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DISCOVERY CASE – VIRGINIA GOLD MINES LTD.

by Eric Hommelberg       
October 08, 2005

NOTE : A PDF version of this article is available here

This article is the first in a series of case studies (as announced in my previous column ‘GOLD & JUNIORS – wanted : discoveries’) examining some amazing discoveries in the past 5 years.

“If you are lucky enough to buy into an exploration company that makes a discovery, you can effectively buy your own auto teller machine. Some of these things are just phenomenally profitable.”

- John Bridge, a senior gold analyst at J.P. Morgan Chase & Co -

Investors in Virginia Gold Mines experienced first hand how profitable investing in an exploration company during the process of a discovery can be. After publishing a press release on the discovery of gold from the Eleonore project in august last year the stock sky-rocketed from 1.15 CAD$ to around 8 CAD$. Even now, after more then one year, the size of the discovery grows month by month. On October 6, 2005 Virginia announced again some very impressive drill results from their Eleonore Project thereby continuing to expand the Eleonore resources.  

So the case of Virginia Gold Mines is a wonderful example of the miracles of investing upon discovery since it reduces the downside investment risk tremendously while the upward potential still could be staggering (which was the main topic in my earlier column ‘GOLD & JUNIORS – wanted : discoveries’).

In this column we will study the different stages during a discovery and point towards probable good entry-points.

Sounds simple right ? Just wait for a new discovery and react with the speed of light to send your hard earned money into these new discovery holes. But the truth is that it ain’t that simple as it might look like. The thing is that every single discovery is unique. So much variables are involved which make a fair judgment of new discoveries no easy task. What is the type of discovery ? What kind of grades of Gold, Silver, Copper, Zinc were found ? What about existing infrastructure (lack of infrastructure makes a discovery less attractive for a major producer since a good infrastructure is simply required in order to build a mine etc..) As you can imagine this list goes on and on….

Now sometimes you’ll see a stock launching into the stratosphere upon extremely good drill results and sometimes you’ll see a stock hardly move at all. The thing is you simply can’t predict if a stock will launch upon good drill results since so much depends on sector-sentiment at the time of release.

Example Victoria Resources  : stock jumped 100% on good drill results in Feb. 2004 (good sentiment)

Example Northern Dynasty : stock hardly didn’t move on good drill results in 2002 (bad sentiment)

This brings us to lesson no. 1 -

Market sentiment plays a crucial role in investment decisions whether or not to buy a stock upon discovery.

Investors shouldn’t expect a rocket launch straight upon discovery. Shares of exploration campanies do experience their greatest appreciation during their discovery phase which is not a one day event.  So you don’t have to rush in after a discovery during bad market sentiment. Often the shares will fall back after a initial short spike in the share-price. (see chart #2, Model of Classic Mining Company Share Price Cycle) )

In the discovery-case of Virginia Gold Mines which we’ll be discussing in this issue of THE GOLD DISCOVERY LETTER we’ll see that investment upon discovery could be a wise strategy indeed but doesn’t guarantee a rocket-launch overnight.
 

Virginia Gold Mines:

Virginia Gold Mines is a mining exploration company with its head office in Quebec City, Canada.

In June of 2004 Virginia Gold announced that it had launched its busiest summer-fall exploration season ever. This news often leads to some speculation. Also in this case, the share price of Virginia gained quite a bit. After two months into this summer-fall exploration season Virginia Gold announced impressive results from their Eleonore project the Roberto zone (Channel samples yielding up to 19.75 g/t gold). The stock was trading around 1.15 CAD$. Now the big question of course remained whether or not to get in.

Now looking back at this period of time it’s easy to answer since Virginia Gold trades around 8 CAD$ these days but what kind of clues investor’s had at that time ?

Now what we’ve learned over the past few years is that good/important news always sparks a buying interest. This is clearly visible in the chart by a sudden spike in volume of traded shares which could easily amount up to 10 times the average volume of traded shares a day.

Since charts are telling more than a 1000 words let’s take a peek at Virginia’s chart of the summer-fall 2004 :
 

Now in this particular case when Virginia Gold announced some good channel sample results on Thursday August 11, 2004 there was a huge increase in traded shares indeed but the stock didn’t launch straight away. But is was only after the weekend, that volumes and share price started to improve substantially.

The sudden increase in volume of traded shares should have triggered an alert for the investor. Sure, the channel samplings were good but usually investors would like to see those channel samplings confirmed by solid drill results so here’s a dilemma for the investor, get in or wait…

Now knowing that Virginia Gold just launched its most aggressive exploration program ever it became very unlikely that not one single future drill hole would confirm these excellent channel samples. 

And that’s exactly what happened. On September 15 Virginia Gold confirmed these good channel samples by 5 new drill holes. This time there was a huge spike in volume of traded shares. Events like these do mark a good entry point since there is confirmation of a potential gold deposit and as long the company keeps on drilling more good results will follow until the size of the entire deposit is defined. Stock was already up 50 % from the trenching results in August, but the risk was now much more reduced.

This brings us to lesson no. 2-

Waiting for a second confirmation takes away some of your profit but most of your risk.

The fact is that a discovery doesn’t happen overnight and might take up to 100 drill holes or more before the deposit has been confirmed and defined. During this ‘discovery-phase’ the company share will experience its greatest appreciation. (see chart below)
 

chart #1, share price appreciation over time from exploration until production.

So what is important here ? Well, as said before, as long as the company is expanding their resource estimates by continued drilling programs you’ll see its share price appreciating all the way up until the entire deposit is confirmed.

The following graph shows a more detailed typical share-price cycle of a classic mining company from discovery to production.



chart #2, Model of Classic Mining Company Share Price Cycle

This chart clearly shows that investors who’re stepping in upon discovery (1) could do very well indeed. In most cases there is a pull-back after the initial discovery.  Again, investors should realize that the discovery phase is not an one day event.

Even when invested upon discovery, don’t expect a smooth ride all the way up to a discovery high. That road will be bumpy and is being characterized by sudden sell-offs due to profit taking. Just look at the Virginia chart above, you’ll see that the first break-out to $1.49 was sold off two days to $1.27. The second move up to $1.60 after which profit taking brought it back to $1.38. Then after the discovery news of the Roberto Est zone on Oct 04, 2004 (see below) the stock jumped to $2.32 only to go down to $1.72. This pattern continued all the way up to $8,-. So smart traders can make even more money.

This brings us to lesson no. 3-

Don’t chase the stock.

Always invest after a inevitable pull-back. And don’t invest all in one time. Especially when there is confirmation  on the discovery after a series of press releases  you know you have your own teller machine working.

So from an investor’s point of view once you’ve bought upon a discovery it’s more or less safe to stay in that position as long as the company continues to drill and expand the estimated resources..

Investors who got in upon the first good drill results on Virginia’s Eleonore project just could wait for many updates to come  (whether good or bad) since Virginia had launched its most aggressive exploration program ever.

Needless to say that Virginia investors who had the nerves to withstand all sudden sell-offs (see above) were rewarded tremendously since Virginia rocketed all the way up to $8,- in less than a year. Why ? Because Virginia kept on  announcing good drill results (see below) and again as long as a company remains in their discovery phase there’s no need to rush out of the stock…

Still there are investors who feel the need to trade during a long term up-move as we’ve witnessed with Virginia. Well, all we can say is that investors who insist on trading should always keep a core position and only sell a part of their holdings into strength and buy back on weakness.

This brings us to lesson no. 4-

Only sell (part of) your position in the  following cases.

a-      When uptrend is broken. Always keep track of the stock-chart (eg via www.stockcharts.com)

b-      When 100 % profit is made. In case you are not very sure about future developments you can sell 50 % and ride the rest for free.

c-       When you’re an excellent and experienced trader sell  a part of your position (eg 1/3)  during strength and buy back on weakness.

But remember. As famous trader Jesse Livermore used to say :.

As said before there is no need to rush out of a stock as long as the company continues to expand their resource estimates. In this particular case of Viriginia this process is still unfolding, see news releases below :

………………………………………….

Virginia News after first good drill results on their Eleonore project on September 15, 2004.

September 15, 2004
Éléonore project Roberto zone yields more impressive results

October 04, 2004
Eleonore project– new drill intercepts at Roberto Zone
– Discovery of Roberto Est Zone

November 1, 2004
Éléonore project
– Roberto confirmed to a depth of 175 m
– Roberto Est : up to 11.07 g/t Au over 9.2 m in drilling

December 13, 2004
Éléonore project
· Roberto : 14.52 g/t Au / 12.55 m at a depth of 230 m
· Roberto East still expanding
· Zone Veine : high grade intersections

February 14, 2005
Éléonore project
Roberto continues to yield good results
Roberto Est best result to date: 19.64 g/t Au / 11 m

February 23, 2005
Important developments at Éléonore :
Prolongation of the Roberto zone toward the North,
South and at dept

March 16, 2005
Éléonore project
The Roberto system now confirmed laterally over more than 500 m and to a depth of 400 m

March 31, 2005
Éléonore project
The Roberto system now confirmed laterally over more than 700 m

April 21, 2005
Éleonore project,
The Roberto system now traced laterally over more than 1 Km

May 16, 2005
Eleonore project
The Roberto system now followed over 1.2 Km

June 9, 2005
Eleonore project
Roberto: 20.66 g/t Au / 12.05 m to a depth of 550 m
Emergence of new gold-bearing zones in periphery

July 14, 2005
Eleonore project, deep drilling confirms Roberto to a depth of 600 m and yields up to 11.8 g/t Au / 24.2 m, Roberto north extension confirmed by stripping, Roberto FW grades 4.49 g/t Au / 32.2 m to a depth of 660 m

August 10, 2005
Eleonore project very good continuity of Roberto system at depth Roberto north extension : Drill intercepts up to 15.17 g/t Au / 6 m and 19.94 g/t Au / 4.35 m.

September 7, 2005
Eleonore project: Persistency of high grades at depth - the Roberto system now traced laterally over 1.5 Km Falconbridge abandons its option on Coulon.

October 6, 2005
Eléonore Project: The Roberto System Now Traced Over 1.9 Km and to
a Vertical Depth of 720 M

END.

Again, investors who could withstand the sudden sell-offs during the discovery phase were rewarded tremendously, see chart below :
 

Highlights :

• Investment upon discovery could be very rewarding indeed.
• Discovery phase is not an one day event
• Share prices can go wild on discovery-expectations, investors should be aware of sudden sell-offs due to profit takers.
• As long as a company keeps drilling and expanding their resource estimates there’s no need for investors to rush out of the stock.

Comments and feedback are welcome at:

Eric Hommelberg
The Gold Drivers Report

E-mail: ehommelberg@golddrivers.com
Web-site: www.golddrivers.com

October 09, 2005

NOTE: readers interested in future discovery-alerts and discovery-cases can drop a mail here

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