Undervalued Juniors

Eric Muschinski from the Gold Investment Letter joins us again today. He’ll give us his juiciest picks in the junior resource space.

I’ve been following Eric for a bit and watching his performance. I’m impressed by his ability to trade these stocks a bit more than the average resource investor. In a lot of instances these stocks are NOT investments. Mining is an extractive business and the asset is continously depleted. Trading can make sense if you understand the story, the cycles and the psychology of juniors investors.

It also helps to have projects located in a (relatively) safe jurisdiction. Why pile risk on top of risk, especially if you don’t have to. Unbelievable values abound on the domestic front. Even though I’m a frontier capitalist, I will go back to mature markets when the valuations drive me there.

Let’s see what Eric likes right now.

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Mark: Eric, tell us what you’re watching right now, and why you like the stories.

Eric: Well Mark, as you know, there are a lot of exciting stories to pick from in the junior resource sector, with many at all-time-low valuations. I will highlight a few and your readers are welcome to sign up at Gold Investment Letter for regular updates, new ideas, and trading ideas.

We highlighted Goldquest a few weeks ago and you can look at that chart and see how massively the stock has moved (from 5 cents in may to $1.60 today) since their discovery in the Domincan Republic. We feel we’ve isolated the next possible Goldquest with pending drill results out of Nevada, and our readers are up to speed on it but for the sake of this article I would like to focus on more long-term potential home runs/stories.

Speaking of Nevada, I want to mention an exciting and undiscovered gem I found called Sniper Resources (TSXV: SIP.V) trading at about .16 cents. Sniper was formed by Scott Baxter and Doug McGibbon. Scott was CEO of Tone Resources, which he started with $3500 in Nevada claims and sold to Rob McEwen of U.S Gold at the time (now McEwen Mining, NYSE: MUX) for $53 Million.

Scott’s shareholders made a lot of money, and now Sniper is on deck with, I believe, an even better story and only a $5MM market cap currently. Doug is the Geologist and he is one of maybe a handful of people on the planet that are credited with discovering over 10 million ounces of gold (I believe he is the only one in Nevada specifically). Obviously, management in these juniors is the key to success and these guys have done this before with great success.

Mark: It’s ALL management, and a bit of luck thrown in as well (laughs).

Eric: Luck plays a role, that’s for sure. But we make our own luck, don’t we?

Regarding Sniper, I wrote up a piece in more detail on my blog for those interested here:  http://www.goldinvestmentletter.com/sniper-resources/

Now, because your subscriber base is mostly sophisticated/accredited investors, I will point out that Sniper just put out a private placement of $500,000 with a 10 cent unit. So, the stock is 60% higher in the public market and there is a 2-year warrant convertible at 15 cents. This is a significant discount and warrant bonus. Those that qualify may want to contact the company for more information.

Mark: Thanks for bringing that to our attention Eric.

Eric: Sure. Next up is Timberline Resources (AMEX: TLR), trading at about .30 cents. TLR is one of, if not my favorite junior over the next 12-24 month time horizon. There are significant lynchpins/catalysts forthcoming in early 2013 that could transform the company from an obscure explorer to an exciting explorer and producer of gold.

The two key parts of their story are the Butte Highlands project in Montana, and Lookout Mountain in Nevada. TLR’s operations partner, Small Mine Development (SMD), spent $24MM on developing Butte for production with a 50/50 interest. Recently, due to delays and the CEO/Founder of SMD retiring, TLR acquired 100% of the project for shares and NSR (net smelter royalties). The company is working hard on getting through all of the final permits, which are expected around the end of the year.

They will need a least $10-15MM to begin production, but with permit in hand they may very well be able to cut a royalty deal and/or debt versus an equity raise. Either way, they will move into being a 40-50,000 ounce per year producer for the next decade, which with TLR’s tight/small capital structure, will throw off major cash flow. At $1500 gold and 40k in production, you’re looking at $60MM in revenues and $20-30MM in earnings. This company at 30 cents per share has a ridiculously low market cap of less than $20MM, not even enough to account for the monies spent on Butte development, much less discounted future cash flow or any credit for their other properties/assets.

Mark: I’ve read about timberline before. It’s nice that you’re pointing out some US-focused explorers. Don’t get me wrong, I’m a frontier markets guy, but there are a LOT of factors that can work against you overseas. I had a pretty sizeable position (for me anyway) in Avion Gold. Along comes a coup in Mali and the stock tanked. It just accepted a “buy under” at a significant discount to my cost-basis…ughhhhh!

Eric: That’s unfortunately a story that is playing out more and more – the buy under – unfortunately.

With Timberline you don’t have the country risk, although US environmental regulations can put a damper on projects as well, so nowhere is perfectly safe.

Lookout Mountain is actually Timberline’s flagship property and is one of the largest undeveloped land packages in Nevada. They have an approximate 400,000 ounce M&I 43-101 compliant resource at Lookout Mountain that should easily become a million ounce resource in 2013. If we get back to more reasonable ounce in the ground valuations in the resource sector, this asset alone is worth 2-3 times the market cap of the company currently. They also have a slew of US-based (primarily Nevada) exploration projects/claims they own that could add serious sizzle to their story in the future. I think this is a no brainer to accumulate and hold for a 5-10 bagger over time.

Mark: OK…I’ll take those kind of returns.

Eric: Yeah, no doubt. Of course nobody has a crystal ball, but we try to pick situations where the value is there and just not being reflected in the market cap. Or, where we can buy assets at a discount because of some mis-perception, or mis-pricing for whatever reason.

Lastly, as a show of our diversity (we don’t just cover gold/silver and company’s in those sectors) I want to highlight a best-of-breed graphite company I like a lot. Zenyatta Ventures (TSXV: ZEN.V Pinksheets: ZENYF) at about .18 cents per share. They have a new graphite discovery in Ontario, Canada at their Albany project. I like this article for a little background on how Zen ‘stumbled’ into this exciting Graphite discovery: http://resourceclips.com/2012/03/26/a-pleasant-surprise/

The drill results to date show vein type graphite only found to date in Sri Lanka. This is potentially the highest value graphite in the marketplace and Zen may be sitting on a monster discovery.

Mark: Funny you mention Sri Lanka. I am looking at participating in a graphite play there that an associate has put together. You’re right, the graphite in Sri Lanka is ultra-high grade stuff. Although the market has settled down a bit after quite a bit of “hype” surrounding the sector earlier in the year.

Eric: Yep, the market has cooled for graphite stocks after a feverish run in the spring and Zen has as well. I think this may be giving investors another opportunity to position in some of the better issues.

There are some significant potential catalysts for Zenyatta forthcoming, one being the purity results from the lab. I am looking for these to be out within 30 days, and if high purity vein graphite is truly what they have (I suspect they do), the stock could go gang busters again this fall and quickly move to new highs as they put more drills to work in Albany.

The company has a lot of good information out there for the public and certainly I’ll keep my readers up to date.

Mark: Thanks Eric, those are some good tips, and a bit different than most of the stuff a lot of our readers will likely be familiar with.

Eric: My pleasure Mark. As a thanks for asking me to chat with you, I’d like to extend an offer to anyone who wants to try out our premium service. They can utilize this discounted link for only $25 a month:  http://www.goldinvestmentletter.com/gold-premium-membership-special/. We don’t lock people into long-term subscriptions.

Mark: I like that Eric, and I’m sure some of our readers will appreciate that generous offer. I want to point out, since you made that offer, Chris and I do NOT receive any compensation or affiliate fees from you or any of the companies you’ve mentioned in this post.

Eric: I’ll confirm that’s true Mark. Thanks for letting me share my thoughts.

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Eric digs up some interesting stories, that’s for sure. As I pointed out, I think he’s pretty good at trading these small resource stocks as well, which may appeal to those who want to limit risk and keep capital active.

In full disclosure, Eric does have positions in all three of the companies mentioned. He also performs consulting services for Sniper and has been compensated to do so with both stock and cash. Chris and I do not own any of the stocks mentioned, nor do we have any agreement of any kind to provide services, marketing or advertising for any of the companies mentioned herein.

I also want to mention that our CPAN service is still open, although going FAST! If you are a qualified investor, and you have an interest in receiving information on private equity and early-stage opportunities, the kind of stuff you won’t hear about anywhere else, CLICK HERE to tell us about yourself. We’ll send you more information on this exclusive, subscriber-supported, self-directed information and research service.

- Mark