How to Profit in a Sideways Market
By Steve Todoruk
For the last two months, gold has traded sideways in a range between $1,190 and $1,260 per oz. In similar fashion, silver, copper, and uranium have oscillated between relatively tight boundaries.
Generally speaking, the price of resource mining companies tends to mimic the pattern of the underlying commodity. Hence, a range bound commodity market generally translates to similar price movements for the associated mining company.
Nevertheless, there is a class of mining company that can deliver profits even in a sideways market. I refer to these collectively as “new discovery” types of mineral exploration companies.
New Discovery Companies
New discovery companies acquire mining properties and engage in basic exploration. These activities may include: airborne geophysical surveys, land satellite imagery surveys, ground geophysical surveys, stream and soil sampling surveys, geological mapping, prospecting, and trenching. Then, a drill rig (also known as the ‘truth machine’) is employed to drill holes at various targets of interest.
The vast majority of times, the results of these drill holes are disappointing. In practice, the odds of discovering an economic deposit are horrifically low.
Nevertheless, the enormous profit potential of new discovery companies can’t be ignored.
Finding the Winners
Spotting the winners in this group is no easy task. Many novice investors adopt a gambler’s “buy and hope” mentality. But for those with experience and related (geological) expertise there are better ways.
I look for new discovery companies that have demonstrated early results and, hence, increase my confidence that something special is happening on their property.
For starters, I like to see metal grades that are sufficiently high to support economic mining in an open pit or underground mining operation.
Then, it’s important that the company demonstrate similar (or higher) grades and widths in the subsequent step-out drilling exercises. Higher grade results may point to “sweet spots” in the deposit which may command a healthy premium in an eventual takeover.
In the ideal situation, step-out drilling over an expanded area confirms a larger and more valuable mineral deposit which causes the marketplace to re-evaluate the value of the mining company.
The End Game
In a successful new discovery play, once the deposit is ultimately delineated, a large company typically makes a friendly takeover bid at a price much higher than our initial buy-in 2 to 3 years earlier.
Approximately two years ago, I produced a 20-minute video presentationon this type of company in which I cited several historical examples of successful new discovery plays. I believe the talk is just as relevant today if the company names are updated.
With this in mind, I recently compiled a shortlist of my favorite names in the new discovery category.
Although there are no guarantees, there are good reasons to believe new discovery plays will once again deliver excellent results, even in a range-bound market.
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