Shiny Metal

At a time when Gold price is lingering around $1,100 an ounce and some expects it to go further . It is worth analyzing the viability of gold mining companies. Is it the right time to invest in Junior miners? Junior miners are the tiny mining firms that often own little more than a piece of land, some geology studies and big dreams.

For many investors chasing these gold mines will end up in a nightmare. There are many hurdles, before they actually start producing gold. Economic feasibility is the main concern. Getting the permission from Government agencies and environmentalists are another major hurdles. In short, even if they managed to find Good quantity of gold, the actual production may be years away. In the mean time, your stake will be substantially reduced by further share issues.

The best way to reduce your risk: Focus on junior miners that are within a year of production. And understand the lifecycle of small mining stocks before you invest.

• Idea and exploration. This is “wing and a prayer” territory, where you’re betting an upstart company with no assets in the ground, some cash in the bank and a fistful of geologic analysis will unearth a mountain of gold. Most flame out; some persist for years, perpetually drilling and fund-raising, while diluting existing shareholders. These risky crapshoots have little to do with gold prices.Some firms do find gold, which brings investors running. In 2006, Aurelian Resources announced what some labeled a “bonanza” in Ecuador. Shares that traded earlier that year for 13 cents soared to more than C$3 on the announcement, even as gold prices slumped. The shares eventually went above C$10 a share, even though it was years from production.
• Discovery and feasibility. This marks the period when a miner determines the costs of building a mine and mitigating environmental concerns necessary to secure permits. It is rife with delays and disappointments that undermine share prices.Consider Aurelian, again. An Ecuadoran decree in April 2008 shut down all mining operations, and Aurelian’s shares collapsed to less than C$4. (Kinross Gold later bought Aurelian for C$8.20 a share to gain access to the gold deposit.)Or consider NovaGold Resources, a junior miner that in late 2007 suspended construction of a massive gold and copper mine in Canada because revised cost estimates — some C$3 billion more than projected — made the project uneconomic.

  Shares fell more than 50% in a day to less than C$10. Today it hovers near C$6.

• Production. A few companies make it to the point at which they’re mining gold in quantity. Red Back Mining first started producing gold in its West African mines in the fall of 2005, with the shares then at about C$2. The cash flow provided a floor for the stock price, and the shares have pushed higher as production increased and as Red Back brought another mine into production. Today the stock trades near C$20.Many juniors in production end up getting acquired. Canada’s Wheaton River Minerals for years traded between C$0.50 and C$3, and was producing more than 500,000 ounces of gold annually when, in late 2004, it agreed to an all-stock merger with mining giant Goldcorp. The merger valued the junior miner at C$4.29. Goldcorp’s share price has more than doubled since, and that C$4.29 share is now worth about C$10.The lesson here: Junior miners that haven’t reached the production stage aren’t really a play on gold. They’re a far-out-of-the-money call option that a particular company will be able to navigate all the various regulatory and operational hurdles and actually produce the yellow metal.

If you’re going to gamble on the juniors, put the odds in your favor. Focus on those generally within a year of production. They’ve got gold in the ground, they’ve passed regulatory and financial hurdles and have determined they can build a mine profitabl.

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