How To Profit On The Road To Failure

By Dr. Richard S. Appel              November 10, 2005 www.financialinsights.org

October 30, 2005 - I published the predecessor to this article in April 2004. I have expanded upon my original text in the present essay to include the new thoughts, insights and knowledge that I have more recently acquired. I believe that the following can help prepare the reader to successfully navigate in this potentially highly profitable area by better understanding how the mining industry works. This includes both the positive conditions and attributes that a company must possess in order to succeed, as well as the various obstacles that must be avoided when one speculates in this exciting stock segment.

Given my belief that the junior mineral exploration sector is on the cusp of a major advance, I feel that sharing my thoughts at this time is quite timely. I hope that the following will help both novices and experts approach these stocks in a different light, and will give all readers a better perspective of what to look for and what to avoid, whenever they evaluate a potential investment in this area.

It is my desire as the reader peruses this missive, that they will benefit from my intent. I hope that you recognize that substantial profits can be acquired without owning a company that either makes a major mine or is taken over by another enterprise. If the truth be known, most of those who have amassed the greatest fortunes speculating in this market have done so by putting to use what I now recognize and describe below.

One issue that is rarely mentioned in the junior exploration industry is the fact that few companies actually bring a mine into production. Some are successful in taking a discovery to the feasibility stage. Yet, rarely does a mineral deposit, let alone a substantial one, actually generate cash-flow or a profit to the company. This truth should always be kept in mind whenever one evaluates a junior resource stock. But also never lose sight of the reality that it is not necessary for a mining company to ever turn a profit, in order for the knowledgeable, astute investor to garner substantial capital gains.

A few years ago a very capable and successful geologist confided in me some very unusual and at the time, very upsetting information. He worked a number of years for a major, profitable mining company, Cominco Ltd. The company operated in numerous countries and had decades of mineral exploration and mining experience. Cominco was since acquired by Teck Corporation, and the surviving entity is now Teck Cominco Ltd.

I believe that it was during the early 1990's, when one of their directors desired to compare their successes with their failures. To this end, he ordered an evaluation of all projects in which Cominco expended $1 million or more for exploration. For newcomers to the mineral exploration business a large number of potential mineral targets are eliminated before the $250,000 level of expenditures is reached. The fact that a major company continues to work on a property and incurs over $1 million of expenses, indicates their great belief in the likelihood of the project’s becoming a mine.

Industry-wide, after one million dollars is spent, very fewer projects remain which a company believes warrant further exploration. These are indeed the best of the best. Unfortunately, of these, few actually become mines. Invariably, what appeared to be highly prospective ground fails to meet the necessary criteria for the company to continue working on it.

In the case of the Cominco study, their researchers found over 2,000 projects upon which over $1 million was expended. From this pool, the company only made six or seven mines. Think about that for a moment! This gives you an idea of the actual likelihood of a junior company developing a project to the point where it is either bought out by a major company, or proceeds into production. However, it also gives one insight into the enormous profits that can be garnered if an investor picks one of the few companies that will reach the ultimate goal of mining success. After all, Cominco began as a small concern and grew to generate substantial profits during its decades long existence, and greatly rewarded its shareholders in the process.

The rewards that Cominco and other major mining companies bestow upon their shareholders is enormously magnified if a junior miner is successful. In this instance, a company worth pennies can see its shares sky-rocket in price, and move into the multi-dollar range.
The reason that I am presenting this information is not to frighten investors about the junior exploration market. It is to help you better understand the industry and to make you aware that given all of the potential difficulties and pitfalls that must be dealt with, there are ways in which savvy investors can be quite successful and continually garner substantial profits.

I am in the forefront of those who desire to pick companies that have the qualities necessary to move a project to a profitable conclusion. I still believe! Fortunately, I have been able to early recognize a number of companies that grew from the exploration stage to be either acquired by a major corporation, or moved into production. When this occurred, I was not only compensated for losses that I sustained from a number of companies that were not so fortunate, but I was left with an impressive, overall profit. Finding a company that generates such success should be viewed as the icing on the cake!

If an investor can control a normal amount of greed which we all possess, he can not only position himself for a great wind-fall, that a truly successful junior company can generate, but he can also profit from companies that are fated for failure.

The primary necessary ingredient for success in the junior exploration industry are the people! I will assume that those managing any company in which you choose to invest are responsible for at minimum a major discovery or have actually been instrumental in building one or more mines. This immediately eliminates the vast number of junior mining companies! Further, they must also be capable of acquiring capital with which to carry out their exploration programs, and must have the ability to successfully present their story to the investment community. Additionally, it is typically best to enter such a company’s stock while it is quietly developing its projects rather than when it is in the midst of a surging share price created by some element of successful progress.

During all Bull Markets, whether of an entire market or an individual stock, there are always secondary, downward corrections. It is during these periods, such as I believe we are just exiting in the resource sector, when an astute investor can acquire fine companies at substantial discounts to their earlier highs. In this fashion you can have significant information about the company, while exposing yourself to less risk due to its reduced price level.

One of the qualities that I look for whenever I evaluate a company to feature in Financial Insights, is that it is in the early stages of its development. It may take a while, but if you have a proven management team these companies offer the best risk vs. reward potential in the industry. Further, they give their investors the greatest opportunity for exceptional profits.

The time to acquire your share position is when a company’s stock is quiet, its price is weak, and it is in the beginning stages of its development. The worst is when other investors are clamoring for it, and are driving it up in price. You will learn that when everyone seems to want to purchase your shares, is the exact time when you should actually be doing some selling! With these conditions and concepts firmly understood and followed, one has the opportunity to benefit from the great volatility that is inherent in this market.

HOW CAN AN INVESTOR GARNER SUCCESS WHILE RECOGNIZING THAT HIS COMPANY IS LIKELY DESTINED TO FAIL?

I believe that this can be best explained by following a company through a typical cycle in the junior exploration sector. Whether a company begins its existence as an initial public offering or was dormant for a period due to an earlier failure, they all emerge by raising their initial working capital. This usually comes from members of their management team and from investors who are familiar with the directors, and who have confidence in their abilities.

The company then searches for what they believe is an attractive exploration target or advanced stage project. As an aside, the best projects usually find their way into the hands of those mining men who have met with past great success. Occasionally, what appears to be a dormant company, or shell, may announce an important acquisition. In this event, overnight, the company’s value can enormously increase and its share price may soar.

After acquiring their initial project the junior company prepares for their first exploration campaign. During each stage of exploration a company has the potential to meet with some form of success. For example, early geophysical or geochemical evaluations might be sufficient to allow the company to announce the discovery of a geological setting that is highly conducive to hosting an important mineral deposit. Or, as they proceed and begin to test the rock types through chip or channel samples, they may report high grade results. As progress continues and if they advance to the drilling stage, the company might be fortunate to state that they "pulled a hole" that had a significant if not a spectacular mineralized intercept. In all of these events, it is likely that the marketplace will become excited and investors may sharply bid up its share price.

The knowledgeable investor, who owned the stock before any of these milestones occurred, will utilize these price advancing periods not to add to his position, but to take some profits! He will do this with the knowledge that the majority of the positive effect upon the share price will likely only be temporary, and he will use the occasion to recoup some or all of the initial capital that he invested in the company.

This is not to say that a price movement from say $0.75 C. to the $1.25 C. to $1.50 C. or higher range will retreat back to its lift-off price of $0.75 C. The excitement that excellent field results generates tends to temporarily drive a company’s share price further than is justified. This is normal price action. When the enthusiasm dissipates the stock will retreat to a better price indication of the company’s new found value. If the news was truly important to the company $0.75 C. might never be again seen.

Such times present the investor with not only the opportunity to reduce his financial exposure, but it also gives him the good fortune to own some promising stock, that has already increased in value, for little or nothing. The goal of successful investors in this industry is to possess a stock position, and to be carried for as close to a zero cost basis as possible! Occasionally, if he is convinced that the success is not a flash in the pan, he will wait for the stock to pull back before adding to his position. However, he will do this with great care.

You must recognize that it is for a plethora of reasons why so few mines are actually built. It can be due to either acts of nature, the fallibility or overzealousness of man, a drop in the market price for the mined metal, or for an unending array of other reasons.

For example, nature has a way of creating a very rich body of mineralization but later, due to either erosion or one or a series of earth movements, it can either reduce its size or transport a portion of the deposit miles from where it was formed. Thus, initial encouraging surface geophysical or sampling results may have occurred because the remnants of an ore body may have been carried by an ancient river and were deposited at the site. When the company either performs channel sampling or drills the target, the ground beneath it might be barren of mineralization. Similarly, if a company discovers either a seemingly strongly mineralized open pit deposit or a very rich vein, they may later abandon the prospect because either the grade is insufficient, its tonnage is inadequate, the mineralized structure may be at too great a depth to economically mine, the project is too remote to infrastructure, the metallurgy is too complex, or the vein might pinch off or disappear. In each instance what initially appeared to be an exciting discovery may turn into a disappointment!

As for man, mistakes are made or a company’s management may attempt a feat for which they are not sufficiently experienced. A great exploration geologist normally is unprepared to build a profitable mine. He may have the capacity to sense the presence of a great body of mineralization, but once the deposit is defined he should hand the mine’s development to those who specialize in that field. Too often, a team of explorers attempt to bring their discovery into production and fail.

Another reason for failure could occur during the feasibility stage if the costs are underestimated. When they begin building the mine only to run out of capital for its completion. These are some of the reasons why even many impressive exploration results and even positive feasibility studies ultimately lead to the abandonment of the projects!

Yet, even in these instances the knowledgeable investor can profit! This is because excitement will likely be generated by the announcements of each positive press release. This will give him the opportunity to take profits, and at times they may be exceptional!

To me, it is a given that well managed companies will periodically generate market excitement as the current precious and base metals Bull Markets unfold. Further, even if they are not successful with their first project, the finest managements will find new ones in their continual search for success! Therefore, as your company progresses, it is virtually assured that your ability to take some money off of the table should present itself on more than one occasion. This assumes that you have entered your stocks during their early stages of evolvement, and have the patience to allow them to develop.

In Financial Insights I try to feature companies that I believe have a major head start over their competitors, and are early in their life cycles. Their management is either already successful or they are competent and possess assets that I believe are greatly unrecognized which renders them undervalued by the marketplace. I attempt to initiate stock purchases before most investors even know of the company’s existence. This limits my downside risk while it exposes me to far greater profits. In effect, I feature and buy solid, little known companies at low prices, and sell them when they excite the marketplace and investors clamor for them. You should attempt to do the same!

In order to achieve success, a primary investor goal should be to own shares in as many companies as possible, while having as little of his own money at risk in any individual junior. Further, patience is mandatory for an investor to profit from speculating in this field! Remember, it normally requires five to seven years from the time of a "discovery", to profitable ore extraction if a mine is built.

Additionally, exploration is often hampered by any of a number of problems or conditions. They can range from weather, licensing or other government interferences, infrastructure construction, environmental considerations, or various negotiations that can delay a project’s advancement. Further, even with the best of exploration experts, it often takes time to find and acquire the right project. Also, it can easily require one or more years for the negotiations of an exciting acquisition to actually be consummated.

These are among the reasons why I attempt to acquire shares during a company’s early stages, and that are managed by those individuals in which I have the greatest confidence and trust. It allows me to purchase stock for pennies that have the potential to soar to multi-dollars. I am prepared to wait patiently as it could take one, two or even three or more years before the right conditions present themselves. However, I will comfortably and confidently await the rewards knowing that I have aligned myself with the best management teams in the industry.

If one of your companies successfully proceeds to the point of performing either a pre-feasibility or feasibility study other opportunities and problems will arise. If investors believe that the project is nearing a mining decision they will normally bid up it’s stock price with this anticipation. This gives the wise investor yet another chance to either recoup the balance of his investment in the company, or to even take some profits. He does this with the knowledge that one of a number of potential problems still lurk in the shadows that may kill it!

This might be caused by a metallurgical difficulty that can greatly impact the mining cost. It could arise from political, environmental or native problems. Or, the cost of building the mine might be too prohibitive. This could be due to the absence of adequate infrastructure such as electrical power, water, or roads which would make the mine uneconomic. Additionally, the economics of the project might be insufficient for other reasons. This might prevent their management from acquiring the capital necessary for the mine’s construction. Also, the sector’s market condition might be poor at the time. This would discourage potential investors from offering the needed development capital.

Potential problems still remain to be overcome. In the event that a company announces a positive feasibility study and prepares to finance and build a mine, they’re still not out of the woods. However, a decision to proceed with building a mine will virtually assure another wave of investor interest and a surging share price. Again, this offers the aware investor an opportunity to greatly profit from his initial investment. In this event, his remaining shares should now be worth many multiples of their original cost.

Among the possible pitfalls for the company as they proceed to production, are that they may realize that they have underestimated some of their costs. Further, they may become entrapped in a legal battle. This can arise for a number of reasons. Someone may claim that they hold title to the property or were somehow cheated by the company. Or the local inhabitants, environmentalists, or the overseeing government might interfere with the permitting process and delay or prevent the mine’s construction. However, if you have properly retrieved your original investment in the company these problems will barely affect you. You will possess free stock in the company and can patiently wait until the problems are resolved.

As you can see, the junior exploration sector has more than its share of problems and pitfalls. However, if you accept this you will actually take your first major step towards success! You will not depend upon a company to go into production for you to profit! You will make your mind up to utilize the periods that are destined to occur, when a company generates excitement during a given stage of its development, to sell your cheaply acquired stock and generate exceedingly handsome rewards. This will not prevent you from substantially profiting if one of your companies is either taken over or goes into production.

I have delved deeply into the workings of this industry because I want to educate the reader about the possible dangers that a company may encounter on its journey towards either success or failure. You should not feel threatened by these problems! Instead, I hope that you will now view them from a different perspective as I do. I recognize that I will not own many companies that will ultimately make a mine or that will be acquired by a major company. However, I am confident that I will possess a number of stocks that will sufficiently excite the marketplace to drive their shares to substantial levels. If you follow my lead, this will allow us to take advantage of these fleeting exciting and profitable periods when our stock’s shares soar, to take profits.

From experience, I am convinced that if managed properly, speculating in this field gives one the potential to meet with great financial rewards. This can best be achieved if you buy companies early in their development that possess the finest management, and sell some of your stock each time that they achieve success.

The surging precious and base metal prices of the last few years have allowed the junior Canadian exploration industry to acquire an enormous amount of working capital. The total has been staggering and is unrivaled in the history of the industry. This has allowed a number of the Canadian explorers to acquire and develop their best projects to the point where I believe some major discoveries if not mining decisions will be announced. In Financial Insights, I am closely watching several small companies that I feel have the potential to meet with tremendous success. They will not all work. However, if only one in five companies does, the overall profits should be substantial.

When the next major discovery, take-over, or mining decision is announced, it will generate a substantial amount of excitement that will vibrate throughout the industry. This will bring what will likely become an unprecedented amount of capital into this tiny stock sector. When this transpires, it will act to drive the majority of stocks to higher levels. In essence it will raise the value and therefore the prices of the companies that participate in the industry. Further, the Bull Markets in not only the precious metals but also in the various base metals, will transform numerous heretofore uneconomic deposits into wildly profitable ones. Uneconomic deposits will become economically viable because the value of their mineral content will soar. This will greatly enhance the value of the companies benefiting from this event, and will bring additional excitement and investor interest to the other junior mineral exploration companies. And with it, higher prices for the majority of their shares.

The above was excerpted from the November 2005 issue of Financial Insights © October 30, 2005.

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I publish Financial Insights. It is a monthly newsletter in which I discuss gold, the financial markets, as well as various junior resource stocks that I believe offer great price appreciation potential.

Please visit my website www.financialinsights.org where you will be able to view previous issues of Financial Insights, as well as the companies that I am presently following. You will also be able to learn about me and about a special subscription offer.

CAVEAT

I expect to have positions in many of the stocks that I discuss in these letters, and I will always disclose them to you. In essence, I will be putting my money where my mouth is! However, if this troubles you please avoid those that I own! I will attempt wherever possible, to offer stocks that I believe will allow my subscribers to participate without unduly affecting the stock price. It is my desire for my subscribers to purchase their stock as cheaply as possible. I would also suggest to beginning purchasers of these stocks, the following: always place limit orders when making purchases. If you don't, you run the risk of paying too much because you may inadvertently and unnecessarily raise the price. It may take a little patience, but in the long run you will save yourself a significant sum of money. In order to have a chance for success in this market, you must spread your risk among several companies. To that end, you should divide your available risk money into equal increments. These are all speculations! Never invest any money in these stocks that you could not afford to lose all of

Please call the companies regularly. They are controlling your investments.

FINANCIAL INSIGHTS is written and published by Dr. Richard Appel and is made available for informational purposes only. Dr. Appel pledges to disclose if he directly or indirectly has a position in any of the securities mentioned. He will make every effort to obtain information from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Dr. Appel encourages your letters and emails, but cannot respond personally. Be assured that all letters will be read and considered for response in future letters. It is in your best interest to contact any company in which you consider investing, regarding their financial statements and corporate information. Further, you should thoroughly research and consult with a professional investment advisor before making any equity investments. Use of any information contained herein is at the risk of the reader without responsibility on our part. Past performance does not guarantee future results. Dr. Appel does not purport to offer personalized investment advice and is not a registered investment advisor. The information herein may contain forward-looking information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the statements contained herein that look forward in time, which include everything other than historical information, involve risks and uncertainties that may affect the company's actual results of operations. © 2005 by Dr. Richard S. Appel. All rights are reserved. Parts of the above may be reproduced in context, for inclusion in other publications if the publisher's name and address are also included for credit.