The junior frenzy heating up again

Peter Koven and David Pett
Financial Post
Sunday, October 04, 2009



Quebec. Wyoming. Iraq. Northern Sumatra? The days of wild speculation in the junior resource sector are back.

After last year's credit crunch and market meltdown wiped out interest in new discovery plays, billions of dollars have flown back into these companies in the past few months. And it does not seem to matter whether projects are in safe jurisdictions like Quest Uranium Corp. in Quebec, or the most volatile like WesternZagros Resources Ltd. in Kurdistan, Iraq.

A year ago, junior resource companies were hoarding their cash and simply trying to survive the tough times. But the Second Great Depression that so many people called for never materialized. As commodity prices improved and capital returned to the sector, the juniors went back to work. A select few have made some interesting discoveries in their summer drill programs, and their stock prices have shot off the charts in response.

In Northern Sumatra, East Asia Minerals Corp. has made Indonesia's most exciting new gold discovery since the Bre-X fraud. In the Yukon, Underworld Resources Inc.'s gold find has triggered a big staking rush.

Even well-explored mining camps have turned up new discoveries. West Timmins Mining Inc., agreed to a $285-million takeover from joint venture partner Lake Shore Gold Corp. after they made a new discovery in the 100-year-old Timmins gold camp. Evolving Gold Corp. has proved Wyoming still has gold, long after most prospectors gave up on it.

"There are a number of companies that have had what I'd call preliminary success," says Canaccord Adams analyst Wendell Zerb, who tracks the junior mining sector. "What's hard to quantify is how that translates into long-term success and development of a project. I think some of the early results have justified interest in the stories, but it's hard to know how they pan out."

For investors who get into these companies, there is one story they always take to heart: Aurelian Resources Inc. The company started with a couple of discovery holes in Ecuador in 2006, and gradually proved up the best gold deposit the world has seen in years. The stock went from 25¢ a share to more than $40 (pre-split) in a year. Investors that went along for the ride made a fortune.

But for every Aurelian fairy tale, there are dozens of these promising discovery plays that go nowhere, either because the deposit turns out to be a disappointment or metal prices decline.

Take Goldsource Mines Inc., for example. In April 2008, the company said it found thermal coal in northeast Saskatchewan. With thermal coal prices climbing to record highs north of US$120 per ton, it set off a wild staking rush in the area, and those in on the action saw their share prices soar. Goldsource shares climbed from 37.5¢ to $19.09 over April to June 2008. In the midst of the frenzy, it also announced an $18-million private placement at $11.75 per share. But as the financial crisis hit, coal prices tumbled 50%. Goldsource shares collapsed, hitting a low of 96¢ in February.

With commodity prices rising, the stock market rallying hard and the economy on better footing, the appetite for risk is back and many investors who want to make up their losses as quickly as possible see the junior resource space as a good means to an end. But with the economy still on shaky ground, Joanne Hruska, vice-president at Aston Hill Financial in Calgary, reminds investors that as a general rule these more speculative stocks should make up no more than 20% of a portfolio's total value.

"Last year, juniors were hit even harder than the overall market," she says. "Be educated about what you buy and be active. Too many people ride these stocks up, but then ride them back down. If you make some money, don't be greedy and take some profits off the table."

THE HOT RESOURCE PLAYS

Ventana Gold Corp.

Ventana is the undisputed king of the discovery plays. Four months after the Vancouver company found high-grade gold on its La Bodega property in Colombia, investors remain convinced that this could be one of the best discoveries in decades. The company now has a market cap north of a half-billion dollars. While some concerns about political risk fester in the background, the focus right now is just how big La Bodega will turn out to be. TD Newcrest analyst Daniel Earle is using a conceptual resource estimate of 5.9 million ounces of gold, but others are talking about 10 million or more. "We believe that Ventana may be in the early stages of making a world-class discovery," Mr. Earle wrote in a note.

Quest Uranium Corp.

Until recently, almost no one knew what rare earth minerals are. But thanks to recent talk out of China that the government may limit exports, the sector has gone on a roll. Enter Quest, which was exploring its Strange Lake property in Quebec for uranium, but came upon an interesting rare earth discovery in the fall of 2008 (which added to a known deposit nearby). That was in the midst of the economic collapse, so the company decided not to make a big deal of it. Quest finally reported the discovery in April, and the global rare earth frenzy began shortly thereafter. It now has a market cap of $132-million. "Talk about the stars aligning," chief executive Peter Cashen says.

Peregrine Diamonds Ltd.

Diamonds are a tough business. Since the Ekati and Diavik mines were discovered in Canada's Far North in the 1990s, dozens of junior companies have come and gone, but none have proven up Canada's next great Arctic diamond mine. Peregrine, run by Eric Friedland (brother of legendary promoter Robert Friedland), with a market cap of $244-million, may be the one to finally do it. Each announcement out of the company's Chidliak project in Baffin Island has added more promise to the story, and the stock finally exploded last month after Peregrine recovered hundreds of large diamonds from a bulk sample. "There is a possibility that this is Ekati and Diavik all rolled into one," says analyst and junior mining expert John Kaiser.

Evolving Gold Corp.

It's been nearly 50 years since anyone made any real money mining gold in Wyoming, but that may be set to change now that Evolving Gold has moseyed into the cowboy state. Shares of the Vancouver-based company popped in mid-July, tripling in value in just two weeks, after drilling results from its Rattlesnake Hills project near Carson City demonstrated "a major new body of gold mineralization." Now with a market cap of $106-million, the company continues to test the Rattlesnake Hills area aggressively. "We believe the Rattlesnake project is one of the most intriguing North American gold discoveries in recent times due to its potential to be a multi-million ounce deposit," says Vincent Weber, Fundamental Research Corp. analyst. (my bolding for emphasis)

WesternZagros Resources Ltd.

Nowhere is there more political unrest than Iraq, but that hasn't stopped a slew of prospectors from staking claims in the northern part of the country, hoping to develop the next big oil and gas find. Right there in the mix is Calgary-based WesternZagros. It holds a production-sharing contract with the government to explore and develop for oil and gas in the Kurdistan Region, and investors are taking notice of its promising results to date. The stock has climbed six-fold in the past six months, giving it a market cap of $320-million. "There's been a lot of interest in this stock and Kurdistan in general since Saddam [Hussein's] regime came to an end, but there is still a lot of risk," says Joanne Hruska of Aston Hill Financial.

http://www.nationalpost.com/story.html?id=2060647