Day at the Denver Gold Forum – How to invest in junior golds

This year’s Denver Gold Forum got off to a good start Sunday afternoon/evening with early registration, a well provisioned opening reception and an opening keynote address.  The reception featured also seventeen junior gold, silver and pgm miners/developers which attracted decent attention from the assembled throng.

The opening keynote was from Adrian Day of the eponymously named asset management company.  Day was giving attendees his expert advice on  investment in gold mining companies – a sector which has been on the decline for the past four years since gold came off its September 2011 brief peak, but which could well be offering tremendous upside should gold be on the recovery trail once more.

The past three years in particular have seen numerous occasions when investment advisers have been calling a bottom to gold’s decline, only for the price stutter and fall further.  Could this be the time to climb in and make mega profits assuming one picks the right stocks.  The optimistic investor may well feel it to be so – and it is perhaps fair to say the lower the gold price falls the less the potential downside, but it still remains a potentially very volatile market.  Definitely not one for widows and orphans.  Some will feel that the best time to re-enter it is just when all the mainstream analysts are calling for ever lower prices – as happened when gold fell to its recent low point of around $1,080.  It’s always the successful contrarian investor who makes the maximum gains when a depressed market recovers.

It’s probably fair to say that the mood amongst attendees spoken to at the opening reception was more upbeat than four years of almost consistently falling precious metals prices should sensibly suggest.  The view amongst those optimists still remaining in the sector – and perhaps one needs to be an optimist to have stuck with it, or even be involved in precious metals mining and investment at all – is that recent price movements, and a demand picture which appears to be rather stronger than mainstream analysts would credit, may at last be supporting a change in sentiment.  If this is indeed the case it could at least begin to arrest the drastic falls seen in gold and other precious metals prices seen of late.  Even some of the bank analysts so adamant that gold would fall to $1,000 or less only a few weeks ago are beginning to see light at the end of the tunnel.  But then perhaps for the contrarian that’s a negative sign!

Adrian Day’s keynote evening address was something of an investment primer for investors in this volatile, and risky market when one looks at junior golds – particularly explorers.  But again the potential rewards in investing at the bottom of the market in a junior miner or explorer which comes good can be immense and it’s these potentially massive rewards which keeps investors coming back.  He quoted a Newmont Mining executive’s comment as a warning that only around one in ten thousand geological anomalies outlined in preliminary exploration may come good – and even those which appear promising may not end up as viable mining operations.  A sobering comment, but at least most of the juniors which come to the market are at a slightly more advanced stage than just the delineation of potential anomalies.

Day’s presentation was pretty much a statement of the investment principles one should follow for investing in such a potentially volatile market.  In many cases the advice was obvious – but too often just not followed by the retail investor, much as casino gamblers may find themselves taking unaccountable risks which might be avoided by rational initial thought, but so often occur in the excitement of the moment.

Some of the points Day made were as follows:

  • Diversify one’s investment – but not too much. Excessive diversification is often an indicator of basic ignorance of the sector
  • Invest enough to make a difference if you’re right
  • Don’t go overboard on a specific sector or stock
  • Follow a policy of moderation in all things. Experience shows that things can always get worse however bad they have become.
  • Keep a cash reserve in place. If you need money unexpectedly it always tends to come at the worst possible time.
  • In such a volatile market as the junior mining/exploration sector you need to follow the markets closely and trade accordingly
  • Hang on to long term winners. A rigid sales pattern of say always selling when a stock doubles is not necessarily a good policy.  Stop loss sales can be a bad policy in the junior gold sector given its inherent volatility
  • Separate trading stocks from core holdings
  • If something basic goes seriously wrong with an investment don’t hesitate to sell. Hoping that it will get better is not a good investment strategy.  Be ruthless.
  • Be very cautious about what you don’t know. Take trouble to know the company in which you are investing
  • Know your investment style and stick to it – you need a working hypothesis
  • Avoid following the herd
  • Look for specific investment entrance point opportunities
  • Make sure to balance potential risk and reward.
  • Look for potentially fatal flaws – lots of projects have fatal flaws – it’s a tough business!
  • It’s critical to impose buy and sell limits on broker transaction instructions

As Day pointed out, if he wasn’t an optimist he wouldn’t be involved in junior gold investment – particularly for exploration stocks.  One has to understand that losing on some investment decisions in this volatile sector is part of the game.

You must do your due diligence.  Check balance sheets and cash positions.  If a stock is going to have to go to the market to raise money this may well provide an opportunity to buy later at a lower price.

Any recommendations?  Day likes royalty stocks like Franco Nevada and Royal Gold.  They carry much less risk than the miners and explorers.  Similarly some of the best gold majors like Goldcorp, Agnico Eagle and Randgold have proved themselves as good operators and will be among the first for institutions to climb back into if they see sentiment returning to precious metals.  These though are the safety plays and will not provide the kind of potential upside the juniors may do in a sharply rising price environment.

All good advice, but advice which is so often ignored in the heat of the moment.

Today the full Denver Gold Forum programme swings into effect with the first keynotes  from Maureen Upton looking at Mining Social Licensing and David Cox at the impact of low metal prices on exploration and the impact on the future supply pipeline.  These will be followed by two streams of presentations from mainly mid-tier gold, silver and pgm miners, followed in turn by a panel discussion on the paper gold market which is certain to draw a lot of interest.

The afternoon will see further corporate presentations and the evening will be rounded off with a Special Opportunities reception featuring 14 junior miners/developers explorers.  A full day ahead!

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Junior Focus: Rye Patch Gold and Kootenay Silver

From time to time LawrieOnGold is invited to meet with miners and explorers who are London-based, or who are travelling through the city usually as part of a capital raising exercise.  This week we had meetings with two interesting Canadian junior precious metals explorers – both at different stages in their development – Rye Patch and Kootenay Silver.

Rye Patch Gold Corp – TSXV: RPM; OTCQX: RPMGF

Particularly interesting near development stage gold explorer with all its prospects in Nevada, U.S.A.  Interesting in that through some smart research picked up licences on the Oreana and Cortez trends, in what is currently one of the most prolific gold production areas in the world, which had been allowed to lapse by major precious metals miners Coeur Mining and Barrick Gold.  The former was ground around Coeur’s big Rochester silver mine which is now generating significant royalties for the junior, which is enabling it to finance its exploration work on the two precious metals trends without eating into its cash reserves in any significant way.  The latest quarterly payment from Coeur totalled $1.85 million – sufficient to maintain a significant drilling programme on Rye Patch’s other highly prospective properties.

Most advanced is primary drilling activity to confirm and add value to its Lincoln Hill gold/silver project on the Oreana trend, relatively close to the Rochester mine.  This is an ultra low grade project but with good potential financials given the orebody is at surface (mine strip ratio is put at 0.5:1)and the material is easily heap leachable.  An initial Preliminary Economic Assessment suggested that a $750 gold pit shell and heap leach operation could be set up for a capital cost of only $30 million, giving the project a 5-year life, but with payback in only 1.3 years pre-tax  with an IRR of 76.5%.  At a higher gold price this pit shell is easily expandable, and there are also satellite prospects within 1-2 km which could also see a good extension to mine life, although these are yet to be drill tested.  The company’s proposed development schedule here is to proceed carefully with initial production only planned for early 2019.  See more detailed article on Mineweb: Junior gold explorer only spending what it earns.

But perhaps the sites with the highest longer term  potential are on the highly productive Cortez trend, with one area completely surrounded by Barrick Gold property and another to the south of the Barrick holdings between it and McEwen Mining’s Tonkin Springs project.  The Cortez trend includes the most productive Nevada gold mining operations after the Carlin trend and one of the Rye Patch areas borders on Barrick’s Goldrush and Goldrush South projects – which represent probably the biggest Greenfield gold discovery in the past five years.  Rye Patch’s other main prospect here is a short distance further south, but still between the Goldrsush properties and McEwen Mining’s Tonkin Springs project.

Thus Rye patch is an explorer with cashflow, a significant development project and additional highly prospective ground on two major Nevada gold and silver trends.  A great combination.

Kootenay Silver – TSXV:KTN

This is an earlier stage silver explorer with its prime properties in Mexico’s Sonora State in the country’s northwest and in an area already hosting several other gold and silver producing mines.  It was initially focusing on its Promontorio property – a promising large resource but perhaps not quite viable at current silver prices.  But exploring in the surrounding area it has outlined what it describes as a potential ‘game changer’ for Kootenay in the La Negra  greenfields discovery – a large, decent grade deposit offering low cost open pit heap leach potential some 6kms from its initial Promontorio prospect.  The company also controls a large land area with some other highly prospective drill targets.

At La Negra, Kootenay initially released the results of 25 drill holes which confirmed high grade silver mineralisation from surface down to around 100m.  A further 5 holes in its Phase 2 drilling programme are confirming the initial results.  But additionally the company’s geologists reckon that what they have found is the surface showing of a diatreme pipe which has the prospect also of hosting even higher grades at depth – a similar system , perhaps not in size, to Goldcorp’s Penasquito mine and Silver Standard’s Pitarilla project, also both in Mexico.

While it is early days yet for Kootenay its programme is to continue with its Phase 2 drill programme and come up with a detailed resource assessment later this year with a view to add value and perhaps find a partner to develop what could be a highly profitable project.  Much will depend on the silver price though and should the price rise significantly, as some believe it will, that could also bring the original Promontorio project into play too where Kootenay has outlined a silver equivalent resource (the deposit also contains zinc, lead and gold)  of some 92 million ounces Measured and Indicated and 24 million ounces inferred.  Not to mention, of course, other highly prospective targets in and among its big land holdings.  But as with most junior explorers the company has to strike a balance between ongoing expenditures and its cash balances and capital raising prospects – no easy task in the current depressed environment for precious metals juniors.