Two junior gold miners heading for a bonanza

With the price of gold going through the roof, there is hardly a cloud in the sky for junior miners, says Tom Bulford. Here, he picks two explorers that he thinks could be heading for a bonanza.

Last week provided an extraordinary demonstration of the power of penny shares to increase your wealth.

It was all about Solomon Gold (LSE: SOLG). Shares in the company, which were trading at just 10p at the start of last Monday (20th Sept), suddenly took off. They reached 85p on Thursday - a whopping 750% gain - before running into some profit-taking and closing the week at 44p.

The reason for this spectacular jump? Mineral samples taken from the island of Fauro in the Solomon Islands have revealed some exceptionally high grades of gold.

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That would have been exciting enough. But this came in a week in which the gold price soared to $1,300 - an all-time high. The timing of Solomon's breakthrough was perfect, landing on a market eager to snap up any crumb of good news from the gold sector.

In a moment, I'll show you another way you could make some great profits from penny shares in the gold sector.

Other small-cap news

  • Shares in Leni Gas & Oil (tickher: LGO) jump 28% to 2.6p as it reports oil flowing to the surface at its Hontomin 2 well in northern on-shore Spain.
  • Chairman David Lenigas described the discovery as an important development for the company, adding that Hontomin is one of the company's most important assets.
  • UK-based Leni ownsproduction expansion assets in the Gulf of Mexico, Spain, Trinidad and Malta.

But first, why is the gold price rising? There is no shortage of theories: China wants to boost its gold reserves; investors have lost faith in paper currencies; rising inflation means that bond yields and cash deposit rates offer negative returns. And, as is usual at times like this, there is no shortage of fervent gold bulls, talking up the price to $2,000 or even beyond.

We'll see about that. When the oil price hit $150, Goldman Sachs famously predicted a $200 price - and not the $79 we see today. It pays to hold tight to your seat at a time like this and not get too carried away.

But the fact remains that gold's bull run shows no signs of coming to an end. And this has crucial implications for the gold mining sector.

There may never be a better time to invest in junior goldminers

With the price of gold as it is, penny share miners cannot believe their luck. Previous cycles have gone something like this: the gold price rises; opportunists take the chance to raise cash to go gold prospecting; they spendthe cashon geological surveys, rock sampling and some exploratory drilling. Then, by the time they have found some gold, its price has subsided. Nobody is interested, and they cannot raise the money to get any further.

This time it is different. Not only is the gold price high, but many of the world's biggest gold miners have given up on the struggle of finding new reserves. Instead they are relying on buying into the discoveries made by small adventurers.

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Mine construction needs finance, but today the chances of attracting a rich big brother have never been better. In addition, the financial forecasts look rosy. Most gold projects launched two to four years ago assumed a gold price of $650-$850 per oz. At that level, all things being equal, they would be a commercial proposition and yield a decent profit.

But changes to the gold price make little difference to the cost of developing a mine. Every dollar on the gold price adds to the forecast profit. No wonder the gold sector is hot! And no wonder gold mining companies are beating a path to my door - literally!

Two penny share gold explorers in 'bonanza' territory

Last week, Dr Peter Ruxton, chairman of GGG Resources (LSE: GGG), came all the way to Oxford to press his case. GGG, formerly known as Central China Goldfields,has withdrawn from its Nimu gold and copper project in Sichuanafter being stitched up by its Chinese partner. It now has a 50% stake in the Bullabulling open-pit gold mine in Western Australia's prolific Coolgardie goldfield.

Mined since 1998, Bullabulling has already produced 370,000 oz of gold. At the time of GGG's acquisition in March, it had reserves of a further 430,000 ounces.

Now, that reserve figure assumed a gold price of $315 per oz; but on the basis of today's price, GGG believes the mine's reserve could be increased to two million ounces or more.

Adding to the excitement is evidence that this hitherto low-grade mine could reveal richer seams deep down. There should be plenty of news coming from GGG over the next few months and the signs are already pretty exciting. The broker Westhouse has a price target of 26.5p - three times the current 8.3p

Another gold miner with imminent newsflow is Mariana Resources (LSE: MARL). I met 65-year-old managing director John Sutcliffe in London last week.

One of the sector's greybeards, John is not one to over-egg the pudding. Even so, he described the gold grades found from two drill samples at Mariana's Las Calandrias North gold mine inArgentina as "bonanza".

"This is off the scale," he told me. "The best I have seen in 45years."

The question to which we will soon have an answer is whether these extraordinarily gold-rich samples were flukes, or part of a broader seam. If the latter, then the shares could take off and Mariana could eventually go the same way as another Santa Cruz gold and silver miner, Andean Resources. That's up 205% in 2010. As the big miners scramble for proven reserves, Andean is being fought over by Goldcorp Inc and Eldorado Gold Corp in a $2bn bidding war.

For junior gold miners there is hardly a cloud in the sky.

This article was first published in Tom Bulford's twice-weekly small-cap investment email The Penny Sleuth.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.

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