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TEN SECRETS OF INVESTING IN JUNIOR MINERS

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I AM A "NOISE" TRADER

- harvesting those brief surges from results or aggressive promotion

 

What's the thinking on how many juniors one should own to be diversified enough to take advantage of this scenario. I think this will happen and am happy to buy small positions on a number of these juniors [i've been researching several in preparation] I noted Rubino's comments on CWR that you need a basket of these ; 10 or more.

MunsterK

 

I own over 30 miners and explorers.

Some are only small postions left over from water-testing exercises in new stocks over the last year

or two. I dont recommend so many, but I watch my portfolio carefullly, watch for signs of outperformance.

When one runs ahead of the pack, and then the voluem starts to slow, I will sell it. I then reinvest the

proceeds in more Juniors, or sometimes in Hk property.

 

Fortunately, I have had few big losers, and this form of trading, sell my winners, after their momentum

flags, has worked well for me over several years.

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I AM A "NOISE" TRADER

- harvesting those brief surges from results or aggressive promotion

 

 

 

I own over 30 miners and explorers.

Some are only small postions left over from water-testing exercises in new stocks over the last year

or two. I dont recommend so many, but I watch my portfolio carefullly, watch for signs of outperformance.

When one runs ahead of the pack, and then the voluem starts to slow, I will sell it. I then reinvest the

proceeds in more Juniors, or sometimes in Hk property.

 

Fortunately, I have had few big losers, and this form of trading, sell my winners, after their momentum

flags, has worked well for me over several years.

Very interesting. I'll take a look with this in mind. I have a lot of reading/internalising to do ..... :D

 

thanks

MunsterK

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Very interesting. I'll take a look with this in mind. I have a lot of reading/internalising to do ..... :D

 

I started a new thread on "Noise Trading" - a concept that I want to develop

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Any opinions on the Market Vectors Gold Miners ETF (GDX).

 

This seems to track the HUI pretty closely.

 

I simply dont have the time/knowledge to research the juniors sufficiently or the cash to invest in 10+ companies.

 

I figure buying an ETF of Gold Miners might be the better way to gain exposure.

 

Whilst Im pretty well invested in Gold and Silver Bullion, I'd like to get some more leveraged exposure to these metals by way of equities.

 

Does anyone buy this ETF? Or have any thoughts/comments

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Any opinions on the Market Vectors Gold Miners ETF (GDX).

This seems to track the HUI pretty closely.

I simply dont have the time/knowledge to research the juniors sufficiently or the cash to invest in 10+ companies.

I figure buying an ETF of Gold Miners might be the better way to gain exposure.

 

Yes, GDX is virtually identical with HUI, and it tracks the majors.

But you will find more value amongst the Juniors.

 

Some funds that buy which, which I either: own, have owned, or are on my watchlist include:

(I occasionally buy them, but I think a broad exposure to "interesting juniors" may outperform these & GDX):

 

+ Pinetree Capital / PNP.t

+ Endeavour Mining / EDV.t

+ Longview / LV.t (thnx to Ace, for this one)

 

...Other which may have a reasonable correlation, given their business activities are:

 

+ Canaccord Capital / CCI.t

+ US Global Investors / GROW

 

...and in the UK, maybe:

 

+ Ambrian Capital / AMBR.L , and/or its spin-off

+ ?>?

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WINNERS OF THE DAY / #1

 

(Readers of GEI may know that I hold a wide diversity of shares,

I thought it might be interesting to report here some of the stocks I hold that have

good days as they happen. And also report where I am investing the capital raised):

 

GPR.v / Great Panther : $1.21 Change: +0.20 / + 19.80%

TMM.v / Timmins Gold : $1.29 Change: +0.15 / 13.16% *

TRX.v / Terrane Metals : $0.43 Change: +0.04 / + 10.26%

GORO / Gold Resource Corp : $4.15 Change: +0.36 / 9.50%

 

(these next, maybe?)

PIK.t / Peak Gold : $0.63 Change: +0.03 / + 5.00%

ICX.v / ICS Copper : $0.63 Change: +0.03 / + 5.00%

 

* Has has a nice run, and so I am doing some profit taking, lightening up as it rises

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Any opinions on the Market Vectors Gold Miners ETF (GDX).

 

This seems to track the HUI pretty closely.

 

I simply dont have the time/knowledge to research the juniors sufficiently or the cash to invest in 10+ companies.

 

I figure buying an ETF of Gold Miners might be the better way to gain exposure.

 

Whilst Im pretty well invested in Gold and Silver Bullion, I'd like to get some more leveraged exposure to these metals by way of equities.

 

Does anyone buy this ETF? Or have any thoughts/comments

 

Hi

 

Just to cover practicalities this ETF is only listed in the US. If you're UK-based you can buy it through TD Waterhouse and the best way to track its price is here - http://finance.google.com/finance?q=gdx

 

Can't give any more pointers than that as I've only just bought into it. I bought in at $47 in Jan and today it's $53 - good climb, but because it was my first trade I only spent £200 so not much of an absolute gain!

 

GD

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Hi All,

 

I have started reading your posts and there are lots of insights I can learned from here, very useful.

I was hoping you guys can share some light on a junior exploration company called Sage, sgx.v. This company is exploring for gold, silver, ni, and cu in Ontario, Quebec and Neveda. Their share price took a dive during the economic melt down in Jan and also due to some medicore drill results. I got in this stock just before the dive so it was at somewhat higher prices than what it is at now. The stock price looks like it has level off. With the potential bull commodity prices, do you guys think that this is one of the stocks that can be carried back to higher levels? Since this is a gold exploration company, I am hoping that it will find some gold and bring the sp up and beyond !

 

Thanks in advance for any input you guys may have.

 

Wink23.

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Hi All,

 

I have started reading your posts and there are lots of insights I can learned from here, very useful.

I was hoping you guys can share some light on a junior exploration company called Sage, sgx.v. This company is exploring for gold, silver, ni, and cu in Ontario, Quebec and Neveda.

 

I took a look at Sage about 2 years ago, and thought it was overpromoted and overvalued.

 

Looking at the chart : SGX.v

 

... it seems:

That it is still correcting from a big run-up, and may drift back down towards $0.23-24,

where it might be an interesting buy.

 

But that is without any digging into fundamentals.

What is the market cap? Why did you choose Sage?

 

You might consider starting a thread in the Mining section, where it might be noticed by more people

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I took a look at Sage about 2 years ago, and thought it was overpromoted and overvalued.

 

Looking at the chart : SGX.v

 

... it seems:

That it is still correcting from a big run-up, and may drift back down towards $0.23-24,

where it might be an interesting buy.

 

But that is without any digging into fundamentals.

What is the market cap? Why did you choose Sage?

 

You might consider starting a thread in the Mining section, where it might be noticed by more people

 

Market cap is 42 million. I got into this stock because I was interested in the whole Beadmore Geraldton area in Northern Ontario, Kodiak (Kxl.v) has some interested drill results and has lifted its stock price several times higher. I felt that sgx was investigating in the adjacent areas, is significantly cheaper than kxl, and at the time I bought it had outstanding assays.

 

I see from the chart that the 200 day moving average is at 0.28 which is where it is at now, how did you come about 0.23 to 0.24 ?

I am holding because it has a significant drill program in the Beadmore Geraldton area in 2008, it also has about $7 million in the bank which will last at least this year before it has to dilute its sp in the current cheap market. I am hoping that the gold bull market continues which will lift the junior companies as well.

 

I have started a thread as shown below, please feel free to comment.

http://www.greenenergyinvestors.com/index.php?showtopic=2732

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Have found a drill result calculator for ounces and a fair value which may prove useful. You just need a few simple figures to get the ounces and fair value. When putting the width and grade in rather than put in the results for every hole, just using an average width and grade for all the holes only needs one entry. Useful as a rough guide.

 

http://www.49west.com/newcalc.html

 

 

.

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Yes, GDX is virtually identical with HUI, and it tracks the majors.

But you will find more value amongst the Juniors.

 

Some funds that buy which, which I either: own, have owned, or are on my watchlist include:

(I occasionally buy them, but I think a broad exposure to "interesting juniors" may outperform these & GDX):

 

...and in the UK, maybe:

 

+ Ambrian Capital / AMBR.L , and/or its spin-off

+ ?>?

 

Does Ambrian Capital still get your vote Dr Bubb? Any other good UK ones? Cheers.

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Does Ambrian Capital still get your vote Dr Bubb? Any other good UK ones? Cheers.

 

 

Ambrian could be a good choice- the stock is building a decent base.

But it is more an investment bank, than a mining stock, so it may be the wrong risk-profile

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Ambrian could be a good choice- the stock is building a decent base.

But it is more an investment bank, than a mining stock, so it may be the wrong risk-profile

 

Thanks for that. After a quick look it seems that in 2006 Ambrian split of PM's into Golden Prospect Precious Metals Limited - trading as GPM / GPMW - 'investing in the equities of metals and mining companies operating in the Gold, Silver, Platinum, Palladium, Diamond and Uranium sectors.' Hmmm.

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Thanks for that. After a quick look it seems that in 2006 Ambrian split of PM's into Golden Prospect Precious Metals Limited - trading as GPM / GPMW - 'investing in the equities of metals and mining companies operating in the Gold, Silver, Platinum, Palladium, Diamond and Uranium sectors.' Hmmm.

 

GPM might be a better way to play it

 

But why stick with UK-traded stocks?

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GPM might be a better way to play it

 

But why stick with UK-traded stocks?

 

OK - what's current recommendation on non-uk etf for juniors - if there is one? Cheers.

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Just look at this chart, which looks set for parabolic move up:

 

aa0je6.gif

 

There is a school of thought (T.Landry) that says that the next Bull move should be the same duration

as the corection. So that might be about 10 months up.

 

And if the move is the same magnitude, it would take CDNX to $4,000

Or it may double that move, and go to: $6,500.

 

OK - what's current recommendation on non-uk etf for juniors - if there is one? Cheers.

 

I have given many. Like $10 Calls on GROW which I suggested buying at $3, and I sold

some yesterday at $8.60. That's almost a triple in less than two months. Why mess about

with AIM listed stocks, where the market makers rob you, and there is little liquidity.

Go to North America where the big boys trade

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OK Dr Bubb - what's 'mystery'? An index of juniors or?

 

I'm considering Jinshan (jin.t) , Endeavour (edv.t), Pinetree (pnp.t) at the mo'. Would you still recommend GROW? Have already gone into Leyshon, Capital Gold, Fresnillo, Royal Gold.

 

Thanks to you and Frizzers for the pointers - maybe they'll turn good for me! Hopefully I can get by playing these as an investor and not as a trader - don't know what I'm doing enough for that!

 

Cheers.

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OK Dr Bubb - what's 'mystery'? An index of juniors or?

 

I'm considering Jinshan (jin.t) , Endeavour (edv.t), Pinetree (pnp.t) at the mo'. Would you still recommend GROW?

 

"Mystery" = CDNX, a sort of index of Junior resource stocks

 

GROW has already moved up sharply, and I have sold down 3/4 of my position.

The last Calls were sold at something like 3x cost

 

Go easy on Jinshan until after they make an acquisition. The rest look pretty decent to me

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What do the esteemed members of this board think of Gammon Lake and Alamos Gold? Possible acquisition targets? These seem to fit the target criteria Jim Pupluva keeps alluding to.. 2-3 million ounce reserves, in the Sierra Madre region of Mexico, just starting to produce, lots of exploration upside potential, stocks knocked down nicely from their highs..

 

 

 

 

 

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Intresting article from IC.

 

Prospecting for profits

Created: 4 September 2008 Written by: Martin Li "A hole in the ground with a liar at the top," is how Mark Twain once famously described a mine. Oil and gas fields don't fare much better when it comes to reputations for accurate description. Against such uncertainties, it can be particularly difficult to assess the value of resources companies which are not yet in production, and which can't therefore be valued by conventional techniques such as earnings ratios or discounted cash flow (DCF) . But it's not impossible.

 

 

Despite the challenges, analysts have increasingly had to estimate the value of resources companies still in the exploration phase. Driven by the global boom in commodities, mining and oil and gas companies - many of which remain years from potential production - have in recent months been among the strongest performers on the Alternative Investment Market (Aim). These businesses require special valuation techniques.

 

The treatment of mining companies is slightly different from that of their oil and gas counterparts, although at the core of both lies an estimate of the quantity of commodity in the ground, together with an assessment of how much it would cost to extract, process and transport. Combined with an outlook for the commodity price, this enables an estimate to be made of a company's value.

 

VALUING OIL & GAS COMPANIES

 

Oil and gas analysts classify hydrocarbon volumes into two distinct categories: resources and reserves.

 

Hydrocarbon resources

 

Estimated with limited confidence, resources are approximations of the volumes of hydrocarbons either not yet found ('prospective') or, if found, that require the resolution of various technical, economic or other challenges before they can be considered commercial.

 

Resource estimates are usually based on seismic studies which have not yet been confirmed by drilling, and as a result analysts don't ascribe much value to them. Dougie Youngson, resources analyst at Aim specialist Ambrian, describes their valuation as "a bit of a black art", requiring assessments of geography, geology, management's technical capability and distance to markets.

 

With most of the world's 'easy oil' now accounted for, explorers are increasingly chasing 'exceptional oil' in far-flung locations, in deep waters, and remote and hostile conditions where discoveries would carry heavy discounts to reflect the difficulties of commercialising any find.

 

In the Falkland Islands, for example, the four Aim-traded explorers - Borders & Southern, Desire, Falklands Oil & Gas and Rockhopper - have so far completed limited exploration activities such as seismic assessment in isolated waters from where it would be very expensive to develop hydrocarbons. Any resources would thus far carry very little value to reflect the limited assessment and challenging practicalities.

 

By contrast, in the North Sea, which has been heavily explored and where the pipeline and platform infrastructure is far more developed and access to markets straightforward, resources would carry much lower risks and therefore higher valuations.

 

Because resources are often estimated prior to drilling, much of their valuation is based on the assessment of a 'Competent Person' - a geologist proficient in economics. The Competent Person applies industry yardsticks of hydrocarbon volumes in analogous formations to the location and geological structure of the deposit to be valued. This estimates a benchmark net present value (NPV) of barrels of oil and volumes of gas in the ground.

 

 

 

Hydrocarbon reserves

 

Drilling an oil and gas prospect provides the opportunity to hit hydrocarbons, which can then be analysed through more detailed seismic studies and additional, closer-spaced (in-fill) drilling into a more accurate estimate of volume - known as reserves.

 

Reserves are the estimated volumes of hydrocarbons that a field can produce commercially. Reserves are sub-classified as 'proved', 'probable' and 'possible', based on commerciality factors, taking into account technical and economic risks:

 

• Proved reserves have been confirmed with a high degree of certainty and have a better than 90 per cent chance of being produced.

 

• Probable reserves have a better than 50 per cent chance of being produced.

 

• Possible reserves are unproven and have a 10 per cent chance of being produced.

 

• Proved reserves are also referred to as 1P reserves. Proved plus probable reserves are referred to as 2P reserves. Proved plus probable plus possible reserves are referred to as 3P reserves.

 

From exploration to development

 

Compounding the difficulties of estimating a resource or reserve, companies are also valued differently depending on whether they are in the exploration, development or production phase.

 

Exploration

 

Pure exploration companies tend to be given nominal 'in the ground' NPV valuations plus estimates of any premium that somebody might pay. However, such valuations are fraught with uncertainty, particularly because the small number of pre-production mergers makes it hard to create valuation benchmarks. Dr Youngson adds: "The oil industry is a mature one, with many executives remembering when oil languished at $10/barrel. With oil having reached $140/barrel, executives are terrified of overpaying for resources. Nobody really knows how to value pure exploration plays, which might be one of the reasons why the expected consolidation on Aim hasn't yet happened."

 

Development

 

At the point where an investment decision has been taken that a hydrocarbon find can be commercially exploited, analysts may assume that the company can reach production within a couple of years. This enables a more accurate valuation. But risks still exist in the transition from explorer to producer, reflecting dangers of overruns of time and cost. Dr Youngson quotes the example of the formerly Shell-led Sakhalin-II liquefied natural gas project in eastern Russia, which faces severe delays and is set to cost twice its original budget.

 

Production

 

Once in or near production, companies can be valued by more conventional means such as discounted cash flow, multiplying production volumes with sales contract values, and deducting capital and operating costs.

 

Cycling to growth

Once an explorer has developed and brought an asset into production, the cycle can begin again, using production cash flows to finance new exploration. This is one way small companies can grow into bigger companies. Dr Youngson quotes the example of Roc Oil, which began with a small find offshore of Australia and is now active across all stages - exploration, development and production - in seven countries.

 

VALUING MINING COMPANIES

 

As with oil and gas operations, the pre-production stage poses the greatest number of uncertainties when valuing mining companies. At the start, a mining explorer might be valued on the basis of drilling costs incurred.

 

Once initial drilling has provided a broad estimate of the likely deposit size, a 'dollars per unit of resource' benchmark can be applied. For example, historically, the cost of making a gold discovery has averaged $35 per ounce (oz). An explorer with a 1m oz gold resource could therefore expect to be valued around the $35m level. If it had spent under $35m in making the discovery, it would have "added value" and vice-versa if it had spent over $35m.

 

In-fill drilling and evaluation by independent consultants helps transform initial resource estimates into more confidently estimated, and higher valued, reserves. The same deposit carrying a value of $35/oz as a resource might be valued at $120/oz if fully developed into a more confidently estimated reserve.

 

Joint Ore Reserves Committee (JORC)

Mining companies looking to raise funds must follow industry standard codes of valuation, the most common being the Australian Joint Ore Reserves Committee (JORC) standard.

 

The JORC code identifies a 'resource' as having 'reasonable prospects for eventual economic extraction'. Resources are classified into 'measured' (most confident), 'indicated' (reasonably confident) and 'inferred' (low confidence) categories.

 

An ore 'reserve' is the 'economically mineable part of a resource', and is classified into 'proved" (highest confidence) and 'probable' (lower confidence but still of sufficient quality to make investment decisions) categories.

 

Reserves are a sub-set of the 'measured and indicated resource', and Mr Gibson regards this 'measured and indicated resource' figure as probably the most important pointer to a mine's potential life.

 

"While it is true that reserves are higher quality and therefore higher value than resources, because of the high cost of drilling, it is not economically efficient to upgrade all resources into the reserve category before mining commences," he explains.

 

Equally, though, it is no good having a plant and mining operation that is too small for the deposit. Therefore, companies need to delineate as much of their resource as early as possible so that an appropriately sized mining operation can be decided upon, and then drill up enough reserves to get started. The reserve category can then be expanded with a further drilling programme. As mining operations progress, therefore, reserves should be added to at approximately the same rate as they are being depleted.

 

The ratio of resources to reserves can also be a useful measure. A falling ratio might indicate that a mine is coming to the end of its natural life, and a rising one that it is coming to the end of its economic life. Ideally, a mining company will replenish its resources over time through exploration , while maintaining its reserves, thereby keeping this ratio more or less in balance.

 

Consolidation of junior miners

Major mining groups cut back their exploration budgets in recent decades when commodity prices were low, focusing their attentions on extraction rather than resource expansion. Now, though, facing the prospect of declining resources, these miners have resumed exploration. However, what the major miners can afford to spend on exploration comes nowhere close to the combined budgets of the junior miners, which makes acquisition an alternative strategy for major miners looking to grow their resources.

 

As stated earlier, though, the much-anticipated consolidation of Aim-traded miners has yet to happen. Mr Gibson speculates this may be because juniors need to reach a certain size before they become of interest to majors. Michael Starke, a fellow mining analyst at Edison, sees smaller companies as currently lacking the cash to consolidate among themselves into companies of sufficient size to be of interest to majors.

 

Bankable Feasibility Study

Once initial resource and reserve appraisals confirm the viability of mining a deposit and the miner has completed a Bankable Feasibility Study (BFS), the valuation process becomes more straightforward. The BFS will set out a mining plan describing the extraction method (such as underground or open cast), estimated mine life, capital and operating expenses, etc, from which a discounted cash flow valuation can be calculated.

 

However, first mining might still be two years away following completion of a BFS, and analysts would still apply a significant risk premium of around 50 per cent to the DCF valuation at this stage. This risk premium reduces as production draws nearer, to maybe 15 per cent just prior to mining.

 

SHARE PRICE TRIGGERS

 

Although pre-production resources companies are notoriously difficult to value, it is often easier to predict when events will move their share prices.

 

Reserve and resource upgrades

Many companies issue streams of press releases updating minor increases to resources, the progress of drilling, appraisal, grade evaluation, mine or wellhead preparation and construction. Although certain announcements are required for regulatory purposes - and at least let the market know that the company is still alive - progress reports generally have little impact on share prices. According to Mr Gibson: "Resource upgrades need to be orders of magnitude bigger to move shares."

 

 

 

Anticipated reserve upgrades underpinned our recommendations to buy oil and gas companies Volga Gas and Nighthawk Energy and miner International Consolidated Minerals.

 

Feasibility, approvals and partners

Completion of a BFS is another potential share trigger for miners, depending on the study's conclusions and the DCF valuation implied by production levels and costs. Securing project finance, permits, licences, and environmental and other regulatory approvals are other vital milestones that can generate price movements, particularly where these are difficult to obtain.

 

Valuations can also be moved by the investment of major industry partners with significant interest in the success of the project.

 

The investment of major miners in Nautilus Minerals, and Corac's partnerships with major gas industry partners provided strong support to our buy recommendations.

 

Production

 

Prior to production, shares invariably trade at discounts to their NPV and reserves, reflecting the risk of time and budget overruns. This discount narrows as companies near production. The start of production triggers a major re-rating for many junior resources companies, since this immediately differentiates the company from the majority of its Aim counterparts.

 

EMED Mining can expect to see a significant re-rating when it resumes operations at the former Rio Tinto copper mine in Spain, expected in 2009. Its shares discount virtually all the upside from this huge project. Mr Gibson adds the example of Ridge Mining, which is close to production at its first project, Blue Ridge.

 

However, just getting into production isn't enough. Analysts want to see that the operating plan works, and will review operations within the first year of production to check whether actual costs and revenues are broadly in line with expectations. With Twainesque scepticism, Mr Gibson describes miners as having a "long and glorious history of coming in over time and over budget".

 

Price killers

 

Downward price triggers can also be predicted with some accuracy, although the market sometimes saddles companies with unachievable expectations, most notably Dr Youngson's favourite: dry holes drilled by oil and gas explorers. Statistically, exploration drilling has only a 20 per cent chance of success. Observers shouldn't therefore be concerned by companies drilling four failures for every success, and failures within this overall hit rate should be share price-neutral. However, the announcement of any dry hole is likely to see the shares fall by 10-20 per cent.

 

Lateness is also punished. One company that has suffered adverse market sentiment through serial late delivery is Van Dieman Mines. On the verge of production, the company should carry just a 15 per cent discount to net present value, but trades at over a 50 per cent discount due to repeated project delays that have run into years. On the positive side, this provides much more upside potential for the shares when the company finally reaches production.

 

Mr Gibson cautions miners: "Not delivering is a quick way to kill a mining company," and Dr Youngson adds: "If you say you are going to do something at a certain time, make sure you do it, otherwise you set alarm bells ringing."

 

As Mark Twain noted: "Actions speak louder than words, but not nearly as often."

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(From the "Questions for Miners" thread, but worthwhile here too):

 

Talking to Mining, or Exploration companies, I like to ask:

 

1/ What is the market cap ?

2/ What percentage does management own, and what was their average cost?#

3/ Who are the otehr major shareholders?

4/ what was the price, size and timing of the most recent financing?

 

(The above will give you a good idea of the strength and motivation of the management and controlling interest.)

 

5/ What are the major projects? (history, work done, work planned)

6/ What is the valuation?

 

(Establishing valuation will typically mean, learning about the size of their respources and reserves.

For example, if it is gold: How many ounces? What is the grade? What is the metallurgy?

If not yet in production, will it be an open-pit or underground mine? What is the cash cost,

and, if in development, likely cost of building the mine.

 

This will help to an idea of how to slant a calculation like: Market Cap per ounce. It is usually not a

good idea to invest in a company that has a Market Cap of more than $10 million, and no resource.)

 

7/ What are the plans to develop the projects, and what will it cost?

8/ What is the timing of future news?

9/ What are the company's promotional plans?

 

10/ The background and track record of management and the directors is very important obviously.

The answers to the above questions, will help give you an idea of how to probe further.

 

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