9\/2\/2009
\nby John Rubino
\nThe precious metals juniors have had a nice pop in the past few months. But according to David Morgan, veteran silver analyst and publisher of The Morgan Report, the real fun is just beginning. We spoke recently about why the sector has a bright future and how to tell the real companies from the story stocks.
\nDollarCollapse: Why do the juniors look good right now?
\nDavid Morgan: First of all, they\u2019re still undervalued. There are projects out there that are selling for less than their cash on hand. Many more are selling for less than a reasonable liquidation value. Once you\u2019re on the floor you can push as hard as you want and you\u2019re not going below the floor, so the juniors look like the best part of the resource sector at the present time.
\nThe only negative is that we\u2019re approaching more volatility in all the markets. There is a possibility in my view that there could be one more smashing of the general financial sector. The large miners tend to go along with the general equity market. So a huge sell-off in the stock market in October would damage the large cap miners such as Newmont Mining and GoldCorp. Will it take down the juniors? Probably not. You might see some of these stocks sell off a bit, but they\u2019re already washed out.
\nDC: How big a part of the story is M&A, with the majors buying up the juniors?
\nDM: It\u2019s a very big part of the story. Basically when the credit crunch started to manifest globally in 2008, companies that had cash positions were sitting like vultures on the telephone line looking at the companies with good projects that were selling at less than asset value. Lots of mergers and acquisitions took place. The big companies didn\u2019t have any problem at all getting credit.
\nBut I don\u2019t spend a lot of time looking for potential takeovers. I approach these companies on a value basis. With commodities, whether you get metal out of the ground in Canada or South Africa, it\u2019s all the same, it\u2019s fungible. So with a big company what you want to look for is the balance sheet and income statement. Who\u2019s making the most profit on the same product? I\u2019m simplifying but that gives you the general idea. But move down to the juniors and that\u2019s more of an art, a much more difficult process. Where are they, who\u2019s managing it, how much cash do they have in the bank, have they done it before? But some of these projects are only so far advanced and they\u2019re in good shape but are sitting there without anyone other than bigger companies paying attention.
\nDC: But you don\u2019t like \u201cstory stocks\u201d\u2026
\nDM: I\u2019m conservative, which comes with experience. I started in this sector at a very early age and was going to get rich quick. I bought every penny stock on the Vancouver exchange that I had money for, and my thinking was that if I just picked the right juniors it would just be a question of waiting a fixed amount of time and these things would go to the moon. But then I calmed down, saw my losses, and started to learn more. The truth of the matter is that on a grassroots exploration company your shot is about one in 2,000. That\u2019s better than the lottery but it\u2019s not as advantageous as a lot of people think. So part of my job is to separate the real companies from the story stocks. Again, I want to state that I am not primarily a junior mining stock picker, I focus much more on making money safely in the sector much like someone managing a gold fund, but we do not manage money.
\nDC: What do you need to see in order to move a company from story to real?
\nDM: You need to see the story coming true according to plan. There\u2019s a sweet spot to buy a stock and it\u2019s always higher than where it was when it started. When a company is just an idea or a great story, that\u2019s usually as cheap as it\u2019s going to get. Very few great stories come true, but if it begins to come true, the market will bid it up. But it can still be undervalued. And once you know a lot about it, let\u2019s say 80% comes true and the other 20% is coming, there\u2019s a point where there\u2019s enough volume and news and knowns-versus-unknowns that you can buy the stock pretty safely and still see a lot of upside. I\u2019d rather buy a $2 stock that goes to $8 in a year than a stock at 12-cents that takes ten years to go to $8.
\nWe had Silver Standard (SSRI), for instance, at 65 cents. I was one of the first other than Adrian Day to recommend it, but [later on]you could buy that stock at $5 and still have a lot of upside. They kept adding shares but at the same time they were adding more silver ounces per share. So there\u2019s your sweet spot: For a while you could buy something that was getting more undervalued the more shares they issued.
\nDC: So who are the next Silver Standards out there?
\nDM: I don\u2019t think there will be another Silver Standard for a while but I\u2019ll give you a conservative pick. Energold (EGD.V) is a drilling company with a unique drill that\u2019s used all over the world. It\u2019s a very efficiently run company, with management that\u2019s excellent. The sweetener on this one is that it owns a pretty good percentage of Impact Silver (IPT.V). They\u2019re mining silver at a profit, a small operation with lots of growth potential. So you\u2019ve got an operating company with solid contracts and a pretty good slice of Impact Silver. This is as solid a speculation as any on our list.
\nOne of my earliest recommendations is Mines Management (MGN). I know the management quite well. It\u2019s developing a huge property, over a billion pounds of copper and a quarter million ounces of silver in Montana. It\u2019s not a super-rich project. It\u2019s been advanced substantially over the last several years but they\u2019re not mining yet. If something happens in the future they don\u2019t have a fallback position, so this adds to the risk. However, it\u2019s so undervalued that it\u2019s a reasonable speculation. If you put this on a graph of ounces in the ground per dollar invested it\u2019s well undervalued relative to its peers.<\/p>\n","protected":false},"excerpt":{"rendered":"
The precious metals juniors have had a nice pop in the past few months.<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[121,89],"tags":[85,86,87,88],"yoast_head":"\n