Geology Does Matter in Junior Mining Investments

By Brent Cook

April 21, 2011 • Reprints

Knowing when to sell a junior exploration stock is as important, if not more so, than knowing when to actually buy one. Selling intelligently requires an edge over your competitors-the thousands of other speculators in the junior mining sector. That edge is the ability to know when a company's share price (market capitalization) is out of sync with the potential value of the underlying mineral asset.

The chart below shows the typical discovery life cycle of a junior exploration company and dramatically illustrates the move from undervalued to overvalued and back again. Knowing where your company is on this chart is the single most important piece of information you as a speculator can have in order to profit in the junior exploration sector. Alternatively, by being on the wrong side of that curve, or missing the opportunity to profit by selling a company with a mineral project that does not contain an economic deposit means that you forfeited that opportunity to someone with better insights than you.

Typical life cycle of a mineral discovery - concept to mining

Those insights that provide the confidence to know when to sell or hold come from a thorough understanding of the company and the mineral property. Specifically, to be consistently successful speculators in the minerals exploration sector you need to know these things ahead of the crowd and act accordingly:

1. What type of deposit is being targeted (epithermal vein, base metal manto, porphyry copper, etc.) and is the geology permissive for such a deposit.
2. What the likely tonnes, grade, and metallurgical characteristics are going to be if the company is successful in finding a deposit.
3. What the probable capital, mining, and process costs may be for the deposit, given the location and metallurgy and, ultimately, the ballpark value of the deposit.
4. How much it will cost in exploration expenditures and time to reach the project goals and how the company intends to raise the funds without diluting shareholders' potential profits.
5. When the results are not confirming the exploration thesis and the project is a bust.

Obviously, the ultimate answers to the project economics in numbers two and three will require the expenditure of tens of millions of dollars over several years in order to produce a feasibility study strong enough to enable the company to raise the capital to build a mine. However, in the early exploration stages, we need only know if the project is showing the right tonnage and grade characteristics to meet our mine cost hurdles. That means careful analysis and interpretation of the incoming drill results and related geological setting.

The simple recognition that an "exciting" high grade drill hole went down the vein rather than across it can keep you from following the herd into a costly investment mistake. Likewise, recognizing that a drill hole replicates historical results and adds nothing to the potential value of a property is an important geologic insight that is often overlooked by anxious speculators playing the currently hot mineral sector.

The reality for speculators in the exploration sector is that there are in the order of 3,000 companies exploring more than 10,000 geochemical and geophysical anomalies on Earth. The baseline odds of any one of those anomalies producing an economic ore deposit are somewhere near 1 in 1,000. Although these odds can be improved with careful due diligence the fact is that more often than not it will become obvious that a company's property is either not going to be economic, or if it is, that it will probably not be worth as much as the pre-development market value. The sooner you recognize this, the more likely you are to lock in a profit rather than sustain a loss.

My point is that when the wind is blowing hard and even turkeys are flying we all look smart. But when the wind stops and reality sets in the truly smart speculators have sold because they understood the mine cost parameters and geology. That, dear reader, is what differentiates Exploration Insights.

Brent Cook brings more than 25 years of experience to his role as a geologist, consultant and investment adviser. Cook's weekly Exploration Insights newsletter focuses on early-discovery, high-reward opportunities primarily among junior mining and exploration companies. He will talk about "Turning Rocks into Money" on Monday, May 9, and on "Interpreting Exploration Results from New Releases" on Tuesday, May 10, during the New York Hard Assets Investment Conference.