With the jaw-dropping run in silver and gold since last summer, mining companies have had their day in the sun. In particular, junior mining companies have seen shares soar as a gigantic surge of investor interest has caused surges in share prices across the sector. The Junior Gold Miners ETF (GDXJ) rocketed from 25 last summer to a peak of almost 45, and still sits at 38 today.However, discretion is advised. The bull market in metals has sent nearly all junior mining and exploration stage precious metals plays soaring. Several companies within the space have merely tagged along for the ride, however, without any fundmental justification for the large increases their share prices have enjoyed. Here's several mining companies you should get out of now before an upcoming correction in the sector sends these companies' shares downward.
NovaGold (NG) -- Novagold rejected a buyout from Barrick Gold (ABX) for $16 a share several years ago and it has been all downhill for Novagold since then. The company's two flagship properties are still many years away from operations, and progress on them is proceeding at a snail's pace, while the company's once-promising Rock Creek mine has been written off the balance sheet entirely after environmental problems and a fatal accident ruined that mine's utility.
As best as I can tell, shares have rebounded from less than 50 cents to more than $12 largely due to a slick press relations campaign combined with the investment of several noted investors such as George Soros, who bought in at prices of less than half what Novagold trades for today. The company still is woefully underfinanced and cannot build either its Donlin Creek or Galore Creek mines without selling itself out entirely or diluting itself beyond recognition. Read my articles Novagold: The Precious Metals Sector's Most Overvalued Stock (Part 1) (Part 2) for the complete story.
Seabridge (SA) -- Like NovaGold, Seabridge has a long history of putting out press releases and funding itself with additional share offerings while it has no operational experience in running mines. The company has long been promoted (via paid advertisement on such exciting venues as CNBC) as a way to buy a call option on gold, since Seabridge merely acquires gold in ground and then sits on it without trying to develop the assets.
While this strategy may have made sense when gold was trading at $500/oz, it makes no sense now. When the price is high, generally a mining company is wise to produce its gold, rather than leaving it sitting in the ground. Of course, Seabridge may be smart not to extract its gold, since the company's largest project is sitting in large part under a glacier and the CAPEX to actually extract that gold would be enormous.
Better to keep selling people the promise of large gold deposits than the reality that Seabridge's deposits are difficult to reach and costly to extract. Seabridge, interestingly enough, has almost no coverage from the analyst community; while the company has a more than billion dollar market cap, it has not been able to convince mining analysts of its potential. This Barrons expose should have sent Seabridge shares diving, but instead, people have kept on believing Seabridge's unlikely story. Could KSM-- Seabridge's main asset which was acquired for less than a million dollars from Placer Dome, and which has been unsuccessfully explored by gold mining majors since the 1960s-- really be worth billions today? Sure, but it's also possible the company is merely selling you the proverbial Brooklyn Bridge.
Great Panther Silver (GPL) -- Unlike NovaGold or Seabridge, there are no great problems with Great Panther other than valuation. However, the market is valuing this rather ordinary silver miner as if it were a star performer. The company's management has had a long history of breathless press releases followed by lackluster results, and the stock had consistently hovered around a dollar.
Then, last fall, everything changed, as Great Panther shares began to surge and soon after the company announced an uplisting off of the pink sheets. Mayhem ensued as soon as the move was completed, with shares doubling since February to more than $5 last week. For a company lacking exemplary management or any long track record of success or profits, a 400% pop in a few months is way too much. The Price/Sales ratio is now 12, the Price/Book ratio is more than 15, and the trailing PE is near 100. Take your profits here and re-deploy them elsewhere. Great Panther is a high-cost silver producer, meaning that it is highly leveraged to the price of silver. If silver retreats even modestly, Great Panther shares will get clobbered.
Gold Reserve (GRZ) -- Stocks like Gold Reserve really make me doubt the efficient markets theory. Gold Reserve is presently trading near its 52-week high at close to $2 a share. The company, however, has a book value of merely 8 cents a share, and its one and only significant asset-- the Las Brisas property-- has been nationalized by Venezuelan despot Hugo Chavez. The company is burning close to $20 million of cash a year, though at current loss rates, the company can sustain itself a few more years before running out of cash. It seems that the company is trading upward entirely on its sector's strength, as there has been no good news to drive the share price surge since last summer.
For $1.80 a share, Gold Reserve investors get 8 cents a share in net assets (this number should turn negatve within the next two quarters), plus they get to participate in Gold Reserve's lawsuit against Hugo Chavez for expropriating the company's Venezuelan property. While anything can happen, let's just say that the odds of a foreign company beating Hugo Chavez in court and then actually taking possession of a property in Venezuela is infinitesimally low. I highly doubt that Chavez is going to care even if some foreign court declares that Gold Reserve has a right to the Las Brisas property-- he is a socialist dictator after all. Shareholders expecting Gold Reserve to reclaim possession of the Las Brisas property are deluded. Gold Reserve shares are worth close to zero and profits should definitely be taken, with the stock trading up more than 125% since June of 2010.
Crystallex (KRY) -- Speaking of companies facing a Hugo Chavez problem, embattled Crystallex also remains a strong sell. Crystallex's prolonged effort to develop the Las Cristinas mine is finally coming to its pathetic end. The Chavez-controlled Venezuelan state mining company officially took over Las Cristinas last month leaving Crystallex out of cash, in debt, and with no mines or properties to develop. Unlike Gold Reserve, Crystallex doesn't have the cash to launch a protracted legal struggle against Hugo Chavez and the company should finally give up the ghost around the end of this year when its cash supply is extinguished. Remarkably, Crystallex still has a $57 million market cap despite it having no remaining shareholder value nor any realistic hope of creating value in the future.
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