Dave from Denver…

Friday, December 3, 2010

Some Random Musings/Thoughts Late Thursday Night...

I have been busy during the day trading the crap out of the intra-day market volatility for both my fund and my own account. As such, I've been a bit too preoccupied to post during the day. In addition, as I was discussing with a friend tonight, I'm a bit burned out from spending the last three years researching/reading/analyzing etc in order to set up the fund I co-manage to be positioned to take advantage of what I believe will unfold financially/economically/politically in this country. I think we are entering the early stages of what will be a monster run in the metals/miners. This is great for anyone positioned for what is happening - but really bad news for the well-being of the hoi polloi.

Of particular note, it looks like sophisticated institutional money is rushing into the large-cap, liquid mining stocks like SLW and AEM. More significantly, real money is starting to sniff at the better quality, more visible junior mining stocks. Some of the holdings in our fund have more than doubled over the last 2 months. As such, this is still the early stage of what could be a breath-taking move in this segment of the mining stock universe. As an example, ECU has moved from the high .50's to a recent intra-day high of $1.41. It has pulled back and is consolidating this move. I think it is now "coiling" for an even bigger move. The last time around, starting in mid-2005 when I bought into the name personally at .34, it ran from my entry point to a little over $3.30 before the whole sector was manipulated into a crash by Bernanke/Paulson. I'm not saying that magnitude of a move will occur this time around - but it sure as hell could.

Let's work out some conceptual math using rough numbers to demontrate the possibilities using ECU. Back in 2005, ECU had around 40 million ounces of 43-101 silver. As my colleague Andy pointed out today in an email to our group, right now the juniors are being cap'd by the market at $1-1.25 per silver equivalent ounce. In early '07 at the last valuation peak for juniors, the average valuation was anywhere from $4-7 per silver equivalent ounce. Currently, ECU's share base has doubled since early '07 but its 43-101 silver has increased more than 10-fold to over 400 million ounces. I'll let anyone interested in calculating possible price targets using ECU's current share base, 43-101 silver ounces and potential market cap targets. In other words, stocks like ECU have quite a move ahead if we get a run like the market had the last time around. And remember, back then the small cap mining stocks were largely fueled by the individual investor. Contrast that with now, when it looks like bigger, more sophisticated capital pools are starting to discover the junior segment of the mining share sector...