Speculating on Junior Mineral Companies: From Exploration to Mine
By Steve Todoruk (email@example.com)
To me, the most exciting time to invest in a junior exploration company is shortly after the company makes a potentially high-quality discovery of gold, silver, copper, uranium, or other metals. I believe investments made at this point of a company’s life cycle, though highly risky, offer the best upside potential in the natural resource sector.
The ultimate financial reward comes if the “junior” in question can successfully grow this discovery, through an exploratory drilling program and other geological research, into a deposit whose operation is economically feasible and large enough to interest a large mining company, which ideally culminates in a takeover of the junior exploration company.
I typically recommend investing in these discovery plays very early on, when market capitalizations tend to be low (usually under 100 million dollars). As the company advances the project, we monitor the results of their ongoing drilling. We focus on discoveries that have higher than average grade and large size potential in regions that are the most “mining-friendly.” These criteria (grade and size) increase the quality and attractiveness of the discovery over time.
A deposit is of high quality when it can be mined at lower cost than prevailing metal prices (and prices reasonably expected over the life of the potential mine) – a characteristic which major mining companies will seek out. If ultimately successful, the junior exploration company will be able to define a deposit that is big enough and economically attractive enough to build into a new mine. A successful discovery-to-deposit cycle has the potential to significantly reward shareholders in the junior mining company.
Companies that have made a new high quality discovery within the past two to five years are the ones most likely to be near-term takeover candidates. Successful companies with high quality discoveries will have successfully drilled and grown their discovery into one of economic significance. Carrying out various types of economic and/or feasibility studies further “de-risks” (reduces the uncertainty related to the actual deposit size and grade) the deposit, making it more attractive to larger mining companies.
Companies that made their discovery in the last 6 to 24 months are likely to be further from the takeover stage. They will typically have one to three years of drilling and engineering studies (in order to prove out the potential resource) ahead of them prior to becoming legitimate takeover targets.
Companies with the most recent discoveries are usually the most risky from an investment perspective. Companies that are just drilling their first drill holes that reveal ore have a two to five-year path ahead of them that will see them drill at least 150 to200 holes.
Exploration companies are mostly event-driven. In other words, these stocks have catalysts to move the share price other than a change in the price of the underlying commodity. Exploration successes and takeover potential are often the main drivers of the stock price. These companies have a legitimate shot to advance in any type of market conditions; I always look for a second reason to own a company aside from the potential of higher gold or other commodity prices. Similarly, when exploration results are disappointing, or the chances for a takeover appear to be reduced, the stock is likely to face downward pressure even in a bull market for the underlying commodity.
The junior exploration market is inherently volatile and it can also be confusing when events unfold at a very fast pace. This is where knowledge and experience become paramount. Investing in these types of companies requires extensive analysis, not simply reading company press releases. You must be able to quickly analyze the rapidly unfolding situation and make an informed decision. We believe it is critical to visit the actual properties, examine drill core, and maintain frequent communication with the company geologists and management.
Steve Todoruk worked as a field geologist in many major and junior mining exploration companies after he graduated with a B. Sc. in Geology from the University of British Columbia, in 1985. Steve joined Sprott Global Resource Investments Ltd. in 2003 as a Senior Investment Executive. To contact Steve, e-mail him at firstname.lastname@example.org or call him at 1.800.477.7853.
This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.
Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment. Because of significant volatility, large dealer spreads and very limited market liquidity, typically you will not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.