Don't Overlook Non-Precious Metall Stocks
by Dr. Richard S. Appel
February 27/04
I first entered the Canadian junior exploration sector in my desire to
maximize my profit potential. The year was 1993. I had earlier come to
the belief that gold had begun a major secular uptrend when it broke through
strong resistance at $325 an ounce. With this thought firmly entrenched
in my mind I set out to target the most profitable areas within the precious
metals complex in which to invest. I knew that investing in gold bullion
or bullion coins would offer me a one for one profit potential that would
mirror any rise in gold. I was also aware of the great leverage that I
could achieve if I invested in gold futures or gold options. However,
from my earlier experience during gold’s great 1970's Bull Market,
I knew that my ability to “time” gold price movements was
far from precise. On a number of occasions I believed that “gold
had to move higher, and now”. Yet, after suffering innumerable price
reversals, traps, and the passage of time which left many of my options
worthless, I was only left with dashed hopes and dreams and less working
capital. I learned that while I had the ability to readily and early recognize
long-term trends, I was ill prepared and unable to regularly ascertain
short term ones. This ruled out my engaging in gold trading offered by
gold options or on the commodity exchanges.
My thoughts then turned to the major gold producing companies. I knew
that a rising gold price should drop to their bottom lines and greatly
increase their cash flows and profits. It was logical that by the action
of the price-earnings multiplier, the PE Ratio, a company’s share
price would benefit from the greater revenue and profit that would be
received for the product that they mined. If a company had a PE of 30
and their profits doubled, I would receive a windfall profit of many multiples
of its original price. Unfortunately, I usually felt that most gold producers
were vastly overpriced. Thus, I was reluctant to invest in these companies
for fear that their PE ratios would decline to more reasonable levels.
If this resulted a higher gold price would not significantly benefit me.
Further, from experience, I realized that the underlying factors that
drive gold to higher levels would also act against those companies that
profit from retrieving it from the bowels of the earth. Just as gold’s
price is influenced by a depreciation of the dollar’s purchasing
power, the dollar mining costs of the gold producers also rise. The result
is that these companies do not fully benefit in the long-term from gold’s
price appreciation.
Having run out of the classical fashions in which to invest in gold I
though back to my experience during the gold and silver Bull Markets of
the 1970's. In that era my first gold investments were in some South African
gold mining companies. Later, with a similar desire to increase my profits,
I found the Coeur D’Alene silver exploration companies. These were
basically small companies that had little hope of finding a mine, and
in fact did limited or no exploration. Further, the sole opportunity that
they offered an investor was their tiny prospects located mostly in the
Silver Mile of Idaho. The hope was that one day they might be coveted
and acquired by a major producer. I knew from investing in this market
during the late1970's, that investors clamored for these companies and
provided their shareholders with enormous profits. This, despite the fact
that not one in ten performed much more than the required work to maintain
their mining permits.
In 1993, and with this knowledge and experience in hand, I began in search
of a new area of gold investments that would offer me the greatest return
on my capital. I read numerous investment newsletters and attended many
gold conferences. I realized that a number of things had changed since
my 1970's experience. In that decade the junior Canadian exploration industry
was in its infancy. In fact, only a few companies such as Agnico Eagle
were ever mentioned. However, by 1993 a number of changes had occurred.
Not only had a number of countries enacted friendly mining laws that enticed
exploration companies to travel around the globe, but several technological
advances had essentially opened up the world to aggressive senior and
junior exploration teams. Country after country that were thought or known
to possess vast under-explored and unexploited mineral deposits had now
opened their doors to anyone who was willing to enter and attempt to unlock
their fabulous natural wealth. Further, a host of earlier uneconomic ore
bodies could similarly be exploited. This was enabled by the new mining
techniques and processes that were far more cost effective than those
earlier available.
When I first learned of the global opportunities available to the mining
industry, my thoughts solely focused to gold. After all, I was only looking
for a fashion in which to best profit from my belief in far higher prices
for the yellow metal. At the time it seemed logical that if one of my
junior companies was successful in defining an economic gold deposit I
would handsomely profit. If my company was able to discover one million
ounces of gold, it could rise from virtually nothing and suddenly sport
a market capitalization commensurate with others developing a similar
sized gold mine. If they were exceedingly fortunate and found a two or
three million ounce deposit, their market cap could soar from virtually
nothing to heights that approached $500 million or more. What a rush!
However, what I didn’t realize was that in the scheme of things,
a one million ounce or even a three million ounce gold deposit isn’t
all that huge in the mining field.
While a $500 million or more market cap is a lot of money, the odds of
finding a gold deposit that can generate such a capitalization is no more
unusual than finding a base metal mine worth a multiple of that amount.
Or, for that matter, a small oil or gas exploration company can find a
massive hydrocarbon deposit worth five or ten million ounces of gold.
And, the result to the investor in any of these alternative instances
can similarly equate to substantially greater profits. It’s simply
a question of the magnitude of the metal or hydrocarbon’s value
that can be economically produced! The greater the net present value of
the deposit, the more that the company’s shareholders will benefit
that find such wealth.
When I first entered the Canadian junior exploration sector I didn’t
adequately understand the economics of the industry. While I was determined
to best profit from my gold investments I missed the greater picture.
It was only after I had been involved in this sector for a while, and
witnessed first hand the great profits that some investors experienced
with non-gold exploration successes, did I fully understand that gold
isn’t necessarily better. That is at least in regards to maximizing
one’s profit in the junior natural resource industry.
In the mid-1990's, a junior called Diamond Fields was exploring for diamonds
in Labrador. They were unsuccessful in making a diamond discovery, but
instead stumbled upon an enormous multi-billion dollar nickel deposit.
Their shares soared from a few dollars to over $150 C. Earlier, Aber Diamond
Corp.was another exploration company that traded for pennies before making
a major diamond discovery. It is currently trading at over $40 C. Pennaco
Energy began its life well below $1.00. After beginning the development
of a major coal bed methane play in 1998, it was acquired for about $20
a share a few years later. I can go on and on! In fact, the world’s
major mining and oil and natural gas companies similarly began as juniors.
It didn’t matter for what they were exploring. What was important
was that their initial major discoveries led to their growth and their
ultimately becoming household names.
I am confident that not only are gold and silver in secular Bull Markets,
but also are oil and natural gas and all mineral based commodities. In
the past several years we have seen a barrel of oil rise from $10 to its
current $50+ price. Copper rose from near $0.60 to $1.48 a pound. Molybdenum
was at about $2.50 a pound, iron ore was a few dollars a tonne, and uranium
sold for $8 a pound. They are now selling for $30, $30+ and $22 respectively,
and their potential Bull Market peaks are nowhere in site. Further, as
their Bull Markets mature, numerous known but presently uneconomic deposits
will become profitable to economically exploit.
This offers great opportunity for many juniors. Not only may their current
projects become economic, but they will have the opportunity to obtain
newly economic deposits that are made so by higher metals prices. In either
of these events we will be presented with the good fortune to invest in
many nascent companies that may one day enter the ranks of the secondary
or major producing companies.
As an investor you must be open minded. You should not rule out investing
in companies that are searching for natural wealth, or have made important
discoveries or acquisitions in metals or substances other than gold and
silver. You will find that far more money can often be made with companies
that meet with success that target copper, uranium, oil and gas, or even
iron ore or lead. If you limit yourself to solely considering potential
gold or silver stocks you may short change yourself, as I did. You should
also seek companies that scour the world for massive base metal, hydrocarbon
or other wildly economic deposits.
The above was excerpted from the March 2005 issue of Financial Insights
© February 27, 2005.
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 information contained herein is at the risk of the reader without
responsibility on our part. Past performance does not guarantee future
results. Dr. Appel does not purport to offer personalized investment advice
and is not a registered investment advisor. The information herein may
contain forward-looking information within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. In accordance with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, the statements contained herein
that look forward in time, which include everything other than historical
information, involve risks and uncertainties that may affect the company’s
actual results of operations. © 2004 by Dr. Richard S. Appel. All
rights are reserved. Parts of the above may be reproduced in context,
for inclusion in other publications if the publisher's name and address
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