-- Posted 6 June, 2005 | | Source: SilverSeek.com
“I’m gonna buy me a dog, ‘cause I need a friend now”
-- The Monkees
As silver investors have looked over their portfolios in the last few months, a once-familiar grumble has re-appeared on their lips.
“Dog.”
“Dog. Dog. Dog.”
It’s understandable, because many silver stocks are down 50-80% from their annual highs, even as the price of silver sits on the bright side of $7.50, and even as the ubiquitous uses of silver continue to bode well for the future price of the metal. For the first time in what seems like ages, serious money is being spent on exploration, which ought to bode well for the future of the industry, especially the juniors.
But the prices of individual silver stocks, like those of gold stocks, often defy rational explanation, even to the point that investors throw up their hands in frustration as every stock but the ones they own seems to pop at random intervals. The message boards are full of accusations of manipulation and naked short selling (accusations which are occasionally correct), and a painful frustration overcomes the investor, especially the new investor, as the sure thing he bought slinks to the basement on low volume. “Dog,” he says, and shakes his head.
Yet through it all, the dog remains man’s best friend. But not just any dog. Picking a silver stock, like picking a dog, means learning a bit about breeds. Anyone can own a mutt and it will love you forever, even if getting rid of its puppies is an impossible task. But finding a purebred will take some time and effort.
So how do you find a good dog in the barking, drooling pack?
The real answer is that there is no dog that’s right for everyone. Each investor, like each dog owner, must decide exactly what he’s looking for and what he’s willing to pay for it. Silver stocks run the gamut of established, NYSE-listed producers to inactive OTC stocks with but a single claim and which trade a few thousand shares a month. They include pure area plays and worldwide producers. They include companies with cash and no properties, and they include companies with properties and no cash. But there are four legs that every dog must stand on.
Leg 1 is location. Knowing where a company’s properties are is paramount. What’s there? What’s nearby? A silver mining company here in Kansas will not get a second look from me, though there are those who love such long-shots. Some investors love Mexico and Columbia, some love Canada, and some will only invest inside the US. But all locations have risk (geologic risk, political risk, environmental risk), and while silver investors are famous for taking risks, they should not take them without understanding them. Robert Heinlein in “The Moon is a Harsh Mistress” said that a Loonie (substitute “silver investor”) would bet on anything so long as there was a 1-in-10 chance of winning. But you can’t know the odds unless you understand the risks. Heinlein’s characters used a living computer. You’ve got to rely on doing your homework.
Leg 2 is cash or cash flow. Having a lot of cash does not mean a company, especially an exploration company, will always have cash. Exploration is expensive, and juniors notoriously burn a ton of cash before they discover or develop anything worth selling or mining. Cash flow is, however, indicative of two things: activity and probability that the company will give you an exciting ride.
There are Silver Valley juniors, for example, that have not issued a share of stock in 20 years. Their claims are under lease, they collect a monthly check from a major, and for the most part, they simply survive. They’re not sexy, but they are stable (meaning they haven’t changed much since Carter was President), and the careful investor can, over time, accumulate a pretty good grubstake in the most prolific silver district in America by buying them carefully. They are the once-in-a-generation moon shots, but watching them day-to-day is like watching fire hydrants rust.
There are others, however, that are drilling, testing, exploring, even though they are burning cash. They can be sexy, because you won’t find anything without looking. But they can be dangerous, because looking is no guarantee of finding. “Seek and ye shall find” is not a promise given to silver miners: it’s just a good idea.
Leg 3 is market capitalization vs. reserves or resources or potential. Lots of miners have low prices (that’s the problem, right?), yet their market caps continue to grow. I recently came across an exploration company that had – get this – 750 million shares out. Though it looked like a good deal based on price, the market cap of $50 million dollars for what was a Washington wildcat play made it far overpriced in my book. Those who purchased it at twice or thrice that price would doubtless disagree, but when compared with similar companies that had fewer than 20 million shares out, 10-50% of that market cap, and were exploring in better districts, they didn’t have a leg to stand on. A company that has a low market cap with a lot of potential can turn out to be a blue-ribbon winner, even if only you see its potential today.
Leg 4 is liquidity. The final leg to be considered (though for many investors it ought to be the first) is where and in what volume the investor can expect to get out of a stock. For the producers and favored developers, this is not an issue. They trade millions of shares a week. For the bargain-basement exploration stocks, they may have not traded a million shares over the course of the past decade. But this itself is not a reason to buy or not buy a stock. It is a reason, however, to limit ownership of a stock to small quantities. For many of the stocks in Idaho’s Silver Valley or on the Toronto Venture Exchange, one person putting $5000 into a single stock is sure to move the price. Putting $10,000 is almost as sure to double it. And while that’s great for those who own the company, it is a two-edged sword: dumping that $10,000 in a moment of weakness is sure to halve the price as well.
Buying a dog of whatever breed means rummaging through breeder’s guides, talking to pros, or maybe even visiting the pound. But there’s no better time to buy man’s best friend than when he looks like nothing but ears and paws. That’s the one that can grow up to be your best friend.
I would be remiss if I didn’t mention the finest breeder’s guide (maybe the ONLY breeder’s guide) on the market: David Bond’s “The Silver Pennies”. All of the above information (and much more) on three dozen companies is available for the price of a couple trades from your discount broker. For those who want to find the dog that might grow into a champion, there’s no better place to start looking.
Bill Hoyt, June 6th, 2005
Bill Hoyt a director of Timberline Resources Corp (TBLC). Views expressed herein are purely his own, but he invites you to share them if you wish. Visit his web log, El Borak’s Myopia, for daily commentary and responses to reader email.
-- Posted 6 June, 2005 | |
