Some Considerations For Selecting Junior Miners

Now that the investment clarion has been sounded, investors may wish to do their own homework for evaluating candidates for investment.  Among the several dozen decent publicly traded companies how does one decide which ones to invest in?

While not an exhaustive list, here are some things every investor ought to keep in mind.  Follow these rules, and your chances of getting in trouble will be greatly diminished.  

Ask and answer the following questions:

1.  Where Are The Operations Located?

In my opinion, the biggest risk currently is geo-political.  Some countries are dependent on their mining industries and are not terribly interested in having foreign interests, i.e. us, coming in and pillage their resources for our own profit.  The risk is nationalization.

A recent case is that of Crystallex International Corporation (KRY), whose mining interests were nationalized by Venezuela.  KRY stock sold for more than $4 per share as recently as 2007, before losing a mind-numbing 98% of value to hit 10 cents per share.  It has recovered somewhat to trade at $0.45 today.

Personally, I prefer to stick to North American companies which operate in some combination of Canada, the United States and Mexico.  I tend to avoid companies with the bulk of their operations in Africa, whose countries tend to be perpetually unstable and subject to ethnic conflicts and new governments.  It's impossible to predict which country in what continent will be unsafe, so I stick to where I believe the business environment will not be subject to change without warning.

2.  What Aspect Of Mining Is The Company Involved With?

The junior mining sector is basically divided into explorers, developers and producers.  The explorers are like oil wildcatters.  They can have the greatest gains and the most severe losses.  Some junior explorers to consider are U.S. Gold Corporation (UXG), Explor Resources Inc. (EXSFF) and Vista Gold Corporation (VGZ). 

Most explorers wish to develop their projects, but some don't.  Vista Gold successfully developed its Nevada-based operations to form Allied Nevada Gold Corp. (ANV), which was later spun-off to shareholders at a tremendous profit.

The key risk to an explorer is that its projects turn out to be not viable economically.  NovaGold Resources, Inc. (NG), which has a 50% interest in the Galore Creek project, had to suspend development in late 2007 as cost estimates proved way too low.  The stock lost 99% of its value from more than $20 per share to about 25 cents in one year.

3.  Is The Company Profitable?

The only companies that can report profits are producers.  Some geo-politically safe producers include Aurizon Mines Ltd. (AZK), New Gold Inc. (NGD), ECU Silver Mining Company (ECUXF) and Hecla Mining Company (HL).  Each of these is profitable and getting more so, based on recent financial reporting.

Given the very favorable mining economics prevailing today, the list above is far from extensive.

4.  Is There An Asset Play?

Some companies are primarily an asset play.  They hold already drilled and largely delineated projects.  Probably the best asset play out there is Seabridge Gold (SA), which boasts more than 60 million ounces of economically viable Gold, in addition to a slew of other minerals such as Copper.

Producers can also be terrific asset plays.  ECU is not only currently producing and profitable, it also boasts what is now the 4th largest resource base of Silver, at a fraction of the market capitalization of high-quality giants such as Silver Wheaton Corp. (SLW) and Pan American Silver Corp. (PAAS).

5.  Does The Company Have Sufficient Financial Resources?

Miners who are not generating cash flow are dependent on the capital markets.  The financial meltdown of 2008-2009 placed these companies under extreme financial duress.  Developing, drilling and exploring is capital-intensive and requires regular infusions.

It's important to note both how much liquid resources a company has and its offsetting debt obligations.  If too much debt is coming due and the financial markets are frozen, the company may have to raise additional funds at extremely bad terms.  Companies with limited financial resources got particularly bludgeoned in the 2008-2009 meltdown.

6.  Is This Company Likely To Acquire Or Be Acquired?

Undoubtedly, as the mining industry starts to boom, there will be a slew of mergers and acquisitions.  Any company making an acquisition will typically do a "stock-for-stock" transaction, which will dilute the acquiror while paying a premium to the acquiree. 

This is why I tend to avoid the larger companies.  To remain competitive, it's more cost-effective to acquire in-ground assets than to go through a long and expensive exploration, drilling and development process.  Existing projects have far less risk.

The companies most likely to acquire are primarily the majors such as Newmont Mining Corporation (NEM), Barrick Gold Corp. (ABX), Yamana Gold Inc. (AUY) and Goldcorp. Inc. (GG).  Even higher-quality intermediate producers such as IAMGold Corporation (IAG) or Eldorado Gold Corp. (EGO) can be expected to join the acquisition race.

If you hold a company that gets acquired, you receive an instant windfall.  While you may be disappointed that the ride to much higher prices has been cut short, you can easily re-deploy the gains you just received in another junior.

Naturally, this is just a brief checklist of the items to look into prior to making a sizable investment.  There are many more items to consider such as quality of management and liquidity of the stock.  And, a technical review of the stock would also be a very important criteria. 

Great fortunes can be made in the next several months for investors who can make good decisions as to the horses they choose to get them to the finish line.  Most important is to avoid the big loss.  Another obvious factor to incorporate is good diversification.  For those investors who are not comfortable with making these choices, an excellent vehicle which includes 40 juniors and intermediates, is the Exchange-Traded Fund GDXJ.

Marko's Take

U.S. Gold Corporation: A Junior Explorer Ready To Go Big Time

While the Euro-Zone's problems continue to make the headlines, investors should NOT lose sight of the emerging opportunity in the precious metals market and junior miners.  Against a backdrop of a 1,000 point intra-day loss in the Dow Jones Industrial Average last Thursday, GOLD surged above the $1,200 level as it begins the long-awaited hyperbolic growth phase.

That said, we wish to continue our series on junior precious metals companies with incredible promise to make huge gains in this very exciting phase of the bull market.  Today's featured company is U.S. Gold Corporation (UXG), an American-based explorer with significant land holding in Nevada and Mexico.  UXG continues to report excellent drilling results and appears poised to take this relatively unknown company to the next level.

Rob McEwen, Chairman and CEO of US Gold, is also the Company's largest shareholder with 21% of the stock and does not draw a salary.   Previously, McEwen was the founder and former Chairman and CEO of Goldcorp Inc. (GG), where its Red Lake Mine in northwestern Ontario, Canada is still considered to be the richest gold mine in the world.

During his tenure at Goldcorp, McEwen transformed the company from a collection of small companies into a mining powerhouse, growing its market capitalization from US $50 million to approximately $8 billion.  The shares of the Company produced a compounded annual growth rate of 32%.

UXG's Nevada holdings are concentrated in the Cortez Trend - of the Battle Mountain-Eureka Gold Belt that includes American Barrick's (ABX) Cortez (35 million ounces of gold) to the north and the Ruby Hill mine (4 million ounces) to the south.  US Gold's combined properties on the Cortez Trend sit 10 miles south of Barrick's recent discovery. 

While the Cortez Trend remains under-developed, recent discoveries indicate that it could rival the famous Carlin Trend which is located approximately 30 miles to the northeast where reserves and mineralized material are estimated to be 180 million ounces.

The Company also owns approximately 500,000 acres of mineral rights in Mexico's Sinaloa State.  Exploration work was initiated in early 2008 and has produced encouraging results including the exciting El Gallo discovery announced in November 2008.

McEwen believes that GOLD will rise to $2,000 per ounce this year and to an ultimate high of $5,000.    Sounds pretty familiar.  Could he be a reader of Marko's Take?

The company's investor presentation could be accessed by clicking here http://www.usgold.com/presentation/pdf/24.pdf.

According to UXG's most recent financial statements for the quarter ended March 31, 2010, liquidity was ample with more than $35 million in cash, short-term investments and GOLD bullion.  The Company is debt-free.

As an asset play, UXG's value should be viewed based on its resources.  All holdings have been independently audited with an "NI 43-101" - a national instrument for the Standards of Disclosure for Mineral Projects.  The Instrument is a codified set of rules and guidelines for reporting and displaying information related to mineral properties owned by, or explored by, companies which report these results on stock exchanges.

According to the most recent review, UXG has "measured and indicated" holdings of 3.3 million ounces of Gold, primarily in Nevada and 9.8 million ounces of Silver in Mexico.  Based on 122 million shares outstanding and current prices of the metals, this reveals an asset value of approximately $30 per share.  UXG closed Friday at $3.27 per share. 

Naturally, this valuation doesn't include the costs of development and mining, nor does it include the potential value of FUTURE discoveries.  Since 2007, "measured and indicated" Gold resources in Nevada have nearly tripled!  Given the prodigious history of the Cortez Trend, further resource discoveries would seem highly likely.  The company intends to invest $18 million in the coming year to add to its resource base.

UXG is traded on the Amex and is quite liquid - trading approximately 1 million shares per day.  The Company intends to list on the NYSE as soon as it can.

As a disclosure item, I hold some UXG.  This stock is not for the feint of heart.  The stock traded at nearly $7 per share in late 2007 before declining to about $.50 at the bottom of the financial crisis in late 2008.  This stock should only be considered by aggressive holders with a high tolerance for risk.

Marko's Take

Everything you never wanted to know about Social Security is revealed on our latest You Tube video which can be accessed here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI.   Our subsequent video, to be released in the next week, will propose a 7-step solution to the Social Security mess.  For information on "Peak Oil", the Federal Reserve, Income Taxes and a mock "State of The Union" address, you can access all by clicking here http://www.youtube.com/markostaketv.