I thoughtyou would appreciate the following article by Richard Mills. That's oneof the reasons that I'm solidly in the MPV camp. Reading time is about5 minutes.
Cheers,
Brit .........
Why Juniors?
As a general rule the most successful man in life is the man who has the best information
It'sa fact in the mining world that most discoveries are made by a)junior mining companies and b) old time individual prospectors. Why arethe juniors so successful at making discoveries and finding mines? Well,the good ones are lean mean boots on the ground exploration anddevelopment companies run by people who have been out there and know whatit takes. They know how to raise money from the suits and they know howto get the story out to the retail investor.
They are not tied upin bureaucratic red tape and can make the important decisions withoutcommissioning a six month study or running it up through 12 layers ofpencil pushers and then sitting on their butts waiting for an answerwhile somebody else scoops the prize. They can and do make up their mindsvery quickly and can execute immediately on plans.
I believejunior resource companies offer the greatest leverage to increased demandand rising prices for commodities. There is also a very real andincreasing trend for Mergers and Acquisitions (M&A) in one of the fewbright spots available for investors - resources.
"As thepotential for commodity scarcity escalates, M&A activity in theglobal mining sector will likely intensify, mimicking a 'globalarms race. With few large targets in play and diminishing key resourcereserves,we expect global miners will continue to scour the globe forprojects and broaden their deal strategies." M&A in the Global Mining Sector -No Stone Unturned, Price Waterhouse Coopers
Juniors,not majors, own the worlds future mines and juniors are the ones mostadept at finding these future mines. They already own, and find moreof,what the world's larger mining companies need to replace reserves andgrow their asset base.
Junior resource companies, the owners ofthe worlds next mines, are soon going to have their turn under theinvestment spotlight and should be on every investors radar screen.
IfI was looking for superior investment vehicles to take advantage ofwhat I think I know regarding the future for commodities I'd be lookingat junior producers, near term producers and companies that are in thepost discovery resource definition stage with the occasional green fieldexploration play thrown into the mix.
Remember, our juniorresource companies, the same ones who today are so oversold andundervalued, are the present owners of the world's futurecommodities supply.
Company Stage - Risk vs. Reward
Juniors are risky, managing that risk is what investing in the junior resource sector is all about - in a nutshell it's all about when you invest.Somepeople invest extremely early because of management, some on thepossibility of what a property might host, some people will wait andinvest as you start to drill and build resources thus reducing theirrisk. You pay less because there is more risk or you pay more becausethere is less risk, only you can decide the level of risk you cantolerate and how much patience you have to sit while developments, thestory, plays out.
The most upside (and by far the greatest risk)comes from buying a junior when they are exploring and make an initialdiscovery. Great drill assay results can send a juniors share priceskyrocketing. The reverse can also be true.Junior explorers, the greenfield plays, are the riskiest plays by far. Strikeout on assay resultsand it could be goodbye to a share price rise for a very long time - tillthe company finds another project they can work on. If you'rebuyinginto this kind of play make sure the company has another fallbackproject in its portfolio.
My favorite stage junior is a junior inthe post discovery resource definition stage (also known as brown fieldstage companies). These companies have already found something, the shareprice has settled back after the initial discovery(never chase acompany whose share price has already exploded, the share price has hadits run, for now the moneys been made. I try and enter after theexcitement has died down and the share price has settled back) and thecompany is going in to see what they have and hopefully produce a 43-101compliant resource estimate and build upon it. The risk has been greatlyreduced, the waiting time for a discovery non-existent and the rewardvery nice considering the much lower amount of risk.
For nearer term producers - for those further down the development path towards a mine - you have:
- Preliminary Economic Assessment's (PEA) or scoping studies are done to examine potential mining scenarios and economic parameters - A PEA or scoping study is an important milestone for a mineral project, it's the first step in a company's economic and technical examination of a proposed mine
- Preliminary feasibility studies or pre-feas studies are more detailed than PEA's and are used to determine whether or not to proceed with a detailed feasibility study. They are also used as a reality check to determine areas within the project that require more attention
- Feasibility studies will determine definitively whether or not to proceed with the project. A feasibility study or bankable feasibility provides budget figures for the project and will be the basis for raising capital to build the mine
Rememberall these different stage studies are only yes/no decisions onwhether to move to the next stage. NONE of them mean you are goingmining, there'sno mine till every stage is completed, permits approvedand the necessary financing has been arranged.
Because thesecompanies are well advanced along the development path a lot of theguesswork about grade, size, costs and metallurgy have been taken out ofthe equation for us. They have done sufficient work to give investorsa certain level of confidence that their project will successfully movetowards being a mine. The later stage companies (those doing feasibility,permitting and money raising) can have an excellent entry point forinvestors - they often enter a quiet period when they are doing theadvanced studies and raising money to go into production. They often base(a flat share price) for quite a while through this period - possibly agood time for accumulation of their shares if you believe in the story.After the money is raised for production investors can see they are goingmining - cash flow is just over the horizon - and the share price willoften break out of its trading range.
With producers you have tolook at the balance sheet, consider their plans for the future and judgefor yourself the ability to meet those plans. Remember cash flow is king,but can they grow that cash flow? These large well established producershave the least risk and the least upside. But gains could be steady andmaybe they pay a dividend.
The International Monetary Fund (IMF)recently published its report World Economic Outlook for October 2010 andin it they talked about commodity demand from emerging countries. "Becausetheir growth is more commodity-intensive than that of advancedeconomies, the rapid increase in demand for commodities over the pastdecade is set to continue...the current era of higher scarcity,risingmetal price trends and a balance of price risks tilted toward theupside may continue for some time."
Also consider the following:
- Population growth
- Scarcity of new resource discoveries
- Declining grades and ore reserves at existing deposits
- Resource nationalization
To me it all means we are going to see much tighter supplies of, and higher prices for commodities going forward.
Because of:
- Rising commodity prices
- Soaring share prices because of outstanding drill assay results
- Increased excitement being brought to the junior sector by increasing M&A activity for junior "fish"
Thesoon to be tidal wave of money coming into the resource sector isgoing to bypass the majors and roll right over the few survivingmid-tiers. This money is going to be looking for the greatest leverage toincreased commodity demand, rising commodity prices and the potentialfor an extremely lucrative buyout.
This is going to happen at thesame time senior miners are going to be buying,earlier in their lifecycle, junior exploration and development companies.
New money iscoming into the junior sector, bids are building and the asks are beingtaken out. Significant drill assay results are giving companiesshare prices a rocket ride when released.
Conclusion
It'san exciting time to be an investor in the junior resource market.Are there some quality junior producers, soon to be producers, postdiscovery resource definition, green field exploration companies andpotential takeover targets on your radar screen?
If not, maybe there should be.