The Goldbug Weekly Comment - Feb. 21, 1997

Has gold bottomed ?

Who can really tell ? The gold market is controlled and its various participants have their own agenda. The only thing we are sure of, is that gold is money and as such, will remain a store of value for centuries to come. With this reality in mind, you should consider mining companies as possible extensions to your bank accounts.

Instant wealth creation. That is what you should be looking for when you invest in mining companies. The basic idea is simple. Look at the Bre-X Minerals story over the last two years. When I bought my first shares near $2, the company had a market cap of $20 millions, a few properties in Indonesia and a few millions to explore them. A few drill holes down the road and BXM had one million ounces of gold in the Central zone and still many more million dollars coming their way. In the summer of 95, they pulled out the first big hole and became suddenly the most followed mining company in the world. As the count continued to increase on both the number of drill holes and the number of discovered ounces of gold, millionaires were being created by the dozens. The market capitalization of Bre-X Minerals is now in excess of five billion dollars. Instant wealth creation, that is the goal of the game in the mining business and the name of this game is Exploration.

Does that mean that you should be searching for the next Bre-X?! You may well do so, but my bet is that you will reach retirement age before you find another jewel like this one. Let me suggest that there will be plenty mining companies (as there has been in the past) that will discover valuable deposits in the years ahead. These discoveries will add instant value to the balance sheet of these companies and most probably, simultaneously increase the wealth of their shareholders.

Are you part of the global search for the real money ?

If not, well don't rush to buy Barrick Gold or Homestake Mining. In this search for gold, there are a few basics you must understand. The potential profits for investors is inversely proportional to the market capitalization of the companies you will invest in. In other words, small is beautiful. It won't do a lot if you own shares in Barrick Gold and this company announces tomorrow the discovery a one million ounces of gold deposit in Argentina. However, if any of the companies I mentioned in"Gold Stocks for 1997 & Beyond" or any of the other juniors included in my regular selections find such a deposit, you can bet on a gradual increase in their stock prices of anywhere between 50% and 1000%.

Another important issue is to understand that you don't need to wait for gold to be fully entrenched in a secular bull market to buy these mining companies. While gold was taking a beating in the last 12 months, several companies have gone up several times in price simply because they won the game of exploration and succeeded in creating instant wealth. Will the Richmont Mines, Crystallex International, Manhattans of the gold world be the next ones in line to add to your bottom line? Check them out as well as many others that have the properties, the money and the management to make these valuable discoveries.

Don't count silver out!

In your search for the mining stocks that will help you build your wealth don't forget about the companies that explore for the other precious metals, especially silver. Although silver is no longer a monetary metal, it is still considered a store of value. Not only that, but silver, unlike gold, is not controlled. Its current fundamentals are explosive with the annual demand far exceeding annual supplies. Above ground reserves are being depleted and there is no doubt in the mind of most experts that much higher silver prices will be needed in the years ahead to allow new production and/or scrap silver to reach the market and fill the deficit. Silver prices will not reach the $50 level attained when the Hunt brothers tried to corner that market in the late 70's, but you can certainly bet on double digit prices.

Currently, there are several mining companies that are producing and exploring for silver. You will find the traditional ones like Sunshine Mining, Hecla and Coeur D'Alene, but you will also find a new brand of smaller producer that is quite active in exploration. These might well be the big winners of the next cycle. They have recognized the gradual changes slowly taking place in the silver market and have positioned themselves to be ready for the day when silver prices explode.

Of course, if silver prices again reach double digits, it also means that gold will have finally reached the $500 level. So many of the former large silver producers that now have diversified into gold will be big gainers as their silver production becomes more profitable. But the big leverage will be in the smaller capitalization companies that have weighted their metal production in favor of the white metal. So, what companies will duplicate the performances achieved by the Equity Silvers and United Keno Hills of the late 70's? Well, look at Pan American Silver, Silver Standard and International Avino Mines to take their place in due time.

International Avino Mines is the latest addition to my model portfolio - and at this moment it is not very well-known. But their partner in Mexico, Cia. Minera Mexicana de Avino, has done everything right in the last 5 years to accumulate a few properties that could well provide all the silver needed to make big profits in the coming boom. The president of the Mexican partner is Pedro Sanchez Megorada, former president of Industrial Penoles, the large Mexican silver producer. Watch this one carefully. It is still a company with a very small market capitalization, so there is a lot of room for growth here.

Another special situation that I would like to mention is Prime Resources, a subsidiary of Homestake that is producing close to 10 million ounces of silver a year from its Eskay Creek Mine in British Columbia. Although this one is a senior and has a much larger market capitalization, it will profit big time when the rush is on.

The music will stop sometimes in the next 12-24 months. Get ready for the grand precious metals bull market of all times.