Gold Stocks for 1997 and Beyond

February 14, 1997

Gold has been locked in a downtrend since February 1996 - and you will find most fund managers and financial advisors saying that this market sector should be avoided. Well, the Goldbug strongly disagrees with that assertion. The sector remains very much alive and exciting - and the reason for this is very easy to understand.

The name of the game in mining is exploration. As long as there is cash showing on the balance sheet of these mining companies, deposits will be discovered and mines will be built. And that is just what there is right now, a lot of money available to drill the next discovery holes. In the past 4 years, hundreds of mining companies have raised millions of dollars to acquire and explore properties all over the world, as many undeveloped countries opened their frontiers to modern mining. However, don't look at the seniors to provide you with some excitement, they are too much dependent on the price of gold and the success of their hedging programs. Although they also have a lot of money, any new discovery will hardly be reflected in their already high market capitalization's. Instead, get into the junior mining sector.

In the past 3 years, the performances of companies like Bre-X Minerals, Diamondfields, Arequipa - and many others who went up hundred of times their initial prices - have convinced more than one investor that the junior mining exploration business is the place to be. I believe this is true. But before you jump in and buy the first XYZ Resources or ABC Exploration that you read about in your local financial newspaper, you better read what well-known Pierre Lassonde had to say about gold mining companies:

 

"MOST PEOPLE WHO INVEST IN THE STOCK MARKET END UP AT SOME TIME dabbling in gold shares. The lure of the gold, the rags-to-riches stories, the excitement and the frenzy generated by new gold discoveries are too much for the average investor to ignore. Unfortunetely, too many investors fail to distinguish hype from reality and lose their money. Gold companies are riskier and more volatile than most other kind of stocks, but there are guidelines that will help you understand the risk structure of gold equities and recognize good value or bad value within each segment of the industry. The key word here is "guidelines". There aren't any absolute rules in any market, let alone the gold equity market."

              Pierre Lassonde, president Franco-Nevada, The Gold Book 1990

You can bet that Mr. Lassonde knew what he was talking about. If you get in this market without a clear understanding of the main guidelines that rule this business, you stand to lose most of your investment dollars. You must also look for specific characteristics to be found in the companies you want to invest in. The companies that have attracted my attention all had these in common: 1) good management 2) well-located properties and 3) cash in their bank account. It is with this in mind that I always try to build my best hand to play this game. Although, one could win the game with a very different hand, here are some of the cards I would pick to play during the months ahead.

Richmont Mines
is a model gold miner
that you can't find on
each corner of the street

Richmont Mines is an extremely well-managed junior producer that is about to start a rapid expansion phase on the international scene. Backed by strong cash flows generated by two operating mines in Quebec and one soon-to-be in Newfoundland, it is in a position to build up shareholders equity without the heavy dilution that is so common in this business. The stock is selling for a mere 5 times 1997 forecasted cash flows which is way below the normal ratio of 10 that juniors usually get. Management has succeed where many have failed in the mining business. They generate income. Since commercial production began at the company's first mine, Richmont has had 20 consecutive quarters with positive net income. You don't see such a performance too often. As Richmont grows over the next several months, it should justify higher ratios and the stock price could reach much higher level.

Manhattan Minerals
future growth is
in Mexico and Peru

Since I purchased Manhattan Minerals at the $2 level a few years ago, the company has kept their promises. They brought in their first producing mine in Mexico and are now in the middle of major exploration programs to develop new deposits in Mexico and Peru. The quality and size of the Lancones and Tambo Grande properties in Peru as well as their new discovery at Candamena Mexico, could change the future of this long time favorite. The months ahead will tell us how big is big. Manhattan is one of my aces and could be one of the best ways to get exposure to gold, silver, copper and zinc in 1997. They have good management, good properties and the money available to discover the big deposit.

Pan American Silver has to be
your play on the coming short
squeeze in the silver market

Many of the readers will remember when the Hunt brothers tried to corner the silver market in 1980 and succeeded in moving the price of this metal above $50. Since then, silver prices have gone down in price and have remained at depressed levels despite a growing imbalance in the market. The demand for silver has exceeded supplies since the late 1980's and has caused above ground reserves to become almost completely depleted. In the years ahead, much higher prices should develop thanks to the coming shortage - and consequently Pan American Silver is my selection to profit in this market. The company has a few hundred million ounces of silver in reserves, several properties to explore and more than $40 millions in its war chest to help bring its reserves into production. Unless some unforeseen event arrives, silver and PanAm Silver should shine again.

International Precious
Metals could soon prove
that it is really the next
Bre-X Minerals

If you are looking for a wildcard to add to your hand, well consider International Precious Metals. This company has many detractors but also has the biggest potential among all the juniors I follow. It is currently exploring the BRX property, a so-called desert play in Arizona. The problem here is that the mining establishment does not believe that there are precious metals in the desert lands. But International Precious Metals has made great steps in the past 18 months to prove everybody wrong. Last December they announced a break-through in recovery techniques that will allow them to recover the metals. They have succeeded in recovering high grade gold using a new leaching process. Tests have been successful on small samples but the company is now proceeding with larger bulk samples of 500 kg. Behre Dolbear, a reputable engineering firm, will be monitoring the process. We should know very soon if this works also on large quantities of the desert materials. The BRX property contains several hundred millions tons of this material that could contain this high grade gold. So far, a 121 drill holes program has indicated that at least 50 millions tons have some gold in it. The story has attracted the well-known Midas fund, which bought shares in the company. If International Precious Metals can confirm the recently announced results with the bulk test program now starting, they have a real chance at becoming a bigger story than the now famous Bre-X Minerals.

Crystallex is in good shape
to finally rebound from
its consolidation zone

Another very interesting junior gold producer and an active exploration company is Crystallex International Corporation. Its Albino mine is located in the Kilometer 88 gold district, Bolivar State, Venezuela. In 1995 this mine produced more than 16,000 ounces of gold at a low cash cost of US$123 per ounce. The company reported earnings per share of $CN0.11 on record revenues of $CN9.4 millions. Operations were suspended several months in 1996 to allow for the expansion of the mill capacity from 200 tons to 400 tons. The company, through continuous exploration, expanded its reserves in 1996 which now stand at more than 300,000 ounces of gold. Recently, it acquired an interest in a Brazilian property which has already 300,000 ounces of gold reserves. Exploration potential at all their properties in Venezuela and Brazil remains excellent. The ultimate potential of its Venezuelan properties can be estimated at a few million ounces as the geology is similar to nearby properties owned by Placer Dome and Gold Reserve, and the Las Cristinas and the Brisas deposits - both in the 7-10 million ounces category. Crystallex has in excess of 18 million dollars to spend on these properties. A very good record for a company that has a market capitalization of only $50 million.

The companies mentioned above represent only a few of the many opportunities that now exist in the junior mining sector. Not all of them have the same potential and carry the same level of risks. Only a good understanding of the nature of each investment as well as a minimum diversification can allow for maximum growth and safety in a portfolio of junior mining companies. The reader is well advised to do his due diligence on each of the above companies, or consult with his financial advisor before purchasing any of their securities. For those not familiar with this market sector, I strongly advise that you first read Pierre Lassonde's book. It has to be considered as a primer for all would-be junior mining stocks investors.

Gold is the world’s oldest and most known currency.