Practical Advice in Picking Junior Golds

(posted on July 13, 2001 on http://www.lemetropolecafe.com)

Dot.coms and techs are crashing and burning daily, and despite all the claims of the gurus and spinmeisters from Bubblevision that the bursting of the tech bubble would be an "isolated phenomenon" thereís no getting away from daily reports of negative earnings (euphemism for losses) affecting companies that produce anything from footwear to flight simulators. A stock market crash may not be in the offing, but we can expect markets worldwide to continue their "middling down". Greenspan is lowering interest rates below the rate of inflation in a heroic effort to revive the economy. It didnít work in Japan, and it wonít work in America.

Thus the stage is set for historically unparalleled opportunities to create wealth - REAL wealth, not dot.com paper wealth. Iím talking about gold mining and exploration. When the price of gold skyrockets - and it will - every company with some exposure to gold mining or exploration will stand to benefit. The old hedgers like Barrick and Anglo will benefit too, but the really big profits - the 20, 30, 50 or even 100 baggers - will be made in the juniors.

First, a bit of a history lesson for those who have watched too much CNBC and suffer from "sound-bite memory". Back around 1993-94 the exploration business suddenly went global, as legislation and fights with environmentalists drove explorationists out of North America. Numerous South American countries reformed their mining and foreign investment laws. Russia and the newly created "-Stans" opened their doors. Apartheid ended in South Africa. Some truly remarkable exploration successes followed and fed what by 1996 had become a feeding frenzy. Arequipa Resources, a tiny junior out of Vancouver found what would become one of the worldís best gold mines with +7 million ounces. Between October, 1995 and end of October 1996 when it was bought out, shares rose from $1.15 to $30.00; a 2509% increase! The race was on internationally to get ground - the remoter the better. All of it could be "elephant country".

We all know what happened next. A Calgary outfit named Bre-X spoiled the party with the biggest fraud in mining history in a remote area of Indonesia. But letís not dwell on that. By the time the fraud was uncovered in March, 1997 the market was tanking anyway as venture capital was being siphoned away by newly-created "dot.coms". From one bubble to another bubble.......

However, letís not lose sight of one important fact, La Pierina was REAL. Itís presently being mined by Barrick. Gold exploration is risky, and speculative, but the payoff can be bigger than cocaine smuggling - and itís legal!! But investors donít have to be entirely at the mercy of slick promoters. To shy away from junior golds because of the Bre-X fraud will be to sleepwalk through the greatest money-making opportunity of our lives. If gold becomes the "only game in town" we stand likely to see gold companies rise to valuations only previously witnessed in the tech bubble. Already the gold funds are the best performing funds this year. With mine supply drying up due to orebody depletions and mine closures, the majors will be increasingly pressured to secure new reserves. Since the majors almost unanimously and shortsightedly gutted their exploration staffs in an effort to cut costs, the juniors will once again have to step up to the plate. But this time they will be in the driverís seat.

We expect that as the boom gets underway the spinmeisters will daily dredge up the Bre-X story and try to throw cold water on the gold market. Eventually theyíll come on board and pile into the market. The boom is already picking up speed, though the media continue to smirk and deny that it is happening. For the first time in 4 years, juniors can once again raise venture capital for exploration. So, this time around how do you make your portfolio "Bre-X proof"? - the goal being to identify companies and projects - early - which stand the most chance of being bait for the majors - but at top dollar. Weíre not talking about Mickey Mouse companies with a promoter at the helm and a tired old prospect that has been flogged to death since 1993. Weíre talking about new, aggressive companies with solid new plays. Any major, when thinking of joint venturing or buying out a junior would conduct a geological and a legal due diligence. You may not be a lawyer, nor a geologist, but here are a few tips that will not only bring you peace of mind in the security of your investment but will allow you to separate the wheat from the chaff. Guaranteed, that if a company canít satisfy these criteria, after Bre-X, no major would touch 'em with a ten-foot pole.

1. A posting on this website recently said that the three most important criteria to picking a junior were "strong management", "good properties" and "money in the bank".....BUT weíre buying shares of a gold exploration company - not a real estate firm. The author left out "an experienced technical team". If the junior has three investor relations people and no geologists or geo-engineers they are to be avoided. Period. Also, Iíd be less likely to invest in a company that lets all technical work be handled by a consulting company. Consultants are hired hands with no vested interest in making a company a winner, nor do they usually provide project continuity as would someone on staff. Chances are, if a company doesnít have a geological staff they are just speculators. Canadian companies now need to have a "qualified person" (a geologist or geo-engineer) sign off on press releases. Donít be afraid to phone up the company and ask management what the qualified personís relationship is with the company. Are they getting their hands dirty in the field? Or are they sitting in the offices and are fed information by others? Any formal technical document that is to be used to raise money needs to have a "certificate of qualifications". Ask to see it. Ask them to fax you a resume of the qualified person ≠ hell, itís your money at stake!

2. Any company with a legitimate new discovery will have an independent, third party project assessment done as early as possible - perhaps several. We can expect that companies will go to extreme means to prove their finds are real.

3. Is the property in a geographical area where gold has been found before? Are there government reports relating to the area? Usually this kind of information can be found on the internet. A company with a new discovery in the Carlin Trend, next to Kalgoorlie, or in the Timmins camp wouldnít be hard to believe, but if the company claims to have found the worldís largest gold deposit in Nebraska or Paraguay then be a sceptic! Many juniors play it safe and tie-on their land positions to known deposits. These are whatís called "proximity plays." Though this strategy sometimes pays off, the juniors most of the time simply try to bask in the reflected glory of the company next door with the goods, and donít do any of their own exploration. Make sure the company is out there doing work, not simply speculating in real estate.

4. Beware of companies that say their deposits are "heap leachable" or their ore "free milling" if they canít back this up with an independent metallurgical study.

5. What assay laboratory does the company use? Are they licensed? ISO 9000 Series accredited? In the past bubble we saw unlicensed assayers and analytical laboratories that had no history of working with mining companies suddenly churning out numbers. If the company canít or wonít tell you the name of their lab avoid them. Donít be afraid to phone up an unfamiliar lab and ask them if they have other clients.

6. Sins of omission: Does the company have the title to the property and all permits to carry out exploration? In the past bubble, many companies had only filed applications or signed letters of intent, yet left it to the investor to "fill in the blanks" and believe that the property was a solid asset (remember Bre-X didnít have all itís CoWís [contracts of work] in order?). Is the property next to a Wilderness Area, National Park, Archaeological site, Panda habitat?? Is the project likely to run into environmental opposition?

7. Sins of commission: These are cases of outright fraud and harder for the layperson to detect. As a rule remember that no gold deposit in the world will produce consistently good (or incrementally increasingly better) drill results. There will ALWAYS be some misses. We are dealing with a natural phenomenon after all. If a company exponentially increases their reserves without increasing their number of drill rigs, something is very wrong. Beware of companies that donít carry out occasional check assays with a separate lab. Some things are just common sense. For instance, during the last bubble I came across a company that said their deposit was "open pit-able" though the ore zone didnít start until 300 metres down! No one removes 300 metres of waste to get to the pay zone. Never. As one of my old professors used to say, itís only "ore" if you can mine it at a profit. Also, high grade gold, platinum and palladium NEVER occur together in nature except EXTREMELY RARELY so be forewarned!

8 Obfuscation part 1: Beware of companies that mix up different units of measurement, especially metric and imperial units; ppb, ppm, ppt, oz/t, g/t in the same press release. ppt is parts per trillion, ppb is parts per billion, and ppm is parts per million (ppm is the same as grams per metric tonne). Iíve seen companies post low gold results in ppt to make them look better. Bigger numbers = better results right? Wrong. Check the units! Most rocks around the world contain 1 to 3 ppb of gold (so does concrete). 20-100 ppb would be "low anomalous" (unusual but not really too interesting). Greater than 100 ppb starts to get interesting, and 1000 ppb (i.e.1 ppm or 1 gram per tonne) can be very interesting depending on the context. Assays of tens of ounces per ton (or 1000's of grams per metric tonne) are bonanza grades. However, whether any of it is mineable at profit depends on where it is and how much of it there is. Any encyclopaedia will give you metric and imperial equivalents.

9. Obfuscation part 2: Never invest in a company that measures value of their rock in "gold equivalents" unless they are willing to give you a breakdown. This is an old trick to inflate the numbers. For instance, a company whose rock contained gold, copper, silver, bismuth, cobalt and nickel worked out the value of the contained metals and reported it in "gold equivalents" though some of the metals only occurred as traces, and the likelihood that all these metals would be recovered together in a commercial operation was just about nil.

10. Desert dirt scams: Every time there is a boom in gold mining stocks these things resurface. The line is always the same, "We have a new proprietary method to liberate gold from rock and soil." The following is always the kicker," the contained gold is not amenable to conventional fire assay." If you see either phrase take your money and run. If it canít be conventionally fire assayed it canít be conventionally milled either (see how the two nicely fit together?) A Vancouver-based company a few years ago claimed to have found hundreds of millions of ounces of gold in desert dirt near Death Valley. They used some proprietary "black box" technology to do the assaying "in house". Everyone who invested and believed the hype lost everything.

11. Check out the principals of the company: Have they ever been banned from trading on a stock exchange? Have they been convicted of insider trading? Do they have any felony convictions? Your broker should be able to help you find this out. Do a search on their names using one of the many internet search engines. You may dredge up some newspaper articles they would rather forget. Felderhof & Co. of Bre-X fame had been banned from trading on the ASE.

This list is not intended to be exhaustive, but it contains the important stuff. Remember, just because a penny stock is cheap doesnít mean it is a "buying opportunity". Do your own "due diligence". Donít always simply rely on the word of your broker - he is probably only passing along something he heard anyway. Donít be afraid to ask tough questions. Many of the promoters in the gold bubble of '96-'97 switched into dot.coms. If they arenít selling used cars now theyíll be back to gold soon. Enjoy the coming ride to riches. Good luck and happy hunting!

Keith M. Barron Ph.D.

© 2001

kmbarron@compuserve.com