SAMEX MINING CORP – ENTERING DISCOVERY STAGE ?

by Eric Hommelberg
October 15, 2005

NOTE : A PDF version of this article is available here

In my piece ‘GOLD & JUNIORS – wanted : discoveries” I made strong case for investment upon discovery since investors would minimize their downward risk potential but still allowing them to participate in a multi-month up-leg during the discovery phase.. I pointed out that companies do enjoy their greatest appreciation during their discovery phase which could take many month or even years.  Sure enough, investors stepping in upon discovery would miss the initial blow-off but again since the entire discovery phase is not a one-day event many good entry point will follow.. This strategy has worked remarkably well over the past two years since there is no real excitement in the junior sector yet so juniors still being in their early exploration phase are facing frozen share-quotes while the ones coming up with good news did remarkably well. (eg  Norsemont +440%, US Gold Corp +380%, Tanrange + 272%, Seabridge +110%, …)

In my piece ‘DISCOVERY CASE – Virgina Gold Mines’ I described how profitable investing upon discovery can be. Investors who stepped in upon discovery in August 2004 at 1.15 CAD$ are still enjoying the upward thrust which launched the stock to 8 CAD$ and the story doesn’t end there…

I also made it clear that investors who stepped in before discovery were rewarded tremendously but they had to be patient all the way up to discovery and taking the risk of no discovery at all since only one out of 1000 projects will ever make it to a mine..

So investors taking their chances of promising exploration plays should remember that patience is required since those companies simply need the time to do their exploration and yes, thereby taking a risk of no discovery at all..

Does it mean that the exploration plays will be facing frozen share quotes until a potential discovery ? Not exactly, there comes a moment when sentiment turns positive for the entire sector, it’s just a bit difficult to predict when… Maybe it takes $500 gold maybe it takes $525 gold who knows but the thing is that a severe undervaluation of the junior shares compared to gold won’t last for ever and sometime in the future the pendulum will swing to the other side and we’ll be witnessing extreme overvaluations like we saw in 1996 when all juniors exploded to the upside in just a little period of time (mania-phase) . The higher the price of gold the more likely we’re nearing the end of those extreme under-valuations but again, timing this event isn’t easy.

But nevertheless with gold on the march towards the $500 mark it seems that the down-side investment risk of the junior sector is dwindling week by week and yes it seems that the junior sector marked their bottom in May of this year..

One leading gold expert who saw this opportunity right was Mr. Jim Sinclair, in June of this year he told his readers :

It is only six short months until 2006 is upon us. In my opinion, 2006 to 2008 will be our best years ever.

Wait until 1/1/06 and you will find you are much too late. Things always start quietly before it becomes apparent. People trying to time the market perfectly are going to be left behind in the comet's debris trail.

The establishment interest has started. It took form last May in the majors and is beginning now in the juniors - not January 1st, 2006. In my view, 2006 is for all practical purposes - TOMORROW! END.

How right Mr. Sinclair proved to be. Not only did his own firm Tanrange appreciate by a stellar +240% since mid May but lots of other juniors did the same (see examples above..) END.

Now at the time of writing the gold shares are facing a correction since gold is hammered down hard from its temporary top at $480… Does it spell trouble ahead ?

Well not according to Mr. Jim Sinclair, he told his reader on Oct 11, 2205 :

Some of the institutional, fund and establishment entities that purchased gold shares last May are cutting their positions just under the $480 level which materialized as gold broke above $440 on the second move up.
 
These sellers will turn buyers again one by one as gold moves above $480 and $500 the second time and wildly as gold moves over  $529.
 
You can see there are buyers in size for the better issues in all categories of serious precious metals companies. The real fun is yet to begin on the upside in the precious metals shares. END.

Another market veteran who subscribes to the view of little downside investment risk is Sprott Assett Management’s president John  Embry. He appeared on ROBTV lately and told his host :

Jim O’Connel (ROBTV):

Investors looking to buy some of these penny-stocks, what’s your advice to them?

John Embry:

I think that this is probably a good entry point for anything that is semi-legitimate. In the sense that the stock-prices of lot of this stuff  are beaten down to such levels where I think your risk is about 10 to 1 which is what you’re always looking for. END.

So after all we may conclude :

·         Some serious investment money is already chasing the high-quality junior stocks

·         Juniors still in their exploration phase aren’t participating yet the current run of the leading ones...

·         Downside investment risk seems limited..

·         Discoveries are rewarded well most of the time..

Investors out there willing to take their chances in a junior exploration play should take this simple advise :

Try to find one which could be on the verge of discovery…

The reason why new discoveries are needed so desperately is described in detail in my piece ‘GOLD & JUNIORS – wanted : discoveries’..

Some highlights :

 Highlights :

·         The Industry is not replacing the reserves it is mining every year

·         High grade mines are running out of ore.

·         If Gold were $1000 / oz , it still takes four to seven years to open a mine.

·         The industry isn't going to be able to respond immediately to higher gold prices.

·         Reserves will be depleted in 10 years at current annual production rates

·         The industry needs some major new finds desperately. Since 1999 only a very few world class gold deposits have been found.

·         Newmont President Pierre Lassonde expects new world class gold discoveries (> 5 mio ounces) in 18 months to two years time
 

Furthermore the major producers are pulling between 3.5 – 7 mio ounces gold out of the ground every year. So in order to replace those mined reserves you’ll have to find a major world class deposit ( > 5 mio ounces) each year which is highly unlikely. Since 1995 only a very few world class gold deposits have been found (see chart below) and things aren’t getting any better soon.
 

 

As said above, things aren’t going to be any better soon :

Newmont President Pierre Lassonde  recently said in an interview with Robert Bishop of GMSR :

I think we will see new discoveries in the five million ounce range over the next 18 months to two years. END.

Well, new world class gold discoveries over the next 18 months to two years is a long time and even then it still takes another 4 – 7 years in order to build a mine.  So with that in mind and South African Gold production falling of a cliff (see chapter IV Gold & Supply) it ain’t hard to understand why new discoveries are wanted desperately and why juniors making discoveries are appreciating in price so fast.

OK you’ll say, I agree but which company could bring me a major discovery ?

Well, to be honest, that’s of course the $64 mio question… we all want to know who’s next but unfortunately picking the real winners isn’t easy… Nevertheless a company I’m quite confident of in succeeding doing so is SAMEX Mining Corp. It seems that their Los Zorros property in Chile could host a multi million ounce gold deposit indeed but they have to prove it up… SAMEX literally said in their latest press release of Sept 9, 2005 :

If the gold-rich mantos layer should prove to be extensive beneath much of the NORA prospective area that measures 1,200 meters by 1,000 meters (See Figures A, C & D) and maintains the average thickness intersected (0.51 oz/mt) , a large target of 20 million to greater than 25 million metric tons could be present (a possible multi-million ounce high-grade gold deposit). END.

Well an Area of 1,000 by 1,200 meters hosting a possible multi-million ounce high grade deposit is HUGE.. and this Area is just one out of seven such Area’s all located on a single property and thus representing a very important strategic opportunity for the company.  

The company ends their Sept 9 press release by saying :

The high-grade gold mineralization at NORA represents a very exciting exploration target, with substantial upside potential, that was discovered through the patient and diligent efforts of the SAMEX team. Should the geologic model hold together through Phase II drilling a major discovery could result and be a tremendous success for the Company. This is only one of several quality targets that are coming together at Los Zorros and management is pleased with the progress and potential resulting from these efforts. END.

The potential target size is based on a model developed by the Company using available geological information which, although thought by the Company to be a reasonable explanation for the occurrence of identified mineralization in the NORA target area, has yet to be proven by drilling and other exploration activities.

tc "The potential target size is based on a model developed by the Company using available geological information which, although thought by the Company to be a reasonable explanation for the occurrence of identified mineralization in the NORA target area, has yet to be proven by drilling and other exploration activities. "

Phase I drilling in Exploration Area III (DDH-N-04-01 to 06 and 08 to 10) indicated that grades of up to 16 g/t (grams/tonne) gold over significant thicknesses are present in the target area.tc "Phase I drilling in Exploration Area III (DDH-N-04-01 to 06 and 08 to 10) indicated that grades of up to 16 g/t (grams/tonne) gold over significant thicknesses are present in the target area."

This target potential is conceptual in nature, there has been insufficient exploration to define a mineral resource within Exploration Area III and it is uncertain if further exploration will result in discovery of a mineral resource within the NORA target. ENDtc "This target potential is conceptual in nature, there has been insufficient exploration to define a mineral resource within Exploration Area III and it is uncertain if further exploration will result in discovery of a mineral resource within the NORA target. END"
 

Introduction to SAMEX MINING CORP:

SAMEX Mining Corp. (SXG : TSE-V) is a junior resource company focused on gold/silver and copper exploration in South America. Samex began, in 1993, to explore one of the most prolifically mineralized regions on earth, the Cordillera Occidental (Andes Mts.) of Bolivia and Chile. 

Management :

I consider good management as one of the key assets a junior mining company can have since they can make or break a company. I mean in order to be successful the company needs good properties, in order to find good properties you need a team of good geologists, in order to build a team of good geologists you’ll need good management, it’s as simple as that!

Does Samex management fit into that category ?

Well, SAMEX’s CEO Jeff Dahl certainly has a good reputation among many industry veterans. Bill Murphy of Lemetropolecafe once wrote me :

Hi Eric,
How nice.
It is great to know that you know what a CLASS ACT jeff dahl is. He is the best.
If I am wrong about him, I do not know myself. He is one of the finest I have ever met and I have met quite a few.
As a result of my confidence in Jeff, Samex is my second biggest holding.
The best to you,
Bill . END.

Another key-player in SAMEX management is of course VP Exploration Rob Kell.

Rob Kell has led/participated 3 mineral discoveries during his 25+ year career (eg  the platinum/palladium discoveries at Stillwater , Montana and the Dall cu/zn/ag massive sulphide discovery in Alaska)

From an investors point of view it’s always good to invest in companies with good exploration geologists with proven track records since most of the geologists won’t be making any discoveries at all…

Projects :

SAMEX main project is Los Zorros, Chile. I will only focus on this project here since this piece has a strong focus on potential discoveries and Los Zorros will be the main focus for SAMEX coming year..

As mentioned earlier the Los Zorros project seems to have a huge potential but since SAMEX is still in an early exploration phase they still have to prove it up..

Now let’s first focus on the geographic location of Los Zorros

The two maps below are showing the geographical location and an overview of the Los Zorros project and its 7 exploration area’s   :

 

SAMEX map of Los Zorros
 

The prospect is geologically well-situated within the highly prospective mining belt that contains the copper-gold ore bodies of the Punta del Cobre District (150 million cumulative tonnes with an average grade of 1.5% copper, 0.2 to 0.6 g/t gold, 2 - 8 g/t silver), the large Candelaria mine (460 million tonnes containing 0.82% copper, 0.22 g/t gold, 3.1 g/t silver), the large, mined-out Chanarcillo silver deposit (+100 million ounces of silver), plus many smaller copper-gold and gold ore bodies which still locally support mining operations. 

So a mineral rich area indeed.. a fact which is clearly illustrated by the map below.(Many copper/gold porphyry systems are found around this so-called ‘pacific-rim of fire’)

Company valuation

Obviously all investors care about is future share-price expectations. Again, that’s extremely difficult to predict, but let’s focus on the following :

·         Downside investment risk

·         Historical company valuation when sector sentiment was high (eg 1996)

·         Future possibilities upon potential discovery

Downside investment risk :

As stated before the downward potential for junior investments seems to be fading week by week and as John Embry said :

 the risk is about 10 to 1 which is what you’re always looking for. END.

Now let’s focus on the SAMEX share itself, is it cheap ? Is it expensive ?

Well, as described in part I of this article it seems that the junior shares have bottomed out in May this year. Samex bottomed during that time as well by hitting a year low of 27 cents. Does that mark the bottom ? Although nobody can predict the future my guess is yes. Why ? Well, in order to determine trend changes it’s always good to study the long-term monthly charts since they filter out all daily noise. Now when looking at the 5 year monthly-chart of SAMEX you’ll see that a change in trend indeed occurred around mid May this year. Further more you’ll see the bottom of 27 cents providing solid support. (long term resistance in 2003 becomes solid support in 2005)
 

 

Conclusion : Downside investment risk seems limited to 27 cents (current trading at about 39 cents)

Historical company valuation when sector sentiment was high (eg 1996)

As said earlier sector sentiment isn’t rosy these days but at one point the pendulum will swing from severe undervaluation back to over valuation, it simply works that way.. We just can’t predict what it takes in order to create a better sentiment, could be $480 gold, $500… who knows.. but it’ll come just as it came in 1996 and to a lesser extend in late 2003…

Now what did Samex do during these periods when excitement kicked in ? Well in 1996 the company made a stellar move from a mere 30 cents all the way up to 7 CAD$.. It was during a time that all juniors exploded (eg Golden Star rocketed from 5 to 25 CAD$ in that time..) It all happened fast, just within a year. Why do I come up with this example ? Simple, just to show you that sentiment can turn around fast…. In order to reach the same company valuation today as it did in 1996 SAMEX should be trading around 3.5 CAD$ these days…. (twice as much shares outstanding today than in 1996).. Sure we all remember the junior ride of late 2003 where SAMEX reached a high of 1.50 CAD$ (when gold was trading $100 lower !), again, sentiment turned around rather quick and a gruelling long correction started, one of which many juniors are still suffering… Samex included.

Conclusion is simple :

Share prices of  companies in their exploration phase are determined to a high degree by sentiment only since they don’t represent any real value yet…

Now in times of negative sentiment there’s no need to be invested in those exploration plays unless you have a strong suspicion they could be on the verge of discovery…

Now let’s look again at what the company said in their press release of Sept 9, 2005:

The high-grade gold mineralization at NORA represents a very exciting exploration target, with substantial upside potential, that was discovered through the patient and diligent efforts of the SAMEX team.  Should the geologic model hold together through Phase II drilling a major discovery could result and be a tremendous success for the Company. END.

So SAMEX could be very well on the verge of discovery indeed and if they’ll be successful investors can ride this stock for many years to come. Investors have to realize that a discovery is not a one-day event. The stock will start to move upon the first good drill-results but maybe up to 100 drill holes or more will be needed in order to define the entire deposit. As long as the company continues to drill and to expand their recourse estimates there is no need for the investor to rush out of the stock…a process which could last for years.. (This process is described in detail in my piece ‘DISCOVERY CASE – Virginia Gold Mines.)

So from an investment point of view you could wait until the phase II drill program is announced or even wait until the first drill-results come out, sure if successful you’ll have to pay up some more but it reduces your downside investment risk…

The only risk of waiting is that upon a sentiment change (eg gold crosses the $500 mark) all juniors will be flying anyhow with or without discovery…

SAMEX is planning the phase II drilling program and will begin when funding is in place…

Personal Note :

At last I want to make a personal note here towards the SAMEX shareholders since I’m getting lots of feedback from disappointed share-holders and asking me if I still do believe in this stock and why its share performance is stinking up to the place. Well, I think that I’ve answered these questions here quite thoroughly but would like to add the following remark :

Please be patient since we’re entering an interesting phase in the bull market in gold. For sure there will be some psychological barriers around the $500 mark since gold has only traded above that level for a couple of days ever… Now when that level is taken out and gold will be marching on towards the $600 area (an event which I believe could already be the case in 2006) then it ain’t unlikely new excitement to kick in the junior share arena. And yes it’s my strong believe that upon new excitement SAMEX could take out its 2003 high of 1.50 CAD$ even without discovery… But as I explained above it’s my strong believe that SAMEX could enter a discovery stage in 2006…

You get it ? New excitement on top of a discovery is a very very explosive mix  and would reward the investor who is holding on to his shares today tremendously…

So what is the risk reward ratio for this stock when looking to the end of 2006 ?

Well, as we have seen there is solid support at 27 cents (2003 resistance became 2005 support) so the downside risk is limited (current trading at 39 cents..)

The upward potential however is a multiple dollars since sentiment and discovery could prop this stock much higher coming year..

So SAMEX investors are facing here a penny downside risk and a multi-dollar upward potential… As John Embry says these are the kind of risk/reward ratio’s which you’re always looking for.

 

Comments and feedback are welcome at:

Eric Hommelberg
The Gold Drivers Report

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

October 15, 2005

Disclaimer

SAMEX Mining is a founding member of the author’s website golddrivers.com and the author does own Samex shares. Readers have to be aware that the author is not a professional investment advisor so this piece is not a solicitation to buy or sell and no responsibility can be had for losses on the basis of this analysis. The reader should be aware that investing in Gold Mining/Exploration equities is a risky endeavor with a very real probability of substantial losses. Before making any investment decision, do your own research and consult a professional investment advisor. All facts presented here are retrieved from the public domain and can be verified easily by readers themselves. Therefore I strongly encourage readers to do their own research as well. END.