A professional investor with Boy Scout genes in his DNA, Mercenary Geologist Mickey Fulp picks winners in the junior resource sector based on three criteria: share structure, people and projects. In this exclusive Gold Report interview, Mickey touches on how he studies up on such key factors as insider holdings that indicate management’s skin in the game and the public float necessary for liquidity. He also suggests that the summer slump—with low volumes and low prices—is a good time for some homework on equities that could double within 12 months.

The Gold Report: So far in 2010, there’s been both positive and negative economic news. We now have health reform, about to have financial reform and stimulus money is still working its way through the system. The markets are bumpy. What’s your view for the second half of 2010?

Mickey Fulp: We always see volumes take a nosedive in the summertime, as everybody in the business goes on vacation. We’re in the summer doldrums right now, and so I think we would hope for a better market after Labor Day. Amongst the juniors, liquidity has been the real problem. Volumes have been way down on the Toronto Venture Exchange; that’s one of the criteria I always look at for the health of the market. We’re down to around 150 million per day; you want to see something on the order of 250 million in a robust market. There’s not been wholesale divestiture, though, so after Labor Day I think we’d expect higher volumes for the juniors and, hopefully, a better market. I even saw some Canadian analysts the other day talking about how the World Cup has affected volumes in that country.

TGR: You’ve talked about junior resources as a very high-risk, high-reward sector where people must be prepared to lose, as well as win. If they consider this gambling money, your “Power of Two” concept helps them improve their odds. Could you explain this concept?

MF: It’s actually simple: The Power of Two is the idea that you take your money off the table when a stock doubles, so you’re playing with somebody else’s money. Let’s take an example: Say you invest $10,000 in a junior stock that costs $0.20 per share. When it reaches $0.20, sell half; take all your initial investment off the table. Then take your $10,000 and find another stock that will double within 12 months and do exactly the same thing. It’s an iterative process. You’re accumulating positions in a basket of juniors and preserving your initial capital. If you do it five times, you still have your $10,000 ready to go into stock number six; and 25,000 shares each of the five investments with a zero cost basis. It’s an infallible way to make money in a bull market.

TGR: What if the stock halves instead of doubles?

MF: There’s only one reason to buy a stock—because you think it’s going to go up, or if it’s a blue chip, to generate cash flow through a dividend. There are myriads of reasons to sell a stock. If the reason you bought has changed, sell it; if not, hold it or average down on weakness, because you still think it will double within the original 12-month period. Part of the Power of Two concept is to buy stocks you think will double within 12 months, and nearly all active exploration juniors will have a low-to-high in any 52-week period of at least a double. In other words, during any given year, the stock’s high will be at least double its low. The key is to buy at low volumes at low prices and sell at high volumes and high prices.

TGR: And when do you sell?

MF: If the reason you bought the stock has changed, when do you sell? It depends on many things. Perhaps it becomes deadwood and doesn’t perform. You hang on to break even. Perhaps there are better opportunities, so you sell at a loss and move money elsewhere. Perhaps you sell it at the end of the year for a tax loss, because if you’re doing your homework—and doing it right—you will have profits so you can take tax losses and write off against your capital gains. If it was a bad investment decision, just take your lumps and move on.

TGR: If the key is to buy at low volumes at low prices and sell at high volumes and high prices, does it make sense to buy now, during the summer doldrums?

MF: Yes, the summer doldrums always present buying opportunities. But make sure you don’t buy too early. If you buy stocks with underlying good fundamentals and value, you will be rewarded at some point.

TGR: Aside from juniors, what would you advise investors?

MF: It’s important to have a nest egg, and I have that outside of the money I have in the junior equity market. It’s important to spread your assets and, therefore, your risk. I’m a bit of a Boy Scout, so I’m prepared. It’s necessary to own your own shelter, and hopefully you don’t have a mortgage on that. I have some farmland, keep some cash on hand and own large market cap equities, mainly in a managed IRA. I own gold, guns, gas and goods. I’m a bit of a survivalist. It’s important to be prepared.

TGR: You say you look for three critical components in any public company: Share structure, people and projects. Tell us what you want to see in share structure and why that is important to you?

MF: You want a low number of shares outstanding, but it’s a floating target that depends on the stage of the flagship project. I have some rules of thumb that I use for what constitutes a low number of shares. If it’s a startup company, you want a low number of shares—10 million to 20 million—that are tightly held. If it has an advanced project, the acceptable number of shares would be higher, perhaps in the range of 40 million to 60 million. For a company going into the development stage, I like to see no more than 100 million shares outstanding. You want insider holdings to be significant, and you want insiders to participate in their company’s private placements. They need to have skin in the game.

Institutions can be good or bad. Companies with advanced projects often have a large institutional fund holding. I am very particular about seeing a spread of institutions, and not one institution controlling a significant number of shares, because management then becomes beholden to that institution.

The Achilles heel for most of the juniors is the lack of liquidity, or trading at low volumes. Volume is generated in the market by a healthy retail public float, so although you want companies that are relatively tightly held by insiders, families and friends, you also want a significant retail public float because that’s what generates liquidity.

TGR: What do you consider significant?

MF: 50% or more. Retail investors are the ones that provide trading volume.

TGR: What percentage of insider holdings do you like to see as opposed to, say, institutional holdings?

MF: I certainly prefer at least 10% to 20% insider holdings, sometimes more. I don’t have strong feelings about institutional holdings. Oftentimes, it depends on the institutions and how committed they are to the junior resource market. Institutional funds need to make money, so they often do not have the company’s best interest in mind. If any institution holds 10%, 15% or 20%, you want to make sure they are pros and committed to the company business.

TGR: Any other share structure factors that you consider important?

MF: You want to be wary of overhanging warrants, especially if they’re marginally in or out of the money, because that can cap the share price. A company can go on a run but, in times of low news flow, drift back toward the price of overhanging warrants.

I always run working capital in with share structure. You want to make sure the company has sufficient working capital for a year or the ability to raise money—at non-dilutive share prices—when necessary.

The other thing I very much watch is insider selling. As a general rule, I want insiders not to sell. They should make their money on options and not huge salaries. If they sell into positive news or front-run, that raises a big red flag as does selling before or during bad news I’ve dropped coverage of three companies in my two-year newsletter history; two because of insider selling. It’s very easy to find out about insider selling, assuming those people file transactions on time. There’s a website called CanadianInsider.com that shows the last 10 insider transactions for every listed company, and sedi.com lists all the insider transactions in the history of a company. It’s all available but no different: I look a lot of people pay attention to it. They absolutely should. Read More…

– Posted Friday, 2 July 2010 | Digg This Article | Share this article | Source: GoldSeek.com

Economic rebound? Not with 22% unemployment. Banking reform legislation? Loaded with pork. Bankrupt nations? Rock-solid, lead-pipe cinch. “We need to start all over,” says the inimitable Bob Moriarty in this exclusive Gold Report interview. “And in the end, we will.” Meanwhile, he’s keeping an eye out for the few-and-far-between juniors that manage to get things exactly right.

The Gold Report: Just in time for President Obama to meet with the leaders of the G20 nations in Vancouver over the last weekend in June, Congress finalized a sweeping bill to overhaul the banking system. These reforms are touted as the most ambitious rewrite of financials since the Great Depression. What impact will this legislation have on protecting us against another financial meltdown similar to 2008?

Bob Moriarty: Not a person I know, including myself, can actually say one thing of significance about this bill because no one actually understands what it says and what it does. Congress is voting for bills, while they have no clue as to what’s in them. Senator Dodd from Connecticut says, “Well, we’ll have to see what the effect of the bill will be.” Well, I’d like my representatives in Washington to understand the effect of a bill in advance of writing the damn thing. It’s going to be another bill totally loaded with pork, totally out of control. Accomplishing nothing.

Actually, what we need is another Glass-Steagall Act. We need to take banks back to being banks instead of casinos underwritten by the United States government and with their losses paid by taxpayers. If they actually reported their assets, you’d see every bank in the U.S. underwater financially.

The biggest of the big banks are doing something called High Frequency Trading. Basically, they are getting data a half second before the rest of the market and they are front-running their own customers. HFT is 70% of the market trading and it’s stealing. Congress didn’t even address the issue. Because they have been bought and paid for by Wall Street and the biggest of the banks. It’s all corrupt and nothing is going to get fixed until we demand an honest monetary system.

Banks are supposed to be conservative. When I go down to the bank and deposit a check, I want to know that money is going to be there a week from now. I don’t want those guys flying to Vegas shooting dice with my money. That’s what they’re doing. We are at a pivot point in world history. The people in Greece understand they’re being screwed by government. The Greek government made all these promises they can’t possibly keep. People in the U.S. are waking up to the fact that we’re $150 trillion in debt and we only have $50 trillion in assets in the U.S.

We need to go back to Economics 101. We need to put people to work doing real things rather than make-work. We need to get government off the backs of taxpayers. We need to declare bankruptcy. We need to reduce the size of government. We need a lot less government and we need to start all over. And in the end, we will. Individuals around the world understand that we are at a turning point in world financial history. Governments don’t.

TGR: You mentioned Greece. China came in and bought a bunch of its debt, helping bail them out. The government is also doing some massive restructuring and cutting.

BM: Have you ever seen the guys playing the shell game in New York? Shuffling the three walnuts and there’s supposed to be a pea under one of them? This is a shell game. Nobody is addressing the issue; there’s more debt in the world than money. It’s simple. It cannot be paid. It makes no difference who’s on the hook for it. There’s not enough money in the world to pay down the debt. Greece is bankrupt. Spain is bankrupt. Italy is bankrupt. Ireland is bankrupt. The UK is bankrupt. The U.S. is bankrupt. Japan is really bankrupt. Those are the issues we need to address—the issues for which governments are giving lip service. They’re just as effective at solving this financial disaster as they are the Gulf of Mexico oil spill.

TGR: Is this a house of cards? Where finally one nation declares bankruptcy and others follow suit?

BM: Of course. This is an instant replay of 1931. An Austrian bank went bankrupt and, when it did, it took everybody else down. You can think about it as a circle with say 10 people in it. One guy has $1 million and loans it to the next person. He loans it to the next person. He loans it to the next person, and on and on. The last guy in line is a crack addict who goes out and blows the money. When he defaults, how many people lose a million dollars?

TGR: Nine others.

BM: Exactly. So we have this incredibly leveraged system that cannot possibly pay the debts down. When Greece or Spain goes, there’s going to be a cascading default and everybody is going to go. This is not a “prediction.” It’s a rock-solid, lead-pipe cinch. There’s no other possible alternative.

TGR: Where will the first card fall?

BM: It’s really hard to tell. A whole flock of black swans is circling and we aren’t exactly certain which one will land first. But who cares who defaults first? They’re all going to go in the end. I think 20 states in the U.S. are functionally bankrupt right now and are very near the point they tip over the cliff.

TGR: Some people say we’ve seen a rebound from the depths of the recession. Others are talking about a double-dip recession. Where do you stand on that?

BM: There was no rebound. You can’t have a rebound with 22% unemployment. In my entire life we have never had 22% unemployment. There was the appearance of fewer problems, which was total fiction. We’re in a depression.

You have to get to where government revenues equal government spending. Nobody wants to do it, but we’ll do it in the end because believe it or not the law of supply and demand does work. Economics 101 does work. Governments fight it tooth and nail, but you have to balance your books sooner or later.

TGR: Are we looking at decades of depressions while we transition from overspending to balanced budgets?

BM: It didn’t take very long in Iceland. The government will get very attentive when there are riots in the United States. When people understand their life savings have been destroyed, their pensions are gone and their jobs have all been exported to China, they’re going to be furious. Guys like Peter Schiff and Gerald Celente and I have been calling for it for years. When Americans understand how big a mess we’ve got down in the Gulf and the government isn’t doing anything about it, they will be furious. Read More…

Those that could not see the disaster coming, and grossly underestimated its magnitude once underway, have been loudly proclaiming an economic rebound is underway. Such proclamations, spewing from establishment channels, are so blatantly short on truth that it reveals a disturbing level of desperation to raise confidence. Furthermore, the straight-faced dissemination of such transparently amateurish “official analysis” being served as a substitute for tangible economic growth clearly shows that the damage to the national economic infrastructure is so great that past practices employed by the Fed and Government to goose the economy to revival are now futile at best and most likely counterproductive.

No Such Thing As A Jobless Recovery

Only the generation of millions of private sector jobs producing a legitimately saleable product or service is a reliable indicator to herald real recovery. Unfortunately, the country foolishly embraced an economic model based on consumption over production. As such, there will be no healthy and sustainable growth until the populace somehow improves its personal cash flow, pays down previous consumption, builds some savings, and re-establishes a manageable line of credit. That said, parsing through all the official gibberish about the “V” shaped recovery, however, I can find no irrefutable data to confirm that such confidence-building job generation is, in fact, developing.

We Are In A Short Intermission Before Act Two

The economy may appear to have stabilized but this is a brief respite on a long journey down. The trillions of stimulus, nationalization of GM, etc. should have halted the slide and jump-started the economy but, instead, such action has just provided a short intermission - with a heavy price to be paid down the road. All that has really been accomplished is the official establishment of trillion plus dollar deficits going forward, with no end in sight. This recurring annual budget shortfall is actually modest in comparison to the multi-trillions needed for unfunded entitlements, Obama-care, debt servicing, and the legions of upcoming bailouts for state governments and union pensions.

Remedies Are Being Politicized To Our Detriment

Of course, a crisis demands governmental action. True to form, those that thirst for power seized on the perverse opportunity they helped create and are grinding out legislation that does nothing to honestly curtail future abuses. Instead, it burdens the innocent and productive sectors of society with oppressive, intrusive and damaging regulation. Unfortunately, there has not been one iota of legislation by government - or dollar spent - in response to this crisis that has not been politicized. Consequently, the economic, regulatory and judicial distortions associated with heavy and far-reaching governmental intervention guarantees an ever diminishing standard of living.

One Dim Bulb And One Bright Spot For Financial Refuge

In a speech earlier this month Ben Bernanke treated us to a demonstration of his understanding of money as one beholden to the fiat monetary system. A couple of the pearls of ‘wisdom’ he uttered were:

“Other commodity prices have fallen recently quite severely, including oil prices and food prices… So gold is out there doing something different from the rest of the commodity group.”

“I don’t fully understand the movements in the gold price, but I do think that there’s a great deal of uncertainty and anxiety in financial markets right now.”

No Ben, gold is NOT so much a consumable commodity as it is a monetary metal and, yes Ben, there IS a lot of anxiety in the financial markets. Net, net, there is too much limitless paper and not enough finite gold, ergo the falling value of paper to gold.

That simple exercise in cause and effect could have saved the Pride of Princeton the embarrassment of appearing visibly perplexed about the basic tenets of money. What do they teach in Ivy League economics?

Contrary to Ben’s befuddlement, there is clear and unambiguous precedent for coping with the demise of a paper-based, and thoroughly abused, monetary system. The options for financial refuge in such an imploding economic and monetary environment are few. Historically, gold has served in this role and appears to be asserting itself for the position again. This can be witnessed playing out across the globe in all major currencies.

Conclusion

Don’t be waylaid by the clueless conformists. Talk of a gold bubble is coming from those who made the same assertions when gold broke $400 an ounce. Except for its justifiable 4X price rise over the previous decade, there is no evidence of the typical bubble characteristics attached to gold yet.

Unlike the behavior of “investors” in the dot.com and real estate manias, the masses are not running out to buy gold at any price. Indeed, if you talk about investing in physical gold bullion at a cocktail party, you can still count on being subject to ridicule. For contrarians, such an environment is ideal. It is setting the stage, aside from the occasional periodic normal price pullback, for gold to ascend to much greater heights.

Chris Blasi is President of Neptune Global Holdings LLC ( www.NeptuneGlobal.com ) and a frequent contributor to both www.FinancialArticleSummariesToday.com and www.munKNEE.com. He can be contacted at GroupDirector@NeptuneGlobal.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Neptune Global Holdings LLC (Neptune). The author has made every effort to ensure accuracy of information provided; however, neither Neptune Global Holdings LLC nor the author can guarantee such accuracy. This article is strictly for informational purposes only and a sampling of diverse editorial opinion. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Neptune Global Holdings LLC and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication. Neptune does not act as, nor offer the services of, an investment advisor. Individuals should conduct their own due diligence before making any investment choices.

By: David Galland, Casey Research LLC
– Posted Friday, 2 July 2010 | Digg This Article | Share this article | Source: GoldSeek.com
For some years now, Doug Casey has gone on record with his view that we’ll know the gold bull market is really picking up steam when central banks stop selling their reserves of gold and begin buying the stuff.

The following excerpt from a Wall Street Journal article titled “As Gold Hits Record, Central Banks in Focus” indicates that this is now happening…

The metal has surged over worries about Europe’s debt woes and the slumping value of the euro. Investors in metals and currency markets have been on alert for any sign that the world’s central banks, and China in particular, are shifting reserves out of the euro and into gold.

Though central banks typically are coy about investment decisions, there have been signs lately that they might be shifting out of euros and into gold.

A key point in this discussion has to do with the Central Bank Gold Agreement under which signatories were allowed to sell 400 tons of gold – 14.11 million ounces – annually.

According to the World Gold Council, in 2007 the central banks took advantage of the CBGA to sell on the order of 484 tons of gold. In 2008 the number began dropping – to 232 tons, followed by a miserly 41 tons in 2009, just 1.44 million ounces, or 10% of the amount sold two years before.

And at the same time the banks stopped selling, they began buying… a net 200 tons last year and almost certainly more than that in 2010. Thus, we have a swing in demand of some 600 tons, or 21 million ounces annually… an amount equal to about 30% of new mine supply.

This, of course, is a two-edged sword, because, in sum, the central banks, IMF, and the Bank for International Settlements hold some 29,000 tons of gold. If push came to shove and the central banks were forced to defend their currencies by selling off their gold reserves, it could have a serious detrimental effect on the gold price.

Using the struggling eurozone as an example, if you added together the official gold reserves of the European Central Bank, Germany, Italy, and France, you’d arrive at a total of 8,791 tons of gold available to be delivered to the market. Converted into a more commonly used and understood unit of measure, 8,791 tons equals 310 million ounces.

Now that seems like a lot of gold, and no question it is. Keeping things simple, at $1,000 per ounce, the European central banks are sitting on gold reserves worth $310 billion.

One might be tempted to think that the European central banks could begin to view this very tangible asset as an important part of the solution to the sovereign debt crisis now bedeviling them.

However, when you consider that Italian government debt alone comes to $1.91 trillion and is closing in on $8 trillion for all the eurozone, it becomes clear that selling their gold would have little real effect. And, of course, selling off their gold reserves would announce for all to see that the sovereigns were nothing more than hollowed-out shells, their currencies dried husks ready to be blown away by the next puff of wind.

Staying on topic, with 8,133 tons of gold in its reserves, the United States rates as the world’s largest sovereign holder. In fact, as of March 2010, gold made up 70% of official U.S. reserves. Pretty good, eh? Now, let’s break it down.

8,133 tons of gold = 287 million ounces.

287 million ounces x $1,000 = $287 billion held in gold reserves.

If $287 billion is 70% of total U.S. reserves, then total U.S. reserves = $410 billion.

Total U.S. government debt, not including unfunded obligations, comes to $14 trillion, so total reserves (of all categories) as a percentage of debt = .029.

And the gold component of those reserves, as a percentage of total government debt = .02.

I think the technical term is a “drop in the bucket.”

Even so, one doesn’t want to be naïve about these things – 29,000 tons of gold is roughly the equivalent of seven years’ supply. Which is another way of saying that it would be a mistake to completely discount the possibility that desperate governments won’t eventually attempt to dump their gold to defend their currencies, as counterproductive as that might be, given that it would send the price sharply lower.

For the time being, however, the central banks are net buyers – and so very supportive to gold’s price.

To stay in the loop about gold and silver – as well as gold-related investments that can give you up to 4:1 leverage to the actual metal – check out Casey’s Gold & Resource Report. At $39 per year, it’s a must-read.  Learn more here.
– Posted Friday, 2 July 2010 | Digg This Article | Source: GoldSeek.com

Managing Director, Casey Research

David Galland is Managing Director of Casey Research,LLC., and the Executive Director of the Explorers’ League. His career in the resource and financial services industry dates back to a stint working underground at the Climax mine in Colorado, following college. Over the course of his career he has worked in a publishing and/or editorial capacity with Gold Newsletter, the Aden Analysis, Wealth Magazine and Outstanding Investments, among others. He currently serves as Managing Editor for Doug Casey’s International Speculator, Casey Investment Alert, and What We Now Know. In addition to his work in financial publishing, David has served as the Conference Director for the annual New Orleans Investment Conference (1979 to 1987), as a founding partner and Director for the Blanchard Group of Mutual Funds, and was a founding partner and Executive Vice President of EverBank, one of the biggest recent success stories in online financial services.

Scott Wright     July 2, 2010

Ahhhh … summer heat, stock-market corrections, and juniors.  What more can one ask for to soothe the soul?  OK, so perhaps writhing would be more appropriate than soothing.  But you know, heat happens every summer, the stock markets were due for a correction (especially after an 80% move higher since March 2009), and junior gold stocks will eventually return to favor.

It has no doubt been frustrating owning gold stocks of recent, especially the juniors.  With gold achieving record highs it is natural to believe the gold stocks would mount material rallies and achieve records of their own.  And based on their inherent risk, the juniors should have been exhibiting huge upside leverage.  But with gold stocks continuing to lag gold (the HUI/Gold ratio remains at 2003 levels), the few remaining investors not selling into these crazy volatile markets have experienced wailing and gnashing of teeth.

While the summer doldrums may not be the best time to cheer for a rally, as long as gold’s secular bull remains intact the gold stocks will have their day of reckoning and juniors will respond in fast and furious fashion.  And with such fundamental underpinnings as gold investment demand just starting to heat up and ongoing production woes among the many, there is little arguing that gold’s bull still has many miles left in the tank.

On the junior front, these little explorers heavily rely on stock-market capital to fund operations.  But since junior investors are fickle and only have so much patience when they aren’t being rewarded for the risk, this sector can melt down in quick fashion.  And unfortunately if the capital is not coming in at a fast-enough pace, these juniors won’t be able to perform their critical role in the gold supply chain.

But at risk of further hampering gold’s structural supply problems if this sector flops, I don’t believe we’ve seen the end of the junior glory days.  In fact, for a variety of reasons which I’ve outlined in previous essays, the junior gold stocks are likely to have their best days ahead of them.

Fortunately it is amidst these sector struggles where the best bargains can be found.  But in order to find these bargains investors need to do a lot of work on the research front.  And for this reason our research house has dedicated the last 6 months to researching and profiling our favorite junior gold stocks for our popular reports.

Over the course of this gold bull the junior landscape has grown increasingly dynamic.  And a key dynamic one must consider is this sector’s size.  With gold demand and hence its price on the rise, more and more juniors are hitting the markets in search of gold.  We came across over 400 junior gold stocks trading in the US and Canada!

With hundreds of junior gold stocks to choose from, it is more important now than ever before to skillfully select your portfolio of potential winners.  Until the junior complex mounts a concerted run higher and regains more mainstream popularity, only an elite group will outperform.  And it is this group that will deliver the outsized rewards that investors should expect in return for owning these risky stocks.

The only way to perform unbiased research is to of course scrub the entire pool.  And as you can imagine with such a large population this has been quite an undertaking.  But after various levels of screening and filtering those elite juniors poised for success do eventually emerge.  And with so many more gold juniors today, and quality ones at that, the bellwethers don’t quite fit on one page anymore.

And since these juniors reside in such a wide assortment of stages, from small grassroots explorationists to large emerging producers, it has become increasingly important to segregate this sector for better comparative analysis.

Measured by market capitalization the juniors stretch across quite an expansive range.  On one side are the classic penny stocks, those juniors trading at mere pennies per share with market caps well under $10m.  And on the other side you’ll find the mega juniors, some with market caps over $1000m.

But market caps don’t necessarily tell you where these juniors are in advancing their projects.  There are sub-$100m companies well-advanced in the development of their deposits, within just a couple years of commissioning gold mines.  And then there are those companies pushing $1000m that aren’t even close to producing an ounce of gold.

In most cases this disparity is simply attributed to deposit size.  The near-term producers on the small side of the spectrum are bringing online smaller gold mines.  These mines will most likely be pulling gold from a reserve base under 1m ounces, with annual production forecasted at well less than 100k ounces.  And there is nothing wrong with small.  Many of these stocks offer great value and have huge potential to reward shareholders.

On the larger side of the spectrum there are of course those market-darling emerging producers about to pour gold at high-volume low-cost long-life mines.  But you also have those juniors still in the early stages of advancing massive gold deposits.  Investors have caught on to the potential of their discoveries and want to take part in the growth.

Since this market-cap variance doesn’t allow for a clean segregation as far as advancement goes, I believe the truest way to compare juniors is based on their project maturity levels.  And the simplest categorical distinction is early stage versus advanced stage.

Now there is no definitive line that separates these two categories.  In fact, in my research I’ve observed executives across the industry offer wide-ranging interpretations of stage criteria.  All too often juniors are over-ambitious in marketing themselves, touting their projects as “advanced stage” when in fact they are nowhere near proving up reserves and developing gold mines.

Because of these inconsistencies I’ve drawn my own line.  Simply put, and logically, advanced-stage juniors are closer to producing gold than the early-stage juniors.  To me, project maturity and timeline to production are the key determining factors as to where junior gold stocks fall within these categories.  Below I’ll touch on some guidelines as to how these juniors can be separated.

As far as research goes, our two most recent Zeal reports focus on the opposing sides of this junior spectrum.  And since the advanced-stagers aren’t likely to remain juniors for as long as the early-stagers, we focused on this category first.  In March we published a research report profiling our dozen favorites in this category.

Among these stocks are emerging producers, those juniors in the process of constructing quality mines.  Also profiled are juniors with projects in the pre-development phase.  These companies have performed positive economic studies based on current market conditions, and are either entering into or are within the final feasibility stage.  They are on the cusp of mine development.

These next-generation miners should all be producing gold within the next few years.  Of the 12 stocks profiled in this March report one will be a producer by the end of 2010, three are on track to commission their mines in 2011, five are anticipating production in 2012, and three hope to be mining gold by early 2013.

Following the completion of this advanced-stage report we spent the spring researching, identifying, and profiling our favorite 12 early-stage junior gold stocks, with the final product now hot off the presses.  Now it is important to understand that this category does not simply consist of pint-sized juniors with only a few drill holes under their belts.  In actuality some of these next-next generation gold miners may have already put a lot of time and capital into defining their deposits.

In general, these early-stagers are smaller with an average market cap of $167m versus $665m for the advanced-stagers.  But just because they lag in project maturity, it doesn’t mean an early-stager can’t be larger than an advanced-stager.  And indeed a handful of our favorite early-stagers are quite a bit larger than some of their advanced-stage counterparts.

While in many cases this size differential again boils down to potential deposit size, these early-stagers also vary in size based on their own differing levels of maturity.  On the smaller side we see juniors that are thus far discoveryless.  These companies are leveraging location or perhaps some promising initial exploration results, but have yet to make a meaningful find.  While a handful of these super-risky juniors may make significant discoveries and greatly reward the speculators gambling on their stocks, most will likely fail.

In the mid-range of this category you’ll find juniors that have made discoveries, but don’t yet have enough data to define resources and perform advanced technical studies.  In most cases these juniors have captured some attention from the markets, have raised record amounts of capital relative to their size, and are performing their most aggressive drilling programs to date.  These companies are motivated to move their projects along and offer significant news flow to the markets.

On the most mature side of this category are those juniors that have given the markets a taste of what their gold deposits are shaping into.  Many already have a round or two of resource estimates and are working on additional definition drilling in order to upgrade these resources.  They are also working on drilling the open horizons of their mineralized zones, and have likely expanded their lab work to include metallurgical testing in order to better understand the complexity of the ore.

In some cases these mature early-stagers have put together a preliminary project plan that outlines a timeline to production, but at this point it is more of a guess than anything.  Unless there is existing usable infrastructure that will allow for fast-track mine development, it is not likely these companies will deliver on their original targets.  Mine development is a huge undertaking, and it is inevitable that the more advanced technical studies, permitting, financing, and construction will take longer than anticipated.  This is why in many cases it can be 10 years or more between discovery and production.

As for deposit size, there are early-stage juniors advancing discoveries that have the potential to be in the big leagues.  Drill results to date have hinted at simply massive deposits, and these rare elephants get a whole lot of attention.  And some of these large mineralized zones have yet to see their first resource estimates.

But we know they are big, as even in these early stages a combination of regional geology and drill results allow us to recognize multi-million-ounce potential.  Interestingly the top-performing junior of 2009 watched its market cap soar, making it one of the largest juniors today, and it has still yet to return a resource estimate.  When it does, it is expected to be enormous.

When scrubbing these early-stagers, regardless of potential deposit size, what I want to see is progression.  What are these explorers doing to advance their cause?  Those that will emerge from the pack of course need to own quality deposits, but they also need to show initiative by aggressively gathering data to define and/or upgrade resources.  And it is in their best interest to show investors, and the big miners, that their prospective undeveloped deposits have what it takes to get to the next level.

And believe me it is critical for the big miners to notice, as more often than not these juniors’ fates lie in their hands.  Reason being is it is a rarity for juniors to reach producerdom on their own.  Of the small percentage that own gold deposits that are economically feasible to mine, the majority are absorbed into the senior circuit before the first ounce is produced.  In fact, it is a near certainty that several of the 12 advanced-stagers profiled in our March report will pour their first ounce of gold under the ownership of a mid-tier or senior producer.

But while advanced-stagers do make for attractive acquisition targets, it is the early-stagers that are the sweet spot of junior M&A activity.  The larger miners will pay premiums for grabbing these early-stage assets, but they are a lot cheaper at this stage than they would be once resources are firmed.

As is typical investors aren’t usually privy to the knowledge of larger mining companies sniffing around the junior realm, which is why we have to assume these juniors can be taken over at any time.  And you can be assured that if a junior explorer is returning out-of-this-world drill results, the big boys will be in the neighborhood.  Quite often the best geologists on payroll at these larger mining companies are focused on M&A and not their own grassroots exploration.  Much of their time is spent performing due diligence at prospective takeover targets.

And most juniors don’t mind this attention.  I’ve found that many of these companies aren’t even interested in advancing their projects all the way to production.  They actually run business models designed to stick with their bread-and-butter skills of exploration and discovery.  When they advance their projects far enough they seek out senior joint-venture partners, or buyers, to shoulder the development burden.

One major reason for this strategy is skill sets.  Just like many miners lack the exploration skills to renew their own reserves, most junior explorers lack the operational skills to build a gold mine.  Mine development is inherently risky, and expensive, which is why in most cases it is best left for the larger deep-pocketed companies.

As an investor I always like to see a junior advance its project as far as possible on its own, optimally to production, as this affords the opportunity for maximum project leverage.  Unfortunately this is a rarity, and all you can hope for is that your junior sells out for a healthy and fair gain.  Once a junior is acquired the leverage on its individual project disappears as it is lumped in with a larger diversified portfolio.

But thankfully we don’t need juniors to become producers in order to see share appreciation.  In fact, those juniors skillful and successful as pure explorationists will greatly reward shareholders.  As junior investors and speculators our challenge, and excitement, is found in identifying those rare juniors that have projects of high-enough quality that they could eventually be developed.  Once found, we will be rewarded whether the junior brings a mine to life on its own or pawns it off.

And it is this early-stage group that offers such excitement.  Since these juniors don’t quite have their arms around the depth and breadth of the gold mineralization they have at hand, and a lot of work is left to be done, there is huge potential for upside surprises.  And through diligent research one can find those stocks that have the potential for legendary gains.

Zeal’s brand-new report profiles our dozen favorite early-stage juniors, all of which have incredible potential to capitalize on this gold bull.  Even though we gravitate towards those juniors that have already made discoveries, a lot of upside remains, especially since many have yet to define their first resource estimates.  These juniors are in the midst of an exciting season of news flow in the coming months and years.  Buy this report today to have all 12 detailed fundamental profiles at your fingertips!

Though seasonals and technicals may not favor the gold stocks right now, this report will give you a fundamental read so you can put together your list and be ready to go shopping when the time is right.  And of course if you are looking for guidance on the timing, I encourage you to consider subscriptions to our acclaimed weekly and monthly newsletters.  Our next junior-gold-stock buying campaign will draw from these reports.

The bottom line is even though the spark has been hard to find, the junior-gold-stock flame will eventually be reignited.  A lot of investors have been turned away from this exciting sector by the way these stocks have lagged gold.  But since it would be fundamentally unfeasible for the juniors to fade into oblivion, those battle-hardened speculators staying the course are likely to be greatly rewarded as gold’s bull charges forward.

You’ll find that you won’t have a more invigorating feeling in these markets than owning junior gold stocks as part of your speculative holdings.  These modern-day 49ers offer investors a sense of adventure, allowing us to take ownership in a real-life treasure hunt.  The risk is of course on the high side, but so can be the rewards.  It is never too early to put together your junior-gold shopping list.

Scott Wright July 2, 2010     Subscribe