Marcos, I also thought that was a good article Albert Matter wrote. I saved an html "snap shot" of that page from the National Gold web site prior to it becoming Alamos. Every now and then I like to refresh my memory. Here's the text of that article. I also have the graph but don't know how to post it.
The Classic Mining Company Share Price Cycle, or The Second Best Time to Buy Mining Shares
Author: Albert J. Matter
The absolute best time to buy a mining stock, of course, is just prior to the drilling of the discovery hole, which makes the nightly news and sends the penny stock soaring to new highs! However, this is a difficult task as statistics show that 600 properties have to be drilled for each mine that is discovered. It can be an expensive proposition trying to cover your bets by speculating in all the penny dreadfuls.
However, from the work we have done over the past 30 years, the SECOND BEST TIME to buy a mining stock is when a single mining company is preparing to put an ore body into production. A purchase of mining stocks during this development/construction period has produced the best Risk/Reward Ratio.
"Mines are not discovered, they are made!"
Mines are usually "discovered" during an "up-cycle" in metal prices as the mining industry and the public enthusiastically spends money on exploratory drilling. One or two discoveries are made and the enthusiasm spills over into all the penny mining companies. As it may take 3 to 4 years to fully "prove" discovery while the "up-cycles" in metals prices are often as brief as 1-2 years, the discoveries will usually be brought into production in the next (and possibly, later) up-cycle of metals prices.
Model of Classic Mining Company Share Price Cycle
The difference between the real discoveries and the promotional clones is not signaled by their price action in the stock market. They both go up during the enthusiasm (see model on second page, Item 2-Anticipatory/discovery rise) and down when metal prices recede, (Item 4-Confirmation/disinterest slide). The fact is that the real ones identify themselves (those discoveries that are being 'made' into mines) by continuing to spend money on their properties when metal prices are depressed (Development/construction period) and funds are not readily available from a now unenthusiastic public, but rather only from management and serious investors.
Investing in discoveries is speculation. Investing in mine making is serious investing and yields the best risk/reward ratio.
Thus, the lowest risk/highest reward comes from buying a mining stock when it is being readied to go into production (Development, construction period) and is already fully financed. An even better time is if this period of pre- production coincides with the trough in a bear market for the stocks of the particular metal.
Low metal prices and disinterest from the speculator/investment community (who often drove the prices of stocks to excess during the discovery period) combine to produce a very depressed price for a mining stock during the confirmation/disinterest slide. This is precisely when a good ore body, financed by intelligent investors and operated by qualified management will fare well despite the prevailing prices for the metal.
Now for the Big Payoff:
Significant capital gains occur as the market begins to anticipate production and earnings (see below Production/Cash flow). The maximum appreciation is recorded if the mine is readied for production at a period when metal prices are down, but begins pouring metal and generating earnings when prices are trending up again.
In thirty years of investing in nine companies that have qualified (not that many do), all but one have equaled or exceeded their discovery highs by a factor of TWO. The rises from their confirmation/disinterest lows to their production/cash flow highs have produced 300-700% gains.
Our conclusion is that the best time to invest in a mine is during the development/construction period when good mining companies go about the work of 'making mines'. This is when the responsible principals of these companies are themselves putting additional money in, as are serious investors.
Albert Matter has extensive experience in securities brokerage and corporate finance. During the past thirty years he has participated in the financing of numerous public and private corporations and the structuring and negotiation of major corporate transactions. He is a successful manager of private investment funds with emphasis on mining investment analysis.
Originally published in 1979, republished by The Oxford Club, September 1995. |
