RE: Look Out!Here you go ;-)
Prospecting for Juniors' Gold
By Matt Whittaker
597 words
5 May 2008
(c) 2008 Dow Jones & Company, Inc.
While the world's major gold producers have reaped a windfallfrom high gold prices, their much-smaller counterparts -- known as junior miners-- not so much.
Hit by the credit crunch and risk aversion, the venturecapital-fueled juniors have had difficulty using debt to finance theiroperations. So they turned to equity financing, diluting holdings even asinvestors were dumping their shares in a flight to quality that, ironically, wasbehind the record gold prices.
But change may be afoot. Gold has slid by more than 16%, froma March peak above $1,000 to Thursday's $848.90 low, the weakest front-monthlevel since January; May futures closed at $856.10 an ounce Friday, down 3.5% onthe week. Such a decline could indicate risk appetite is growing and may signalinvestor readiness to return to the juniors, in hopes that gold exploration willbring a big payoff.
"Gold moves up [when] we're in a riskier market," says VictorGoncalves, economist and president with the Equities and Economics Report, whotracks mining companies and sees Canadian juniors at "fire-sale" prices. Sogold's easing "would bode well for juniors," he says.
Pure-junior listed indexes are rare, but investors can get asense of their performance with the Standard & Poor's/TSX Venture CompositeIndex (ticker: ISPVX), which tracks gold juniors among other small-cap stocks.It fell more than 23% from its August high to March's low as the credit crunchintensified, and has since recovered only about 0.6%. Meanwhile, theAugust-March period graced large-cap gold miners in the Philadelphia StockExchange Gold Silver Sector Index (XAU) with a 73%-plus rise; but they've givenback more than 18% as gold's price fell back.
The second quarter has historically been harder for thejuniors due to waning seasonal jewelry-making demand. But Thomas B. Winmill,whose Midas Fund (MIDSX) invests in commodities, sees juniors' share prices"ratcheting up fast," in two to three months, as cash-flush majors in need ofbolstering production numbers are likely to buy up underpriced juniors.
In addition to buyouts, juniors' shares can appreciate as theminers discover deposits or secure beneficial financing.
But not everyone sees the wider market as risk-tolerantenough to return to junior-mining investment: "If there is capital coming backinto the market, it's not necessarily looking at junior gold," says David W.Adamson, president and CEO of Rubicon Minerals (RMX.Canada).
Indeed, junior miners are risky, because they are often yearsfrom commercial production, and their properties may come with higher productioncosts. Political risk can also be a factor.
A case in point is Aurelian Resources (ARU.Canada), anoft-mentioned analyst favorite because it's sitting on an attractive gold-silverdeposit in southern Ecuador. But that nation's acting legislature recently frozemining activity, and reduced the number of concessions allowed private miningcompanies.
The skittish may want to look at more politically stablecountries -- Canada, for instance, says Carlos Sanchez, precious-metals analystwith consultancy CPM Group. But that nation also comes with higher labor costsand a slew of junior-mining competition. With juniors "you have increasedpotential to gain, but you also have increased risk," Sanchez says.
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Matt Whittaker is a reporter for Dow Jones Newswires inJersey City, NJ.