reasons to accumulate CZX shares Steve Todoruk: "Why I speculate in discovery plays…"
By Henry Bonner (hbonner@sprottglobal.com)
Sprott Global Resource Investments Ltd.
Steve Todoruk joined Sprott Global Resource Investments Ltd. as a Senior Investment Executive in 2003. With nearly two decades as a field geologist, his evaluation of natural resource plays is uniquely worthwhile. He spoke with me about natural resource investment opportunities:
There is always going to be a mining industry.
Mining companies have been mining gold, silver, copper, uranium, nickel and other metals for more than a hundred years. These companies continuously need new resources to replace their depleting reserves. With this fact in mind, small exploration companies (“juniors”) go looking for the next big deposits.
Majors seek to acquire large and high quality deposits from juniors, either by purchasing the property outright, or making a takeover bid for the junior. The deposit becomes a mine that replenishes the major’s ever-depleting mineral inventory and grows its shareholders’ assets. Majors must continuously invest in new deposits or face extinction when their existing mines stop producing.
Many majors make good acquisitions that become mines that arrive on schedule and mostly on budget. Some majors, however, have made a number of bad acquisitions, especially during the bull market that ended in 2010. Negligent due diligence and oversights caused these companies to suffer billions in write-downs. In the current market correction, the good companies are being painted with the same brush as the bad. Investors are throwing them all out the window.
Despite poor market conditions, the explorations and takeover cycle must continue. Two types of stocks have done generally well for investors over the past three years.
The first type is the discovery play – companies like Aurelian Resources, Hathor Exploration, Virginia Gold Mines, or Gold Eagle Mines. At least four new discoveries in the last 18 months resulted in the share price of a company going from pennies to $5.00 within six months. A discovery announced just a few days ago saw the price of one junior rise from $0.16 to a high of $0.89 in a few days (regulations prohibit me from mentioning the names of current stocks in this letter).
The second type is the takeover target – a junior that has made a high quality discovery and is on track for acquisition. Another company will pay a premium to take over the junior, resulting in gains for its shareholders.
In the first four months of this year we have already seen four such takeovers in the mining industry.
I believe these are the two most likely ways to make money investing in mining stocks for the foreseeable future. Junior exploration speculators like me try to identify the next new discovery or takeover target early on -- and get in before the rest of the market does.
Steve Todoruk worked as a field geologist in many major and junior mining exploration companies after he graduated with a B. Sc. in Geology from the University of British Columbia, in 1985. Steve joined Sprott Global Resource Investments Ltd. in 2003 as a Senior Investment Executive.