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How to Survive and Thrive in the
Resource Market |
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June 25, 2006
- The junior exploration market is a minefield to most who
enter it. This is because few individuals are properly prepared
to maneuver in it, and are thus fated to suffer the inevitable
consequences. Yet, if properly approached I believe that junior
stock speculation can greatly enhance an investor’s
wealth.
An investor may wisely or luckily select a
company’s stock that is destined for higher prices.
Or, he may become entranced by one of the over-zealous promoters
who convince him that his company’s future is destined
for a meteoric rise. In either instance the investor may enjoy
a roller coaster ride that takes his stock to dizzying heights,
only to find it returning to or below his starting point when
the meteor falls back to earth.
The purpose of this essay is not to deter investors
from this market. My hope is to better educate and prepare
the reader so that he or she can reap the rich rewards that
it offers, while minimizing their losses.
In order to achieve this goal one must understand the true
odds for a company’s lasting success, the players in
this market, and the application of risk vs. reward when choosing
a company. Further, the risk must be spread among a number
of companies. In this fashion if one does well it should more
than compensate for any losses produced by the others. Finally,
and possibly of greatest importance is the absolute need to
control one’s emotions, and especially our greed.
A successful mining stock has many meanings
to different people. This runs the gamut between promoters
who are only interested in generating excitement in their
stock, so that they can sell their cheaply acquired shares
to the public, and dedicated mining people who are interested
in utilizing their skills to make a mine.
The ultimate goal for all participants is to
take a company’s share price from pennies into the multi-dollar
range. However, you must first recognize that finding a mine
is not the only fashion in which to achieve this end. In fact,
if this is your primary expectation your financial future
is likely doomed to failure.
A story was related to me several years ago
by an experienced and successful mining professional. Around
1990, a major mining company Cominco, now Teck-Cominco, decided
to review all of the projects upon which they expended at
least $1 million. For newcomers to this industry, the vast
majority of potential properties are dropped long before this
lofty expenditure threshold is reached. The result was that
only six or seven mines were actually brought into production
across a period that spanned nearly a century.
This should give you an idea of the industry’s
mine finding success rate, which is nil. However, it also
exposes the great profitability that results should a company
succeed. This track record allowed Cominco to prosper for
decades as one of the earliest and foremost north American
mining companies.
Correctly evaluating the market’s players
is of primary importance and can determine your ultimate investment
success or failure. When I investigate a junior company my
first goal is to determine the quality of its management.
I look for directors who have had past exploration success
and who hopefully were instrumental in developing one or more
mines. Unless a company is fortunate to already possess an
advanced stage project, it is rare that a management team
with no earlier successes will prove successful in their present
venture.
I also desire to be assured that a company’s
management has the ability to attract major projects as well
as to finance their development. Importantly, the more successful
the individual or team has been, the greater the likelihood
that these goals can be achieved.
This results for the following reasons. First,
their earlier successes have made substantial sums of money
for their earlier followers. This will motivate their investors
to again finance their ventures. Next, vendors will offer
them their better projects. In exchange for their properties,
owners benefit most when the acquired company’s shares
either rise in value, or if production ensues and their residual
interests becomes valuable. In effect, they get their greatest
opportunity to profit if they sell to the best management
teams.
The term promotion is normally perceived in
a negative light. Indeed, there are “unethical promoters”
in this industry who misrepresent their company’s attributes
through deceit. They do this in order to attract buying to
their stock with little concern for those whose confidence
they betray. Knowing this, it is the investor’s duty
to be aware of their existence and to do your best to steer
clear of them. The old adage, “if it’s too good
to be true it probably isn’t”, should be kept
at the forefront of one’s mind, and adhered to when
you evaluate any company.
In the mining industry a certain amount of
promotion is mandatory! This is due to the poor dissemination
of information that is inherent in this market. It is virtually
impossible for the various market players to know and properly
evaluate the progress that thousands of junior companies achieve
on a daily basis. This includes the resource market brokers,
analysts and other professionals.
For example, if an obscure company “pulls
a hole” or acquires an important project that has great
implications for its future, few individuals may initially
recognize that fact. Those who do will be able to make their
purchases without increasing its share price to a level that
is commensurate with the company’s new state. Therefore,
it is not unusual for a company to be forced to unnecessarily
dilute its share structure when they go to the marketplace
to fund new work programs or its major acquisition. This occurs
because they will have to issue far more stock due to its
lower than justified price, and also reduces their shareholder’s
profit potential.
It is for this reason that promotions that
are meant to make investors aware of a company’s advancement
are not only justified but are crucial to the company’s
progress, and to their stockholders. If performed successfully
it will make a far wider segment of the investment community
aware of their progress. This in turn will attract sufficient
purchasing of their stock to raise it to a fair market level.
When done properly, without the primary motive to prey on
the unwary, it will benefit the company, its stockholders,
and the industry.
Determining the risk vs reward when evaluating
stocks is crucial. As I noted earlier most companies are doomed
to fail in their quest to make a mine. Thus, a prudent investor
should only be interested in projects that have substantial
upside potential. In this fashion you will be greatly rather
than lesser rewarded, if it avoids all of the potential stumbling
blocks, and your company actually succeeds.
I begin my risk vs. reward assessments by comparing
a company’s fully diluted market capitalization (number
of fully diluted shares multiplied by its current stock price)
with the value that the company’s interest in a project
should reasonably be expected to be worth, if they develop
an economic orebody. I then arrive at a multiple; the company’s
projected market cap if they prove successful, divided by
its current market capitalization. This helps me compare one
company with another and choose the one that should percentage-wise
benefit me the most if I am correct.
There are some intangibles that also must be
factored in. They include working capital and other project’s
already in the company, their management’s ability to
acquire new projects, their overhead and burn-rate, and the
pluses or minuses of the country in which they are working.
As you can see this requires some work. There
is truly no easy road to riches! If you are not prepared to
do your own due diligence, you should avoid not only this
but all investment areas. You must remember that you are working
with your hard-earned money. Do not be deterred. After a while
it will become an easier exercise.
Controlling one’s emotions and a business
like approach to investing in this market are mandatory. The
volatility of the junior companies compares best with that
of commodities. However, the price movements of the juniors
often pale those of even the most explosive commodities. This
allows for substantial profits, but also for great losses.
Many investors are drawn to purchase junior companies when
they see the excitement generated by some news announcement
or a rocketing share price. This is quite dangerous and is
a primary cause why most investors lose money in this field.
They buy during a run-up only to later see their stock prices
whither away. Or, they ride a company from its lows to its
peak only to have their greed keep them invested as it crests
and cascades downward.
I strive to acquire shares in companies that
are well managed and already have one or more projects offering
great potential. Further, I do this when their markets is
quiet and its prices are low. This requires much patience
to allow their projects to advance. But, I believe it is the
best method that one can utilize to survive and thrive in
the junior resource universe. If you choose a good mix of
stocks using these methods, I believe that you will give yourself
the best opportunity for success.
You must learn to sell into strength! Assuming
that you have picked a number of well-managed explorers you
should periodically be presented with exciting price rises.
Given the fact that most projects will ultimately fail for
one reason or another, you should always take profits when
the opportunity presents itself. Some analysts suggest selling
half of your holdings when a stock doubles in price. It is
my belief that if you are fortunate enough to experience more
than a doubling in a share price, you should make a partial
sale of your position if for no other reason but for self-preservation.
The longer that you speculate in this market
the more times that you will see a stock explode in price
only to later give back half or more of its spirited advance.
This will occur even if the company ultimately achieves the
greatest possible success. Remember, you can usually buy back
later. In fact, as time progresses, you will have more information
and the stock price will likely be lower after the initial
excitement wears off.
If you rigidly follow the above suggestions
I believe that you will have the best opportunity for success.
Our greed is our worst enemy! Its effect must be overcome
if we are to succeed in this or in any investment endeavor.
Routinely taking partial profits whenever they are offered
to you is one of the surest methods to survive and flourish
in this field. I wish you all the very best of luck in achieving
this goal.
******
The above was excerpted from the
July 2006 issue of Financial Insights © June 25, 2006.
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.
© 2006 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.
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