DON'T OVERLOOK NON-PRECIOUS METAL STOCKS

By Dr. Richard S. Appel              March 3, 2005 www.financialinsights.org

February 27, 2005 - I first entered the Canadian junior exploration sector in my desire to maximize my profit potential. The year was 1993. I had earlier come to the belief that gold had begun a major secular uptrend when it broke through strong resistance at $325 an ounce. With this thought firmly entrenched in my mind I set out to target the most profitable areas within the precious metals complex in which to invest. I knew that investing in gold bullion or bullion coins would offer me a one for one profit potential that would mirror any rise in gold. I was also aware of the great leverage that I could achieve if I invested in gold futures or gold options. However, from my earlier experience during gold's great 1970's Bull Market, I knew that my ability to "time" gold price movements was far from precise. On a number of occasions I believed that "gold had to move higher, and now". Yet, after suffering innumerable price reversals, traps, and the passage of time which left many of my options worthless, I was only left with dashed hopes and dreams and less working capital. I learned that while I had the ability to readily and early recognize long-term trends, I was ill prepared and unable to regularly ascertain short term ones. This ruled out my engaging in gold trading offered by gold options or on the commodity exchanges.

My thoughts then turned to the major gold producing companies. I knew that a rising gold price should drop to their bottom lines and greatly increase their cash flows and profits. It was logical that by the action of the price-earnings multiplier, the PE Ratio, a company's share price would benefit from the greater revenue and profit that would be received for the product that they mined. If a company had a PE of 30 and their profits doubled, I would receive a windfall profit of many multiples of its original price. Unfortunately, I usually felt that most gold producers were vastly overpriced. Thus, I was reluctant to invest in these companies for fear that their PE ratios would decline to more reasonable levels. If this resulted a higher gold price would not significantly benefit me. Further, from experience, I realized that the underlying factors that drive gold to higher levels would also act against those companies that profit from retrieving it from the bowels of the earth. Just as gold's price is influenced by a depreciation of the dollar's purchasing power, the dollar mining costs of the gold producers also rise. The result is that these companies do not fully benefit in the long-term from gold's price appreciation.

Having run out of the classical fashions in which to invest in gold I though back to my experience during the gold and silver Bull Markets of the 1970's. In that era my first gold investments were in some South African gold mining companies. Later, with a similar desire to increase my profits, I found the Coeur D'Alene silver exploration companies. These were basically small companies that had little hope of finding a mine, and in fact did limited or no exploration. Further, the sole opportunity that they offered an investor was their tiny prospects located mostly in the Silver Mile of Idaho. The hope was that one day they might be coveted and acquired by a major producer. I knew from investing in this market during the late1970's, that investors clamored for these companies and provided their shareholders with enormous profits. This, despite the fact that not one in ten performed much more than the required work to maintain their mining permits.

In 1993, and with this knowledge and experience in hand, I began in search of a new area of gold investments that would offer me the greatest return on my capital. I read numerous investment newsletters and attended many gold conferences. I realized that a number of things had changed since my 1970's experience. In that decade the junior Canadian exploration industry was in its infancy. In fact, only a few companies such as Agnico Eagle were ever mentioned. However, by 1993 a number of changes had occurred. Not only had a number of countries enacted friendly mining laws that enticed exploration companies to travel around the globe, but several technological advances had essentially opened up the world to aggressive senior and junior exploration teams. Country after country that were thought or known to possess vast under-explored and unexploited mineral deposits had now opened their doors to anyone who was willing to enter and attempt to unlock their fabulous natural wealth. Further, a host of earlier uneconomic ore bodies could similarly be exploited. This was enabled by the new mining techniques and processes that were far more cost effective than those earlier available.

When I first learned of the global opportunities available to the mining industry, my thoughts solely focused to gold. After all, I was only looking for a fashion in which to best profit from my belief in far higher prices for the yellow metal. At the time it seemed logical that if one of my junior companies was successful in defining an economic gold deposit I would handsomely profit. If my company was able to discover one million ounces of gold, it could rise from virtually nothing and suddenly sport a market capitalization commensurate with others developing a similar sized gold mine. If they were exceedingly fortunate and found a two or three million ounce deposit, their market cap could soar from virtually nothing to heights that approached $500 million or more. What a rush! However, what I didn't realize was that in the scheme of things, a one million ounce or even a three million ounce gold deposit isn't all that huge in the mining field.

While a $500 million or more market cap is a lot of money, the odds of finding a gold deposit that can generate such a capitalization is no more unusual than finding a base metal mine worth a multiple of that amount. Or, for that matter, a small oil or gas exploration company can find a massive hydrocarbon deposit worth five or ten million ounces of gold. And, the result to the investor in any of these alternative instances can similarly equate to substantially greater profits. It's simply a question of the magnitude of the metal or hydrocarbon's value that can be economically produced! The greater the net present value of the deposit, the more that the company's shareholders will benefit that find such wealth.

When I first entered the Canadian junior exploration sector I didn't adequately understand the economics of the industry. While I was determined to best profit from my gold investments I missed the greater picture. It was only after I had been involved in this sector for a while, and witnessed first hand the great profits that some investors experienced with non-gold exploration successes, did I fully understand that gold isn't necessarily better. That is at least in regards to maximizing one's profit in the junior natural resource industry.

In the mid-1990's, a junior called Diamond Fields was exploring for diamonds in Labrador. They were unsuccessful in making a diamond discovery, but instead stumbled upon an enormous multi-billion dollar nickel deposit. Their shares soared from a few dollars to over $150 C. Earlier, Aber Diamond Corp.was another exploration company that traded for pennies before making a major diamond discovery. It is currently trading at over $40 C. Pennaco Energy began its life well below $1.00. After beginning the development of a major coal bed methane play in 1998, it was acquired for about $20 a share a few years later. I can go on and on! In fact, the world's major mining and oil and natural gas companies similarly began as juniors. It didn't matter for what they were exploring. What was important was that their initial major discoveries led to their growth and their ultimately becoming household names.

I am confident that not only are gold and silver in secular Bull Markets, but also are oil and natural gas and all mineral based commodities. In the past several years we have seen a barrel of oil rise from $10 to its current $50+ price. Copper rose from near $0.60 to $1.48 a pound. Molybdenum was at about $2.50 a pound, iron ore was a few dollars a tonne, and uranium sold for $8 a pound. They are now selling for $30, $30+ and $22 respectively, and their potential Bull Market peaks are nowhere in site. Further, as their Bull Markets mature, numerous known but presently uneconomic deposits will become profitable to economically exploit.

This offers great opportunity for many juniors. Not only may their current projects become economic, but they will have the opportunity to obtain newly economic deposits that are made so by higher metals prices. In either of these events we will be presented with the good fortune to invest in many nascent companies that may one day enter the ranks of the secondary or major producing companies.

The above was excerpted from the March 2005 issue of Financial Insights © February 27, 2005.

I publish Financial Insights. It is a monthly newsletter in which I discuss gold, the financial markets, as well as various junior resource stocks that I believe offer great price appreciation potential.

Please visit my website www.financialinsights.org where you will be able to view previous issues of Financial Insights, as well as the companies that I am presently following. You will also be able to learn about me and about a special subscription offer.

CAVEAT

I expect to have positions in many of the stocks that I discuss in these letters, and I will always disclose them to you. In essence, I will be putting my money where my mouth is! However, if this troubles you please avoid those that I own! I will attempt wherever possible, to offer stocks that I believe will allow my subscribers to participate without unduly affecting the stock price. It is my desire for my subscribers to purchase their stock as cheaply as possible. I would also suggest to beginning purchasers of these stocks, the following: always place limit orders when making purchases. If you don't, you run the risk of paying too much because you may inadvertently and unnecessarily raise the price. It may take a little patience, but in the long run you will save yourself a significant sum of money. In order to have a chance for success in this market, you must spread your risk among several companies. To that end, you should divide your available risk money into equal increments. These are all speculations! Never invest any money in these stocks that you could not afford to lose all of.

Please call the companies regularly. They are controlling your investments.

FINANCIAL INSIGHTS is written and published by Dr. Richard Appel and is made available for informational purposes only. Dr. Appel pledges to disclose if he directly or indirectly has a position in any of the securities mentioned. He will make every effort to obtain information from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Dr. Appel encourages your letters and emails, but cannot respond personally. Be assured that all letters will be read and considered for response in future letters. It is in your best interest to contact any company in which you consider investing, regarding their financial statements and corporate information. Further, you should thoroughly research and consult with a professional investment advisor before making any equity investments. Use of any information contained herein is at the risk of the reader without responsibility on our part. Past performance does not guarantee future results. Dr. Appel does not purport to offer personalized investment advice and is not a registered investment advisor. The information herein may contain forward-looking information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the statements contained herein that look forward in time, which include everything other than historical information, involve risks and uncertainties that may affect the company's actual results of operations. © 2005 by Dr. Richard S. Appel. All rights are reserved. Parts of the above may be reproduced in context, for inclusion in other publications if the publisher's name and address are also included for credit.