-- Posted 2 September, 2009 | | Discuss This Article - Comments: Source: SilverSeek.com

The precious metals juniors have had a nice pop in the past few months. But according to David Morgan, veteran silver analyst and publisher of The Morgan Report, the real fun is just beginning. We spoke recently about why the sector has a bright future and how to tell the real companies from the story stocks.


DollarCollapse: Why do the juniors look good right now?

David Morgan: First of all, they’re still undervalued. There are projects out there that are selling for less than their cash on hand. Many more are selling for less than a reasonable liquidation value. Once you’re on the floor you can push as hard as you want and you’re not going below the floor, so the juniors look like the best part of the resource sector at the present time.

The only negative is that we’re approaching more volatility in all the markets. There is a possibility in my view that there could be one more smashing of the general financial sector. The large miners tend to go along with the general equity market. So a huge sell-off in the stock market in October would damage the large cap miners such as Newmont Mining and GoldCorp. Will it take down the juniors? Probably not. You might see some of these stocks sell off a bit, but they’re already washed out.

DC: How big a part of the story is M&A, with the majors buying up the juniors?

DM: It’s a very big part of the story. Basically when the credit crunch started to manifest globally in 2008, companies that had cash positions were sitting like vultures on the telephone line looking at the companies with good projects that were selling at less than asset value. Lots of mergers and acquisitions took place. The big companies didn’t have any problem at all getting credit.

But I don’t spend a lot of time looking for potential takeovers. I approach these companies on a value basis. With commodities, whether you get metal out of the ground in Canada or South Africa, it’s all the same, it’s fungible. So with a big company what you want to look for is the balance sheet and income statement. Who’s making the most profit on the same product? I’m simplifying but that gives you the general idea. But move down to the juniors and that’s more of an art, a much more difficult process. Where are they, who’s managing it, how much cash do they have in the bank, have they done it before? But some of these projects are only so far advanced and they’re in good shape but are sitting there without anyone other than bigger companies paying attention.

DC: But you don’t like “story stocks”…

DM: I’m conservative, which comes with experience. I started in this sector at a very early age and was going to  get rich quick. I bought every penny stock on the Vancouver exchange that I had money for, and my thinking was that if I just picked the right juniors it would just be a question of waiting a fixed amount of time and these things would go to the moon. But then I calmed down, saw my losses, and started to learn more. The truth of the matter is that on a grassroots exploration company your shot is about one in 2,000. That’s better than the lottery but it’s not as advantageous as a lot of people think. So part of my job is to separate the real companies from the story stocks. Again, I want to state that I am not primarily a junior mining stock picker, I focus much more on making money safely in the sector much like someone managing a gold fund, but we do not manage money.

DC: What do you need to see in order to move a company from story to real?

DM: You need to see the story coming true according to plan. There’s a sweet spot to buy a stock and it’s always higher than where it was when it started. When a company is just an idea or a great story, that’s usually as cheap as it’s going to get. Very few great stories come true, but if it begins to come true, the market will bid it up. But it can still be undervalued. And once you know a lot about it, let’s say 80% comes true and the other 20% is coming, there’s a point where there’s enough volume and news and knowns-versus-unknowns that you can buy the stock pretty safely and still see a lot of upside. I’d rather buy a $2 stock that goes to $8 in a year than a stock at 12-cents that takes ten years to go to $8.
-- Posted 2 September, 2009 | | Discuss This Article - Comments:

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