How to Profit in a Sideways Market

How to Profit in a Sideways Market

By Steve Todoruk

For the last two months, gold has traded sideways in a range between $1,190 and $1,260 per oz. In similar fashion, silver, copper, and uranium have oscillated between relatively tight boundaries.

Generally speaking, the price of resource mining companies tends to mimic the pattern of the underlying commodity. Hence, a range bound commodity market generally translates to similar price movements for the associated mining company.

Nevertheless, there is a class of mining company that can deliver profits even in a sideways market. I refer to these collectively as “new discovery” types of mineral exploration companies.

New Discovery Companies

New discovery companies acquire mining properties and engage in basic exploration. These activities may include: airborne geophysical surveys, land satellite imagery surveys, ground geophysical surveys, stream and soil sampling surveys, geological mapping, prospecting, and trenching. Then, a drill rig (also known as the ‘truth machine’) is employed to drill holes at various targets of interest.

The vast majority of times, the results of these drill holes are disappointing. In practice, the odds of discovering an economic deposit are horrifically low.

Nevertheless, the enormous profit potential of new discovery companies can’t be ignored.

Finding the Winners

Spotting the winners in this group is no easy task. Many novice investors adopt a gambler’s “buy and hope” mentality. But for those with experience and related (geological) expertise there are better ways.

I look for new discovery companies that have demonstrated early results and, hence, increase my confidence that something special is happening on their property.

For starters, I like to see metal grades that are sufficiently high to support economic mining in an open pit or underground mining operation.

Then, it’s important that the company demonstrate similar (or higher) grades and widths in the subsequent step-out drilling exercises. Higher grade results may point to “sweet spots” in the deposit which may command a healthy premium in an eventual takeover.

In the ideal situation, step-out drilling over an expanded area confirms a larger and more valuable mineral deposit which causes the marketplace to re-evaluate the value of the mining company.

The End Game

In a successful new discovery play, once the deposit is ultimately delineated, a large company typically makes a friendly takeover bid at a price much higher than our initial buy-in 2 to 3 years earlier.

Approximately two years ago, I produced a 20-minute video presentationon this type of company in which I cited several historical examples of successful new discovery plays. I believe the talk is just as relevant today if the company names are updated.

With this in mind, I recently compiled a shortlist of my favorite names in the new discovery category. 

Although there are no guarantees, there are good reasons to believe new discovery plays will once again deliver excellent results, even in a range-bound market.

If you have questions about the topics raised in this article, please reply to this email or contact the author here. You can also call your Sprott Global financial advisor at 800-477-7853.

Sprott U.S. Media, Inc. is a wholly owned subsidiary of Sprott Inc., which is a public company listed on the Toronto Stock Exchange and operates through its wholly-owned direct and indirect subsidiaries: Sprott Asset Management LP, an adviser registered with the Ontario Securities Commission; Sprott Private Wealth LP, an investment dealer and member of the Investment Industry Regulatory Organization of Canada; Sprott Global Resource Investments Ltd., a US full service broker-dealer and member FINRA/SIPC; Sprott Asset Management USA Inc., an SEC Registered Investment Advisor; and Resource Capital Investment Corp., also an SEC Registered Investment Advisor. We refer to the above entities collectively as “Sprott”.

The information contained herein does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation.

Forward-Looking Statement

This report contains forward-looking statements which reflect the current expectations of management regarding future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as “may”, “would”, “could”, “will”, “anticipate”, “believe”, “plan”, “expect”, “intend”, “estimate”, and similar expressions have been used to identify these forward-looking statements. These statements reflect management’s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking statements contained in this document. These factors should be considered carefully and undue reliance should not be placed on these forward-looking statements. Although the forward-looking statements contained in this document are based upon what management currently believes to be reasonable assumptions, there is no assurance that actual results, performance or achievements will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this presentation and Sprott does not assume any obligation to update or revise.

Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any fund or account managed by Sprott. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any fund or account managed by Sprott will be invested.

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