As Gold quickly rises in price, people are looking for good investment opportunities. 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. In part 1 I give an introduction to the industry and what to look for when investing in a small cap gold exploration company, in part 2 I will site specific examples of companies and their returns to give the reader an idea of the risks and rewards of the small cap gold exploration industry.
My first example is Beaufield Resources Inc, symbol BFD on the Venture Exchange. This company recently released outstanding assays from their property and saw their stock price move up over 200% in one day. The advantages of investing in such a company is that while the news is already out, mainstream investors are unaware of it, meaning that there is potential for above average returns in the long run. The disadvantages are an investor is paying a relatively high price for the stock compared to its historical value and that companies tend to do Private Placements at high historical values (refer to part one for an explanation of Private Placements) as management is anxious to further develop the property and wants to stock up a lot of cash to do so. While this is good business practice and good news for a long term shareholder, the dilution is a potential short term down side risk on the stock. Refer to my next example below.
First Gold Exploration, symbol EFG also had a large gain in one day similar to BFD early in 2010. Its price has since come down since speculators have exited the stock and it did a Private Placement. The advantages to investing in a stock in a similar position to EFG is that the cash is now in the bank and since speculators have left the stock its not at an abnormally high price compared to its history, yet the good assays from the property have already been released to the market so its less of a guessing game as to what they have. The disadvantages to a stock in this position is that the momentum has left it and it might be a poor choice to hold on to for a short term run.
Another example is Great Quest Metals Ltd., symbol GQ. As opposed to the prior examples it has never had one big day but rather its stock price has risen steadily and is currently at its all-time high through good business decisions and property acquisitions in western Mali. An advantage to this stock is that you are investing with a team that has proven to be good management and has incoming revenues. A disadvantage is that it may be more expensive compared to its peers so it may have less upside potential or more downside risk should something go wrong. Remember that even with good management, a mining company may encounter problems with their mines that is out of their control.
My final example is a gold stock near its 52-week low. Appleton Exploration, a gold company with its main property also in western Mali, symbol AEX on the Venture. An advantage to investing in a company like this is you are getting it very cheaply compared to historical prices. All speculators have left the stock so there is potential for well above average increases should it release news items similar to ones that drove its stock price in the past. A disadvantage is that it could be a long time before speculation drives the stock as momentum has left it. When investing in a company near its 52-week low it is imperative to check their burn rate vs. their cash balance to see how long they have until their next Private Placement to ensure they have enough time for a price increase so that they do not have to offer the shares at historically low prices.
You have now been given examples of the different ranges of gold exploration stocks available on the TSX Venture. You are encouraged to do you own due dilligence when potentially investing in one of these examples or similar companies as above average risks are inherent in all of them, made obvious by the large price fluctuations each stock has had in its past.
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