The Ormetal Report

A sad week for the mining sector!

The announcement this week that the huge Busang gold discovery in Indonesia may not be for real, caused a major sell-off on the Canadian exchanges. Most junior mining companies stocks were hit by sell orders from worried investors.

Bre-X Minerals was halted Wednesday morning on news that Freeport McMoran (FCX) came out with major discrepancies with the gold content at Busang, while completing its due diligence. However, Bre-X was reinstated for trading late Thursday at 3:00pm, after it was announced that 7 holes drilled by FCX showed no gold at all. Four of these holes where twins to 4 good holes drilled by Bre-X Minerals. Consequently, the stock started trading at more than 80% down from its previous close.

Bre-X had announced earlier that they had 71 million ounces at Busang. Now the market is in effect saying that there is very little precious metal in that part of the Indonesian Jungle.

In an emotional reaction to the above, investors demonstrated a total lack of confidence in this market sector by dumping their holdings at market prices. On-balance stock prices fell 15% in two days - while those companies focused on Indonesia were down as much as 50%. A small rally developed late Thursday, allowing most issues to close above their lows of the day.

How can this be possible?

So many people visited the Busang property, including mining analysts, brokers, geologists, financiers and other third parties. Could they all have been so very blind?! It could be that the gold is there and something else is going on. At this point in time, very few know with certainty. But we will eventually know - that is for sure. And believe me, everything is possible.

And what about the other mining companies?

There is one thing that we can be sure of. It is that this story has given birth to a major confidence crisis in this market sector. Nobody can tell how long this will last and how low the stock prices will fall. But along with lower prices will come the big bargains. It has always been in the middle of chaos that the best opportunities have shined.

This is not to say that I will not sell some weaker companies next week or that I will be 100% invested at the end of the day on Monday. But you can bet that I will be fishing the bottom of this correction in the months ahead. And who knows if this crisis won't turn on a dime next week? It would only take a major rise in the price of gold, or the revelation that there is really gold at Busang.

Commodity prices are heading higher. Inflation is coming back. The debts of our governments are still enormous and growing. This tells me that, over the long-term, gold and gold stocks will have to move higher. The big challenge will be to find the best vehicles to maximize your profits. We will have to look mostly for producers with strong cash flow, a big cash account and good exploration prospects. And there are plenty of this kind.