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What allows juniors to pursue exploration, which the majors avoid? Rick believes that the reason lies with a hidden advantage enjoyed by the juniors.
“They have an effective sub-zero cost of capital,” Rick says. “On the whole, the exploration industry loses between $2 billion to $10 billion per year, subtracting annual expenditures against income from corporate and property acquisitions, production income, or portfolio transactions.”
“Exploration on the whole is a capital destroying business,” Rick continues. “It costs more than you get out of it – and yet, it raises billions of dollars of fresh equity every year. Its cost of capital is thus arguably sub-zero – a fact that majors cannot ignore.”
But can this be sustained? How long can an industry which destroys billions in capital yearly survive?
“In order to play down the low odds of exploration success, juniors have begun to emphasize ‘market success’ instead – the value of their paper instead of that of their projects. One manifestation of this attitude is the juniors’ habit of recycling exploration targets that have failed in the past but can be counted on to yield decent confirmation holes. Another is their tendency to acquire hyper-marginal deposits and promote the ‘in situ’ value of the resources, without regard to the capital costs of developing these resources, the operating costs, or the net present value of operating cash flows that might occur in three decades time.”
So don’t let promoters swindle you into lousy stock positions, Rick advises. “The industry has been quite successful, during ‘bull market’ cycles, at causing allegedly sophisticated investors to focus on exciting but meaningless criterion. Successful investing and speculating in the sector is truly about discriminating amongst choices. If your broker convinces you to buy the entire sector indiscriminately, they will have lived up to their moniker: you will become ‘broker’ and ‘broker.’”