GOLD: PENNY SHARE HOT TOPIC

Why gold mining juniors can’t believe their luck…

(This article first appeared in Penny Sleuth on 27 September 2010. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

• There may never be a better time to invest in junior gold miners

• Two penny share gold explorers in ‘bonanza’ territory

Last week provided an extraordinary demonstration of the power of penny shares to increase your wealth.

It was all about Solomon Gold (ticker: SOLG). Shares in the company, which were trading at just 10p at the start of last Monday, suddenly took off. They reached 85p on Thursday – a whopping 750% gain – before running into some profit-taking and closing the week at 44p.

The reason for this spectacular jump? Mineral samples taken from the island of Fauro in the Solomon Islands have revealed some exceptionally high grades of gold.

That would have been exciting enough. But this came in a week in which the gold price soared to $1,300 – an all-time high. The timing of Solomon’s breakthrough was perfect, landing on a market eager to snap up any crumb of good news from the gold sector.

To find out about my latest penny share recommendations in the gold sector, you need to subscribe to Red Hot Penny Shares.

In a moment, I’ll show you another way you could make some great profits from penny shares in the gold sector.

But first, why is the gold price rising? There is no shortage of theories. China wants to boost its gold reserves. Investors have lost faith in paper currencies. Rising inflation means that bond yields and cash deposit rates offer negative returns. And, as is usual at times like this, there is no shortage of fervent gold bulls, talking up the price to $2,000 or even beyond...

We’ll see about that. When the oil price hit $150, Goldman Sachs famously predicted a $200 price – and not the $79 we see today. It pays to hold tight to your seat at a time like this and not get too carried away.

But the fact remains that gold’s bull run shows no signs of coming to an end. And this has crucial implications for the gold mining sector.

There may never be a better time to invest in junior gold miners

With the price of gold as it is, penny share miners cannot believe their luck. Previous cycles have gone something like this. The gold price rises. Opportunists take the chance to raise cash to go gold prospecting. They spend it on geological surveys, rock sampling and some exploratory drilling. Then, by the time they have found some gold, its price has subsided. Nobody is interested and they cannot raise the money to get any further.

This time it is different. Not only is the gold price high, but many of the world’s biggest gold miners have given up on the struggle of finding new reserves. Instead they are relying on buying into the discoveries made by small adventurers.

Mine construction needs finance but today the chances of attracting a rich big brother have never been better. In addition, the financial forecasts look rosy.

Most gold projects launched two to four years ago assumed a gold price of $650-$850 per oz. At that level, all things being equal, they would be a commercial proposition and yield a decent profit.

But changes to the gold price make little difference to the cost of developing a mine. Every dollar on the gold price rises adds to the forecast profit. No wonder the gold sector is hot! And no wonder gold mining companies are beating a path to my door – literally!

To find out about my latest penny share recommendations in the gold sector, you need to subscribe to Red Hot Penny Shares.

Two penny share gold explorers in ‘bonanza’ territory

Last week Dr Peter Ruxton, chairman of GGG Resources (ticker: GGG), came all the way to Oxford to press his case. Formerly known as Central China Goldfields, this mining junior has, after being stitched up by its Chinese partner, withdrawn from its Nimu gold and copper project in Sichuan. It now has a 50% stake in the Bullabulling open-pit gold mine in Western Australia’s prolific Coolgardie Goldfield.

Mined since 1998, Bullabulling has already produced 370,000 oz of gold. At the time of GGG’s acquisition in March, it had reserves of a further 430,000 ounces.

Now that reserve figure assumed a gold price of $315 per oz, but on the basis of today’s price GGG believes the mine’s reserve could be increased to two million ounces or more.

Adding to the excitement is evidence that this hitherto low-grade mine could reveal richer seams deep down. There should be plenty of news coming from GGG over the next few months and the signs are already pretty exciting. The broker Westhouse has a price target of 26.5p – three times the current 8.3p

Another gold miner with imminent newsflow is Mariana Resources (ticker: MARL). I met 65-year-old managing director John Sutcliffe in London last week.

One of the sector’s greybeards, John is not one to over-egg the pudding. Even so, he described the gold grades found from two drill samples at Mariana’s Las Calandrias North gold mine in Santa Cruz, Argentina, as “bonanza”.

“This is off the scale,” he told me. “The best I have seen in 45 years.”

The question to which we will soon have an answer is whether these extraordinarily gold-rich samples were flukes or part of a broader seam. If the latter, then the shares could take off and Mariana could eventually go the same way as another Santa Cruz gold and silver miner Andean Resources. That’s up 205% in 2010. As the big miners scramble for proven reserves, Andean is being fought over by Goldcorp Inc and Eldorado Gold Corp in a $2bn bidding war.

To find out about my latest penny share recommendations in the gold sector, you need to subscribe to Red Hot Penny Shares.

Dom Davies from Poole wrote in to comment… “Once again, thank you for your great newsletter, which I consider to be one of the best with excellent follow up advice about the shares you recommend and am very pleased with my profit of £1352 in less than a month.”

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(This article first appeared in Penny Sleuth on 27 September 2010. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)