Prospecting for value amongst junior miners

Benj Gallander and Ben Stadelmann
Friday, July 8, 2005

One of us has collected a gaggle of junior miners, while knowing that these outfits sometimes disappear into larger black holes than they will ever create. However, given the cyclical nature of commodities and investor psychology, this sector always comes back into play, and even the ugliest of ducklings seem to attract investment dollars, if for only a scant moment.

Of course, “investing” in penny plays is in many ways a crapshoot, somewhat akin to finding the next big cancer cure. So every throw of the dice is with money from the small pocket, where the spare change resides. All of the following companies seem like worthwhile gambles today. None of them resides in the Contra portfolio.

The most recent purchase was Band-Ore Resources. This exploration outfit presented a challenge to buy at 15 cents, as the stock is very illiquid. A number of years ago it was much more popular, trading at over a dollar. Annual general meetings in those days attracted more than 500 people; this year there were less than a dozen.

The corporation has a half dozen properties in Northern Ontario and is hopeful that the Thorne Gold Property will prove fruitful. So does Placer Dome, which signed a letter of intent in April to help develop this prospect. The initial sell target price is 44 cents.

The dual excitement of China and gold led to the acquisition of TVI Pacific at 6.5 cents in 2003. This was a quick success story: half of the position was dispensed with at 19 cents in November of that year — percentage-wise, miles above the initial target of 14.5 cents. The stock was moonstruck and skied to 39 cents, but the vast “potential” led to a hold.

Oops. It now trades around a dime. While losing a bit of money, the enterprise is now cash-flow-positive, with revenues of $3.2 million in the first quarter, up from less than $1 million a year ago. Potential dilution on this one is a problem, as more than 400 million shares would be outstanding.

South American Gold and Copper is another miner in the big float department, with more than 400 million shares fully diluted. Bought one year ago at 9 cents with a target of 14.5 cents, the firm has done a slow decline on the stock-price front, albeit while trading a ton of shares — the average volume is almost 850,000. Revenues have started ramping up from the Pimenton Project in Chile to almost $1 million during the last quarter, and chief executive Stephen Houghton says positive cash flow is close. Rio Tinto is now working with the company on evaluating the copper potential.

One that has taken a beating since its purchase is diamond and gold explorer Twin Mining, bought in early 2003 at 33.5 cents. Currently it is at less than half that. This outfit has diamond potential in two of its claims and gold in Idaho but the problem thus far is viability. Last month a strategic adviser was retained and consideration is being given to splitting the company in two, merging or acquiring another company. Best for shareholders would likely be a takeover of Twin by a larger firm searching to further their resource base. The initial sell target of 75 cents seems roseate.

Both of us own Glencairn Gold, a “major” player in comparison to the aforementioned with gold sales in the first quarter of $5.2 million. The stock was recently purchased at an average price of a bit more than 40 cents with an initial target of 75 cents, although the potential is much greater if the Bellavista Mine in Costa Rica and Limon Mine in Nicaragua fulfill expectations.

In May, Glencairn entered into a loan agreement for $6 million to bring these two into full production. The cost was high, however, at Libor (London interbank offered rate) plus 8 percent, but the company is confident that payments will be completed by June 2007. Management has been overly optimistic before, but if this comes to pass, one can easily imagine the stock price topping the $1.25 mark.

When the commodity sector spurts from lows to highs, junior companies often quickly jump a few hundred percent. Patient investors who don’t catch either the bottoms or tops can still often see their stocks double. If this happens in seven years or better, that is a minimum return of 10 percent a year, eminently doable for people with the capacity to relax and not worry about being traders.