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October 20, 2005 - I first
invested in gold stocks in1972. During the ensuing three plus decades I
limited my purchases to those companies that ranged from somewhat to wildly
speculative. Whenever I was actively involved in this market, gold was
typically either in a Bull Market or in a substantial upward correction
within a Bear Market. In either case, I believed that all gold mining
companies would appreciate in price greater than gold itself, with the higher
gold prices that I foresaw.
My reason for targeting these typically small
companies was simple. It was due to my now time tested and proven belief that
the better enterprises within this group would most profit from an important
rise in gold.
Initially, it seemed obvious that the major and
secondary producing companies would directly benefit from a higher price for
the noble metal. This would result because they would sell their gold ore at
increasingly higher prices which would bestow them with greater profits. However,
I believed that an exploration company that either acquired or was on the
path towards defining a important ore body would
attract far greater attention. It would arouse the imagination of investors!
This in turn would bring the necessary buying that could drive its share
price higher, and greater reward its shareholders than would the well-known,
established companies. Thus my search began for those few companies that
would help me not only prove my theory, but would also reward me for my
foresight.
During the 1970's there were few junior gold
exploration companies from which to choose. Importantly, most of the best
exploration geologists were firmly entrenched in the employ of a major or a
secondary producing company. This left a paltry few to even consider working
with a junior company that was financed on a shoestring. Further, there was
limited information available about these small stocks, and the overall
ability of their management teams left much to be desired. These conditions
progressively and dramatically improved from the late1980's through the
1990's, and set the stage for the great mineral exploration investor
opportunity that is available today.
When gold's first great Bull Market ended in1980,
worldwide gold exploration began to decline. It became so drastically curtailed
that by the mid-late1980's, the major mining
companies began to reduce their geological staffs. This resulted for the
first time in the availability of numerous geologists to the junior market. Many
were individuals who were instrumental in earlier major gold or other mineral
discoveries. These professionals were in search of employment and some found
themselves in the director's seats of some small, little-known companies.
After the late 1980's, the number of resource
companies and the availability of exceptional geologists continued to
escalate. Between 1993 and 1996, gold experienced a major price rise.
However, subsequent to gold posting its $420 peak in1996, the damaging and
seemingly interminable decline that ensued witnessed even greater lay-offs among
the gold producers.
When the smoke cleared, and after gold probed its
$255 double bottom low in 2001,
a large number of seasoned, successful exploration
geologists had shifted positions. They were fired from the major companies
for which they may have been employed for decades, and were manning the helms
of various junior companies.
The two-decade Bear Market in gold was accompanied
by similar declining markets in the various base and other precious metals. This
factor forced numerous extraordinary geologists from the world's major mining
companies to seek new forms of employment. The end result was the first
availability of many extremely competent explorers, with expertise across the
mineral spectrum, to the junior mining industry.
After 1996, an additional contingent of the world's
best mining people found their way into junior companies. This time, however,
it was due to their belief that they could transfer their abilities, for
which they made billions of dollars for their former employers, to their new
companies. They envisioned their ability to directly and greatly benefit from
any success in their new roles. Instead of making a maximum of a few hundred
thousand dollars a year as employees of a Barrick,
a Newmont, or a Placer Dome, they could make fortunes for themselves and
their shareholders, if they again did what they did best and made a new mine.
I LEARNED THE HARD WAY, FROM EXPERIENCE
In my determination to ferret out the junior gold
companies that offered the greatest profit potential I learned many lessons. It
was a costly learning process! I found how enormously difficult it was to
find competent and straightforward management teams. It was easy enough to
learn of companies that had great "stories". However, I found that
it was extraordinarily difficult to find those that had a great likelihood of
actually delivering the goods.
Through my encounters I met more than a few
individuals and groups that "talked the talk", only to later find
that they had other agendas. They were more interested in talking up their
companies in order to sell their stock to investors, rather than being
devoted to finding a mine. After learning much from these and other
experiences, and having left much of my investment capital behind, I began to
better understand this potentially highly profitable but pitfall-ridden
industry. I learned what to look for in a junior mining company that would
increase my chances for success, while allowing me to avoid many of the
dangers.
The first and most important lesson that I learned
was that the people running these companies are the most important factors
for success. While there are thousands of geologists involved in the industry
only a small handful, possibly a few percent, will ever make a mine. And, it
is not unusual for one individual to be instrumental in numerous discoveries
that lead to mines. I believe that this is because certain exploration
geologists have, for lack of a better term, a sixth sense. They seem to
intuitively understand the processes that nature goes through in creating and
depositing an ore body. Further, they have the ability to recognize the
confluence of geological and other conditions that indicate the existence of
such a potential, that will be overlooked by lesser
geologists.
Next on my list is the ability to raise capital to
fund their advancement. If a company cannot raise sufficient working capital
it has little chance for success! They may have an outstanding project. Yet,
it will languish if they cannot finance the necessary work to move it forward
in its development.
Promotion is a dirty word to many people! However,
in this industry it is truly a necessary evil. This is not to suggest that
either unethical or illegal dissemination of information should be condoned. I
am referring to professionally designed "market awareness"
programs. It is unfortunate, but in order for a company's share price to
attain a sufficiently high price commensurate with the value of its projects,
the public must know its attributes. We as investors cannot intuitively sense
whether a company is overvalued or is working on a great project. We must
first be made aware of its existence, and then learn the details of its
assets to recognize its potential.
In this industry it doesn't follow that a company's
share price must reflect its underlying value! There are far too many stocks
for even the most dedicated and driven analyst or investor to follow. This
creates a condition where many companies are overlooked and undervalued. For
this reason, I believe that it is mandatory for a company to contact
investors and get the word out. In this fashion buying will enter its market
and hopefully move its price to a fair value.
If a market awareness program is properly performed
it may allow the company to execute an equity financing at a higher price
than would otherwise be the case. The result will be less stock dilution,
where fewer shares will have to be issued. This in turn will render the
existing ones more valuable.
The final major factor that separates the finest
potential junior exploration companies from their competition are their
projects. I am discussing this last because these will typically be acquired
by the industry's best management teams. When a major gold producer desires
to joint-venture one of their projects with a junior it will consider those
that possess the finest people. Similarly, the best projects typically find
their way into the hands of the groups that have the greatest likelihood for advancing
them towards production.
I have attempted to detail the factors that a junior
mining company must possess in order to have the greatest possibility for
achieving success. I must stress that the people leading these companies are
far and away their most important attributes!
Not only are the finest management teams the most
likely to make a mine, but they will also attract the best projects as well
as the financing necessary to move them towards their goal. In this industry
as in most, the people are indeed everything!
The great difficulty, and near impossible task for
the novice, is separating the best from the rest. I use the factors described
above and my experience whenever I search for junior companies to feature in
Financial Insights. Hopefully, I have helped the reader to better approach
this market and to be fortunate enough to gain similar success as I have.
______________________________
By
: Dr. Richard
S. Appel
www.financialinsights.org
I
publish Financial Insights. It is a monthly newsletter in which I discuss gold,
the financial markets, as well as various junior resource stocks that I
believe offer great price appreciation potential.
Please
visit my website www.financialinsights.org where
you will be able to view previous issues of Financial Insights, as well as
the companies that I am presently following. You will also be able to learn
about me and about a special subscription offer.
CAVEAT
I
expect to have positions in many of the stocks that I discuss in these
letters, and I will always disclose them to you. In essence, I will be
putting my money where my mouth is! However, if this troubles you please
avoid those that I own! I will attempt wherever possible, to offer stocks
that I believe will allow my subscribers to participate without unduly
affecting the stock price. It is my desire for my subscribers to purchase
their stock as cheaply as possible. I would also suggest to beginning
purchasers of these stocks, the following:
always place limit orders when making purchases. If you don't, you run the
risk of paying too much because you may inadvertently and unnecessarily raise
the price. It may take a little patience, but in the long run you will save
yourself a significant sum of money. In order to have a chance for success in
this market, you must spread your risk among several companies. To that end,
you should divide your available risk money into equal increments. These are
all speculations! Never invest any money in these stocks that you could not
afford to lose all of
Please call the companies regularly. They are controlling
your investments.
FINANCIAL INSIGHTS is written and published by Dr. Richard Appel
and is made available for informational purposes only. Dr. Appel pledges to disclose if he directly or indirectly
has a position in any of the securities mentioned. He will make every effort
to obtain information from sources believed to be reliable, but its accuracy
and completeness cannot be guaranteed. Dr. Appel
encourages your letters and emails, but cannot respond personally. Be assured
that all letters will be read and considered for response in future letters.
It is in your best interest to contact any company in which you consider
investing, regarding their financial statements and corporate information.
Further, you should thoroughly research and consult with a professional
investment advisor before making any equity investments. Use of any
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