Why invest in the junior mining shares?

Leverage is the simple answer. It is not uncommon for junior mining companies to experience huge gains (10x or more) very quickly as news of a discovery is made known to the public. But before we talk more about leverage let�s go over some facts.

In the mining world, it is no secret that the majority of economic mineral deposits are found by the junior mining companies or individual prospectors. There are several reasons for this. Junior explorers are not slow-moving bureaucracies like many senior companies. This makes juniors able to make fast decisions both in the boardroom and in the field. Senior resource companies generally have a different role to play, namely, to fund and place into production deposits discovered and developed by juniors. But perhaps the most important reason juniors make most discoveries is the talent, motivation and dedication of their management team.

It is often said in the mining business, that if an exploration geologist finds a mine it is likely that he will find others. This is due to the fact that far fewer than 5% of all exploration geologists will ever be credited with a discovery that leads to a mine in production. This is because those select, gifted, explorers who find numerous mines, seem to have a sixth sense that moves them to succeed. Most of the true leaders in mineral exploration are geologists that don�t necessarily fit into the corporate culture. They are men and women who like to walk outside, kick rocks, and sleep under the stars. They do not want to sit behind desks, stare at computer monitors and talk on the phone. The majority of geologists may have a firm grip on the theory of mineral exploration, yet they cannot take it to the next level to unravel Mother Nature�s secrets.

As is often the case juniors are managed by men and women who have had success working for both senior and other junior companies. So why would someone want to be a director of a junior mining company that has no revenue and sometimes not even a decent salary to offer. It�s the huge potential rewards that can come when a discovery is made that attracts the top talent of the mining sector into the juniors. In other words, they want to work for themselves and get the big payoff instead of getting a nice salary and some kudos if they made the discovery working for a senior company. In a major mining company, a successful exploration geologist who made a significant discovery might get a pat on the back and a new credenza, if they�re lucky. As part of a junior mining company, the geologist who made that same discovery might get $10 million, $20 million, or a $100 million capital gain for their efforts. In the life cycle of a mining share, it is the exploration phase that provides the biggest move (leverage) in share price. The best and brightest minefinders of course know this and are highly motivated to search the world over to make a new discovery. When they do, the monetary rewards are substantial, for both the management team and its investors.

Because the mining sector has been in a long-term bear market, very little money was going into the search for new deposits. Exploration expenditures declined drastically from 1997 into 2001 as the brunt of the bear market took its toll. Since then, we have seen the start of what looks to be a major bull market in the precious and base metals. Exploration budgets are cranking up again as the search for new deposits is greatly needed to replenish depleting reserves. With this renewed interest in exploration, demand for good exploration companies is increasing in the capital markets and the junior mining sector is once again showing spectacular gains. As the spot prices of the minerals continue to rise, we are also likely to see a parabolic rise in the share prices as additional capital comes their way. Richard Russell, in his November 2003 newsletter had this to say about the current bull market in precious metals:

I believe that fortunes will be made in the years ahead by those who are now establishing major positions in gold and gold shares. These primary moves last longer than anyone thinks possible � and they take the items higher than anyone thinks possible. We are now in a primary bull market in gold. I believe gold (and very probably silver) will make fortunes for those who now take major positions in the precious metals.

The increase in the mineral prices not only focuses more attention on the sector, but also causes even more money to be spent on exploration thereby increasing the probability of finding new deposits. It also increases the value of any potential discovery through leverage. Mineral deposits are gauged by the net present value of future cash flow should the deposit be mined. Say for example we find a million ounce deposit of gold and an engineering study suggests it could be mined over ten years at a cost of $250 an ounce, including capital. Let�s assume gold is at $350 an ounce. At a 10% discount rate that deposit would be worth roughly $70 million. However if the gold price were to increase to $400 an ounce (a 15% increase) the value of the same gold deposit increases to $100 million (almost 50%). That is over 300% leverage to the gold price (50/15). Imagine what a gold price at $600 or $1000 an ounce would do!!!

At �The Mining Speculator�, we focus on the junior mining sector looking for companies that have 10X or better potential for our subscribers. We look for the gifted geologists and management teams who are most likely to make things happen. Personally, I have been evaluating and investing in such companies for the past 5 years with great success. We invite you to give our newsletter a try and be part of the fortunes that are now being made in the mining sector.

Greg McCoach / The Mining Speculator