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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Internet Startup Dot.com Collapse versus Junior Mining Sector Collapse

Commodities / Gold & Silver Stocks Oct 22, 2008 - 06:45 PM GMT

By: David_Urban

Commodities Best Financial Markets Analysis ArticleBack in 2000 at the peak of the Internet bubble investors poured money into startups hoping to strike it rich with the next EBay, Amazon, or Microsoft. When the liquidity bubble popped most were left with massive losses on their positions as the startups that were running at a loss were unable to continue financing their operations and closed their websites and doors.


In 2007 and 2008 the junior mining sector was hit by similar problems. Many hedge funds and individual investors rushed into the sector buoyed by rising commodity prices on the back of infrastructure build outs in emerging markets and the collapse in the US Dollar. As liquidity and leverage was pulled from the market many junior mining companies saw their share prices collapse as worries mounted about being able to finance future drill projects and mine construction.

There are similarities as well as differences between these two periods. Identification of the differences can lead investors to sizable gains in the future.

Internet Startups had a defined territory within their industry. The website marked the territory from which the company sold products and services within their industry. As an example, Amazon.com's territory is their website or territory within the retail industry.

Junior Mining Companies have tracts of land under which are various minerals of underlying value which they hope to extract and sell to end users who will further refine the commodity for a particular product.

Both utilize the capital markets for financing operations through the issuance of common stock and warrants.

The business model of an Internet Startup was to create a website with an underlying physical infrastructure. A retail company will have warehouses where product is stored and shipped to customers who purchase the products sold through the website. A service firm will have physical bodies providing and/or supporting a given service offered through a website, be it a game or service.

The business model of a Junior Mining Company is to acquire a physical property, drill out the location with the intention of completing a 43-101 resource estimate along with a pre-feasibility study. Once these are completed the Junior Mining Company can move along the path of putting the mine into operation or sell the company to a major firm who may choose to either bank the property for future use or finance the construction of the mine.

The ability of an Internet Startup to ramp up operations from obtaining the web address to actually selling product may be a short period of time, just a matter of months, and takes little capital to start.

The ability of a Junior Mining Company to ramp up operations is on the order of years when you consider drilling, permitting, acquisition of equipment, and mine construction. The actual capital necessary to start operations is quite large, often in the hundreds of millions of dollars to over a billion dollars.

Small Internet Startups typically go out of business as their business plans are uneconomical if they cannot turn positive cash flow and need to continually return to the capital markets for financing.

In a Junior Mining Company, cash flow from the deposit needs to be enough to fund current operations and future prospects or the company will be left with a plot of land with no economic value.

During periods of tight credit or financing, an Internet Startup unable to generate positive cash flow more than likely will be forced to go out of business leaving only the inventory which will be sold off leaving little or no remaining assets.

A Junior Mining Company can shut down drilling and choose to bank a project or operations leaving a project with underlying value based upon the mineral value in the ground. This difference is the key for investors. The underlying property has a value based upon the underlying mineral wealth.

A Junior Mining Company has value even if current financing conditions are difficult. Drilling can be shut down or delayed while a 43-101 or pre-feasibility study is prepared and the value of the company can be determined by the estimated mineral wealth underground.

An Internet Startup cannot afford to temporarily shut down operations or they risk losing sales and market share to the competition. In addition, restarting operations can be difficult and time consuming.

In the aftermath of the collapse of Internet Startups, there were firms that survived and thrived today. The key was to look for companies who had profitable operations on the cash flow level and/or enough cash on the balance sheet to finance current and future operations. Cash rich firms were acquired by larger website companies or they continued operations and built up their brands.

The key to wading through the current carnage in the Junior Mining Sector is to identify the cashed up firms or those with a positive cash flow that can not only fund current but future operations. For those firms without positive cash flow, large deposits with at least a 10 year lifespan and/or significant stakes by major mining firms will be survivors as projects can be banked if the current financing environment is difficult.

By David Urban

http://blog.myspace.com/global112

Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This blog and the author is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile.

David Urban Archive

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