With almost every junior mining stock trading at year – or multi-year – lows, it is almost impossible to separate the wheat from the chaff - which ones have made real discoveries, and which are unlikely to survive.

It used to be – it’s supposed to be – that companies successfully finding economic ore bodies will trade at a substantial premium to their brethren. But not anymore. In the rush to raise cash or get out of debt, all publicly-traded companies have been indiscriminately trashed.

Believe it or not, geologists working for junior mining companies have made some significant mineral discoveries in the last 12-18 months.  But junior mining investors haven’t discovered them!  These companies’ stocks trade for pennies, if they trade at all. Investors are ignoring discoveries in this market environment, and in fact may be ignoring everything except for how much their portfolios are down. 

Right now value in the ground means nothing.  But that will change, and it almost always changes faster than most investors think – all of a sudden they look at a stock they have been following and it has doubled on them. Nobody really knows when commodity prices will turn, but you have to be positioned – and very, very patient - to experience capital gains with the penny stocks.

History is clear.  In the junior resource exploration market, companies with value in the ground get to see their stocks run up first.

So what are some of the undiscovered discoveries that have been made in the last 12-18 months that investors could be watching? Here is a quick list of five possibilities that warrant attention:

Donner Metals (DON-TSXv; $0.10) won both The Mining Journal International Exploration Award, and Quebec’s Explorer of the Year Award for discovering a high grade zinc deposit called BraceMac-MacLeod, in the Matagami base metal camp.  They are joint ventured with metals giant Xstrata, who are operating the Perseverance Mill only 6 km away.  Xstrata has quickly moved this deposit into a scoping study.  A new geological interpretation caused the Bracemac-MacLeod discovery, which appears to be in the fast track lane for production.  But it’s the same old story from investors – yawn.  10 cents.

Lumina Copper (LCC-TSXv; $0.40) is developing the Taca Taca copper property in Chile.  This mineral occurrence has been known for awhile, but it was just in the last year that the work was done to make it a truly world class deposit.  Because it is from the stable of companies run by famed copper explorer Ross Beatty, the stock started to trade over $1 this year – but quickly collapsed to 23 cents as the global copper price fell, despite announcing a new resource of almost 9 billion pounds of copper, 3 million ounces of gold and 330 million pounds of molybdenum.  Where’s the love?  Beatty’s last 3 copper companies were taken over at $10/share or more.

Uracan Resources (URC-TSXv; $0.17) has developed the third largest uranium resource of any junior in Canada, and will be #2 when its new resource estimate comes out in early 2009.  It is the most significant uranium discovery in Canada after Hathor Explorations (HAT-TSXv; $2.40). Hathor is getting investor attention, and therefore is not in our list.  Uracan is hitting uranium in 90% of their holes over a very very large area.  Investors don’t like the low grade (1/3rd of a pound, or 0.012% U3O8), despite the fact that Forsys Metals (FSY-TSX: $5.75) was just bought for $7/share or $580 million and its Valencia uranium deposit has the same grade.

Underworld Resources (UW-TSXv; $0.18) recently announced a new gold discovery at its White Gold Property in Canada’s Yukon Territory. Grading 3-5 grams per tonne gold near surface, it could be a large open pit deposit.   White Gold has two zones, both are open. One zone is already 450 m wide.  Tight share structure gives it a very low market cap.

Bell Copper (BCU-TSXv; $0.05) worked hard last year to successfully outline an easy near-surface open-pitable 205 million/lbs copper resource at its La Balsacopper project in Mexico. With infrastructure in place, the bonus of a potential underlying porphyry and multiple additional zones providing expansion potential, you’d think the market would care. Their team of Ph.D.’s is certainly amongst the top copper-porphyry hunters on the planet. Ho-hum. 5 cents, shell value! 

With over 90% of the junior stocks down between -75% and -90% so far this year, one can only view the scene as a wasteland. Silver stocks are the worst, down -80%, energy -75% and exploration plays -67%. There has been no place to hide with the exception of gold the metal and senior gold stocks to this point. Many investors have even lost their cash positions sitting in some of the money market funds that invested in derivatives and leveraged asset backed securities.

The good news is we are likely already off the bottom, looking up. The uranium sector seemed to be the first to firm, notable in that it was the first to suffer a virtual collapse. Senior/mid tier golds have bounced over 50% off their October lows and they continue to see accumulation as money comes off the sidelines. Speculation and interest is still alive and well, albeit more subdued.

The junior exploration stocks are actually acting a little better than the energy and silver stocks lately, with a small handful that have not been totally trashed: Aurelian -15% and Gold Eagle +45%, both takeovers this year by Kinross and Goldcorp respectively.

The strategy going forward for most experienced investors will be to nimbly recoup losses with a recovery rally in the market, probably already in motion. The more senior stocks are now well on the way with many of the gold stocks having moved up. Many intermediate and junior stocks were so over sold they will see easy gains of several 100% from their bottoms.

This market has been the most difficult any of us have ever faced.  This is history in the making. But crisis always means opportunity, and investors must do the homework and position in a timely manner to benefit from it.

Can we blame them for stampeding towards perceived safety after the 2008 meltdown and more recent flashcrash? Investors today hear a lot about the Great Depression, Japan in the 1990s and the horrors of deflation. Many Americans, Brits and Europeans have seen their leveraged real estate equity wiped out. Bond market players clearly believe there exists a "Bernanke Put". With more quantitative easing coming in the form of QE2, which is an open-ended commitment to buy more U.S. Treasury bonds, speculators think there is a price floor under Treasury prices, making it a “no-lose” investment.

Every bubble in history has been sold with a great story. Along with a good story, bubbles are also perceived as enjoying support from governing authorities, such as the Federal Reserve. The so-called Greenspan Put in the 1990s allegedly put a floor under stock market prices, emboldening speculators, which then led to the dot.com craze.

Many people buying Treasuries really do think the U.S. is becoming Japan, with lackluster growth and declining price levels ahead of it. They don’t realize that – contrary to common thought – history doesn’t usually portray de-leveraging as the big bad wolf.

Gerry Tang and Christian Upper recently wrote Debt Reduction After Crises, an essay for the Bank for International Settlements, which examined 20 credit booms that ended badly.

In nearly every case, inflation actually greatly reduced debt after the credit booms. Debt was paid back with cheaper currency. This is why the Federal Reserve wants to stoke some inflation in the U.S. through quantitative easing. It’s betting the U.S. will follow the trend… instead of Japan.

There are major differences between Japan and the U.S., differences that the bond bulls are ignoring at their own peril.

The Bank of Japan maintained high interest rates in the early 1990s in order to squelch any remaining speculation. It actually acted very conservatively to its own crisis, and for good reason given its demographics. It only resorted to quantitative easing (i.e. printing money) a decade after deflation really sunk in.

The U.S., on the other hand, has quickly recapitalized its banking system. The Federal Reserve has pulled out all the monetary stops to re-inflate the economy. The Treasury market bulls obviously haven't caught on as to the real reason why Japan did what it did.

Japan’s conservative approach reflected a political imperative to avoid inflation at all costs. It's populace was aging rapidly and retirees had much of their life savings invested into Japanese government bonds. Japan’s senior citizens were also over-represented in the legislature. Obviously these representatives wouldn’t cast a vote for inflation. They had a vested interest in delivering the opposite, or at least price stability, to their constituents.

There were also other deflationary forces were at work in Japan. The disproportionate numbers of elderly citizens resulted in a continuous weakening of domestic demand. And the rise of neighboring China as a fierce price and labour competitor certainly didn’t help Japanese businesses. They needed to bring down the costs of doing business, and needed to ensure a weak or stable yen in order to spur exports, which had the unfortunate effect of raising their costs of importing raw materials.

The U.S. has a younger demographic, and hence little political reason to welcome deflation. American households have vast outstanding debts, whereas the Japanese credit boom was largely a corporate affair. U.S. families would certainly benefit from a pickup in inflation, and Bernanke and Obama know this.

If the Fed’s inflation efforts fail, bond investors will win out and low rates will prevail for a long time. But as the old Wall Street adage goes, “Don’t fight the Fed.” What the Fed really wants, the Fed will more than likely get. Ben Bernanke needs his plan to succeed. Readers will recall his infamous “Helicopter Ben” speech from 2002:  “The US government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices of those goods and services", and “We conclude that, under a paper money system, a determined government can always generate higher spending and hence positive inflation.”

Treasury funds are a giant game of musical chairs right now. Prices have been bid up into all-time high territory. Big investors obviously want to ride the momentum until the music stops. If QE2 succeeds, they will lose out; everyone will simultaneously rush for the exits and many won’t get out in time.

When the big money reverses and fear of deflation is replaced by an inflationary mindset, it will likely coincide with a big drop in the U.S. dollar, and a large rally in all things resource based. The hint of things to come is the concurrent money-flow into gold and silver, and our old canary-in-the-coalmine, the metal with the PhD, Dr. Copper. The cross-currents we see today is like a tug-of-war where one slip-up can alter the balance very quickly.