Summer is here. The markets are still undecided on whether to climb
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, fall, or sit still. So while the market takes its vacation, both gold and silver haven’t taken a break. Gold is now on a nine-week win streak and silver is up over $19.
If prices continue to hold at these levels for another year, many of us who are invested in precious metals miners and explorers may finally reap the rewards we were looking for.
The prices of gold and silver have yet to translate into a fair share price increase for many of the precious metals juniors – including our recent investments into Minco Silver (TSX: MSV) and United Mining Group (CNSX: UMG).
Neither Minco Silver or United Mining Group are producing – but both are very close.
Minco Silver has delineated over 158 Moz of silver, which at today’s prices are worth over $3 billion. Their 2009 feasibility show reserves of 55 Moz, using only $13.57/oz silver – add another $5 to that number and those reserves alone are worth another $275M in revenue. The Company currently has a market cap of $130M – but it was just $110M when our Special Edition Report on Minco was released last week (see The Brink of Milestone) and shares prices of Minco Silver shares were trading at $2.56 (June 11, 2010). Minco Silver is currently trading at $3.05, nearing Raymond James’ target price of $3.35. (see The Brink of Milestone)
United Mining Group currently has a market cap of under $31 million, but had revenues nearing $16 million last year, and a 10Moz silver resource scheduled to go into production within a year. Not only that, their Crescent Mine project sits between two of the world’s largest-ever silver mines and is a potential takeover target given its untapped resource and location. They also have over $6 million in the bank and is fully permitted and financed to go into production. The math is pretty simple – they are extremely undervalued when stacked against comparable companies. (see The Secret Battle)
The biggest difference in valuating juniors is how close they are to actually producing. Having ounces in the ground is one thing, but to actually get it out is a different story. Minco Silver is as close as ever to becoming the largest pure silver play in China. United Mining Group is fully permitted and financed to go into production in less than a year, in one of the largest silver districts in the world.
We’re sure many of you who have invested in precious metals juniors may be scratching your head at the current valuation of your investments based on resource in the ground. The average consensus by institutions is around $80-90 of market valuation for every ounce a gold company has in the ground, but we have seen companies with over 3Moz of gold valued at less than $20 million.
Look at United Mining Group – its trading with the same market cap as its own 2011 projected revenues.
Mining Takes Time – But It’s Worth Every Penny
We have to remember that mining is a time intensive process and look at share prices the same way. The juniors are lagging the rise in precious metals for one major reason: fear.
When the market crashed, many junior explorers were forced to raise money at significantly discounted prices. They issued millions of shares and warrants far below market value and we’re still seeing some of that overhang in the markets.
The economic problems that are driving gold and silver prices will affect the junior markets. The problem lies in the fact that investors fearful of the market implications of a Euro collapse due to Greece will retreat to areas of safety such as gold and the U.S. dollar, leaving the market for capital bone-dry.
There is a very real possibility that risk aversion will outweigh any positive sentiments from a rise in gold prices, putting junior companies with exposure to precious metals under significant downside pressure.
Strike While the Irons Hot
Right now, retail traders have an advantage: risk.
Institutions are still weary of the markets and there hasn’t been a propensity by the larger institutional funds to buy into the resource sector yet. Institutions have a lot less room for errors and thus, have to mitigate their risks. This gives retail investors the advantage to enter into the resource markets before the institutions.
When things settle down and precious metals stay above current prices, perhaps a year from now, these institutional investors will return to the Venture Exchange. When they do, look out. All of that patience could be rewarded and we could see the Venture exchange above 4000.
Right now, the summer has arrived early for traders and we`re starting to see thinner trades and lighter volumes – including that of gold, which is rising despite very low average volumes. If you can stomach investing during the summer, it can be a great time to pick up some cheap shares of juniors.
For now, we continue to look toward companies such as Minco Silver and United Mining Group. They both have lots of cash in the bank to survive a downturn in the markets, and both are near term producers.
Keep your eyes on the juniors during the summer – there will always be garage sales with bargain prices on a nice sunny day.