As Gold quickly rises in price, people are looking for good investment opportunities. Companies like Goldcorp and Randgold have moved up significantly in price. An investor may wish to turn to the Toronto Stock Exchange in Canada, particularly the TSX Venture as a place to invest in some speculative gold positions. The Venture Exchange has more gold exploration companies than any other stock exchange in the world.
Most gold companies on the venture can be classified as small cap under $100 million dollars with many even being smaller than $10 million in market cap. They often trade under a dollar and many are undervalued because the fear of uncertainty. The Venture Exchange gold companies will be an excellent bell weather determinant if gold is in a bubble as they will likely be pushed up to very high prices near the top of the gold price ascent. Right now there is a good mix of speculative plays and bargains available.
Most gold exploration companies have no debt and rely on Private Placements which are the offering of shares beyond what they currently have available for trade in the market in exchange for cash. It is important to determine if the company you plan to invest in will need to do a Private Placement soon because they are usually looked upon unfavourably by current shareholders as their position in the company will get diluted and the stock will come under selling pressure.
A simple way to determine if a company is in need of funds is to look at their latest balance sheet and compare that to their latest cash burn rate which is on their cash flow statement and compare that to their Management Discussion and Analysis to see what they did with their cash. For instance, if the company you are looking at has $1 million left in cash on their balance sheet and has burned through $500,000 in the past year you could assume they have 2 years worth of cash left.
If they used that $500,000 for one exploration program and this year they plan on two exploration programs of a similar size, you could infer that they have a little over 1 year's worth of cash. That limits the window of time you have to sell before there is a risk of a Private Placement, however that gives you not one but two opportunities for the stock to strike it large and for above average profits. A potential investor can see the above average risk and potential reward available by investing in small cap gold exploration companies.
In part 2 I will give examples of specific companies on the TSX Venture.