As a general rule the most successful man in life is the
man who has the best information
It’s a fact in the mining
world that most discoveries are made by a) junior mining
companies and b) old time
individual prospectors. Why are the juniors so successful at making discoveries and finding mines? Well, the good ones are lean mean boots on the ground
exploration and development companies
run by people who have
been out there and know what
it takes. They know how to raise money from the suits and they know how to get the story
out to the retail investor.
They are not tied up in bureaucratic red tape and can make the important decisions without commissioning a six month study or running it up through 12 layers of pencil pushers and then sitting on their butts waiting
for an answer while somebody else scoops the prize. They can
and do make up their minds very quickly
and can execute immediately on plans.
I believe junior resource companies offer the greatest leverage to increased demand and rising prices for commodities. There is also a very
real and increasing trend for Mergers
and Acquisitions (M&A) in one of the few bright
spots available for investors
- resources.
“As the potential
for commodity scarcity escalates, M&A activity in
the global mining sector will likely intensify,
mimicking a ‘global arms race. With few large targets in play and diminishing key resource reserves, we expect global miners will continue to scour the globe for projects
and broaden their deal strategies." M&A in the Global Mining Sector - No Stone Unturned, PricewaterhouseCoopers
Juniors, not majors, own
the worlds future mines and juniors are the ones most adept
at finding these future mines. They already own, and find more of, what the world’s larger mining companies need to replace reserves and grow their asset
base.
Junior resource companies, the owners of the worlds next mines, are soon going to have their turn under
the investment spotlight
and should be on every investors radar screen.
If I was looking for superior investment vehicles to take advantage of what I think I know regarding the future for commodities
I’d be looking at junior producers, near term producers and companies that are in the post discovery resource definition stage with the occasional green field
exploration play thrown into the mix.
Remember, our junior resource companies, the same ones who
today are so oversold and undervalued, are
the present owners of the
world’s future commodities
supply.
Company stage – risk v. reward
Juniors are risky,
managing that risk is what
investing in the junior resource
sector is all about
– in a nutshell it’s
all about when you invest. Some people invest extremely early because of management, some on the possibility of what a property might host, some people will wait and invest as you start to drill and build resources thus reducing their risk. You pay less because there is more risk or you pay
more because there is less risk,
only you can decide the level of risk you can tolerate
and how much patience you
have to sit while developments, the story, plays
out.
The most upside (and by far the greatest
risk) comes from buying a junior when they are exploring and make an initial discovery. Great drill assay results can send
a juniors share price skyrocketing. The reverse can also be true.
Junior explorers, the green field
plays, are the riskiest plays by far. Strike out on assay
results and it could be goodbye
to a share price rise for a very long time -
till the company finds another project they can work
on. If you’re buying
into this kind of play make sure the company has another fallback project in its portfolio.
My favorite stage junior is a junior
in the post discovery resource
definition stage (also known as brown field stage companies). These companies have already found something, the share price has settled back after the initial discovery (never chase a company whose share price has already exploded, the share price has had its run,
for now the moneys been
made. I try and enter after
the excitement has died
down and the share price
has settled back) and the company
is going in to see what they
have and hopefully produce
a 43-101 compliant resource
estimate and build upon it. The risk has been greatly reduced, the waiting time for a
discovery non-existent and the reward
very nice considering the much lower amount of risk.
For nearer term producers - for those further down the development path towards a mine - you have:
- Preliminary
Economic Assessment’s
(PEA) or scoping studies
are done to examine potential
mining scenarios and economic
parameters - A PEA or scoping
study is an
important milestone for a mineral
project, it’s
the first step in a company’s
economic and technical
examination of a proposed
mine
- Preliminary
feasibility studies
or pre-feas studies
are more detailed than
PEA’s and are used
to determine whether
or not to proceed with
a detailed feasibility
study. They are also used as a reality
check to determine areas within
the project that require more attention
- Feasibility
studies will determine definitively whether or not to proceed with the project. A feasibility study or bankable feasibility provides budget figures for the project
and will be the
basis for raising capital to build the mine
Remember all these different
stage studies are only yes/no decisions on whether to move to the next
stage. NONE of them mean you are going mining, there’s no mine
till every stage is completed, permits approved and the necessary financing has been arranged.
Because these companies
are well advanced along the development path a lot of the guesswork
about grade, size, costs and metallurgy
have been taken out of the equation
for us. They have done sufficient work to give investors a certain level of confidence that their project will successfully move towards being a mine. The later stage companies (those doing feasibility,
permitting and money raising)
can have an excellent entry point for investors - they often enter a quiet period when they are doing the advanced studies and raising money to go
into production. They often base (a flat share price) for quite a while through this period - possibly a good time
for accumulation of their shares
if you believe in the
story. After the money is
raised for production investors
can see they are going mining - cash flow is just over the horizon - and
the share price will often break out of its trading range.
With producers you
have to look at the balance sheet,
consider their plans for
the future and judge for yourself
the ability to meet those plans. Remember cash flow is king, but can they grow that
cash flow? These large well established producers have the least risk
and the least upside. But gains could
be steady and maybe they pay
a dividend.
The International Monetary
Fund (IMF) recently published its report World Economic Outlook for October
2010 and in it they talked about commodity demand from emerging
countries. “Because their growth is more commodity-intensive than that of advanced economies, the rapid increase in demand for commodities over the
past decade is set to continue…the current
era of higher scarcity, rising metal price trends and a balance of price risks tilted toward the upside may continue for some time.”
Also consider the following:
- Population
growth
- Scarcity
of new resource discoveries
- Declining
grades and ore reserves at
existing deposits
- Resource
nationalization
To me it all means we are going to see much tighter supplies of, and higher prices for commodities going forward.
Because of:
- Rising
commodity prices
- Soaring
share prices because of outstanding
drill assay results
- Increased
excitement being brought to the junior sector
by increasing M&A activity
for junior “fish”
The soon to be tidal wave of money coming into the resource sector is going to bypass
the majors and roll right over the few surviving mid-tiers. This money
is going to be looking for the greatest leverage to increased commodity demand, rising commodity prices and the potential for an extremely
lucrative buyout.
This is going to happen at the same time senior miners are going to be buying, earlier
in their life cycle, junior exploration and development companies.
New money is coming into the junior sector, bids are building and
the asks are being taken out. Significant drill assay results are giving companies share prices a
rocket ride when released.
Conclusion
It’s an exciting time to be an investor in the junior resource market. Are there some quality
junior producers, soon to
be producers, post discovery resource definition, green field
exploration companies and potential
takeover targets on your radar screen?
If not, maybe there should be.
Richard Mills
Aheadoftheherd.com
If you're
interested in learning more about the junior resource market please come and
visit Richard at www.aheadoftheherd.com. Membership is free, no credit card or personal
information is asked for.
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