December 2010’s Penny Shares to Watch…

This month’s penny shares to watch:

• How to spot a penny mining tearaway…

POLAR STAR MINING (TSX:PSR), KEFI MINERALS (AIM: KEFI), GULF KEYSTONE (GKP)

• Join the mining rush to Toronto…

VATUKOULA MINING (VGM), MARIANA RESOURCES (MARL), GGG RESOURCES (GGG), ANGLO PACIFIC (APF)

How to spot a penny mining tearaway…

(This article first appeared in Penny Sleuth in November 2010. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

The great mining investor Julian Baring used to have a bit of advice for small miners. ‘Whatever you do’, he would say, ‘don’t try to get anything out of the ground!’

Strange advice for a mining company, you might think. But his point was this: small mining companies are explorers. They consist of geologists, adventurers and chancers who like nothing better than peering at maps, striding over sandy plains, picking up soil samples and drilling exploratory holes. This is what they enjoy. This is what they are good at. And it is the dream that the drill will encounter a ten metre slab of solid gold that sends them happily to sleep each night.

The problems start when they actually find something. Then they have to work out how they are going to get it out of the ground. They have to talk to slick financiers and negotiate with hard-nosed machinery salesmen. If the mine is actually built - and the chance of this happening on time and budget is virtually nil – then they have to cope with breakdowns, with workers who go home each night with their pockets full of gold, and with government officials who think that they might like a bigger slice of the pie.

It’s much better to prove up a resource, sell it on to a major miner with experience of doing the dirty work of extraction, and swiftly move on to the next exploration project.

Where are the hottest mining regions right now?

This was one of the messages that came from this week’s Mines & Money conference in London, and this is great news for penny share investors. You see it is these bold explorers that can make investors the most money. This type of company is, according to leading Canadian resource investor Peter Grosskopf, ‘small and hard to find.’ And there is no guarantee of success.

The most important thing is to ‘look at the size of the deposit.’ The world’s big miners, just like the world’s big oil companies, have a voracious appetite for new resources. Unless they find some new sources of supply, they literally mine themselves to extinction. They need to find new reserves - and not small, bite-sized mines. They need to find big new mines, with the chance of extending reserves in the locality through further exploration.

A number of exploration companies made brief presentations at the conference, and one that seemed to tick the right boxes was POLAR STAR MINING (TSX:PSR). They are developing the Montezuma copper project in Chile, slap bang between massive mines run by Antofagasta and Codelco.

Another that is ‘elephant hunting’, this time in the Arabian Nubian shield of Saudi Arabia, is KEFI MINERALS (AIM: KEFI). ‘This looks like Western Australia in the 1890s,’ says Deputy Chairman Ian Plimer.

The size and quality of the deposit is the most important thing. As the Irish miner John Teeling has said, ‘politicians come and go but natural resources stay for ever.’ In terms of the political climate today, Henderson was wary of Russia, Venezuela, Ecuador, the Congo and Tanzania.

But he said that the Colombian government had treated foreign miners ‘remarkably well’ and believes that Kurdistan, where oil companies such as GULF KEYSTONE (GKP) have taken a chance, was a country to watch.

Why I think the penny mining bull will run and run

The world is certainly not about to run out of natural resources, but they are getting harder to find. Costs are inexorably rising as miners go to increasingly remote locations, dig deeper and tolerate lower grade resources, according to Professor Magnus Ericcson of the Raw Materials Group. The discovery cost of copper and nickel has trebled in recent years. The average grade of gold from the world’s mines, around 2g/t ten years ago is now just 1.4g/t and heading lower.

So a penny miner that manages to scope out a big deposit will soon attract a swarm of big mining bidders. In this month’s issue of Red Hot Penny Shares, I look at a miner that is sitting on what could be exactly the kind of deposit that the majors need.

And with rising industrial demand for metals, coupled with a loss of faith in paper currencies and government-backed debt, this is a superb environment for penny mining shares.

Join the mining rush to Toronto…

(This article first appeared in Penny Sleuth in November 2010. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

Feeling unloved? Others don’t appreciate your true value? Maybe then you are the boss of one of the many small mining companies listed on the London Stock Exchange. Because lately several of them have been telling me that their shares are deeply undervalued.

It’s not a sentiment exclusive to mining bosses. Company chiefs regularly complain to me that their shares are too cheap. But still, some of these mining bosses have a point.

The truth is that junior miners have been neglected by City analysts for years. And many are finding a much more receptive audience in Sydney and Toronto. That creates a pretty smart opportunity for us penny share investors.

How Central Asia is safer than London

Share prices are determined by one simple thing. They are determined by whatever investors are prepared to pay. But the investors who invest on the London stock market are not the same people who invest in Toronto or Hong Kong or Rio de Janeiro. And from their perspective things might look different.

Take London property for example. I might wonder why anyone should want to live in this overcrowded, dysfunctional city. But for somebody born behind the iron curtain London carries an allure that I cannot appreciate.

Perspectives differ, and this is one reason why mining shares might have one value in London but a different value elsewhere. Take a gold mine in Central Asia. So far as we are concerned that is a distant, dodgy land, surrounded by hostile neighbours and probably riddled with corruption. We distrust the politics, we are suspicious of the local officialdom and we doubt that roads and power lines will be constructed as promised.

But the Chinese might see things differently. Central Asia is next door. The ways of doing business are understood. And the Chinese are prepared to take the long view. So when it comes to a Central Asian mining business Chinese investors may be more enthusiastic than London investors and ascribe a higher value.

However it is not just a question of prejudice. The valuation of mining shares is tricky. They must be properly understood to be properly valued and many mining chiefs are now questioning the much vaunted expertise of City of London analysts and investors.

City analysts have been left behind

A problem for the City is that it is short of experienced industry specialists. Ten years ago the mining sector was so out of favour that it had virtually disappeared from view. No budding young analyst or fund manager wanted to specialize in this moribund corner of the market and the level of knowledge required today to cover this rejuvenated sector cannot be built overnight.

There is a lot to learn. No two mines are the same. Mining is a complex affair, taking place all over the world. There is the nature of the ore body, the all-important grade (the amount of valuable metal per ton of ore), the requirement for access, power, and machinery, and the finance to build the mine.

Will the mine then be a straightforward open pit operation or a complicated and unpredictable underground mine? How long will it take to bring it into production, and by that time will metal prices be as high as they are today?

A proper valuation of a mining concern takes all of these factors and more into account. The calculations are not easy, but they are crucial - especially when it comes to raising the finance that most new mining ventures need. Many mining chiefs now think that the financial community in Toronto and Australia has a better understanding of these things and that a stock market quote in Toronto or Sydney would produce a higher share price.

Why miners are leaving for Canada

One mining company that has already indicated its intention to list on the Toronto Stock Exchange is VATUKOULA MINING (VGM). Another is MARIANA RESOURCES (MARL), while GGG RESOURCES (GGG) is hoping to list on the ASX before the end of the year. ANGLO PACIFIC (APF), which secures royalty streams in exchange for financing mining operations, has taken the step already.

According to analysts at Fairfax ‘we would expect that this should lead to a gradual re-rating as Anglo Pacific becomes an established company in the Canadian market which gives high ratings to royalty stream companies.’

So while the trend for mining companies to look to overseas investors to give them the credit they deserve should be a worry in London, it also presents an opportunity for smart investors to buy into such shares before Canadian or Australian investors drive them to a higher value.

I’ve already recommended some of my favourite resource stocks to my loyal readers of the Red Hot Penny Shares newsletter.

Good investing,

Tom Bulford
Editor, Red Hot Penny Shares

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(This article first appeared in Penny Sleuth in November 2010. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)