Investing in juniors: advice from the trenches

It must be emphasized at the outset that mineral exploration is a high-risk endeavour.

The fact is, the large majority of properties in a company’s portfolio, and the large majority of “anomalies” or targets of interest on any one of those properties, will not prove to host mineral deposits capable of being mined economically.

This is not to cast aspersions on the competence of the geological professionals involved, but rather to face reality: geology is notoriously complicated!

It is therefore appropriate that junior exploration companies come to market with a portfolio of properties, the attributes of each having been subjected to the collective wisdom of appropriately trained and experienced management and employees, and deemed worthy as prospects for the expenditure of shareholder exploration dollars.

It then falls to management to raise the capital and assemble the teams required to systematically explore each of these assets, as efficiently and expeditiously as resources allow. Though, of course, management always hopes for the opposite outcome, they cannot expect to be successful with the majority of properties. Generally they do, however, believe that ultimately they will succeed with a minority of them.

Even in times of generally robust commodity markets, stock prices in the junior mining sector have long been known to exhibit a pronounced seasonality.

Indeed, speculators count on it. Stocks in the sector tend to strengthen through the fall and early winter on the expectation of exploration results, and weaken with the onset of spring and the dog days of summer.

They can run up strongly well in advance of news, or on rumour, and give it all back a few months later.

These are classic “speculative bubbles.” Sustaining any given stock at higher levels requires real exploration success — discoveries of quantifiable economic significance.

Even then, investors should expect real volatility. Be assured that stocks in the sector will run ahead of themselves to the high side and correct, sometimes to uncomfortably low levels — though generally higher than before the “material news” that generated the upward move in the first place.

Some individuals thrive on this volatility, and take a speculative approach to the industry. Others will invest regardless of the inevitable ups and downs, for the long term. Both approaches have their place.

One might suggest that to speculators, neither team, partners, nor properties are terribly important — momentum is the key and the timing of their buy or sell decisions is everything.

That’s true to a point. The fact is, however, that both speculators and those with a longer time horizon in mind benefit from management teams who are thoroughly committed, honest, motivated, capable and energetic.

These executives will typically disregard near-term cycles and focus on generating discoveries that provide the prospect of real wealth to shareholders in the years ahead.

Needless to say, in the course of getting to their ultimate destination, they’ll provide plenty of trading opportunities along the way.

A last word to the wise: The vast majority of junior mining companies have absolutely no revenue and no immediate prospect thereof. Given the long lead cycles required to find and develop mines, and the attendant risks of doing so, it will certainly be years — if ever — before an income stream can be anticipated.

Rather, investors must hope to make their money through capital gains. As discussed above, these gains may be had through speculation, or through long-term investment gains predicated on exploration success.

This exploration success, or the prospect thereof, can be realized only through the raising and spending of shareholders’ dollars. Each round of financing entails the issuing of stock from treasury, and the dilution of existing shareholders.

The gamble, of course, is that management will be able to make a valuable discovery and have it recognized by the market (in terms of a higher share price) before the inevitable dilution required to raise the exploration capital runs to unsustainable levels.

Good management teams know what’s got to be done. They’ve got a plan and they implement it with fire in their bellies.

— The author is president of Toronto-based junior explorer Canstar Resources.