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January 04, 2004

Treasure in the Hills
by David Chapman

There is treasure lurking in the hills of Canada, Mexico, Peru, Chile, Brazil, China, West Africa and numerous other places where there is rock to drill. The treasure lies in gold, silver and numerous base metals. If there was something to be said about 2003 it was the performance of the metals and gold. The TSX Metals and Mining sub-index led the pack in 2003 with a stellar 76% gain. The Gold sub-index was up only 13.6% but from the lows in March 2003 it was up 51.6%. Those numbers were impressive but the real gains last year were made in the penny junior mining exploration stocks many of them on the TSX Venture Exchange where gains of 100%, 200%, 300% and even more were not unusual.

There are two types of investors out there. There is a small but hard core and dedicated mining stock pickers, analysts and financiers that since 1997 and in some cases 1996 have been living in desperation and despair as many of their favourites plunged 90% or more shamed by the Bre-X and numerous other scandals. And then there is everyone else. The awakening in 2003 was a sight to behold but the secret is that it is only the beginning.

The beginnings began in late 2001 and 2002 when after years of watching the mining stocks bump along bottom suddenly came to life. Insider buying, smart money getting in contributed to sudden upsurges in volume in the stocks with no discernible price movement. Then when the price did move the gains were often 100% or more very quickly.

At the bottom of the market many of the mining companies despairing over the low share price and return to shareholders decided to change themselves into Internet and technology plays. They are all gone now collapsing in the morass of the technology bust of 2000-2002 and there own share of scandals particularly with Enron, WorldCom, Global Crossing and numerous others. For those who stood the course limping along, derided, largely ignored and forgotten the best is yet to come.

The first big leg up saw the producers lead the way as commodity prices rose and names like Inco (N-TSX, NYSE) and Alcan (AL-TSX, NYSE) became household names again but also noticeable was Lion Ore Mining (LIM-TSX) and Aur Resources (AUR-TSX) and many others. Over in the gold sector junior stocks like Eldorado Mining (ELD-TSX) and Bema Gold (BGO-TSX) to name merely two were amongst the big winners and were often at the top of the list for volume. Suddenly mining was exciting to talk about again and people began to ask about who Ivanhoe Mines (IVN-TSX) was for example (up about 220% in 2003 but now off around 33% from recent highs) and China and Asia were becoming hot spots to be.

Accompanying the rise in commodity prices and the stocks was a desire to get drills in the ground again. The past several months has seen record amounts of financing raised guaranteeing that junior miners are flush with cash and the drilling rigs will be busy this year. Just the thought of all this drilling caused numerous junior exploration companies to rise quickly. And the drillers themselves have not gone unnoticed where a name like Dow Jones Industrials stalwart Caterpillar Inc. (CAT-NYSE) was up over 80% in 2003.

Some lesser known drilling names have enjoyed even bigger runs in 2003. ASV Inc. (ASVI-NASDAQ) and Joy Global Inc. (JOYG-NASDAQ) were up 400% and 100% respectively. A lesser known name to take a look at is Strongco Inc. (SQP-TSX) (www.strongco.com, 905-565-3840) that rose 169% in 2003 acting itself like a junior mining exploration play. Strongco may be due for an overdue pullback but any drop to the 40 week moving average near $2.50 we believe could be bought.

But the real stars of the show are going to be the junior exploration mining companies themselves. Many of them rose late this year coming off huge bases. The gains experienced thus far are impressive for many but investors are reminded that they will not all rise equally and some will register spectacular gains while others will remain wannabes even when gaining 100% or more.

In raising the financing necessary to get the drilling programs going the companies offered stock plus at least a half warrant and often a full warrant to investors. Warrants are effectively a long dated option giving the investor the opportunity to purchase more stock in the future at a predetermined strike price. The warrants trade separately to the stock and are lower priced then the stock itself offering an investor considerable leverage. They trade normally with the same symbol followed by the handle WT. Following the financing there is normally a hold period for the investor and once this hold period is over (of at least four months) there could be selling pressure as the early investors cash out some of their stock. If the market is rising strongly the impact might be minimal.

The prices of copper, platinum, nickel, aluminum, gold and silver and others have soared in 2003. The pressure is coming as the world economy recovers and particularly demands from Asia where China and India are surging industrial powerhouses. Of course there is the potential for a global slowdown as well and that would hurt most commodity prices. A falling US Dollar is we believe the prime cause of rising gold prices and our chart of gold shows that the dollar has further to fall and gold should soar over US$500/oz in 2004.

Right now numerous gold stocks are faltering at lower highs despite a new high in gold prices. Gold prices are at the highest levels since 1996 and silver prices are at their highest levels since 1999. A pause in the climb would be healthy. Remember that thus far the climb in gold prices has been accomplished largely because the mining companies have been removing hedge programs.

There are still a lot of hedges to remove and the commercials remain at a very low bullish consensus (20%). This means that it is essential that they continue to work their way out of their short positions and the market won't really explode until this has moved further along. As well the vast majority of the market remains largely out of gold and silver stocks. The market cap of all the gold and silver companies in the world is only around $80 billion in an upwards of $10 trillion global stock market universe. A small shift in these funds would cause an explosive up move in the gold and silver stocks.

But while the producers will certainly continue to benefit from an upward rise in prices the junior exploration plays could truly explode. We are we believe no where near that point. Many are recently showing signs of consolidating recent big gains. Once this consolidation is finished we believe the stage would be set for a powerful second leg advance.

There are far too many stocks to mention. We have had our favourites and we mention only three of them. There is certainly no guarantee or reason to say these three will be the best but we do believe that they will eventually return investors with impressive gains. Investors will want to examine the market to find their own and watch articles that focus on the sector. Remember that they are all highly speculative and are not for everyone.

Our three picks for the moment remain Verena Minerals Corp. (VML-TSXV) (www.verena.com, 416-368-2998) up 100% in 2003, J-Pacific Gold Inc. (JPN-TSXV) (www.jpgold.com, 604-684-6677) up 32% in 2003 and Golden Goliath Resources (GNG-TSXV) (www.goldengoliath.com, 604-683-2950) a silver play up 120% in 2003. These three and many others are currently correcting their first powerful leg up. It will be important for them all to hold key moving average technical support levels and form higher bases even if they correct 30% to 60% of their upward move. This will ensure a good 2004 as we move to find the "Treasure in the hills".

DavidChapman.com
Technical Scoop

Charts and technical commentary by:
David Chapman of Union Securities Ltd.,
69 Yonge Street, Suite 600,
Toronto, Ontario, M5E 1K3
(416) 604-0533
(416) 604-0557 (fax)
1-888-298-7405 (toll free)

David Chapman is a director of Bullion Management Services the manager of the Millennium BullionFund www.bmsinc.ca

Note: The opinions, estimates and projections stated are those of David Chapman as of the date hereof and are subject to change without notice. David Chapman, as a registered representative of Union Securities Ltd. makes every effort to ensure that the contents have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete.

The information in this report is drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does Union Securities Ltd. assume any responsibility or liability. Estimates and projections contained herein are Union's own or obtained from our consultants. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any securities and is intended for distribution only in those jurisdictions where Union Securities Ltd. is registered as an advisor or a dealer in securities. This research material is approved by Union Securities (International) Ltd. which is authorized and regulated by the Financial Services Authority for the conduct of investment business in the U.K. The investments or investment services, which are the subject of this research material are not available for private customers as defined by the Financial Services Authority. Union Securities Ltd. is a controlling shareholder of Union Securities (International) Ltd. and the latter acts as an introducing broker to the former. This report is not intended for, nor should it be distributed to, any persons residing in the USA. The inventories of Union Securities Ltd., Union Securities (International) Ltd. their affiliated companies and the holdings of their respective directors and officers and companies with which they are associated have, or may have, a position or holding in, or may affect transactions in the investments concerned, or related investments. Union Securities Ltd. is a member of the Canadian Investment Protection Fund and the Investment Dealers Association of Canada. Union Securities (International) Ltd. is authorized and regulated by the Financial Services Authority of the U.K.

Copyright © 2002-2008 David Chapman

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