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What Next for Gold Mining Stocks?

Gold mining stocks have taken a beating...

KNOWN AS The Mercenary Geologist, Michael S. "Mickey" Fulp has more than 30 years' experience searching for economic deposits of base and precious metals, industrial minerals, coal, uranium, oil and gas, and water in the Americas, Europe and Asia. 

In this interview with The Gold Report, Mickey Fulp explains why he expects a lot of the patient money sitting on the sidelines to get itchy soon...

The Gold Report: In the midst of a number of record three-digit swings in the Dow of late, the market's just pounded some otherwise healthy precious metals stocks. You pointed out in a July Musing that TSX junior resource valuations were down 20% from their March highs. Is this a good time to take a look at micro caps, Mickey?

Mickey Fulp: I think late summer is always a good time to take a look at our junior resource sector because of disinterest during the doldrums. At some point during the summer, stocks oftentimes drift down to their yearly lows or at least a trough.

If you looked at a chart of the Toronto Venture, you'd probably see summer troughs almost every year. Sometimes they last for a couple of months and at other times as little as a week. This year's summer doldrums, caused by lack of liquidity and lack of buying interest, has been going on for a couple of months now and the Venture Exchange continues to drift lower. The TSX index is down 35% from its highs in early March, right before the Prospectors and Developers Association of Canada (PDAC) conference.

So, yes, I think this is a buying opportunity for some of the fundamentally strong micro caps.

TGR: Are the troughs and the opportunities more extreme this year?

Mickey Fulp: I think so. A couple of other things are going on as well, including the global economic unrest with European sovereign debt issues and US politicos doing shenanigans with the debt ceiling. At the same time we had this nearly exponential rise in the price of gold. The gold producers with record cost margins are catching up somewhat with the gold price, but the advanced explorers continue to lag.

TGR: As regards the micro-stocks, have you taken particular interest in any certain regions or sizes or types of companies over the summer?

Mickey Fulp: I haven't taken an interest in very much this summer other than watching companies that continue to get beaten up. They become buying opportunities at some point, when the potential reward meets the risk that's involved in highly speculative micro-cap stocks. That's the purpose of stink bids, to find fundamentally strong stocks, and buy them when they're down on their luck or the markets aren't particularly friendly.

Area plays don't really interest me that much. I have strong ideas about the kind of projects I'm interested in. I don't really concentrate on areas as much as I look at individual companies. 

TGR: Have any of your stink bids paid off?

Mickey Fulp: No, they're stink bids and we're in a down market right now. I'm just accumulating some stocks that I already have positions in and I see opportunities to lower my cost basis and wait for a better market. You know a contrarian view requires patience.

TGR: How many companies do you typically have in your personal portfolio, Mickey?

Mickey Fulp: It isn't typical but right now I have between 35 and 40.

TGR: So you're pretty focused.

Mickey Fulp: Well, that is as many as I can handle. Historically I've held 20 or 25, but over the course of the last year or so I've just found many stories that I wanted to participate in. Still, I've never covered more than 10 at a time. I may mention other companies in interviews but I only write about those 10.

TGR: How do you select the 10? What makes them rise to the top?

Mickey Fulp: Those are the best of the best. It comes down to the old criteria. Every company I put money into has the requisite share structure, people and projects. If they're severely undervalued, I hope that is when I'm going to choose them. 

TGR: The general media commentary seems to be that the money going into gold is going into physical gold. For example, we're seeing ETF prices rise increasingly, but at the expense of juniors. Money that was expected to go into explorers is going into the ETFs instead. People are going more into the commodity than the equity.

Mickey Fulp: Absolutely. The gold explorers are down because money is going into Gold ETFs versus the junior resource sector. The ETFs have given people another way to participate in the gold market. If you wanted to buy gold 10 years ago, you either bought bullion or played high-risk juniors. Now you can buy the gold ETF.

TGR: If the Gold Price continues to go up, will it continue to dampen share prices in the junior sector?

Mickey Fulp: I think the fact that we're in a time of economic turmoil worldwide is what's dampening the share price of the juniors, because people are looking for safe haven investments and choosing gold as a safe haven. A junior resource company is 180 degrees diametrically opposed to the idea of a safe haven. So you'll see money come back to the juniors when the markets get better overall ? when we have a stronger market.

TGR: Any idea when that will be?

Mickey Fulp: I personally expect a stronger market after Labor Day. I think we'll see a post-Labor Day rally like last year. If you remember, that's when the juniors really started taking off. From Labor Day until the PDAC, we had one of the strongest bull markets for juniors in memory. Will we see that sort of rise again? I hope so, but I wouldn't go to the bank on it.

That said, I do see similar trends. Despite the recent correction in gold, precious metals have been on a run that's almost unprecedented. We have very strong prices for industrial metals, too. Despite economic unrest, we're still seeing strong demand, and copper is hanging in at $4 per pound.

Much like in 2010, we've had these periodic short-lived panics and weeklong sell-offs in the market and, as we do every summer, low liquidity. Because of that we have little interest in buying—or selling—in the juniors.

What I see is many Dollars on the sidelines. All I've been doing is using some of the Dollars I have on the sidelines to pick away with stink bids and select private placements, but, in general, I've been extremely inactive in the open market this entire summer. The question becomes, "When does that patient money sitting on the sidelines get itchy?" Last year, that was right after Labor Day. We had record private placements last fall and winter.

TGR: So things could be looking up for the juniors this fall.

Mickey Fulp: Yes, I think and certainly hope so.

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