The BarkerLetter

October 15, 2007

Greetings investors!

I think we’ll see some restructuring in the gold sector as the bull market enters its second phase.

Companies who are producing or verging on it will be divesting themselves of non core assets, partly to sharpen their focus but also to finance ongoing projects as an alternative to increasing share capital or obtaining bank financing.

This is a good thing for the investors. It means the exploration juniors of yesterday will be more quickly achieving cash flow and profitability, in some cases without creating a lot of dilution. That sort of rapid exponential growth is always exciting for investors.

As you probably know, there is an optimum time to buy a stock. You can buy it early and wait for an ROI, or buy it later and wait less. Of course the early birds make the biggest gains if they’re patient enough to go the distance. But I’m not sure that makes a whole lot of a difference in this market. Exploration juniors are quite pricey, especially those who haven’t yet proven the value of what they have in the ground. In some cases their stock prices are rather close to those of the newly-producing companies, which have cash flow and earnings.

Of course there are advanced exploration projects with very justifiable pricing. Shares of Aurelian Resources Ltd. ARU.TSX) have moved from under $6 Cdn last August to almost $10 per share in recent sessions, without any production at all.  But the company has huge numbers at its Fruta del Norte project in southern Ecuador!  Earlier this month it announced an inferred mineral resource there of some 13.7 million ounces of gold.

I made a tactical error in not buying the stock last August when it was a no brainer, partly because I didn’t like the long term political risk of the project. This is a good example of bad investment timing on my part. The short term prognosis for the stock was excellent. I was merely thinking too far ahead.

Moreover, it probably won’t be Aurelian that assumes the political risk at all. It will be a major mining company like Newmont or Rio Tinto or Barrick.

It’s important to keep an eye trained firmly on your investment horizon. Hang the long term risk if you’re planning on getting out in three months (or in the case of ARU, after sixty days!).
 
It’s also worth keeping an eye on pending divestitures. I’ve noticed that Australian miner Newcrest Mining Ltd (trading on the Aussie exchange under the symbol NCM, recent price $27.85 Aus) has flagged the potential sale of its interest in the Cracow Mine in Queensland.

The underground mine has proven and probable reserves of 288,000 tonnes grading 10/11 gpt. The resource (unproven) category totals 850,000 ounces of gold.  In the year ending June 30 it produced over 116,000 ounces, and Newcrest clams the reserves and resources there will support operation to 2013.  Acquiring that project would elevate the purchaser to instant producer status!

Be careful out there