Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
US Housing Market House Prices Momentum Analysis - 26th Feb 21
FOMC Minutes Disappoint Gold Bulls - 26th Feb 21
Kiss of Life for Gold - 26th Feb 21
Congress May Increase The Moral Hazard Building In The Stock Market - 26th Feb 21
The “Oil Of The Future” Is Set To Soar In 2021 - 26th Feb 21
The Everything Stock Market Rally Continues - 25th Feb 21
Vaccine inequality: A new beginning or another missed opportunity? - 25th Feb 21
What's Next Move For Silver, Gold? Follow US Treasuries and Commodities To Find Out - 25th Feb 21
Warren Buffett Buys a Copper Stock! - 25th Feb 21
Work From Home Inflationary US House Prices BOOM! - 25th Feb 21
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21
US House Prices Momentum Analysis - 20th Feb 21
The Most Important Chart in Housing Right Now - 20th Feb 21
Gold Is the Ultimate Reserve Asset - 20th Feb 21
Is That the S&P 500 And Gold Correction Finally? - 20th Feb 21
Technical Analysis of EUR/USD - 20th Feb 21
The Stock Market Big Picture - 19th Feb 21
Could Silver "Do a Palladium"? - 19th Feb 21
Three More Reasons We Love To Trade Options! - 19th Feb 21
Here’s What’s Eating Away at Gold - 19th Feb 21
Stock Market March Melt-Up Madness - 19th Feb 21
Land Rover Discovery Sport Extreme Ice and Snow vs Windscreen Wipers Test - 19th Feb 21
Real Reason Why Black and Asian BAME are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 19th Feb 21
New BNPL Regulations Leave Zilch Leading the Way - 19th Feb 21
Work From Home Inflationary House Prices BOOM! - 18th Feb 21
Why This "Excellent" Stock Market Indicator Should Be on Your Radar Screen Now - 18th Feb 21
The Commodity Cycle - 18th Feb 21
Silver Backwardation and Other Evidence of a Silver Supply Squeeze - 18th Feb 21
Why I’m Avoiding These “Bottle Rocket” Stocks Like GameStop - 18th Feb 21
S&P 500 Correction Delayed Again While Silver Runs - 18th Feb 21
Silver Prices Are About to Explode as Stars are Lining up Like Never Before! - 18th Feb 21
Cannabis, Alternative Agra, Mushrooms, and Cryptos – Everything ALT is HOT - 18th Feb 21
Crypto Mining Craze, How We Mined 6 Bitcoins with a PS4 Gaming Console - 18th Feb 21
Stock Market Trend Forecasts Analysis Review - 17th Feb 21
Vaccine Nationalism Is a Multilateral, Neocolonial Failure - 17th Feb 21
First year of a Stocks bull market, or End of a Bubble? - 17th Feb 21
5 Reasons Why People Prefer to Trade Options Over Stocks - 17th Feb 21
The Gold & Gold Stock Corrections Are Normal - 17th Feb 21
WARNING Oculus Quest 2 Update v25 BROKE My VR Headset! - 17th Feb 21
UK Covid-19 Parks PACKED During Lockdown Despite "Stay at Home" Message - Endcliffe Park Sheffield - 17th Feb 21
How to Invest in ETFs in the UK - 17th Feb 21
Real Reason Why Black and Asian Ethnic minorities are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 16th Feb 21
THE INFLATION MEGA-TREND QE4EVER! - 16th Feb 21
Gold / Silver: What This "Large Non-Confirmation" May Mean - 16th Feb 21
Major Optimism for Platinum, Silver, and Copper - 16th Feb 21
S&P 500 Correction Looming, Just as in Gold – Or Not? - 16th Feb 21
Stock Market Last pull-back before intermediate top? - 16th Feb 21
GAMESTOP MANIA BUBBLE BURSTS! Investing Newbs Pump and Dump Roller coaster Ride - 16th Feb 21
Thinking About Starting to Trade This Year? Here Are Some Things to Keep in Mind - 16th Feb 21
US House Prices Real Estate Trend Forecast Review - 15th Feb 21
Will Tesla Charge Gold With Energy? - 15th Feb 21
Feeling the Growing Heat and Tensions in Stocks? - 15th Feb 21
Morgan Stanley Warns Gasoline Industry Is About to Become Totally Worthless - 15th Feb 21
Debts Lift Gold - Precious Metal Prices Will Rise on a Deluge of Red Ink - 15th Feb 21
Platinum Begins Big Breakout Rally - 15th Feb 21
How to Change Car Battery Without Losing Power, Memory, Radio Code Settings - 15th Feb 21
Five reasons why a financial advisor can make a big difference to your small business - 15th Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

How to Make, or Lose, a Fortune in Junior Gold and Silver Exploration Stocks

Commodities / Gold & Silver Stocks Oct 12, 2010 - 03:26 PM GMT

By: David_Galland

Commodities

Best Financial Markets Analysis ArticleDavid Galland, Managing Director, Casey Research writes: 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.

There is, of course, much more to understand about the junior resource sector, but if you're interested in the sector - and you should be - then the best way to proceed is take us up on a risk-free trial to the International Speculator. Click here for the simple details.

As you'll see when you click on that link, at $199 per quarter, we're not giving the International Speculator service away. That said, given the upside potential of the companies it follows, and the fact that you can try it for three full months and still get 100% of your money back if it doesn't provide far more value than it costs - you have nothing to lose by giving it a try.

© 2010 Copyright Casey Research - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules