There are junior mining companies… and then there are junior mining companies that actually have the potential to produce gold. It’s critical you know the difference.
Junior miners can be put in two categories: those that will succeed and those that will never succeed. The vast majority of junior miners are nothing more than lottery tickets, although the odds are slightly better.
Roughly one in 1,000 attempts at finding an economically viable gold deposit will succeed. And that’s according to a very optimistic industry source. Another source, a mine manager with more than five decades of experience, recently told me that the number is closer to one in 10,000.
Now, you can certainly make a ton of money by buying shares of marginal junior miners that will never have a viable gold project. The S&P/TSX Venture Composite Index, which includes more than 400 junior mining companies, has nearly doubled since mid-January.
A rising tide lifts all boats… for a while.
But a marginal junior mining stock can move higher only as long as the promises keep coming and the cash doesn’t run out. So if the promises don’t pan out, the cash definitely runs out, and… poof (goes the junior mining stock)!
So why not stick with the best of breed in the sector?
We recently saw what can happen to real junior mining stocks with real gold prospects. Last month, Goldcorp (NYSE: GG) completed its takeover of Kaminak Gold Corporation for more than C$400 million in stock. Anyone who purchased Kaminak in January could have tripled their money!
Kaminak would have been an attractive takeover target for any major gold company. That’s because it’s just a few years away from producing its first ounce from its discovery in the Yukon. When Kaminak’s project begins producing, it will do so at costs significantly lower than the costs of most of Goldcorp’s other projects.
The deposit holds 3 million ounces of indicated gold resources. But the size of the known gold resource is likely to grow substantially as Goldcorp ramps up its exploratory drilling at the site.
This takeover is likely one of the very first in a new wave of takeovers in the sector.
Today the major mining companies are financially in relatively good shape, after shedding billions in liabilities by closing mines and disposing of assets that are unfeasible at current prices or even at prices exceeding $1,500 per ounce.
They bought projects like these during the last binge when gold soared to $1,900 per ounce. They overpaid and lost a big chunk of cash pursuing opportunities that failed to pan out. That may occur again this time, but not before some very good assets are bought at very cheap prices.
While many major gold companies are financially stronger than they were one year ago, the same can’t be said about their future mining prospects. There’s gold in the ground, to be sure. But discovering it, getting permits, building mines and finally getting it out of the ground is not only expensive, but very time-consuming. And it’s getting more expensive every year. In many cases, it can take more than five years to build out a mine.
A lot can happen to gold prices in five years. And the expense of building out a mine can easily run into the hundreds of millions of dollars, if not billions for some of the major operations. The better solution is to buy existing mining assets, especially those that are either already producing or have all their permits and feasibility studies in process or completed.
Up… but Still Down
Takeovers are going to spice up the next stage of the bull run for junior mining shares. The big mining companies are looking for inventory, and the best place to find it right now is in the cheap junior shares - most of which are still down 60% to 70% from their all-time highs.
The past few years have been immensely difficult for junior miners. Investment capital has been scarce. But even so, some of the best companies managed to continue advancing their projects. And these select junior miners have now become prime takeover targets.
For The Non-Dollar Report