I am starting to feel very bullish about junior mining companies, more bullish than I’ve felt for a long time. Several factors suggest to me we could be set for a very nice run here.

For starters, having called the Federal Reserve’s inflation-fighting bluff last week, gold and silver are looking extremely strong. ‘So what?’ you say. ‘Gold and silver were strong last year and the juniors hardly budged’.

Well, that’s just it. In the great stock market falls of August last year, and January and March of this year, the juniors sold off dramatically and painfully. But last week, as the Dow Jones plummeted towards the gates of hell – with the keeper smiling and jangling his keys – the juniors lost all sympathy with the general indices and moved up.

In other words, it looks as though they might have decoupled. At long last.

Chartists will note that the moving averages of many junior miners are lined up beautifully. Value-driven investors will note the bargain prices, which is why we are starting to see a number of significant moves from seniors into the junior sector, the most recent being a $50m investment from Agnico (NYSE: AEM) into Gold Eagle mines (TSE: GEA).

And news-driven traders will note the huge campaigns, one by Jim Puplava, host of the internet’s leading financial podcast, the other by Jim Sinclair, a veteran gold trader with a huge following, against the practice of naked short-selling which they say is rife among junior miners. (Naked short selling, or naked shorting, is selling a stock short without first borrowing the shares or ensuring that the shares can be borrowed).

After hearing five minutes of Puplava or just skim-reading Sinclair, any sensibly-minded short-seller who values his freedom will be covering his shorts quicker than you can say, ‘Securities and Exchange Commission’.

But the state of the capital markets is such that I wouldn’t be rushing to buy any explorers just yet. Mineral exploration burns cash almost as rapidly as your local council and many are having problems finding funding.

The life cycle of a miner

There is an idealised cycle in mining companies that is beautifully described by Frank Holmes in this now-famous chart.

In the first phase, the exploration phase, a bunch of geologists with beards and picks (the former is not essential) set off for the hills. They drill some holes in the ground. After some months, years – or, as in most cases, never – lo and behold, one of them strikes gold. They drill some more and find more gold in the rock. Eureka! Everyone involved jumps for joy and the stock goes to the moon.

Then reality sets in. “Actually, this thing is going to take four years to bring into production, even with all our modern mining methods. We’ve got to build a road, a mill, shafts, tunnels. How are we going to get power here? What about water? And permits. We’re going to need permits. Lots of permits. And people. We’re going to need lots of them too. Good ones.”

Finally, an accountant speaks up: “It’s going to cost X million pounds”.

“X million pounds?”

“I’m afraid so. Possibly even Y million. And it’s going to take a minimum of three years.”

“‘Oh, no. How are going to keep impatient investors interested all that time?”

The answer is: “You’re not.”

Without exciting newsflow or cashflow, investors quickly lose interest and the stock sells off. But after several years working hard on the project, developing the asset, bringing in roads and power, building the infrastructure, getting the right people in, an analyst perks up. “Hey, you remember that project. It’s not looking so bad after all. They’ll be in production by next year.” “Really?” Gradually, investor interest creeps back and the stock starts to perk up.

And here’s a company that’s at that stage…

One company that is at the beginning of that third phase in the cycle is Leyshon Resources (AIM:LRL). It’s a company I’ve tipped before as a buy below 25p. I’m a shareholder and I’m a fan.

Leyshon is developing a gold asset in China. I don’t need to sell you the China gold story. The country has become the world’s largest gold producer and, after India, the second largest gold consumer. (For more on this, see: Why you should buy this Chinese gold miner).

Leyshon has a market cap of around £50m. Its main asset is in Northern China – Leyshon owns 70% and the Chinese Qiqiha’er Geological Brigade owns 30%. They’ve so far proven up reserves of 1.2 million ounces of gold, 4.5 million ounces of silver and 120,000 tonnes of zinc. These reserves are likely to increase as they explore and develop other ore bodies nearby. They are combining Aussie mining design and expertise with low Chinese operating costs – a production cost of $250 per ounce is predicted.

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