Junior Mining Share Turnaround Update

By: Clif Droke | Mon, Aug 18, 2003
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Mid-summer is here, time to reflect on the progress made across the junior mining stock sector, and particularly, on our previous junior resource turnaround candidates from a couple of weeks back. The nice rally among a number of actively-traded junior mining shares in recent weeks has been long overdue and was more of a technical relief rally from the over-done price decline that took place earlier this year. Based on the "look" of the charts of most actively traded junior mines, the gradual shift in momentum (with downside momentum abating and upside momentum increasing), and the perceptible shift in the dominant moving averages, the juniors stand to benefit in the months ahead from these factors as well as from positive shifts in mining fundamentals and investor focus.

I like the way many of the "penny golds" are trading right now as most are at bargain levels with my favorite moving averages series for short-term trading purposes (30-day and 60-day simple moving averages) trading close by and gradually trying to turnaround. In some cases, certain stocks are already above their 30-day/60-day moving averages, which is a good sign of recovery. Granted, its been a rough winter/spring for many junior mines but throughout summer, share price valuations have been turning around. All in all, I see more hope for greater recovery for the overall junior mining sector as 2003 continues.

In my years of market experience I am convinced that the key to the "game" of junior mining speculation is all about simple supply and demand. It's not so much about company fundamentals and balance sheets or even about technical chart-related indicators. It's about the number of shares outstanding relative to the demand for those shares and more importantly, who happens to own those shares at any given time. Don't get me wrong, corporate fundamentals are important, especially for the long-term outlook. So are the technicals. But for short-term and intermediate-term trading purposes, the way to "read" the market for most low-priced junior mining shares is to try to ascertain whether or not the market makers (whether they be the company insiders or "hired guns") are actively accumulating shares in their stock, or whether they are actively distributing shares.

I can't tell you how many times I've had people connected with junior mining concerns call me up and try to sell me on how wonderful their stock is. They go on and on about how they are sitting on this huge, undervalued ore body that is sure to "explode" the price of their company's stock once the market finds out about it. Once I hear this spiel (and believe me, I hear it quite often!) I immediately bring up a chart of the company's stock price performance to see what's *really* going on in their market for shares. In roughly nine cases out of ten, the chart looks awful with absolutely no sign that management or the insiders have been buying shares in their own stock. This tells me that the company just wants me to give them free publicity in the vain hope that having a bullish comment about their stock in the financial press will somehow lift the share price and increase their cash flow. But it rarely works this way. In order to get a nice rally going in the penny golds there has to be a concerted effort on the part of the company insiders at buying back shares of their stock and then starting a major promotional campaign to draw interest among the public and therefore allow them to run up the share price again. This is a rough description of the process that may vary in the fine points, but it is essentially correct.

In other words, junior mining stock rallies are creations of the mining companies themselves. They must take initiative for either buying up shares themselves or else hiring professionals to do the work for them (i.e., the process of accumulation). Once the excess supply is off the market they can then begin the work of manipulating a bull campaign in the stock. (I use the word "manipulation" carefully, knowing the emotions it often conjures up, but let's be honest -- there is a certain degree of manipulation in EVERY stock or commodity that is actively traded.).

A couple of weeks ago we looked at potential turnaround candidates among several low-priced junior mining shares. Let's update these stocks and see how they've performed since last month. Excellon Resources (EXN.TSXV), reviewed last month when it was $0.13/share, currently trades at $0.16 and made it as high as $0.18 in the past few days. Excellon is a Canadian junior mining company focused on mineral exploration and development of high-grade ore and base-metal opportunities throughout Mexico. EXN broke out of its tight zone of consolidation in the daily chart late last month and has enjoyed a nice upturn, fulfilling some of its potential as a turnaround stock this summer. EXN is still above its rising 20-day moving average, which is the prime directional indicator, a sign of short-term technical strength.

American Bonanza (BZA.TSXV), a Vancouver-based mine, had been consolidating between roughly $0.25-$0.30 for the past few months and it broke out shortly thereafter and made it up to $0.34 before pulling back and settling most recently at $0.30. I previously pointed out that the underlying 30/60/90-day moving averages were starting to turn up, and these dominant short-term MAs still show a steady upward progression despite the recent internal weakness.

Caledonia Mining (CAL.TSX), a Canadian mining, exploration, and development company that owns a diversified portfolio of carefully selected, high quality properties in Africa and Canada, was reviewed last month at $0.29 after it had been quietly rounding out a bottom over previous months. It currently trades near $0.40 and is still above its rising 20-day moving average. Maintaining above the pivotal $0.35 level in the next few days would confirm the short-term uptrend and establish a base of support for another up-swing, in my opinion.

Another low-priced mining share that I reviewed last month as having turnaround potential this summer is Bralorne-Pioneer Mines (BPN.TSXV), a Vancouver-based junior mine that has been around since 1897. BPN has evidently established a low above $0.20 and has been consolidating along this low for the past couple of months. BPN is still below its 90-day moving average, but a close above the $0.25 resistance level will send a breakout signal.

Cusac Gold Mines (CQC.TSX), a mining and exploration company geared towards the localizing, extraction, and purification of gold resources, is a thinly traded share and a potential turnaround candidate. CQC, reviewed in last month's turnaround article, has been consolidating between $0.30-$0.35 in recent months and is currently butting up against its pivotal $0.40 resistance level. CQC is above its rising 20-day MA and will send a breakout signal when it gets decisively above $0.40.

Goldspring (GSPG) is a gold mining concern that currently trades just under $0.10. It has been the subject of much speculative action in the past year, and evidently was part of a mini-trading scandal several months ago. The Motley Fool.com recently published an anti-penny stock article which singled out GSPG, among other low-priced shares, as a poor investment choice over the past few months (it traded as high as $2.25 when it was first recommended by stock promoters). At its current price, GSPG is hated and scorned by the investment community, which makes it an ideal turnaround candidate. Coincidentally, I have been monitoring this very intriguing stock in recent days just before the Motley Fool piece was published and while the chart isn't fantastic, it isn't bad either. Trading most of this week at $0.08, GSPG had a preliminary breakout of sorts on Friday, closing up 14% at $0.097 on increasing volume and just beneath the pivotal $0.10 resistance level. Admittedly, this is a highly speculative stock but is a short-term turnaround candidate with an attractive price.

Disclosure: Clif Droke does not currently own shares in any of the junior mining stocks mentioned in this article, neither is he being compensated by any of the companies mentioned in this article. Speculation in the junior mining stock sector should only be attempted by experienced traders and only with a limited portion of discretionary trading capital. Stop-losses, when possible, should always be employed when making trades.


Clif Droke

Author: Clif Droke

Clif Droke

Clif Droke is a recognized authority on moving averages and internal momentum. He is the editor of the Momentum Strategies Report newsletter, published since 1997. He has also authored numerous books covering the fields of economics and financial market analysis. His latest book is Mastering Moving Averages. For more information visit www.clifdroke.com

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