The Canadian Mine Analysis.com now finds many junior mining stocks are currently selling at such low prices that, based upon historical valuation benchmarks, we think that some important points may merit attention. Please keep in mind that the mining stock market is not an efficient market where value and potential are quickly recognized; so patience is required. In 1736, statesman Ben Franklin wrote that “he that can have patience can have what he will.” That sage advice still goes today.

1-Using technical analysis, we divide a stock into three “zones” after having done in-depth fundamental analysis indicating that there is solid investment potential and that the fundamentals merit investment consideration. What are the “three zones? They are “Red” (high price and higher risk, maybe distribution), “Yellow” (undetermined, in the middle of its price range) and “Green” where our analysis finds a stock as undervalued and a suitable time for accumulating shares. Many junior mining stocks and large mining stocks are in the “green zone” today.

After any stock has had a large percentage move up in price, it often carries greater risk as a correction could be in the offing. So examine the stock’s chart and search for the “green zone” which is where we consider accumulation of the stock. For example, let’s say that XYZ Mining has been as high as .80 cents over the last year and its fundamentals remain positive. If it is near its price high, we wait for a correction down in price. The green zone buying level for XYZ Mining may be closer to .35 cents where we may consider putting in limit orders to buy it.

2-But what if an XYZ Mining stock declines even more? If the key fundamentals (reserves, resources, cash, capable management and insiders buying company shares and not selling) are positive, you might consider “dollar cost averaging” where you accumulate the stock at the lower prices giving you a lower price cost basis. Some of the world’s most successful investors do this in large cap stocks right down to the micro-cap stocks such as the juniors. Their attitude is that when good value is “on sale” they should take advantage of it.

3-Valuations today? For example, historically, when a gold exploration company has gold verified resources and reserves, the market has given them a value of between $30 and $150 an ounce for their in-ground gold ounces. Incredibly today, we can see gold companies “in-ground gold resources” valued as low as $8 an ounce. That is exceptional undervaluation and merits attention! We will write more on this valuation of “in-ground” gold shortly. Many factors have to be considered.

4- When we invest in any mining company, we only enter limit orders. We do not chase or push up stocks as we in invest. We “insist on value” and accumulate on weakness. And if a stock is of great interest to us, we don’t talk about it. We don’t need or want company.

5-Most of us like to use charts to assist us in the timing of buys and sells. One of several technical indicators that we favor is the “Money flow” indicator which indicates if money is flowing into a stock. For example, a stock may be declining in price on light volume but stronger hands money may be buying that stock. So if you find the stock is declining on light volume, it may tell you something.

Let’s suppose that a stock rises from $1 to $2 over six months on a total volume of 12 million shares and later declines from $2 to $1 on a total volume of 2 million shares. That may indicate that much more money had wanted to own that stock than sell it. So take a look at the “Money flow indicator” or the “Chaiken money flow” indicator on your technical services. It is well worth your time.

6-Today, there are very few market makers at the brokerage houses that support stocks by accumulating or holding positions as they have done in the past; so shares are sold and often sell at even lower prices than in the past. This gives the patient value oriented investor the opportunity to accumulate shares when they are on sale. Yet, few ever take advantage of sales on stocks, it’s just human nature.

7-Take advantage of the “flow through” financing price declines. A “flow through” is a private placement of shares to Canadian investors that enables the investors to legally claim an enormous tax deduction. The investor in that “flow through” after having participated in the “flow through” placement must hold those shares for four months. Often, after the four months required holding period, those flow through shares are sold putting selling pressure on the stock. At that time, one can accumulate shares that may be undervalued due to the price decline. As a rule of thumb, after a flow through, we expect a decline of 20% to 30% to commence about four months later.

8-Our analysis suggests that we are in a positive market for gold that will remain for years. The United States is running a $5,000,000,000 ($5 billion) deficit every day. That is where the bubble is! Many institutions are woefully underinvested in gold and gold stocks today. We feel that eventually, they will have to have much greater representation in the gold sector. Think about that.

Bob Pellerin
www.Canadianmineanalysis.com