Successful investing in ASX Junior Gold Stocks

By Neil Charnock
www.goldoz.com.au
info@goldoz.com.au


General comment:

Geopolitical pressure- A close friend sent an email to me the other night and wrote: Did you see that the Israelis put out a travel warning advising all their citizens to leave every Muslim country in the world?… Even those countries like Thailand where Muslims are a small minority. The most ominous travel warning that I have even seen this lifetime. Simultaneously the senior aide to the Iran Defense Minister defected with his whole family to the CIA in Ankara and is now being debriefed in the US. That is the guy who knows more than anyone about Iran’s military installations, nuclear program and state of preparedness. I wonder why he got out right now… He has probably been an ‘asset’ for a while. Does it tie in with Israel’s travel warning? And what about there now being two US battle fleets in the Med? Might be time to start hoarding the baked beans. Definitely not the time to be selling metals. – Thank you Phil.

Commodities- Still strong, a number of base metals have continued to surge in early 2007 and here is a comment I made at the start of 2007 when all was gloomy...

“If that was a top in copper it was the strangest top I have ever seen. Only copper and oil have dragged down the CRB index to date with aluminum, nickel, zinc and lead all near record highs. The resource sensitive Australian dollar is near record highs. Copper is being talked and sold down with gloomy US housing figures yet US housing is not the key to copper prices… China is.”

Then in the next article…
“I have been saying for the last few months that commodities were not finished, many have held up very nicely thank you. I have commented that copper is not dead, it is good for a rebound and the current price correction is nearing completion so I have begun to invest in some of our more interesting and deeply sold copper plays.”

And again in the next article about the end of January… “Copper shows a nice turn pattern at the base of an exaggerated correction following a projected supply crisis which caused an exaggerated price spike.”

Time and the chart have proven me right so far as copper has recovered somewhat… China has led the recovery in price and this bull is not over. Nothing goes up in a straight line, copper has run hard from 80c to $4 and back to $2.50 and now back up to $3, hardly a poor result or a collapse is it? Nickel is up nearly 50% this year, lead is up better than 15% and zinc has corrected.

I believe gold and silver are going to out perform all base metals this year and have been saying it would happen in the second half. The shares might start earlier… that is might, but that some of these stocks will get going earlier due to company specific reasons. These are of primary interest to me at this point in time and the sell off has created a bonanza situation in some of them. More on this further down the page.

Most inexperienced investors probably lack the skill sets to invest in juniors and would be advised to stick to the more stable major leading miners. Australia has done very well to date from the commodity boom and this will continue in the leaders. I have just added a new feature to our spreadsheet products which is a chart set and this is a very useful snapshot in one handy document because it allows for easy visual comparison. These charts are so interesting to view in one continuous document. The leaders have been traveling along just fine and some have done really well during the recent market correction, it really pays to be in the right sector.

General economy - The current imbalances (just to name a few) are; insane debt levels worse than at the end of the 1920’s as compared as a percentage to Gross Domestic Product, mature Western economies with comparatively little remaining manufacturing capacity (it migrated to Asia), mountains of Foreign Reserves in Asia looking to diversify out of mountains of US Dollars, asset bubbles created by easy money and extremely low interest rates such as shares, property and bonds… last but not least are the derivatives markets that have mushroomed in parabolic fashion to somewhere in the region of $400,000,000,000,000. That is 400 Trillion dollars of interconnected paper contracts that threaten the entire economic system as we know it and this is uncharted territory. $400 trillion is roughly 30+ times the total USA gross domestic product – GDP!

A series of large defaults, perhaps resulting from just one or two, in this paper house of cards has the capacity to bring on serious chaos within the financial system causing a panic even greater than 1929. As astute investors, wealthy or not, and the newly wealthy Asians (who have a rich culture of being astute and a love of precious metals) - wake up to what is happening in ever increasing numbers the competition for this tiny hoard of exceptionally rare metal will be fierce. If - or some say when… (I personally cannot see how some form of panic can be avoided and would be in awe if a smooth transition can be engineered somehow), …we do get into a crisis of no return due to all of the problems listed above and others I did not have space to mention, then the rush for the stability plus protection of gold and silver will be fear driven and extreme.

How much gold?
The truly insignificant amount of gold has ever been mined and the even smaller available amount of gold and silver will simply not go around when the music stops. If you can imagine a solid cube with sides approximately 22 meters long – then you can imagine all the gold ever mined. Australia is particularly interesting, 8 out of the top 10 largest gold nuggets ever found were discovered here and we are a global top 3 gold mining Nation. We hold roughly 10% of current known global un-mined resources with 5,225 t.

Investing in ASX juniors
A number of investors have written back to me after purchasing our broad PM sector guide, in essence they have been asking about how to invest in or choose from the list of juniors. We have included what we consider to be key information with each company brief however, as discovered, the average investor needs additional guidance at times on what factors are important and why in addition to what else to investigate before precious capital might be deployed. We have decided to provide some extra assistance exclusively for readers on Kitco over the next month or two.

There are a large range of factors to successfully investing in junior gold stocks. If you don’t want to blow your money you had better study books and a range of articles like this one very carefully. I will try to condense a massive amount of data into a brief on the subject and readers would be well advised to study the various points made until you understand them. This may require that you get the definition of new words and study some of these areas in greater detail.

This is a high risk activity and juniors are both the hardest to get right and also the most lucrative if you do. They are unproven yet have the potential to grow by a much larger degree than any other sector. A one billion dollar stock will take some time to double in price and yet a junior can double, triple or even more in short space of time, yet they can also halve or worse just as quickly. This is not for the feint hearted so if you want to play to win you have to get armed to the teeth with knowledge.

Before you consider your involvement in this sector it is essential to understand your own risk tolerance levels, investment strategy and understanding of; share investment in general, the mining sector and the companies you choose.

Risk tolerance is as much to do with understanding, certainty and experience as it is to do with your level of available capital for this activity. Certainly having a spare amount of capital you can just play with without the stress involved from losses is a big advantage. You have to be able to hold your nerve and sleep at night or chances are you will react at the wrong time and sell during a dip in share price resulting in a loss. Risk can also be lessened by understanding market timing which can be greatly improved by a thorough understanding of charting and technical analysis. It is also about reading changing economic conditions and long term trends so that you are positioned in a winning sector to start with.

Investment strategy is about the style of investing you have adopted, your selection processes, the time you are willing to hold the stock and your belief in the company / sector they operate in. This can only be derived from knowledge focused by analysis which results in foresight or predictive ability. Finally understanding the sector involves a broad knowledge of the mining industry and at least some basic understanding of geology.

First you have to be able to decide if capital assigned to such investments is spare capital that can be allowed to ride in the sector while your investment choices advance their projects and gain market acceptance. This can take quite a while so if you do invest and then your circumstances change you may have to sell when it does not suit you again resulting in losses.

It is better to wait until the sector is hot and prices are strongly moving upward? For momentum traders the answer is yes. These elite traders aim to keep their money working hard all the time and are adept at moving their capital into fresh price surges on a regular basis. Day traders cannot generally play these small gold stocks in Australia until the sector really gets kicking either because there is not sufficient volume to enter and exit trades with reliability.

For the average investor however the disadvantage of waiting for sector “take off” is that you lose the leverage and low down-side risk advantage that exists along the bottom level of prices in these stocks. You will probably miss the best of them too as these will generally take off first. Be aware that prices can also bump along a bottoming base formation for years in individual stocks so you have to have at least a rough guide to potential of the sector and the potential company price launch before you partake in this type of activity. So it has to be at least medium- term investment capital that can be left to sit while your chosen stocks get into first, second and finally top gear and go for that price surge you so desire.

A few major considerations to get you started, …more next article

Management
Fortunately the long bear market caused many large companies to down size their exploration teams and so many quality staff have ended up in the junior companies. Finding quality management and geologists is the first key to selection and I look at what these professionals have done in the past. Past performance in identification, delineation, finance and development of operational mines, successful track record is essential. I prefer a mix mainly of geologists and hard core industry professionals, such as former operations managers and the like to make up the major portion of the management. These details are available on their web sites.

Location location location
Mining can be like real estate in this sense. Australia mined about 250 tonnes (t) of gold in 2006, the Super Pit in Kalgoorlie WA produced 26t and dominated production. Australian production for the forth quarter of 2006 was 62t. Of this 62t, all in rounded numbers - 42t was mined in Western Australia (WA), 8t in New South Wales NSW, 5t in Queensland (QLD), 4t Northern Territory (NT), 2t in Victoria (VIC), 1t each in Tasmania (TAS) and South Australia (SA).

Old mining districts that have been under-explored by modern methods are an excellent target, so are mines within prolific districts or along known lines of geological lode. Australia is blessed with several excellent mining districts and gold occurrences tend to be found in these districts and along fairly well defined paths called corridors so this can be a promising guide to juniors and their prospects.

Strategy
One strategy I like to employ is to buy in and really hit a key stock or two and hold for the longer term. I like to buy during a base formation on the chart and add purchases on price pull backs while I accumulate vastly undervalued special situations (which I will cover next paragraph). On minor price spikes I can lighten up if I wish. What I really aim to do here is to wait patiently until there is a considerable price spike where the true value of the company is finally recognized by the market. This will maximize returns through leverage. As price surges I can then sell a portion of these companies and reinvest or diversify into different assets if appropriate. Point is to get back initial capital and healthy investment returns and to also hold a portion for the final blow off spikes that lay ahead in gold.

Thanks to the long bear market from 1980 to 2000 there are some juniors who have been able to buy old mines with quality tenements and infrastructure in place. Mill, tailings dams, perhaps a decline or tunnel down to near other deeper resources, accommodation village, power grid, roads can be a huge time and cost savings not always reflected in the share price of a junior. Sometimes the old mine waste called a mullock heap or tailings can be lucrative enough to put through with higher grade ore because it will be right next to the mill and require no blasting to win it from the earth. The time taken to bring a project to fruition, production, profits and finally pay dividends can normally take nearly a decade. The special situation stocks can jump ahead of this process and time curve amplifying leverage for spectacular profits.

Special offer
I am going to work hard again to re-update the charts and prices on my ASX PM stock PDF files tonight and I now make a special offer again to the rest of the first 200 annual subscribers… Only AUD$99 will get you the current delivery + 4 additional quarterly sets of reports including the initial delivery (total 5), usually $30 each and I will include my updated in depth uranium report covering over 60 ASX stocks, all for only AUD$99… all up around 300 companies covered in a convenient time saving format. The right button is on the site now. In this product many of the better prospects have a chart included to provide a visual price history and so the file is quite large at about 2.7KB. The stock reports are already sorted by stage of development and market capitalizations and this series of a further 4 sets of reports over 12 months will save you a great deal of time while assisting you to clean up on this opportunity. Demand has been good considering current conditions however it did slow with the market corrections. I will not leave any new client out in the cold if we over shoot the target however I actually expect this offer to last for at least two more articles at the current rate. See the special offers on the web site.

Gold Oz is starting to receive helpful investor content and move at last, we will be adding free educational and Australian content at an increasing rate on a regular basis from now on.
www.goldoz.com.au


Good trading / investing.
Regards,
Neil Charnock



Neil Charnock is not a registered investment advisor. He is a private investor who, in addition to his essay publication offerings, has now assembled a highly experienced panel to assist in the presentation of various research information services. The opinions and statements made in the above publication are the result of extensive research and are believed to be accurate and from reliable sources. The contents are my current opinion only, further more conditions may cause my opinions to change without notice. The insights herein published are made solely for international and educational purposes. The contents in this publication are not to be construed as solicitation or recommendation to be used for formulation of investment decisions in any type of market whatsoever. WARNING share market investment or speculation is a high risk activity. Investors enter such activity at their own risk and must conduct their own due diligence to research and verify all aspects of any investment decision, if necessary seeking competent professional assistance.