The Resource Market's Transformation

By Dr. Richard S. Appel              March 3, 2006 www.financialinsights.org

February 26, 2006 – The stocks within the junior exploration sector have recently become influenced by a new mind-set. Earlier in their Bull Market these companies were affected by two primary factors. The first was the price of gold.

The yellow metal struck its Bear Market $252.50 low in August,1999. After displaying an initial burst of strength it again declined and posted a double bottom at $255 in early 2001. It has since doubled in price and, until now, the junior stocks have tended to mirror gold’s price action. Each yellow metal up-wave saw a delayed overflow of excitement enter the juniors moving them higher in price, while each gold set-back made their stocks whither.

The second heretofore major influence driving the junior shares was a spill-over of emotion and capital from the major gold stocks. As a group, the gold producers tended to move in lock-step fashion with gold, with the exploration companies carried by their tailwinds.

For newcomers to this sector I believe that it is important to recognize that the gold and gold producer Bull Markets have influenced virtually all stocks within the mineral exploration universe. It hasn’t greatly mattered whether these small enterprises explored for gold, silver, copper, nickel, uranium or any other precious or base metal.

One should view this sector as a world unto itself. Investors and speculators that enter this arena tend to commit a certain portion of their speculative capital to it. They may initially be seeking exposure to gold explorers, but once their money enters it influences the entire group.

An analogy would be a small town or country, where one or more sectors for one reason or another attract a large influx of new capital. Most of the shops, factories or other enterprises will experience an increase in business. This will encourage a further rise in spending which benefits the financial state of the entire community. Salaries and incomes will improve, and the citizens will become more prosperous as money flows from one hand to another.

So it is with the junior exploration sector. Once exposed to the market, investors witness copper, uranium or other exploration companies generate substantial profits for their stockholders. This moves many to invest in non-gold explorers in their desire to similarly profit. Further, given the numerous Bull Markets in which various precious and base metals find themselves, most stocks within this group attract further capital from other investors for the specific metals for which they search.

I believe that a bit of history from my experience is warranted at this juncture. The early stages of a gold Bull Market, which can last for a few years or more, sees little money entering junior companies from the general public. Those who first purchase gold stocks either recognize the birth of a new Bull Market, are resource funds, or are speculators. They are all familiar with the market.

The early major money enters from generalist funds. They will take positions in the major companies such as Barrick Gold and Newmont Mining and move their prices higher. They acquire shares of the best known companies as they do in all market areas that they trade. The secondary producers will also do well because some money will flow into them in anticipation that escalating gold prices will drive their profits higher. The pending producers will also attract some capital because profits from their future production now seems assured. The junior companies will float higher in price primarily based upon the “hope” that they will “strike it rich”.

Of utmost importance is that all gold stock advances historically follow a similar pattern. They tend to begin with the major companies first leaving their lows behind. This is followed by the secondary producers moving higher, and later by the pending producers. After these sectors are trending higher the junior companies join them, and the entire group rises together.

LATER IN THE GOLD CYCLE

As gold’s Bull Market progresses, the producing companies continue to strike new highs. Their price appreciations are surpassed by the expected producers whose investors hope will one day generate income. During this period the market capitalizations of the producers and future producers sharply escalate in value.

At some point one or more experts announce that “the large caps are too expensive”, and that profits should be taken. They recommend that the money should be reinvested in lower quality gold related companies.

For the first time, significant outside money begins to flow into the various levels of exploration and developmental companies. Its main target is companies with large, advanced projects that higher gold prices are expected to make economically viable. Investors by this time witnessed major profits accrue to those who bought junior companies that rose from pennies to dollars, on the back of their impending production.

Throughout gold’s Bull Market most investors watched from the sidelines while the large known but earlier uneconomic deposits approached or were brought into production. Their hearts sank while they observed the stock prices and market capitalizations of these companies soar without their participation.

Finally, a company or two announce impressive drill results. Earlier, their share prices would have attracted attention, but little excitement. However, now, more and more investors become frightened that they will miss yet another huge score. They compare the new exploration results to those of the “pending producers” that they failed to invest in and fantasize. They dream that their new stock will rise in price and generate huge market capitalizations such as their comparisons. This marks the birth of a “drill hole market”.

The metamorphosis that exploration stocks have just undergone is of great importance to investors. It appears that the last few months of 2005 marked the birth of a “drill hole market”. These are rare and are characterized by the great excitement and soaring stock prices that accompany impressive drill results. Investors now compare single drill assays with those that companies with substantial projects and market capitalizations have reported to the market. Investor’s imaginations take control and they believe that their company will become a producer, and rocket to a market capitalization of an advanced successful “look alike company”. Their fear of lower metal prices evaporates. These are times when “the luck of a single drill hole into a mountain of geological uncertainty” will stun the market and multiply a tiny company’s share price. These markets can last for years, and I believe we have just entered such a market.

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The above was excerpted from the March 2006 issue of Financial Insights © February 26, 2006.

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. © 2006 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.