Digging for gems in the junior mining patch

While Canada's stock market is best known for the dominant market position of its sober-minded and conservative banks, there is a Wild West to the country's equity market: junior mining exploration companies.

When it comes to junior miners, Canada has international bragging rights. The Toronto Stock Exchange and the smaller Venture exchange are home to the largest conglomeration of small-capitalization mining companies on the planet.

Numbering approximately 2,000, junior miners are the most common type of stock found in Canada. They offer investors a binary outcome: Companies that eventually find economic deposits offer some of the best prospects for huge capital gains of any category of investment or speculation, while those that fail offer the prospects of huge wipeouts.

Given this stark reality, the key to making money with junior exploration companies is stock selection. Which of the multitude of companies kicking over rocks in remote parts of the world stand the best chances of finding a deposit rich enough to justify a mine and making money for investors?

With that in mind, The Globe and Mail turned to some of the pros in the business – mining analysts who know the sector best – and asked them for their best investment ideas.

Be forewarned. Exploration companies aren't for the faint of heart. The vast majority fail to find anything of value. As well, many of the companies sport tiny capitalizations and low trading volume, suggesting investors should proceed with caution because of the difficulty of taking positions and liquidating them without causing profit-sapping market moves.

Killian Charles, Industrial Alliance Securities Inc.

Mr. Charles likes Fortune Minerals, Gold Canyon Resources and Moneta Porcupine Mines.

He recently initiated coverage on Fortune, which he says has "two great assets." It has a gold, bismuth and cobalt deposit in the Northwest Territories, along with a 2.8-billion-tonne metallurgical coal deposit in British Columbia, in which South Korean steel giant Posco last year took a 20-per-cent stake for $181-million. Fortune bought the coal property from ConocoPhillips in 2002 for the bargain-basement price of $3-million. The coal operation would have been developed years ago, had it not been so remote.

Bismuth is a little-known metal used as a non-toxic replacement for lead. Most of the world's production comes from China, suggesting there may be some rarity value to Fortune's deposit.

Gold Canyon is currently "one of the darlings of the Street," Mr. Charles said. The company's most attractive asset is a gold find in Northwestern Ontario's Red Lake area, the site of many other prominent Canadian gold mines.

Mr. Charles said the grades being found are about 50-per-cent higher than at Detour, a level of mineralization that "makes a huge difference in future economics" of the deposit. Part of the deposit is under a lake, raising a potential environmental impediment, but Mr. Charles said discoveries with such features have been successfully developed elsewhere in Canada.

Moneta Porcupine in December estimated it has a 3.1-million-ounce gold deposit in a property near Timmins, Ont., a resource discovered in only a small section of a more extensive landholding. The small amount of exploration raises the possibility that more mineralization might be found. "I personally feel that that project could rapidly advance," Mr. Charles said.

Michael Fowler, Loewen Ondaatje McCutcheon Ltd.

Mr. Fowler also likes Moneta Porcupine, which he says trades at a low multiple to the amount of gold in the ground backing each share, a common way of determining the relative value of mining exploration companies. He says Moneta is, as of yet, little known among investors and offers the possibility of more good news should there be further exploration success.

He also gives the nod to Fire River Gold and Northern Freegold. Fire River has a small, producing mine in Alaska that is in the process of ramping up to full commercial production. The company bought the property and infrastructure on the cheap in 2009 for $3.1-million in cash and shares, but estimates the replacement value of mining equipment and infrastructure alone at $150-million.

Northern Freegold has a gold property in the Yukon. The company says the property has a one-million-ounce gold resource, and Mr. Fowler said there could be further upside with future drilling results.

In the interest of full disclosure, Mr. Fowler says Loewen has done investment banking work for all three companies.

John Ing, Maison Placements Canada Inc.

Mr. Ing favours Excellon Resources and Continental Gold.

Excellon is a silver producer with exploration upside at a Mexican property. In a rarity in the junior sector, where companies are perpetually seeking to raise money, it actually has $22-million (U.S.) in cash on its balance sheet.

Mr. Ing likes that Sprott Asset Management and Goodman & Co. rank as the No. 1 and No. 2 shareholders, respectively, in Excellon. The two well-regarded mining-focused money managers are "as good as an endorsement, because they're pretty savvy investors," he says.

Continental Gold has a high-grade deposit in Colombia that Mr. Ing says may attract takeover interest. The company also continues to drill on the site, so there may be exploration news flow that drives the shares higher.

Ronald-Peter Stoeferle, Erste Group Bank AG, Vienna

Mr. Stoeferle looks for companies with a minimum market capitalization of $200-million for the funds he oversees, eliminating most juniors. However, he's keeping an eye on a trio of companies he deems as likely to succeed: Bowmore Exploration, Rye Patch Gold, and Colt Resources.

Bowmore is looking for gold in Mexico and Quebec. The company has a strategic alliance with Osisko Mining, its major shareholder, with a 30-per-cent interest.

Rye Patch has a large land position in Nevada, near existing gold mines, and is hoping to firm up enough gold in the ground to auction itself off to one of the majors needing to replenish its reserves.

Colt Resources is one of the largest leaseholders of mineral properties in Portugal, where it is exploring for gold and tungsten. Mr. Stoeferle says Portugal is "extremely underexplored" and is under pressure to develop its resources because of Europe's economic crisis.

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THE PROS' JUNIOR MINING PICKS

Sources: Bloomberg, The Globe and Mail