Newsletter Watch: Low-priced, high-risk miners
The mining sector in general entails significant risk. Needless to say, low-priced, small-cap mining firms should be viewed as highly speculative. For those comfortable with these risks, a trio of advisors sees upside potential in three mining firms – two focused on gold, and one on copper.
“Caveat emptor,” emphasizes Ivan Martchev in discussing DRDGold Ltd. (Nasdaq: DROOY). In his Vital Resource Investor, he explains, “DRDGold, previously called Durban Rooodeport Deep, is a very high risk special situation. DRD may be South Africa’s fourth-largest gold miner, but the share price hit $0.54 March 14, a level it last saw in late 2000 when the precious metals boom started.”
He notes that the company is a “serial diluter,” pointing out that the company had 105.4 million shares back in 2000 and currently has 370.3 million shares outstanding. As a result, he cautions, “Its results are not an apples-to-oranges comparison.”
“Can DRD make it?” he asks. Says Martchev, “My answer has been yes, even though the brilliant managerial talent DRD possesses is starting to wear me out. Indeed, management needs to come to its senses, which is still a work in progress.”
Martchev emphasizes that this is a highly speculative idea, particular because the stock “doesn’t have an obvious catalyst, other than the fact that a sharp rally in gold can make miracles happen.”
Looking ahead, Martchev states, “If the gold price heads toward $800, the fire under DRD’s shares will be difficult to put out given the high-cost nature of production. Because I’m bullish on the gold price and precious metals in general, I think that this remains a great speculation.”
Meanwhile, Adrian Day, editor of The Global Analyst, notes that gold often peaks in the spring, and the stocks drift down. “This is particularly true for the juniors, when volumes dry up at the onset of summer,” Day says. “This combination however makes it a particularly attractive period in which to do some buying.”
Due to this seasonal pattern, Day has decided to add several junior resource stocks to his portfolio, and the first such buy is Miranda Gold Corp. (CVE: MAD).
Day explains, “Miranda is a prospect generator focused on Nevada, particularly the Cortez Trend, searching for large-scale Carlin-style deposits.” He points out that exploration is always a “long-odds enterprise,” and looking for large deposits requires “lots of money and patience.”
He observes that Miranda limits its risk and enhances its chance of success by bringing in partners. Day notes that the company has about 15 projects with seven different partners, one of the top exploration teams in Nevada, and a strong treasury (about C$9 million).
Day observes, “The stock has recently been particularly weak, with the stock falling from “just north of C$2 to $1.22.” Meanwhile, he notes, “Any positive exploration results should result in a solid move up.”
In the meantime, he says, with a market cap now under C$50 million, Day does not believe investors are “paying up for the high-potential.” He cautions that the stock is being bought for the aggressive part of his portfolio.
Vivian Lewis, editor of Global Investing, looks to Baja Mining Corp. (TSE: BAJ), a play on copper mining. Despite being headquartered in Canada, she notes that the company is involved in reviving an old mine in Baja California, Mexico.
Lewis explains, “Baja Mining got a definitive feasibility study of its Boleo Project in Mexico, and it is lovely.” She notes that the project, on the east coast of Baja California Sur near the town of Santa Rosalia, contains seven mineralized stacked seams dipping east to the Sea of Cortez.
Proven and probable reserves, she notes, are sufficient for a 25-year mine life, with 275 million tonnes of measured and indicated resources grading 1.77% copper equivalent, and a further 250 million of inferred resources grading 1.29% copper equivalent.
According to Lewis, these “huge reserves” mean that the project will have an after-tax indicated rate of return of 24.7%, or 46% at current market prices for the metals. The net project value at an 8% discount rate is $700 million, or $2.3 billion at current market prices.
Lewis adds that strong support of the Boleo Project has come from the Bay Street financial elite, including “project finance lenders and metal off-take parties.”
Further, she says, Baja's advisor, Endeavour Financial, prepared an Information Memorandum to be distributed to commercial banks and other potential lenders immediately. For speculators, she considers the stock a strong buy.
Steven Halpern is the founder of “TheStockAdvisors.com - Steven Halpern's Guide to Financial Newsletters,” the first website to feature a daily overview of the investment newsletter world.
