One Simple Strategy for 3,000% Gains

Ventana Gold is the envy of the mining world...

 

A year ago, Ventana was a penny stock... literally. You could buy shares for 4¢ each. If you bought Ventana then, every $1,000 you invested turned into $74,000.

 

Ventana has enjoyed its outrageous run because of an exceptional discovery – its La Bodega gold deposit.

 

In November 2008, Ventana announced spectacular drill results from its property in northeast Colombia. The rocks were loaded with gold (7.8 grams of gold per ton of rock, to be specific). Every ton of rock Ventana pulls out of the ground is worth $250. That's wildly valuable property.

 

Naturally, the news caused a modern-day gold rush. Investors flooded into the stock, fueling its gaudy 7,300% rise. Ventana is the classic story of the big strike, the kind of story that gets resource investors' hearts racing and their palms sweating. All I have to do, they think, is buy up a small, unknown stock, wait for it to announce a huge discovery, and watch my brokerage account light up like the Harlem Globetrotters' scoreboard...

 

The good news for those dreamers is that another Ventana is always over the horizon. You can find a handful every year. The bad news is that capturing those wild gains requires you to buy at the absolute bottom of the share price. And timing a stock that way is impossible...

 

More than 2,500 junior miners trade on the Toronto Stock Exchange. Most are destined to go belly-up. Even if you could foretell which would survive long enough to make a big discovery, you can't know when the big jump in stocks might start. You might get lucky once in your life trying to guess, but it's not because you knew what you were doing.

 

Over the last five years, I've developed a simple "backdoor" way to get in on huge gold discoveries with plenty of upside and a lot less risk: Buy shares after the initial discovery, but still early in the exploration process. I call this window the "consolidation period."

 

Of course, you don't want to buy just any company with an early discovery. Prospecting for gold is a dicey proposition under any circumstance. It's expensive, and even after you've identified a promising deposit, any number of hurdles (from challenging geology to political stupidity) can scuttle the whole project.

 

But the consolidation period gives you time to evaluate the project and the company before jumping in. To protect your investment, you need to find the best-run companies with the best chances of developing a mine from their discoveries. You want to look for:

 

1. Strong management. You don't want to finance someone's education, so look for a group that's done this before.

 

2. Good location. Ultimately, the company needs to make a business mining these rocks. Ideally, you want lots of rock with lots of metal in it.

 

3. Enough cash. The company needs to pay for exploration and keep the lights on. Look for a company that has enough cash to cover at least a year of operation.

 

With a little bit of research, you can usually figure out which new discoveries are duds and which have legs. Then, you buy and rake in the cash.

 

Take a look at how it worked out with Ventana, which had a great management team, fantastic rocks, and plenty of cash...

 

Three months after its La Bodega announcement, the stock still traded for less than a dollar (70¢ on February 9). Its run to $5 didn't begin until June 2009, and it didn't crack $10 until earlier this month. There was plenty of time to get in...
 

 

 

Before November 9, 2008, you would have been buying just another pipe-dream mining stock looking for gold. After its announcement, you could have bought a penny stock with a tangible and valuable asset.

 

Ventana was a much safer stock to buy after its announcement at La Bodega. Folks who got in after the discovery still made anywhere from 1,000% to 3,000%.

 

Of course, the easy money in Ventana has been made. But as I mentioned, there's always a new "Ventana" lurking around in the corner in the junior mining world.

 

The consolidation strategy is the easiest, least risky, and most lucrative way to sift for the explosive winners in a sector riddled with bombshells.

 

Good investing,

 

Matt

• Thursday, November 5, 2009
  Stansberry: CPI numbers are bunk... this is the best way to measure inflation
  Produces a scary number much different than the government's.
  
  
• Thursday, November 5, 2009
  The gold rally is different this time
  Why it's rallying in many currencies... not just the U.S. dollar.
  
  
• Thursday, November 5, 2009
  Doug Casey provides the best quote on poverty you'll read all year
  Part of a great issue of "Conversations With Casey."