Junior Mining Company Risk
By David Morgan

May 01, 2008

Dear David,

Thank you very much for your hard work and excellent research. Your level approach to the metals has long been a beacon to follow.

Thank you. 

I am writing to inquire about your opinion of the coming need for companies to follow the FASB-157 accounting rules. There has been some speculation on Web forums (such as PrudentBear Chat) that there could be some fall out in the coming months as companies which have been calling derivatives and other "mark to model" assets cash and short-term cash on their balance sheets.

What level of risk is there that the junior mining companies might be bitten by this bug-bear? I would imagine that any producing mines could simply point to their ounces in production as an offset to any suddenly weakened assets that come to light via FASB-157, but wonder what impact this might have on the junior sector as a whole. Kind regards, 

Chris

Comment: Thank you for the kind words. A lot of what makes my work so enjoyable is hearing from subscribers such as you. Soon after the initial fallout of the derivatives mess last fall, which several prominent resource sector writers such as Jim Sinclair and Greg McCoach (and I) have been railing against for some time, a number of the mining companies we follow were quick to assure shareholders that they did not have exposure to these financial time bombs.

You are correct to wonder if, as the new accounting rules take effect, this might be a cause for concern. My studied response is as follows: First, I don’t believe that our sector has seen the level of participation in these investment vehicles that has been taking place in, say, financial houses, pension plans, and banks. Second, there is a simple way to find out . . . go to their Web site and see if they mention their involvement, or lack thereof, in these derivatives. If they don’t have a statement, call the IR of the company in question and ask them point-blank. I think you will find them to be upfront about it. (And if they aren't, that tells you something too, doesn't it?)

Actually I am much less worried that the sector will be tarred with this brush than I am about the ability of many of these “blue sky” explorers to raise the cash they need to keep drilling. Money is going to be harder to come by, it will cost more to get it, and shareholders will expect to see tangible results for the expenditures. If a company is not looking to either start production by themselves, JV with a major on a project, or at least have some very good-looking property to prove up over the next 12-18 months, they could be in real trouble.

My longer term view is as expressed in the past columns, we will see higher precious metals prices by year end, but may see the summer doldrums again this year. Four known metals personalities were recently on a “Metals Roundtable” sponsored by Financial Sense News Hour. Each of us were asked to forecast the gold and silver price by the end of the year, and without exception all of us saw gold over the recent high of $1000 per ounce, and silver over $21 per ounce.

David Morgan
E-mail: ibtimes@silver-investor.com