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Hopeful theory for junior mining sector

0 Comments| April 28, 2008

I have a hopeful theory for the "nice investors that are on here trying to figure out why every junior is in the crapper even when great news comes out."

As the over-exuberant general market for major companies met its Waterloo, the resultant collapse of the economic system became evident. This was due to a number of factors.

1. overpricing and speculative buying of major companies

2. the cost of war, without taxing measures to lessen the debt

3. Sub-prime lending and significantly increased credit limits without regard to ability to pay

4. Artificial increases in oil pricing

5. Hedging practices

All of which has lead to the credit crunch, foreclosures, collapse of the market share pricing and margin calls.

Meanwhile the junior mining area, in particular, never saw the huge speculative surge in share prices that the precious and base metals saw in their spot pricing. This in spite of fundamental values being increased in these vehicles. In fact, in most cases, announcements of major finds were met with a DROP in the share prices of these companies.

Thus when margin calls became the norm, investors tried to mitigate their positions by selling their juniors to meet these calls, further driving down junior mining and other junior company stocks lower.

This disconnect between reality and the panic of the recession (mitigated occasionally with what I believe are "bear market" rallies), and desperate measures by governments to inflate money supplies to ease the credit disaster, together with hedge fund activity to try and mitigate their problems, has led to historically high precious metals, base metals and food supply pricing.

I believe (optimistically and hopefully) that this disconnect in the marketplace will result in a change in the usual summer doldrums for mining stocks, particularly other junior stocks in new fields such as solar and alternative energy areas.

Hedge funds and investment institutions will turn to the fundamental values in precious and base metals mining stocks to attempt to create production revenue from those companies who have the potential to produce the products that the high spot prices are prepared to pay!

These developments take time to come to maturity but as the summer results of ground work and drilling become evident and the fundamental values more imminent, the share prices of these companies will reflect this fundamental value plus the usual over-exuberance of anticipation.

I realize I am speculating, perhaps more out of hope than reality, but I believe it IS a plausible scenario. Only time will tell.

Good luck to all.

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