A Promising Future In Precious Metals Mining Markets – But Choose Wisely

Two industry experts recently shared their views on the precious metals markets and the mining sector. Both believe that there are ample fundamental reasons to support the prediction that we are on the verge of a major move up in the mining sector, especially in the gold and silver markets, and that it’s an excellent time to invest—but only in certain companies.

In a recent phone interview with Rick Rule, founder and chairman of Sprott Global Resource Investments Ltd., Mr. Rule laid out his views on the current financial situation and its influence on the gold and silver markets. Involved in the security markets since 1974, Mr. Rule is a specialist in the mining and precious metals markets.

INTEREST RATES
Mr. Rule believes that current interest rates are too low. “I don’t believe the yields offered in debt markets, including government debt, are anywhere near sufficient to accommodate the risk, particularly when you are looking at absolutely negative real yields.” He believes that rates have to move higher, although it might take two or three years for rates to climb.

“I think higher interest rates are a mixed blessing to the precious metals markets,” Mr. Rule said. Rising rates will increase the cost of holding precious metals, but if interest rates rise because they are being pulled by the market, as they were in the 1970s, and are not pulling the market, then “that would be extremely good for precious metals.” Mr. Rule sees this as a “Time of transition from older, more sclerotic markets, which I would call less free, places like Western Europe, the United States, and Japan, and…frontier and emerging markets that are becoming slightly more free.”

Mr. Rule finds it ironic that countries that had credit concerns in the 1990s now have the better balance sheets. Such a situation is not because such nations were necessarily better run, but simply because they couldn’t access world credit markets to borrow and run up debt. He mentioned Russia, Chile and Indonesia as examples. As a consequence, they are less indebted than the United States and Western Europe, which had access to the credit markets and could borrow.

Since these smaller markets are less debt-laden, they will probably recover first. However, recovery in these smaller markets is not as important to the global market as recovery in Western Europe or larger markets. “But it’s very, very, very good for the natural resources space,” Rule said over the phone, “because as poor people get richer, the type of stuff they spend their money on is made of stuff. As Americans get richer, they buy services….I think the outlook is going to be mixed, but I think it’s going to be very good for commodities.”

Mr. Rule said, “I love bear markets. In my experience, I’ve learned that what a bear market really is, is a sale.” He pointed out that in consumer markets, when people go to buy a car, a can of soda or a sofa, they love things that are on sale, but such is not the case in financial investments. “By definition you can’t buy goods on sale in a bull market; you have to buy them during a bear market.” One sector that is in the midst of a bear market is the mining sector.

Mining Stocks
“We believe this soft market [in mining stocks] will continue for a reasonably long period of time, certainly at least a year or two years,” Mr. Rule said. He argued that some of the better junior mining company stocks have already bottomed out. However, it won’t seem like the bottom because so many of the juniors still have so far to fall. He stressed that stock selection is more crucial now in order to achieve profits, than by trying to increase equity by counting on a general market rebound.

Picking mining stocks that will lead to a nice return may be harder than it appears. Mr. Rule told me that he estimates that 60% to 70% of the companies that occupy the junior mining space are worthless. He stressed that the excesses from the 2002-2010 bull market, with the exception of 2008’s bear market, need to be worked out of the market, before a bottom is reached. The problem, he said, is that “Good companies and bad companies rose in the bull market. Both have fallen in the bear market. Success depends on being able to differentiate between the good and the bad.”

But in a bear market, can even a good company prosper in mining? Last year, a down year, Mr. Rule said, when mining companies executed and showed deposits or exciting information, the market responded well. He mentioned Africa Gold Group, which went from 80 cents to 10 dollars and Goldquest, which went from 6 cents to 2 dollars as examples. “This is not a market that won’t reward success.”

Mr. Rule stressed the difference between picking a good stock with potential versus counting on a broad, market rise. “I think investors who are looking for a rise in the overall market are going to be disappointed for the next year or two,” Mr. Rule said. “Speculators who are willing to do the work, the qualitative work, to differentiate between the good and the bad,…the good goods are on sale.”

How to Pick a Small Mining Company
To pick a small mining company stock, Mr. Rule said that he would look at the preliminary economic assessment in the pre-feasibility stage of a developmental junior that could be the subject of a takeover by a mid-size or major company in the future. “Such companies are selling at the greatest discount to the net asset values that I’ve seen in my career,” Mr. Rule said. He suggested looking for companies with higher grade, low capital intensity and higher rates of return, which should do well in the next 18 months. He stressed, “When you see some of them start to go, there’s going to be a real feeding frenzy.”

He also sees mergers and consolidation in the future. Middle and large tier companies have spent maybe two-thirds of their market cap just maintaining their production, he said. Mr. Rule sees maybe 15 or 20 financially accretive transactions possible, instead of mergers and consolidation merely to increase production. He said there are about 80 companies worldwide that produce less than 200,000 ounces of metals a year, most of which are ripe for consolidation.

In terms of management teams, he stressed the need for a team’s skill set to be specific to their type of company: type of mine, geographic area, scale, etc. A management team with experience and success operating a gold mine in Northern Quebec is probably going to have trouble making a success of an open pit tin mine in Chile.

Small Companies, Big Futures?
One company that exemplifies Mr. Rule’s emphasis on smaller companies with little or no debt, relatively small capital requirements, high-grade resources in the ground, and experienced management teams with expertise in their specific area, is Bullfrog Gold Corp.

Bullfrog Gold Corp. is a mining company with little or no debt, excellent prospects for gold in the ground, and an experienced management team. Bullfrog Gold Corp. (BFGC) is a new (2011) US-based gold and silver exploration company with a development project in a region of Arizona with a long history of proven gold production. The region within 25 miles of the project has produced 1.2 million ounces of gold and 1 million ounces of silver.

As David C. Beling, CEO, President, CFO and Treasurer of Bullfrog Gold Corp., said in a recent interview, “We’ve got three solid assets. We’ve also got our ear to the ground and are looking for additional opportunities. We’ve got the management, so we’ve got all the ingredients to build a mining company. I think we’ve got a long way to run in terms of market share appreciation and market cap.”

The Gold is There; The Price is Right
Bullfrog’s Newsboy Project in Maricopa County, Arizona, was significantly developed in the early 1990s, but was abandoned by the previous owner when gold prices languished below $400 per ounce; production was not cost effective. Now with gold above $1,600, the project shows great promise with a shallow mineral inventory of 235,000 ounces of gold and 3.4 million ounces of silver.

These figures do not include wide-spaced drilling along the strike, which could significantly expand those numbers. Even more promising, there are potential high-grade feeder targets at depth and the company is planning to test drill other mineralized structures that have been discovered on the surrounding land.

The new drilling is planned to be completed by April 2013, when the company will update its estimate of its mineral resources, which should lead to a jump in the firm’s value. Corvus Gold Inc is also drilling in the area and has found significant gold and silver mineralization.

The Newsboy Project is 45 miles northwest of Phoenix with good infrastructure available, making it less costly to extract the gold. The project encompasses 90 federal lode claims, 12 placer claims and three state exploration permits.

The company just completed drilling five holes with what Beling called, “Good drill results.” They will now drill more holes and explore new areas. Based on studies done 20 years ago by a previous owner, the company has a large data base already, which shows great promise.

A Promising Exploration Project in a Gold-Rich Region
Even with just the Newsboy project, Bullfrog would be a promising gold company as an investment opportunity, but the firm also has an exploration project adjacent to a major producing mine.

The Bullfrog Project in Nye County, Nevada is in a district that has produced 3.4 million ounces of gold. Next door to the Bullfrog Project, Barrick Gold Corporation’s (ABX) Montgomery-Shoshone open pit mine has extracted 220,000 ounces of gold, while the underground mine, which closed in 1911, produced about 94,000 ounces of gold. In the 1980s and 1990s, Barrick Gold and its predecessors also extracted about 3 million ounces of gold from two open pit mines in the area. Just 120 miles northwest of Las Vegas, the Bullfrog project is close to infrastructure to ease the cost of extraction and encompasses 79 claims and 2 patented properties.

An Experienced, Proven Leadership Team
Besides gold in the ground in two promising projects, Colorado-based Bullfrog is led by experienced executive and technical teams, which have proven track records acquiring, discovering and operating gold mines in the United States. Alan Lindsay, Chairman of the Board, has founded mining companies before, and David Beling, President, CEO and Director, has almost 50 years of experience in the precious metal, base metal and energy mineral sectors. Beling has been involved with 84 underground mines, 127 open pits and 163 mineral processing plants. Besides being a professional mining engineer, he has been a director and senior executive with nine junior mining companies. He knows the mining business from mine to executive suite.

The Time is Now
Bullfrog Corp. is just two years old and with the Newsboy project moving rapidly toward production and a promising future for the Bullfrog project, it is an excellent time to invest. With fewer than 35 million shares issued and outstanding, the upside potential for this stock is significant. In February of last year, the stock traded as high as .80, but is now sitting around .45. Volume is gradually increasing from a few thousand shares traded in its first year to more than 100,000 changing hands in a given day last month. With two great projects, an experienced leadership team and the price of gold sitting where it is with little to no sign of a significant decline in the near future, Bullfrog is poised to break out.

Bullfrog also owns a third project, called Klondike in central Nevada. The company believes it has the potential for shallow, high-grade silver. In a district first mined in the 1870s, the project is at the early exploration stage. The project encompasses 232 claims with relatively high-grade silver within 30 and 50 feet of the surface.

Between the three projects, Bullfrog, Newsboy and Klondike, Mr. Beling said, “We have three solid prospects for our company, and we want to get all three of our horses running. Newsboy is off and running. In December we got a $4.2 million debt authority from a subsidiary of Rand Merchant Bank, which is a strong endorsement of the assets.”

Listen to the interview here: David Beling, CEO BullFrog Gold – Exclusive Interview with Patrick MontesDeOca

A Fine Time to Enter the Mining Markets—But Choose Wisely
With two industry experts in agreement, it seems like an excellent time to enter the precious metals market. In terms of mining stocks, picking strong firms with low debt, gold in the ground, and experienced management teams may require the help of a specialized advisor to pick the right stock that will rise and be bought by a larger mining company for a nice return on investment instead of languishing at the bottom of the market.