Wednesday, September 1, 2010

Junior Miners in the Sweet Spot

Even as the uncertainties in the stock markets are very worrying, there is a segment in which the prospects are looking quite bright. Gold and Silver miners are setting up to make higher price moves together with the commodity prices rising this Fall according to Jeb Handwerger in his latest article. To take advantage of this possible precious metal price movement upwards, there is also a conceptual sweet spot in the development of a mining project that you should be aware of. A company that is situated in the sweet spot may be able to move more aggressively than is typical.

Mining’s Sweet Spot

The classic model of building a mine has a sweet spot in the development project pathway. This spot is sweet because of multiple factors; not only are there the possibilities of price gain ahead as the mine comes into production, but the risks are now also lower as some of the uncertainties along the development path with bringing a mine to fruition are overcome. See the chart below which depicts a model mine development from discovery to production.

Figure 1 - Classic Model of Production Startup - Note the ramping up to production brings share price appreciation. Source:

The chart plot is of a typical mine along the path of discovery to actually building the mine. The early rise in price peaks with drill results is at point #1 and eventual confirmation of a mineable ore body is at point #3. Then there is fall back in price as shares are diluted for construction funding and there is disinterest during the construction wait time with a low at point #5. Then as the project nears completion, investors become interested again at point #7, moving the prices higher. Finding a miner that is within this sweet spot at the dip in prices around point #7 may help increase your possible returns.

Leveraging with Junior Miners

The typical large existing miner bringing a new project into production will just be adding to their production roll up. The new project will only add incrementally to the large miner’s revenue. The story is quite different for a small junior miner that has only one project that they are bringing into production. As the production is ramped up, somewhere along the line, the company will gradually turn the corner into profitability and shock the market with this good news. The story of a miner suddenly being newly profitable is good to juice up the percentage returns for this particular stock. This is what is meant by the leverage of a junior miner, the returns from the investment is riskier but may be more profitable than for an established miner.

Four Junior Mining Opportunities

To take advantage of the knowledge of the mining sweet spot and leveraging with the junior miners, I will present some viable mining projects that are just coming into production or are just coming back into production after a period of shut down.

Great Basin Gold

This is my favorite gold mining junior, that is just now coming into production with their nameplate mine, Great Basin Gold (GBG). I have written extensively about this miner here. Great Basin will have the first gold pour from their Burnstone mine in South Africa, this month of September. They just were hooked to the Eskom electrical grid on August 8th and have been progressively moving to produce their first gold results this quarter. See the stock chart following, where GBG has broken out of their trading range after their August 11th quarterly report and in anticipation of the Burnstone mine startup.

Figure 2: Great Basin Gold breaking out with Burnstone gold mine startup.

Genco Resources

Genco Resources [TSX:GGC] is a small Silver miner with a large property in Mexico, the whole of the known Temascaltepec mining district. This was purchased from an existing miner, Luismin S. A. de C. V, in 2003, and includes the Guittara Mine and a 340 ton per day process mill. This district has been mined since the 15th century. A summary fact sheet for Genco is located here.

Genco was a producing mine until shut down in 2008. They have restarted mining in May, earlier this year. A Feasibility Study that proposes a ten fold increase to 3000 tons per day and a Technical Report has been completed on their project. Their new CEO, Anderson is acting to implement the feasibility study and the share price has started to move up just this week as displayed in the chart following.

Figure 3: Genco Resources breaking out with the Silver price.

US Silver Corp

US Silver Corporation (TSXV:USA, USSIF OTC) is a relatively new Silver miner working on projects, the Coeur Mine, the Galena Mine and the Calanday Project, all purchased from Coeur d’Alene (CDE), the large cap Silver miner. The properties are in the heart of Silver Valley, Idaho. The Galena mine has ranked as the second largest silver producer mine in the United States. An earlier article by this author on US Silver is here.

The company has just turned in a profitable quarter and are looking to increase production this fall. See the following chart that show the stock price of US Silver breaking out following the path of the price of Silver.

Figure 4: US Silver Corporation breaking out with the Silver price.

Crowflight Minerals

Crowflight Minerals [TSX:CML] is in some ways similar and in some ways different than the previous three precious metals miners. Similar to the previous miners, Crowsflight is restarting mining operations in Manitoba, Canada. Being different, this is a Nickel miner that has been offered a buyout by Jinchuan Group of China, China’s second largest steel producer. The expiration date of the buy out was August 31st, 2010. Another way different is that under terms of the buy out offer, and with 700 million shares fully diluted, the $150 million dollar offer would mean a share price of about 22 cents. Interestingly, the share price of Crowflight Minerals is capped at 14 cents as displayed on the chart following.

Figure 5: Crowflight Minerals - Held at 14 cents.

It is unclear to the author, as to why the share price is stuck at 14 cents while the possible value is 22 cents for the buy out. Should the buy out materialize after August 31st, the stock price should break out as in the charts for the previous miners.


Investing in these mining stocks is not for everyone. You need to perform your own due diligence as to whether the risks and rewards in these investment ideas are acceptable for you.

This fall is shaping up to be a very exciting time for small junior miners that are just turning the corner into profitability by ramping up into production. Astute investors may find that they are just in the sweet spot for a Junior Miner.

Disclosure: Long junior miners

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