The Summer of 2006 will not soon be forgotten by investors in the precious metals mining stocks.
After a dizzying price spike and sell off in May, investors were treated to a ferocious rally in midsummer. Many analysts believed that the bull market was back in full force, but another wave of selling hit in September that has taken metals back to near their July lows. The damage in the metals was not particularly severe, but the mining stocks have been hit hard.
Curiously, other natural resource markets were also sold off in September. Oil, natural gas, nickel, aluminum, and other traded commodities were trashed along with gold and silver. This synchronous sell off in the commodities markets suggests a common cause for the price action.
These market sell offs coincided with news that several aggressive hedge funds went into default. Among those, a prominent Fund called Amaranth got caught in a highly leveraged trade in natural gas that went sour. Like a chain reaction, this fund failure created the conditions for other highly leveraged hedge funds to get into trouble also.
When a fund is in default, its assets are liquidated to fulfill margin calls. All of the assets of the fund may be liquidated including stocks and other securities that were not part of the failed trade. It is known that these particular funds were highly exposed to commodities and precious metals since those were the hot areas in 2006. The sudden liquidation of hedge funds may be part of the trigger for this sharp correction in precious metals stocks.
Of course, we are still strongly bullish on the precious metals and their mining stocks for the long term. Severe corrections like this are a hallmark of long-term bull markets. This is because investors tend to take on more risk and greater leverage (debt) as markets trend sharply higher. This extra leverage cuts both ways and can cause big price spikes as well as hard price corrections. This price volatility is the price investors pay for enjoying spectacular gains provided by the volatile precious metals markets.
The best defense to volatility is a good offense. We have always advocated selling a portion of your positions into strength and having funds ready to invest when opportunities like this present themselves. These sell offs not only give good entry and re-entry points, but they give valuable information on which stocks are strong and which are weak. The stocks that can maintain price levels through severe sector corrections are the ones most likely to gain from the next sector advance.
Fortunately, there are a number of junior mining stocks that have performed very well during this correction and are poised for big moves when the next leg of the bull market starts. One company, Great Panther Resources, has shown excellent strength during this tumultuous period. Great Panther is a junior silver mining company that has a number of promising properties in Mexico.
Mexico has a long history of silver mining dating back to the pre-Columbian era. The region has been blessed with rich primary silver deposits. Most silver production in the world is byproduct from base metals mining. Primary silver deposits are rather rare and very valuable to investors. Byproduct silver provides only marginal additional revenue to base metals mining operations so a big rise in the price of silver has little impact upon their earnings. But a primary silver mine has the potential for massive gains when the price of silver rises beyond the break-even point.
Great Panther is well positioned to exploit the next big rise in silver prices. They have assembled an excellent portfolio of properties in historical production districts of Mexico. These properties consist of operating mines as well as exploration leases.
The Tropia Silver Mine is an operating silver-zinc-lead mine that is in the process of being acquired by Great Panther. The purchase agreement outlines the plan to receive 100% ownership of Tropia with no net smelter royalties. The Tropia Mining District is one of the oldest in Mexico, dating back to the 1500s. The Tropia Silver mine was opened in 1952 and has produced 30 million ounces of silver during its operation. The historical mineral inventory of the site estimates that 2 million ounces of recoverable silver still remain in the Tropia Mine. Additional exploration leases are included in the purchase. The Tropia Mine has full infrastructure, staff, and road access. Operation have temporarily ceased while a full inventory and contractual covenants are fulfilled.
The Tropia property has produced samples of extremely high silver content. Recent drilling has produced grades as high as117 g/ton gold and 130,000 g/t silver. The company plans to ramp production to 1.5 million oz. silver by the end of 2006.
The Guanajuato Mines is another legacy mining operation that Great Panther is in the process of acquisition. This property consists of three mines that were worked by a labor cooperative since the 1930s. The former owners had little operating capital so they did not perform drilling or any other geologic analysis on the mines so the ore body size is a yet undetermined.
Historically, The Guanajuato Mines have been extremely productive. The Vaslenciano Mine was once considered one of the richest in the world, producing as much as a third of the world’s silver supply during the Colonial period.
The Guanajuato Mines is an interesting case where a professional mining company is taking over what was a productive mine but one that was operated below capacity by amateurs. There is risk in this venture because the size of the deposit is unknown, but it is certain that professional operators will be able to run a much more efficient and profitable mine than the previous owners.
Great Panther has recently placed the Guanajuato Mines back into operation and has commenced a drilling program to determine the true size and extent of the deposits. Production is planned to be over 400 tons per day which far exceeds the 200-250 tpd under the previous owners.
Great Panther has three more projects that are in exploration stage. These include the San Antonio Gold-Copper Project in the historic Guadalupe y Calvo District, the Virimoa Gold Property which is near Tropia, and one called KM-66 which is a surface deposit that has an inferred resource of over 20 million oz. silver. These particular properties are all under option to acquire 100% ownership with a small net smelter royalty to the current owners.
These properties represent a strategy of organic growth using revenues from mining operations to fund exploration on promising properties. The company is now running a mine profit on its producing properties and expects to run a net profit by the end of 2006. From the standpoint of shareholders, Great Panther represents a superior risk profile over an exploration company that uses stock issuance to fund exploration. This is because Great Panther is less likely to suffer from dilution of shareholder value than a typical exploration company.
Chairman and CEO Kaare Foy presents his case for Great panther in an extraordinary interview on Howe Street. Readers can view the interview online. - click here...
The 2-year chart for GPR shows a nice move over the last year, representing investor’s response to the news of acquisitions and the rise in the price of silver. GPR shows surprisingly good strength over the Summer ’06 turmoil and has established strong support at C$1.50. Liquidity in this stock is good with average volume of 180,000 shares per day. This point in time looks like an excellent entry point for this stock.
