Finding Value in Gold Stocks

Source: Boris Sobolev, Seeking Alpha  (10/25/07)

The ratio between Exploration I and HUI indices is highly volatile and cyclical. We believe that it has set a long term low and is now on its way for a strong rebound. Exploration I stocks almost always rally in the later stage of the sector upturn. This means that this is the right time to establish positions in quality junior exploration and development companies and reap big rewards.

Mining companies go through a series of stages from listing on a stock exchange to becoming a producer. A chart of a successful mining stock typically looks as follows:

There are three ways to profit based on the above cycles. First (point 1) – find a lucky junior exploration company that will make a discovery. Second (point 2) – buy undervalued shares of stock with established resources for cheap and ride it to production. Third (point 3) – pinpoint a troubled junior producer at the moment of an operational turnaround.

In our view, the second approach is certainly safer than the first and has more upside than the third approach given the project is economically viable and the management has what it takes to capitalize on that...

The main reason stocks often lose most or even all of their discovery gains is the high demand for cash required for preliminary economic and feasibility programs, at the time of zero cash flow and little or no substantive news.

But these quality companies are making progress behind the scenes. They are issuing technical reports, upgrading resources and piecing together various project development studies. The time approaches for a patient and shrewd investor to find exceptional value...

The ratio between Exploration I and HUI indices is highly volatile and cyclical. We believe that it has set a long term low and is now on its way for a strong rebound. Exploration I stocks almost always rally in the later stage of the sector upturn. This means that this is the right time to establish positions in quality junior exploration and development companies and reap big rewards.

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