Picking a Junior Gold Company in a Bad Market

Richard (Rick) Mills
Ahead of the Herd

 

As a general rule, the most successful man in life is the man who has the best information

 

The current investment market for junior gold companies is arguably one of the worst since the United States went off the Gold Standard in 1971.

 

Despite the current high price of gold (and many other commodities), investors have almost abandoned the junior gold mining sector to invest in physical bullion, ETF’s, and producing companies. The value of the TSX-Venture Composite Index, shown below, is similar to what it was in the early 2000’s when the price of gold was below US$300 per ounce. 

 

In 2013 I expect to see the equity market in the junior gold sector begin to correct itself and investors should currently be taking advantage of the investment opportunities resulting from the severely beat up junior sector. There presently exists a great opportunity for those investors who are “ahead of the herd” and want to invest in the market at or near the bottom.

 

TSX-V Composite Index 10 Year Chart

 

 

The Venture exchange is down over 50 percent from its March 2011 high.

 

The questions become – How does an investor take advantage of the dislocation in the junior markets?  What might be a good junior to have on our radar screens?

 

Investing in junior gold miners is a speculative business at best, with risk on the downside but the potential for significant reward on the upside.

 

Two ways to mitigate risk for investors is to buy at market bottoms and have a long-term view of their investments to take advantage of a company’s increasing value as its projects move through exploration and development while markets recover. Ideally, the pay off comes when a project is brought into production, gets joint ventured, or is sold by the junior. 

 

So in this environment, companies should have the following key attributes:

  • Established track record
  • Experienced and competent management teams
  • Established mineral resources
  • Projects in safe and stable jurisdictions of the world
  • Strategically located properties – existing infrastructure
  • Significant upside potential

One junior to consider when looking at the many juniors available to investors is Emgold Mining Corporation (TSX-V: EMR). Emgold has been in existence since 1989 and has survived numerous equity and mining cycles. It has an experienced management team with background in all facets of the mining industry, including exploration, permitting, project development, and mine operation.

 

The Company has a solid resource base in its Idaho-Maryland Project in California.  And this resource has grade – something operating companies are looking for as mining costs continue to rise (higher grades typically equate to lower cost per ounce production). Emgold’s Idaho-Maryland Deposit was listed as the 9th top undeveloped deposit by grade in the Global Gold Mines and Deposits 2012 Ranking, for deposits over one million ounces of gold, by Natural Resource Holdings.

 

“Another data point we found fascinating was that out of 439 mines or deposits, 189 are in fact producing mines owned by companies with an average market capitalization of $1.8 Billion. This leaves us with a universe of undeveloped deposits over 1 million ounces of just 250. Of course some of these 250 deposits are owned by miners (84) while just 166 are owned by independent junior companies, private companies, or government sponsored enterprises. Investors seeking leverage to gold should focus on these companies as they provide the best exposure to a rising gold price environment…In the United States we found only 33 deposits owned by 26 companies (23 Independents).” Global Gold Mines and Deposits 2012 Ranking

In emerging markets, political strife and resource nationalism have triggered increased taxation, social unrest and changing regulations which is hindering resource development and scaring away investment. Emgold works solely in North America with its transparent and structured regulatory regime. Its properties are located in California, British Columbia, and Nevada, some of the most attractive mining regions in the world being internationally known as safe and stable mining jurisdictions. 

 

The Idaho-Maryland Project is in the historic Grass Valley District which produced over 17 million ounces of gold historically. The Stewart and Rozan Properties are in the historic Nelson Mining District of British Columbia, which hosted many small gold and silver mines. The Company also has the Buckskin Rawhide East, Buckskin Rawhide West, and Koegel Rawhide Properties all located in the historic Rawhide District in Nevada.

 

What is strategic about these locations? Obviously the Idaho-Maryland deposit in California represents grade. The mine historically produced 2.4 million ounces of gold at a recovered grade of 0.43 ounce per ton gold and holds a measured and indicated resource of 472,000 ounces gold (1.7 million tons at 0.28 opt gold) and an inferred resource totaling 1,002,000 ounces gold (2.6 million tons at 0.39 opt gold). The potential exists to delineate a 3-5 million ounce resource at Idaho-Maryland, subject to additional exploration.



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