman rivals (New Zealand) and perceive their market as being illiquid and lacking in any real excitement. Could the Americans have a similar view of our markets? Whilst our broader stock market accounts for a minute percentage on a global scale we do possess a mining sector that provides not only excellent leverage but also companies with a long tradition of profit growth in a stable environment.

    THE CASE FOR AUSTRALIAN PRECIOUS METALS STOCKS

    From 1997 to late 1999, our junior mining sector was literally decimated as companies in search of adding shareholder value threw away their shovels and elected to jump on the Dotcom bandwagon. There was however a number of companies that instead of switching sides, simply battened down the hatches and preserved capital with the view that the cycle would turn. Those companies with the benefit of hindsight have prospered whilst the converts struggle to replenish dwindling cash reserves.

    Leverage

    In the junior mining sector we have a broad range of companies with share prices and market caps to match. From the top we have a number of producers with share prices in the $5-$10 range, a growing number that have been re-rated over the magical $1.00 level, whilst the majority are priced under 50c per share. Some examples include,

    Croesus Mining (CRS) 83c (Kalgoorlie Gold Producer)

    CRS's share price touched a low of 23.5c (late 2001) after they announced a merger with CNGC. Since then the stock has benefited from increased institutional interest, a rising gold price and exploration success. With Australian gold producers under attack from foreign giants CRS has had an armchair ride up the producer ladder. Volumes have increased significantly with volumes in excess of 2m shares per day becoming a regular occurrence.

    Herald Resources (HER) 70c (Set to re-open Coolgardie Gold Operation/Base Metals)

    HER was a gold producer for 13 years and paid dividends to shareholders on six occasions. When the $A gold price collapsed the company elected to place it's Coolgardie Gold Project on care and maintenance. The company is set to resume gold production in August, (resources of around 1m ounces), and has made a significant zinc-lead-silver discovery in Indonesia (Dairi Project) (10mt @ 15% Zn, 9% Pb and 13 g/t Ag). HER is currently capped around $30m with cash reserves set to increase to around $6.5m.

    Independence Gold (IGO) 30c (Gold/Base Metals)

    There has been a recent trend in Australia where many Geologists associated with larger companies have put together tenement packages and listed their own junior explorers. IGO is one such example that has already attracted attention due to its Southstar Database (generated by WMC), and the search for high-grade gold deposits with the backing of larger gold producers. IGO has 57m shares on issue.

    Penny Stocks

    The flow of money into the precious metals sector has yet to really have a significant impact on the penny stocks, with many struggling around 10c and below. There are a number of explorers with micro caps $2m-$10m that have lifted the tempo in terms of exploration and could well provide the next bout of excitement. Some examples include,

    Macmin (MMN) 8.6c (Emerging Silver Producer)

    In terms of investment opportunities in silver, there are only a handful of companies that offer pure silver exposure in Australia. MMN is one such company, and when silver stocks are discussed on our local websites MMN usually attracts the bulk of the attention. The company is currently exploring at their Texas Silver Project (near the NSW/QLD border in Australia) and are working towards production in mid 2003. The company's share price spent most of last year and early 2002 trading around 3-4c with minimal attention. Volumes have since increased significantly, with a wider range of brokers (those not normally seen anywhere penny stocks) buying.

    Exco Resources (EXS) 11c (Gold Explorer/Base Metals)

    Whilst the Indonesian scandal associated with Bre-X created significant excitement and heartbreak there still remains interest in conducting exploration in Indonesia. EXS have recently acquired the Manna Project in Southern Sumatra. The project is northwest and along the same volcanic chain as Newmont's Batu Hijau Project (11.7m ounces gold, 4.45m tonnes copper). The company has 51m shares on issue.

    One of the trends during the dotcom boom was the targeting of stocks priced from 0.01c to 3c in terms of gaining greater leverage. With our mining sector dominated with cheap stocks (price and market capatilisation) a continuation of the current strength in precious metals will assist in them attaining market re-ratings.

    For the websites of Australian mining companies the following link is useful (http://www.reflections.com.au/MiningandExploration/Companies/Profiles.html)

    Exploration Hotspots

    Australia is graced with geographical regions that come to life at the first hint of a successful drill hole. The most recent regional boom involved stocks located in the Gawler Craton region where discoveries by Helix Resources in 1996 resulted in explosive share price moves in those juniors with tenements in the region. The Gawler Craton returned to centre stage in November 2002, when Minotaur (MNR) announced encouraging results from their Prominent Hill Project (Copper-Gold). The key for speculators now is to look towards regions that could provide the impetus for the speculative mania to continue. The more widely known regions include, Kalgoorlie (WA), Meekathara (WA), Ashburton (WA), Yilgarn Craton (WA), Gawler Craton (SA), Stuart Shelf (SA), Ballarat (VIC), Bendigo (VIC), Curnamona Craton (NSW), Lachlan Fold Belt (NSW), New England Fold Belt (NSW), Beaconsfield (TAS), Mt Isa (QLD), Cloncurry (QLD), Charters Towers (QLD), Tennant Creek (NT), Tanami (NT), and the Musgrave Region (NT,SA).

    THE GOLD BULL MARKET THUS FAR

    The first major share price moves were experienced by our major gold producers with percentage returns in the vicinity of 150%-200%. When the battle for Normandy heated up, analysts then began taking the gold sector more seriously and takeover premiums were then applied to a number of our producers. Speculation then began to mount where the next corporate move would take place, although the gold price was barely climbing off the canvas. With the $280US and $285US levels broken, the talk of seeing gold again at $300US oz became a major topic of discussion amongst brokers and investors. There were a handful of decent drilling results, however it was apparent that unless the price movements in both spot gold and silver could be sustained the sector would continue to struggle.

    Gold and silver stocks were being discussed on the Internet and sites such as GOLD-EAGLE are becoming popular amongst Australian investors. Those that entered the markets during the Dotcom boom have been faced with dilemmas associated with being comfortable with a new sector. For many the thought of investing in gold and silver would bring back memories of the pain associated with the NASDAQ collapse, however I have noticed that an increasing number are developing an appetite in terms of attaining leverage to the current precious metals bull market. As experienced during the latter stages of the Dotcom boom, I am now taking calls from first time investors interested in the next drilling program and companies worthy of investment based on their near ology.

    The increase in press attention has been significant. The stock watch columns of our newspapers and magazines are now featuring precious metals stocks, and gold bars have again graced the front pages of numerous publications. It would appear that the break of $300US was the trigger the press were waiting for to start seriously covering gold and silver.

    I have not yet taken tips from taxi drivers and the local butchers, however it would appear that the word is certainly spreading and those that have not discussed the market since the events of 2000 are finally prepared to dip their toes in.

    In the last week I have sensed some desperation buying emerging, however this is mainly from those already heavily exposed that are seeking some more cream off the top. With a host of companies announcing the commencement of exploration programs, it would appear that the next stage of the bull market could be fuelled by further discoveries after the corporate speculation subsides.

    Despite the strong moves to date, there is still an underlying cautious tone where the risks of sharp near-term corrections in gold and silver stocks have not been dismissed. As each key level in the gold and silver price is broken you can almost sense the collective sigh of relief amongst investors, however each level brings new challenges and the threat that both gold and silver could yet be beaten into submission.



    Tony Locantro
    [email protected]

    3 June 2002

    Tony Locantro is a client advisor in Perth, Australia, and the author of "The Green Room", A Guide To Speculating on the Australian Stock Market. Tony was previously a major contributor to Australian Internet forums under the nick "Budfox" from 1998-2001.



 
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