Savvy investors have been making money hand over fist during the commodities boom for the last several years.

Gold traded for a mere $266 an ounce five years ago (It’s trading for about $645 an ounce these days). Silver is way up too, moving from about $4 an ounce five years ago to $12 an ounce now. And crude oil continues to hover near record prices as I write.

If you’ve been keeping up with The Sleuth, you know the profit potential exists because of surging demand for commodities ranging from sugar to silver to crude oil from all corners of the globe.

But even if you didn’t get in on the commodities boom from the very beginning, there is still plenty of time for you to make a killing. Commodities guru Jim Rogers said in a recent Barron’s article that he fully expects the commodities boom to last another 14 years.

The Barron’s article continues: “Fundamentals will tell the tale for commodities. Rogers invariably points out in speeches that no major oil fields have been discovered in more than 35 years, nor major new metal-mine shafts sunk in 20 years.”

Today, I’ll be writing to you about gold. If you’re a subscriber to Small-Cap Strategy Report, you’ve seen two small, speculative gold miners recommended to you recently. James Boric also wrote about another small gold outfit last week. (His column can be seen here.) To build on this theme, I’ll review a gold miner in its exploration phase today as the monthly reader pick.

10,000 Acres and a Pickaxe

Quite a few readers wrote in about Tao Minerals Ltd. (TAOL.OB: OTC BB) when I asked for submissions a little more than a month ago. No one who e-mailed me about the stock really said much about about it. In fact, one e-mail just mentioned the ticker, “TAOL.”

But I’m sure the notes were brief for good reason — mainly that Tao Minerals is an easy concept to grasp. A few directors, a geologist, some land and a search for enough gold to build a commercial mine is Tao Minerals in a nutshell.

Tao has an interest in two properties. Its first is called Golondrina, which is 9,600 acres of “highly prospective gold and silver holdings” in southwestern Colombia, northwest of the city of Pasto. The second property is called the Whale Mine, situated 30 miles southwest of Las Vegas. According to the company, “the property is located in the Yellow Pine District which is classed as a major district for lead and zinc production and a relatively important silver district. Although the mines in the area have been worked primarily for their lead-zinc-silver values, a significant amount of gold has been recovered as a by-product of copper-lead-silver mining.”

Tao is basing its confidence on the amount of gold on the property on the fact that local artisans have been successfully extracting gold from the area for centuries. According to Tao, locals have been finding “100 grams of gold per tonne from Golondrina’s more concentrated vein structures using extremely primitive manual extraction methods.”

According to a recent press release, trenching indicates “multiple high grade gold values up to 72.87 grams per tonne” on the property.

Tao tells its perspective investors there’s no question gold and silver exist in Golondrina. The company’s exploration process will be what determines if there will be enough metal in the ground to drill a commercially viable mine.

Risk vs. Reward

Tao is an exploration stage company. It’s never made any money and has no interest in any revenue-generating properties. And shareholders will probably have to endure dilution as the company offers more and more shares to raise the capital it needs to continue with its exploration.

And while Tao lauds the rising price of gold, the stability of the Columbian government and the history of the area on its website, its 10-K is much more telling of the difficulties the company could face as it attempts to start its mining business.

First is the simple fact that there are no known reserves of minerals on its claims. And there’s no guarentee that the company will ever find a deposit worthy of a commerical mine. If the company doesn’t find suitable reserves, the money used on exploration would most likely be gone for good and the stock would be worthless.

Second is the issue of money — something Tao desperately needs. This is a bare-bones operation to say the least. The only employees are the executive officers, and the company’s office in Columbia is donated rent-free by the president.

As of the beginning of 2006, Tao’s only assets consisted of $2,300 in cash and $3,000 worth of mineral rights. In 2005, the company posted losses of approximately $49,000. Its deficit sits at about $109,000 so far during the exploration process. Whether the company can continue to operate is a going concern.

Regardless of the prospects of finding enough gold to begin a commerical operation, Tao is one of the riskiest stocks you could possibly own. This is not to say that it won’t come across a significant reserve and begin to turn a profit one day; it’s just that its chances of doing so without completely running out of options (and capital) are not in its favor. If you’re looking to add gold to your portfolio, this wouldn’t be the best way to do it.

Plenty of smaller mining operations could benefit exponentially as the price of gold continues to be driven up. The best strategy would be to pick up a gold miner with proven reserves that’s turning a profit. In any market, the gold companies that will perform well will be sitting on plenty of gold and making money, not losing it.

Best,

Gunner
August 07, 2006

Greg Guenthner

Greg Guenthner heads up Agora Financial’s small-cap division and is the founder of one of the only independent OTC research advisories in the industry. A graduate of George Mason University, Guenthner joined Agora in 2005 after several years as a journalist. He is managing editor of Penny Stock Fortunes and Bulletin Board Elite.

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