Second-Best Time to Buy MiningThe Second-Best Time to Buy Mining Stocks
The absolute best time to buy a mining stock is just prior to thedrilling of the ‘discovery' drill hole which makes the nightly news andsends the penny stock soaring to extraordinary highs! (see Fig 1, Item1-3, Discovery hole) This is a difficult task as statistics show thatover 600 properties have to be drilled for each ore body that isdiscovered and subsequently made into a mine. It can be a daunting andexpensive proposition trying to cover your bets by speculating in allthe penny dreadfuls.
The experience we have enjoyed over the past 30 years suggests there is asecond best time to buy mining equities. That is when a qualifiedmanagement team is preparing to convert/construct a single ‘ore body'mining company into a producing mine. A purchase of mining stocks duringthis development/construction period has produced significant gainswith a favorable risk/reward ratio.
Mines are Not Discovered, They are Made!
Ore bodies are usually "discovered" during an "up-cycle" in metal pricesas the mining industry and the speculative publics enthusiasticallyspend money on exploratory drilling. One or two discoveries are made andthe enthusiasm spills over into all the penny exploration companies. Itcan take two to four years to fully "prove" a discovery while theshort-term "up-cycles" in metals prices are often as brief as one tothree years. Thus discoveries are often brought into production, madeinto mines, in the following (or possibly later) up-cycle in metalsprices.
The difference between the real discoveries and the promotional clonesis not always signaled by their price action in the stock market. Theyboth go up during the general enthusiasm for the shares of any companiesnearby the
‘discovery' (Fig 1, Item 2, Anticipatory/discovery rise) and down whenmetal prices recede (Fig 1, Item 4, Confirmation/disinterest slide).
Model of Classic Mining Company Share Price Cycle
Figure 1
Companies with bona fide discoveries (those that will ultimately be'made' into mines) identify themselves by continuing to spend money ontheir property when metal prices are cyclically weak, (Fig 1, Item 6,Development
/construction period) and when funds are not as readily available from anow less-enthusiastic public, but rather largely from management andlonger-term investors.
Buying discoveries can be fun and profitable, and is largelyspeculation. Buying qualified ‘mine making' is investing that can yieldsignificant returns with a favorable risk/reward ratio.
Investing in a ‘single' ore body mining stock when it is being readiedto go into production (Fig 1, Item 6) provides some of the lowestrisk/highest reward mining industry investment opportunities. Andresults are even better if this period of pre-production/constructioncoincides with the trough in a market cycle for the stocks of theparticular metal.
Low metal prices and disinterest from the speculator community (whooften drive the prices of stocks to excess during the discovery period)combine to produce a very depressed price for a mining stock during theconfirmation/disinterest slide (Fig 1, Item 4). This is precisely when agood ore body, financed by knowledgeable long-term investors andoperated by qualified management, can be bought in anticipation ofsubstantial gains during the pre-production and production period,compounded when metal prices recover from cyclical weakness.
The Big Payoff
There is significant capital gain potential as the market begins toanticipate and discount the production of metal and the consequentearnings (Figure 1, Items 6 through 8). The maximum appreciation isrecorded if the mine is being readied for production during a period ofmetal prices weakness and begins pouring metal and generating earningsas prices are trending up again.
In thirty years of identifying ten such companies, all but one haveequaled or exceeded their discovery highs by more than 100%! The pricerises from their confirmation/disinterest lows to their production/cashflow highs have produced 300-1000% gains.
Conclusion
One of the best times to invest in a mining stock is during theconstruction – pre-production period when a qualified ‘single' ore bodymining management team is going about the work of 'making mines'.
Found on the SWY bullboard
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