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