Since bottoming at the end of October, the MSCI Emerging Market Index (MXEA) and MSCI Asia Ex-Japan ...
Big Upside in 2 Junior Gold Miners
08/15/2011 1:30 pm EST
This sector of the gold industry is showing a lot of potential right now, writes Lawrence Roulston of Resource Opportunities.
The unprecedented level of uncertainty in Europe and in America has led to big gains in the prices of gold and silver. However, those gains in the bullion prices have not yet been reflected in share prices of gold and silver companies.
Over the past few months, investors have sought a safe haven in the form of bullion. While precious metal prices are higher, the companies in the sector have seen declines in price—a very unusual situation.
Almost certainly, the American debt situation and the European situation will see some near-term resolution. However, it is most likely that investors will remain wary, and therefore the gold price will continue to show strength.
The summer is usually a quiet period for companies in the mining sector, and that has added to the downtrend in the share prices. Before long, investors will recognize the anomaly between bullion prices and share prices.
- First, companies that are producing precious metals are generating substantial amounts of cash flow.
- Second, and perhaps more importantly, the large producers have generated large amounts of cash and are seeking to expand their mining businesses. Companies with metal deposits are takeover targets for the producers with cash. Takeover offers in the sector will lead to a re-rating for similar companies.
Share prices have already started to rebound. This is an excellent time to begin bargain hunting.
Bear Creek Mining (Toronto: BCM)
Shares plunged on news that the Peruvian government revoked the company’s title to the Santa Ana silver project. That deposit is small in relation to the company’s main Corani silver project, also in Peru, but Santa Ana was slated to come into production first.
Corani, with 365 million ounces compared to Santa Ana’s 164 million ounces, carried the majority of the value for the company. However, investors are justifiably concerned that the same heavy-handed government action could put the company’s second project at risk as well.
The title to the Santa Anna project was cancelled by a presidential decree issued by the outgoing president, following violent protests against development of the mine.
Mining is an important part of the Peruvian economy, and is generally well supported. However, in this case locals were concerned about the potential impact on Lake Titicaca, an important historic region and a big tourist attraction.
In reality, the Santa Ana project is far enough removed, with drainage in a different direction, so that it would not impact the lake.
The company has launched a legal action to attempt to regain the Santa Ana project. The incoming president, while left-leaning, is also pragmatic, and will hopefully recognize that development of a mining project like Santa Ana will contribute toward alleviating poverty in Peru.
The Corani project is a large, high-quality silver project that justifies a share price of several times the current level. For anybody prepared to take on the political uncertainty of Peru, this project could result in a very substantial payoff.
My sense is that the Corani project is secure, and the present share price represents an attractive entry level, even without Santa Ana.
NEXT: A Second Play in Copper-Rich Canada|pagebreak|
Copper Fox Metals (Toronto: CUU)
The company recently updated the resource estimate for its huge Schaft Creek copper/gold deposit in northwestern British Columbia. The new estimate is focused on higher-grade portions of the deposit, and that is reflected in the boost to the average grade for the deposit.
The measured and indicated resource now stands at 1 billion tonnes at 0.46% copper equivalent (0.27% copper, 0.017% molybdenum, and 0.18 grams per tonne gold). Those figures add up to 6.1 billion pounds of copper, 383 million pounds of molybdenum and 5.8 million ounces of gold.
An inferred resource of 283 million tonnes carries a copper equivalent grade of 0.39%.
I recently toured the Schaft Creek project, with a particular focus on learning more about the Paramount zone and other exploration targets. My view of the upside potential of the project has been greatly enhanced by what I learned on that site visit, and in a subsequent meeting with Elmer Stewart.
Clearly, the old geological view of Schaft Creek has been replaced by a new model that provides considerable scope for greater size—and in particular, for more of the higher-grade tonnage that will support the economics of the project.
The site visit was also useful in better understanding the logistics of the project. We flew by helicopter from the airstrip at Bob Quinn Lake, following the proposed road access route. The first part of the road has been completed as part of the Galore Creek road.
The Copper Fox share price reflects a substantial valuation for the present resource, in line with the junior’s portion of the project ownership if Teck backs in, based on the values determined in the pre-feasibility study.
However, that valuation incorporated copper and gold price that are much lower than the current prices. Most significantly, the emerging Paramount zone and the other targets stand to add a significant, high-grade component to the project, and thereby adds substantial value to the project.
Further favorable results from drilling that supports the size potential of the Paramount zone could see further strength in the share price.
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