A junior gold stock for the brave

Junior gold mining stocks can be extremely volatile - now more than ever. But Dominic Frisby believes we have reached a point where the risk is low enough to think about buying. Here he picks one very promising stock for the brave.

Recently, several of you have asked me to tip some junior gold miners that I like. I have been reluctant to mention anything in the current market. But, while wild daily volatility is now the menu du jour, I think we have reached a reasonably low-risk entry point for some junior gold stocks.

In fact, based on how they have performed in previous post-bubble contractions, there is a good chance gold stocks could be the star performer over the next few years.

I may be wrong, of course - but then, I may also be right...

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A stock for the brave

A company I mentioned in my last cover story for MoneyWeek (Why gold will shine again) is Sacre Coeur Minerals (CA:SCM). It trades on the TSX Venture exchange in Canada so you'll need a broker that deals in Canadian stocks if you want to buy it. It also trades in Frankfurt under the ticker S5N, but, for reasons of liquidity, it may be easier to buy in Canada.

The company's share price closed on Monday night at 25c, which gives it a market cap of just over C$7m. With just under C$6m in the bank, the group is trading at just above its cash value. Its burn rate is about C$200,000-250,000 per month. So you're getting some very nice assets almost for free.

Sacre Coeur is developing various properties in mineral-rich Guyana in South America, of which the Million Mountain project is the most exciting. With her rich history of mining and miner-friendly culture, Guyana is fairly low on the risky countries list. Several majors, among them Newmont, have operated there successfully, and Cambior's now almost-exhausted Omai mine produced over four million ounces of gold.

Sacre Coeur's Million Mountain project shares many of the same geological traits as Omai. It has so far proven up almost half a million gold ounces of measured and indicated resource in the ground, having explored just 2% of the surface area covered by identified gold anomalies. Even if the other zones prove to be half as good, basic maths suggests this will turn out to be a similarly large, near-surface (i.e. easy-to-mine) elephant deposit.

The future of Sacre Coeur

Sacre Coeur now has to make a decision on the way forward. It can spend money developing the project with a view to being bought out and management has a successful record in this area. But the company is already in a position where it can build a small mine cheaply and produce say 20,000-30,000 ounces a year at a cash cost in the US$300-400 range, and then use the cash to develop the rest of the assets. I'd like to see the group go for the latter option as I think it's the safest in the current environment, but CEO, Irwin Olian, has shown a remarkable ability to raise money even in horrible markets like this.

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Money Morning readers will remember Olian as the boss of Pan African, which I tipped at last spring at around $2.30. It was bought out a few months later at $4.50 a share, with holders also getting a share in the spin-off company now called African Queen Minerals (which Olian also heads). Olian is a serial entrepreneur with a marvellously varied career. Formerly of Harvard and Princeton, he was for many years a lawyer in the movie business with Warner, before moving into corporate finance. He has founded several public companies, including two biotech companies in the late 90s, which were multi-baggers for their investors. He has an unblemished record of making money for his shareholders.

In the heady pre-crash days of the summer, I was a buyer of Sacre Couer above a dollar. Here at 25-30c (less than 10% of its high around C$3.50) is a chance to get it for a lot less.

This stock has potential, but it's high risk

So why is Sacre Coeur so cheap? Because Sacre Coeur is a small-cap stock. And when an institution is forced to liquidate its position in a small-cap, it decimates the company. It's that word again: deleveraging and it has decimated the whole junior sector.

It's possible that funds have now stopped bailing out of this company, because from the last two or three weeks of action it appears sellers are no longer hitting the bid. But no guarantees. This has the potential to be a five-to-ten-bagger even if it just retraces half of its decline - but it is still a high-risk, speculative junior and you should only allocate a corresponding amount of capital 'money you can afford to lose', if you have such a thing.

It may be that funds haven't yet finished their selling and will take advantage if there's a sudden surge in buying to offload stock, which does nobody any favours, so my advice is to patiently accumulate. That's what I've been doing as has Olian, as evidenced by the SEDI reports which show insider buying and selling. Given his track record, that's got to be a good sign.

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