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Guest Post: How To Make, Or Lose, A Fortune In Junior Exploration Stocks
Submitted by David Galland of Casey Research
How To Make, Or Lose, A Fortune In Junior Exploration Stocks
The first thing to know about junior resource exploration stocks is that they are volatile. You can make 50% in a day, and you can lose 50% in a day.
This is due largely to the fact that they tend to be thinly traded. Thus, a whiff of good news, or bad, can overwhelm opposing trades. In the absence of a countervailing bid, the stock can move sharply until it reaches the point that someone is willing to step up and take the other side of the trade. If the news is bad and there’s no bid, things get ugly really quickly. Conversely, if the news is good – for example, the recent case of the AuEx buy-out – the volume of buyers rushing to get a hold of stock can blow the proverbial doors off.
The chart from AuEx, just below, makes the point in a way that words just can’t.
Is volatility bad? Not hardly. If you play these stocks intelligently, that volatility can act like a portfolio rocket booster. The alternative: a widely followed stock has little chance of surprising the market on the upside and so can tie up your capital for a long period of time – plodding along while you remain exposed to general market risk with almost no hope of serious appreciation.
By contrast, a junior exploration company punching holes into interesting geology is all about the potential for surprise. If the surprise is good, your stock is headed for the moon. But a poor drill hole is not necessarily a ticket to the basement – not if the company has not overinflated expectations by aggressive promotion and is following a methodical process in its exploration program.
The topic of aggressive promotion brings me to the second thing to know about junior resource stocks – namely, that most of them are borderline frauds. That’s right – the vast majority of the companies involved in the junior resource sector are headed up by management teams that have no special expertise in finding or developing economic deposits. Rather, what they’re good at is telling a really good story based on the loosest of “facts” in order to get investors to pay their overhead and, hopefully, allow them to trade out of their free or low-cost shares at a big profit.
While there are a number of signs you can look for that will give you some sense of the management’s abilities and ethics, one is that the bad apples will tend to shift their stated focus between breakfast and dinner, depending on the flavor of the day. One minute, they are a junior gold company, the next they are on to the world’s hottest lithium find – then sometime after lunch, they morph into being a uranium explorer.
That’s not to say that there aren’t times when competent management teams are faced with the reality that their primary resource target is going to draw a blank, and move on – it happens all the time. The trick is to be able to discern the difference between a strategic retreat and an opportunistic bunny hop into another area where the management has no real expertise or value to bring to the game.
To help our subscribers understand the difference between a competent explorer and a paper tiger, years ago we started the Explorers’ League. In order to be inducted into the league, you have to have been responsible for a minimum of three economic mineral discoveries – but most of our honorees have a lot more than that. This is no small feat when you consider that probably 98% of the folks in the mining business will retire without a single economic discovery to their name.
Ron Parratt was among the first of our Explorers’ League Honorees – the subsequent success he had with AuEx has only once again confirmed the importance of backing winners.
The next thing to focus on is the size, and the general set-up, of the targeted resource. I saw an exploration company advertising on a major financial web site that was breathlessly talking about the 30,000 ounces of gold it had discovered.
While I suspect a borderline or even overt fraud, in the best-case scenario, building expensive advertising campaigns around 30,000 ounces of gold – a truly inconsequential amount – would indicate that management is hopelessly ignorant of the realities of the business. And the reality today is that, depending on a number of variables – location, geology, local politics, metallurgy, infrastructure, etc. – the minimum resource required for a company to have any chance at success is in excess of 1 million ounces of gold. But, really, you should only be focusing on companies with the very real potential to prove up 2 million or more ounces.
In exploration plays, size counts.
And don’t confuse gross metal value with anything remotely resembling reality. In fact, any company that would even mention the gross metal value of its resource is sending you a very strong signal that something fishy is afoot. For those of you new to the game, gross metal value is derived by doing the simple math of multiplying the companies’ ounces (or pounds, depending on the metal) in the ground by the current price of the commodity.
Thus, a company with a market cap of, say, $50 million and a resource in the ground of one million ounces of gold might tout a gross metal value, based on today’s price of $1,250 per ounce, of $1.25 billion. The implication being that the market cap of the company will soon rocket in the direction of the gross metal value… wink, wink, get it while it’s hot and all that.
Now, I don’t have time to list all the ways that the gross metal value gets hammered down to a net that is a fraction of the total… and, more likely than not, even to the point where the deposit is uneconomic. But I’ll give it a quick try anyway.
For starters, there’s the cost of the infrastructure required to actually extract the mineral. While even the cost of building an open pit mine is huge, if the deposit is too deep for that, then you’re talking about going underground, which can be much, much more expensive. Depending on where the resource is located – and most new discoveries are very remote (Congo, anyone?) – and the depth and structure of the mineral resource, building out the mine infrastructure can cost in the hundreds of millions of dollars, and even billions.
Then there are local politics. For instance, how much of the mine will the government want to keep for itself? How high will the taxes and royalties be? Is the area secure? There are projects I’m aware of that, in order to be built, will require essentially maintaining a private army to keep local revolutionaries and thugs at bay.
How’s the metallurgy? Extracting metal from close to surface, oxidized deposits can be relatively easy and effective, with recoveries in the 90% area. But if the target mineral is bound up with all sorts of detrimental minerals, the processing costs will soar and recoveries plummet… often to the point where the overall costs, and the challenges of disposing of the toxic waste, can torpedo even a very large project.
Mining requires a huge amount of power… where’s it going to come from? Can you imagine the cost and hassle of having to build, say, 60 miles of power lines? How about if the deposit is located in a remote corner of the Yukon?
I could go on and on… but you get the idea. There’s a reason that well over 90% of even legitimate resource discoveries never become economic mines. That doesn’t mean you can’t make money off a discovery play – but if it has little chance of becoming a mine, then you need to be clear on why you own it and when it’s time to sell.
So, how do you sort out the difference between the good guys and the bad? And the good projects and the doomed?
First and foremost, you have to live and breathe the industry. Then you have to have a deep network to use as a sounding board for your analysis. Our network includes the Explorers’ League Honorees and now the Casey NexTen – up-and-coming young professionals under 40 years old who have already proven their ability to find mines. It also includes leading brokers, financiers, mining executives, field geologists, and numerous others… around the world.
In addition to putting boots on the ground in the typically faraway places where new discoveries are found – so we can fully understand the geology, the local infrastructure, relations with the local community, and the political environment, etc. – our due diligence process invariably requires in-depth discussions with individuals in our network who know the people and the geology involved in the new play.
That allows us to quickly identify the good guys who are known to use good process (and virtually all real discoveries emanate from good process) and are working on targets with the right geological address. It also helps us to do a quick knock-out of something like 90 out of a 100 plays that are brought to our attention… leaving us free to focus on the 10% with a real chance of success.
I know a number of individuals who have made fortunes in the sector by taking the time to do the homework necessary to build a solid understanding of the industry and the key players.
The bottom line on how to make serious money as a speculator in anything – the junior resource exploration business merely provides a convenient example – is to identify a volatile, high-risk/high-return investment sector, and then get to know the sector intimately. By doing so, you can eliminate much of the risk… leaving you mostly with the huge upside. And what risk is left is very manageable.
And don’t forget – I’m talking about investing only a relatively small part of your portfolio… 10% to 20%. You can tuck the balance of your portfolio into assets with a much lower risk profile. These days, that might include gold and, for the time being, cash.
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Case in point ...
VGGCF
If you look at the 1 year chart. Its had a nice pop in the last few weeks.
Volume has picked up since sep 24th. We will seeeeeeeee ...
VG GOLD CORP"The Paymaster West Project is immediately adjacent to the west of Goldcorp's Dome Mine. The project is well situated, located 750 m (2500 ft) to the edge of the Dome Mine and Mill, which has been in operation since 1910 and has produced 17.1 million ounces of gold from both a large open pit and the currently operating underground mine. The plan is to announce an initial resource estimate due at year-end and to continue advancing the project through aggressive exploratio."
Who gives a god darn tonight? the first rescuer of the Chile miners is on route! AND they made the decisions to send down only one instead of four and then bring them up. A historical night I don't care what anyone says. They lived 69 days 2 miles down after saving themselves for two weeks! Viva Chile and Humanity! Viva!
++++
PMs going ape in Asia.
Yep! Looks like we may take a stab at new highs overnight.
Dec10 gold 1359.50 last
Dec10 silver 23.54
And if the USDX gets through 77...look out! 77.17 last
Hey Turd! If we break 77/76 it is 73/72 within a couple weeks. At that point, how much confidence remains in the backbone of the FIAT ponzi?
Not very much and a breach of 72 would lead to a full-fledged currency crisis.
Its gonna be a long, cold (and interesting) winter. If it ain't nailed down, buy it. Take it home with you and put it in the basement. Some of everything. Its all going higher.
Bear Lodge is my playground. Heh that VG Gold stock looks scary. That kind of liquidity is around where I would draw the line.
Good call Cammy, This is a feel good story and by God we need one! So what did you hear about that junior????
Good call Cammy, This is a feel good story and by God we need one!
Must not be in gold. Otherwise, you already got your feel good story. Japan considers new QE! Now that is news that warms the cockles of my heart!
MMm I see a nice gold pop goin down.
My big gold stocks SLW and CDE have been weak lately while most of my juniors have been rocking like mad TLG.V (up 52% in two weeks), AXU up 34% in two weeks.
And from a forum that I am on:
http://megamata.com/forum/viewtopic.php?f=4&t=97#p547
"how much of the mine will the government want to keep for itself?"
Unfortunately an increasing proportion, what with the exponentially increasing levels of government debt. Here in Australia total holdings of government debt surpassed $160 billion with another $250 million just yesterday, yet its bonds still get gobbled up at above par. Out of control.
Gold & silver stocks here haven't generally produced outstanding results since '08, with a few exceptions, rather they are following the general trend of the market, which is to go nowhere. Methinks government bonds are still bubbling.
I don't want Casey Research to become too popular because it will eventually become a ponzi house.
Casey research sucks............ not
I've been gathering the names of quality juniors over the past several months and buying small lots of several of them figuring that some will eventually explode 1000's of % in a very short time frame. Since all of them have risen nicely the past month+, I am regretting not going in heavier. Not looking to tout any here but I'm sure you're all waiting with baited breath for a few...alright, twist my arm (lame humor intended).
In no particular order:
ANO
GPRLF
LODE
OPWEF
ECUXF
ISVLF
I am tracking about 30 others and most have done phenomenally well recently in conjunction with the rally in PMs. When the frenzy begins, I expect these and many others to go 5x - 10x fairly quickly.
Last thing, you definitely need to do your due diligence. Google Bre-X and you'll understand why it's critical before investing in junior miners.
This sector is even permeating the local transit papers FWIW (tho with a 7 day delay from the press release below)
http://www.marketwatch.com/story/avalon-receives-additional-96-million-d...
<<Mining requires a huge amount of power… where’s it going to come from? Can you imagine the cost and hassle of having to build, say, 60 miles of power lines? How about if the deposit is located in a remote corner of the Yukon?>>
Power and water....yes, but I guess the author sets behind a desk.
Power is usually by diesel generators and water from a well drilled on site. The well water is recycled into and out of a dug pond by water pumps ran on diesel generator or gasoline.. not so hard to do. The land is reclaimed by nature without environmental damage, after it's resource extraction.Most of these crews are local and hardy people, they know what they are doing. Reads like more cheap scare tactics, with a 'friendly' .....warning.
The Vancouver exchange, where most junior metals companies are traded is a large tank of sharks and chit. Most investors would be well advised to steer clear as you end up eating the chit and having your investment torn apart by the sharks. I have traded there, I have made and lost money there. I don't screw with it anymore. I stopped buying the get rich quick ten bagger dreams and am happy with my 40 percent returns on more reputable firms. Them boys up there in Vancouver are slick dream sellers and greed tappers. Just a word of warning as things heat up in the market.
Just stick with McEwen. He just backed VG gold.
Everyone should look at XRA. If copper hits, and stays above $4, this prospect will be bouth by either Barrick or Kinross.
You know it's dead slow when Tyler is pumping the pink sheets. Most of this stuff is listed on Canadian exchanges, as in no adult supervision, and no end of pump and dump schemes.
This is not investing, it's gambling. On the other hand, how is New York different?
Good and accurate information. Once again ZH showing off their being smarter than the average bear.
My family has owned deeded mineral rights with over 165K oz Au in a hardrock QM less than 300' from the surface in an easily accessible region in the heart of the CA Mother Lode for over 25 years. Having stayed fairly up to date with the industry, I can say this posting has hit on several key issues.
Power, water and locals are imparitive. Security, transportation and now to a larger extent reclamation are next on the heels. Even with "proven" reserves, the "right" geological address and history of productive activity, political will trumps.
In other words, above ground Au will continue to dictate whether below ground Au will ever see the light of day. Don't discount the ability of WS and DC to prevent more kryptonite from threatening the Fed. imo.
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