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Hundreds of Percent Upside, Little Downside Penny Gold Stocks

By Matt Badiali, editor, S&A Resource Report
Thursday, February 28, 2008

To make hundreds of percent gains in mining stocks, with limited downside risk, I love the "prospect generators."

Prospect generators, if you don't know, are the "bird dogs" of the mining world. Rather than build mines, they get other companies to pay for development in exchange for part of whatever they find.

Prospect generators are "only" explorers – they don't want to build mines. They are geologists whose sole purpose is to discover potential ore bodies and sell rights to other companies. And they get as much as half of what they find.

This model is much better than the typical mining company... In the typical mining model, a company discovers an ore body and builds a mine. The company must raise money all along the way, constantly diluting shares and killing investors.

The prospect generator gets paid for the exploration and gets to participate in any discoveries. That allows the prospect generators to spend little money, yet own a piece of many projects.

Now here's the odd thing: Right now, while gold and silver are soaring, prospector generator stocks are struggling. I know... it's bizarre.

I've been on the phone a lot this week with company managements trying to get some answers... They all said basically the same thing: "The investing climate went bad." What they really meant was: "Newsletter writers have turned on us."

One CEO sent me clippings from other newsletter writers that cover the mining sector – many of them are filled with doom and gloom right now. They're extremely bearish on every form of paper asset... even resource shares. "Sell Everything!" one proclaimed. "I'm leaving the business," moaned another. "Stocks are no longer a safe investment." I couldn't believe what I read.

"Circle the wagons and sell all your high-risk stocks." The blathering went on and on. In the end, it reminded me an awful lot of panicked farm animals. Did you ever see sheep or cows spook? It doesn't take much. I've seen full-on panics set off by nothing more than a napkin carried in a light breeze.

I think we're seeing something similar today...

Yes, the subprime mortgage debacle has hurt the stock market... But here's a news flash: The world doesn't end because some smart guys on Wall Street ran a swindle on some other guys on Wall Street. Tomorrow, the world will still need oil, zinc, lead, copper, silver, and gold, just like it did yesterday.

Unfortunately, prospect generators are very small companies. This is a tiny investment niche in the greater scheme of things. When too many people rush for the exits, shares fall. I think this is the big reason prospect generators have struggled.

But the story is still the same here. These stocks still have enormous potential. The commodity markets are still booming. The selloff is simply the result of a short-term change in sentiment.

That's great news for news for folks who buy in right now... Several of these companies have half their market value in cash and shares of other companies. Miranda Gold has $12 million in the bank and a market value of just $28 million. Lara Exploration has $5 million in the bank and a market value of $10 million.

The cash reduces your downside risk. However, it's the upside potential that gets me excited. Discovery creates wealth like few other events in the investing world. Take a look:

• Aurelian Resources rose from 15¢ in March 2006 to $7.70 in March 2007.
• Francisco Gold was 10¢ in December 1992, and $34 in March 1997.
• Esperanza Silver sold for 35¢ August 2005. In February 2007, shares cost $4.18.

Ultimately, that is why you invest in penny stock explorers – discovery. The amazing thing is now, after the selloff, you can get this enormous potential with little downside risk.

I believe we'll see a huge rebound in these shares in 2008. If you haven't bought these explorers yet, this is an excellent time to get in.

Good investing,

Matt Badiali

Market Notes


THE NEXT LEG UP IN GOLD STOCKS HAS BEGUN

Since gold's bull market began in 2001, shares in companies that mine the stuff have demonstrated a simple behavior pattern: Double in value, then rest for a year or two. Double in value, then rest for a year or two.

Gold miners rested for much of 2006 and 2007. The benchmark gold stock index, HUI (aka the "Hooey"), spent its time trading between 300 and 350. As you can see from today's chart however, 350 is a thing of the past. The Hooey has gained 30% in the past few months and reached an all-time high.

This is how a proper bull market behaves... No asset runs up hundreds of percent in a straight line. After their long sleep, large gold stocks are now relatively cheap, their product is enjoying enormous demand, and the next leg in a proper bull market has begun.



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