The terrain of parts of the northwestern Mexican landscape in the state of Sinaloa is not particularly inviting, unless you happen to be into wandering barren soil, if you have a taste for the lonely, if you are an airy bird of prey, or if you’re a geologist. For miles you can look and see sparse vegetation, blue skies and rocks, which stretch to the edge of the Sierra Madre Occidental Range. The dirt you walk on the hard ground covers the sedimentary rocks from the Cretaceous and Tertiary periods which were cut by volcanic intrusions. Near one such large intrusion, the granite Sinaloa Batholith, is the Magistral Project and the El Gallo Mine. Geologists—modern prospectors—who criss-crossed the vast open acreage near an old, sleepy gold mine, found something they weren’t looking for: silver. The elixir of finding the precious metal goes a long way toward explaining the quest for gold and silver, and the appeal of the exploration and discovery that the emerging mining companies called junior miners do, is obvious.
“It was luck,” Ian Ball, Vice-President, Mexico, of US Gold (NYSE Amex: UXG), modestly says of his company’s 2008 silver find at El Gallo. “Rob McEwen, our CEO, is a risk-taker, and had purchased the small gold mine originally which hadn’t done much in the 15 preceding years. He also bought the half-million acres around it.” Luck, maybe, but diligence also for McEwen and his company. The silver is high-grade ore, resting near the surface, and the samples continue to be promising. Shallow deposits are easier to extract, so costs can be kept down. This is a confluence of luck, diligence, risk-taking and savvy which also whets investors’ appetites. The silver find is a clear bonus for US Gold. Michael Ballanger, Union Securities Investment Advisor, in an interview with the Gold Report, said, “While I like gold, what interests me in the near term is silver.”
The Juniors: Who They Are And What They Do
Gold Crest Mines (GCMN: OB), is a company with a $1.59 million market cap, which currently trades at just under 2 cents per share on the over the counter bulletin board. It’s a classic penny stock. Gold Crest centers its exploration in Alaska, with its Kisa project, a collection of eight exploration properties in a band arching through the southwestern part of the state.
The first step for these emerging miners is acquiring land which they think is promising for precious metal discoveries. Then there is the business of exploration, which requires capital investment—it costs to drill and dig in the ground—then there is extensive testing of mineral deposits, if found. If all those steps are successful and the company still has funding, production and selling of gold and silver can take place. Gold Crest, like many of the other emerging miners, is at the explorations stage.
Apollo Gold (NYSE Amex: AGT), which has a market cap of $93 million, with its stock recently trading at around 36 cents a share, is one junior that is progressing in its exploration and discovery. It is currently mining its Black Fox Mine 40 miles east of Timmins in Ontario. It began open pit mining of ore in 2009 and has stated probable reserves of 1.33 million ounces of gold. It is also drilling in its Huizopa Project, also in the Sierra Madre Occidental Range, which showed significant gold and silver values.
Great Basin Gold (NYSE: Amex: GBG) is another junior miner actively drilling, and as its CEO, Ferdi Dippenaar, pointed out in a company release, “Much remains to be done,” as he also mentioned a successful $47 loan facility obtained at Credit Suisse. This underscores what the junior miners have to do: raise cash to keep funding their operations while the front-end loaded expenses of exploration and discovery remain pressing. What many junior miners end up doing is either forming alliances, sometimes merging, or even undertake partnerships on occasion with senior miners. In the latter case, the deal is often better for the senior miners, who benefit from favorable terms in the deal as they provide the cash, sometimes with the promise of part of the strike if drilling is successful.
Thus, many juniors fight to stay independent, though they can become cash-strapped and have to scour for funding to stay alive. As for the costs? “One thing the junior miners can guarantee,” US Gold’s Ian Ball says,”is that we’ll spend all the money.” So the costs of drilling and the capital-intensive nature of the exploration is the sure thing, the discovery of gold, of course, is not.
Why They Do It
Beyond the powerful age-old allure of striking it rich with gold, there is the allure of building a company; that part of it is like any other business. US Gold’s McEwen famously cobbled together Gold Corp (NYSE: GG) from a trading company, added a sleepy mining company then eventually forged Gold Corp into a formidable senior mining powerhouse. Now one of the major gold stocks, the allure for investors can be seen when you look at most of the majors, which began their lives as emerging miners, small companies that explored successfully and grew. Survival in this business can be very sweet.
The junior miners vary in size, also. Allied Nevada Gold (NYSE: ANV), has a market cap of $1.2 billion so some wouldn’t consider it a junior, yet it had its first year of positive earnings. So this is a company that is not only getting gold out of the ground, it’s a producer and seller, with income. A close reading of its earnings report reveals that the $8.5 million, or 13 cents EPS for 2009, includes a net tax benefit which comes out to a plus $12.7 million. But Allied Nevada still shows that it is producing and selling gold, 14, 395 ounces in the final quarter of the year in 2009 and 42, 358 ounces for the entire year.
McEwen’s US Gold, which has a market cap of nearly $394 million, is in a bit of a unique position. Although it is not yet producing and selling gold and silver, it is close to doing so, with probability of El Gallo producing silver on the horizon. US Gold has its large gold project located in the Cortez Trend in Nevada, which adjoins senior miner Barrick Gold’s (NYSE: ABX) Cortez project where over 35 million ounces of gold have been discovered.
Investors can see by the sampling of these junior miners that they are all different, and they should be researched accordingly. US Gold’s Ian Ball freely admits these are speculative stocks. “Investors should by a handful of junior mining stocks to spread the risk,” he says. The idea of leverage and risk is transparent with these stocks, though. Investors should readily know what they’re getting into. The unique appeal of some of these stocks, though, might be illuminated by US Gold. “Rob has invested $60 t o $80 million of his own money into US Gold,” Ian Ball says. The 21 per cent stake in his own company along with McEwen’s refusal to take a salary makes the passionate McEwen’s commitment to his enterprise striking and vivid.
Many individual investors live to find one stock with the potential to go from practically zero to the stratosphere. With investors looking to get in on the ground floor of the next big thing, despite the looming risks, junior mining stocks, prudently bought, may provide just that chance. The kicker is the sense of adventure, almost like getting the gold dust on your boots as you walk the trail of successful investing.
Copyright © 2010 Greg Sushinsky. All Rights Reserved.