Spicy Juniors are Down South -- the Future of Land Grabs and Acquisitions?

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It has been a tumultuous time period for investors in junior gold and silver exploration companies over the past eight months...As a contrarian, you always want to avoid catching a falling safe, but you must also keep your eyes open to what the herd is doing and go against it at some point. The herd is trampling out the door just as gold is breaking all time highs. . .

It has been a tumultuous time period for investors in junior gold and silver exploration companies over the past eight months. The CDNX is trading at multi year lows relative to the value of gold. There has been a severe bear market in valuations in the junior sector. Investors are distraught and have now given up and are selling out of positions. As a contrarian, you always want to avoid catching a falling safe, but you must also keep your eyes open to what the herd is doing and go against it at some point. The herd is trampling out the door just as gold is breaking all time highs, and silver looks poised to run over $20 an ounce on its next breakout. I'll admit that I've been aghast at the valuations accorded to quality juniors with strong drilling results and ore values well above market caps. I've seen some juniors trading at 1/3 of 1% of their implied gross ore value. My opinion is this sentiment will shift once a few acquisitions are made by the majors. The majors are getting very worried about their depleting gold and silver reserves in the ground. In addition, they have to be concerned about the growing global political risk to deposits and discoveries. There will be a narrowing of acquisition opportunities for the majors based on the perceived safety of a region in which a junior is operating. Finding the region or regions most likely to be good "hosts" for a junior to sell out their discovery is of utmost importance for junior investors at this stage of the cycle.

Several juniors have found high grades of gold and silver in Mexico - especially in northern Mexico. In addition, many of these juniors have strong stock charts that have gone against the prevailing winds blowing sector prices south. There seems to be a growing hotbed of discoveries and growing market caps for the juniors making the cut in Mexico. Examples include Canplats Resources (TSX: V.CPQ, Bullboards), Animas Resources (TSX.V: ANI, Bullboards), Pediment Exploration (TSX: V.PEZ, Bullboards), and Geologix (TSX: V.GIX, Bullboards). Newsletter writers who have heretofore been beat up by their formerly adoring public are beginning to recognize this trend. You can tell the sector is unloved when the oracles like Doug Casey, Peter Grandich, Jim Dines, and others are now spoken about in not-so-eloquent terms. Just a few short years ago these same people could do no wrong in their followers' eyes. These are the kind of contrarian "behavioral" signals I love to see. "Sell all your speculative junior exploration plays and only own those that have near term production on the horizon." Yes folks, when you begin to hear, or read this advice from the formerly longstanding bulls in the exploration sector, you are reaching a bottom. Investors continue to value junior explorers as if the gold and silver bull market are not going to last. Since I don't agree with this stance, I view them as severely below acquisition valuations. To wit, my understanding from attendees at the recent Vancouver resource show was standing room only crowds in the breakout rooms discussing opportunities in junior companies. Investors are literally starving for some growth plays and are willing to swiftly reward those explorers who are hitting gold or silver in the right arena with the right results.

However, in order for this sector to regain the adoration of the investing public, a few events are likely going to have to transpire.

1. A major gold or silver "discovery" being proved up by a junior

2. An acquisition or several back-to-back acquisitions by majors

3. Gold heading towards $1,000 an ounce

4. Silver breaking out over $20.00 an ounce

I do expect All four of the above events to happen in 2008. My suggestion is for readers to try and narrow their focus on "mining friendly" regions before starting their due diligence. Certain parts of the world are going to be potentially a lot more hostile areas to be invested in an exploration stock. A few come to mind- Russia, Chile, Bolivia, Venezuela, Argentina, Ecuador just to throw out a few. Mexico has mining friendly laws, much easier permitting procedures, low cost of labor, high grades of gold and silver (Amongst other base metals), and relatively low barriers to entry. When the majors begin to dig around for their next large deposit project, I expect they will be focusing on Mexico as one of their preferred regions. Do some research on the history of the Pensaquito discovery (now owned by Goldcorp (NYSE: GG, Bullboards), / (TSX: T.G, Bullboards) to give you some relative valuation ideas. I own Animas Resources because it controls a huge prior-producing gold district, which has 1,200 historic drill holes, and prior high grade gold production to work off of for its drilling campaign that is about to start. I've also been looking hard at Canplats, Geologix, and Pediment. All of these juniors either have very recent strong drill results, or strong historical results they are building a base with. Geologix is a favorite of Peter Grandich and looks poised to break out technically. I could spend a few articles on each company, but I will leave it to the reader to begin their research with those four names as a starting point.

With the junior gold and silver stocks at such extreme lows relative to gross ore values in the ground, it should only be a matter of time until the vultures come in and start buying, joint venturing, and/or partnering. This could start a rush to move the valuations up in short order. As always, time will tell and the drillbit is the final arbiter of truth. One must always walk carefully amongst the junior minefields.

ABOUT THE AUTHOR

David Banister has written for CBS Marketwatch.com in the past, has been on national radio, and has written articles for local newspapers on the topics of investing and economics. Thom Calandra, the co-founder of CBS Marketwatch.com, called David, "The best market technician I have ever seen" in 2003. David is a contrarian at heart, with a bent for small cap stocks. David owns shares in Animas Resources. You may reach him at [email protected]

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