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How to Profit on the Road to FailureDr Richard
S. Appel An issue that is rarely mentioned in the junior exploration industry is the fact that few companies actually bring a mine into production. Some are successful in taking a discovery to the feasibility stage. Yet, rarely does a mineral deposit, even a substantial one, actually generate cash-flow let alone a profit. A few years ago a very capable and successful geologist confided in me some very unusual information. He had worked a number of years for a major mining company, Cominco Ltd., which was since acquired by Tech Corporation. Cominco had worked in numerous countries during their decades of world-wide exploration and mining. I believe that it was during the early 1990's, when one of their directors desired to compare their successes with their failures. To this end, he ordered an evaluation of all projects in which Cominco expended a minimum of $1 million for exploration. For newcomers to the mineral exploration business a large number of potential targets are eliminated before the $250,000 level of expenditures is reached. This occurs after an increasing amount of information is gathered about the prospect. Invariably, what appeared to be highly prospective ground fails to meet the necessary criteria to continue. Industry wide, by the time that one million dollars is spent, still fewer projects remain which a company believes warrant further exploration. These are indeed the best of the best. Unfortunately, of these, few actually become mines. In the case of the Cominco study, the researchers found over 2,000 projects in which in excess of $1 million had been expended. From this pool, the company only made six or seven mines. This gives you an idea of the actual likelihood of a junior company developing a project to the point where it is either bought out by a major company, or proceeds to production. However, it also gives one insight into the enormous profits that can be garnered if an investor picks one of the few companies that will reach the ultimate goal of mining success. After all, Cominco made substantial profits during its decades long existence, and greatly rewarded its shareholders in the process. This is enormously magnified if a junior is successful. In this instance, it will see its share price sky-rocket. The reason that I am offering this information is not to frighten investors out of the junior exploration market. It is to help you better understand the industry and to make you aware that given all of the potential difficulties that must be dealt with, there are ways in which savvy investors can be quite successful and continually garner substantial profits. I am in the forefront of those who desire to pick companies that have the qualities necessary to move a project to a profitable conclusion. I want to believe! I have been fortunate in the past in early recognizing a number of companies that actually moved from exploration to either a buy-out or to production. When this occurred, losses that I sustained from a number of companies that were not so fortunate, were not only compensated for but I was left with a substantial overall profit. However, for this discussion I want to describe how an investor who has the ability to control his normal greed, can not only position himself for a great wind-fall, that a truly successful junior company can generate, but also can make money with companies even if they are fated for failure. The primary ingredient necessary for success in the junior exploration industry is the people! I will assume that those managing any company in which you choose to invest have been responsible for at minimum a major discovery or have actually built one or more mines. This immediately eliminates a vast number of junior mining companies. Further, they must also be capable of acquiring capital with which to carry out their exploration programs, and must be capable of successfully presenting their story to the investment world. Further, it is typically best to enter a company's stock while it is developing its projects rather than when it is in the midst of a surging share price created by some element of successful progress. In essence, the time to acquire your share positions is when a given company's stock is quiet and its price is weak, rather than when investors are chasing it. You will learn that this is the time that you should actually be doing some selling! With these conditions and concepts firmly understood and followed, one has the opportunity to benefit from the great volatility that is inherent in this market. WHEN HE RECOGNIZES THAT HIS COMPANY IS LIKELY DESTINED TO FAIL? I believe that this can be
best explained by following a company through a cycle that is
typical for junior exploration companies. Whether a company begins
its existence as an initial public offering or has been dormant
for a period due to an earlier failure, they all begin by raising
their initial working capital. This usually comes from members
of their management team and from investors who are familiar
with the directors, and who have confidence in their abilities.
The company then searches for what they believe is an attractive
exploration target or advanced stage project. As an aside, the
best projects usually find their way to those mining men who
have met with past great success. Occasionally, what appears
to be a dormant company, or shell, may announce an important
acquisition. In this event, overnight, the company's value will
be enormously increase, and due to this its share price may soar.
After acquiring their initial project the junior company prepares
for their first exploration campaign. The astute investor will utilize these price advancing periods not to add to his position but to take some profits! He will do this knowing that the effect on the share price will be temporary, and he will use the occasion to recoup some or all the initial capital that he invested in the company. Such times present the investor with not only the opportunity to reduce his exposure, but also the good fortune of owning some stock for little or nothing. The goal is to possess a stock position and to be carried for free! Occasionally, if he believes that the success is not a flash in the pan he will wait for the stock to pull back before adding to his position. It is important to recognize that the reason that so few mines are actually built is for a plethora of reasons. These can be due to either nature or to man. Nature has a way of forming a very rich body of mineralization but later, due to either erosion or movements of the earth, it can either reduce its size or transport a portion of the deposit miles away from where it was deposited. These are the reasons why most positive exploration results ultimately lead to the abandonment of the target. For example, initial encouraging surface sampling results may have occurred because the remnants of an ore body may have been carried by an ancient river and deposited at the site. When they either perform channel sampling or drill the target, the ground beneath might be barren of mineralization. Further, if a company discovers either a potential open pit deposit or a very rich vein, they may later abandon the prospect because either the grade is insufficient, its tonnage is inadequate, the mineralized structure may be at too great a depth, or the vein might pinch off or disappear. In each instance what initially appeared to be an exciting discovery may turn into a disappointment! As for man, mistakes are made or management may attempt a feat of which they are not suitable. A great exploration geologist normally has little knowledge about building a profitable mine. He may have the capacity to sense the presence of a great body of mineralization but once the deposit is defined he will normally hand the mine's development to those who specialize in that field. Too often, a team of explorers attempt to bring their discovery into production and fail. However, even in these instances the knowledgeable investor will profit! This is because enormous excitement will have likely been elicited by the announcements from each positive press release. This will give him the opportunity to take profits, and they may be substantial. To me it is a given that well managed companies will often generate excitement as the current precious and base metals Bull Markets unfold. Even if they are not successful on their first project, they will find new ones in their continual search for success! Therefore, as your company progresses, it is virtually assured that the ability to take some of your money off of the table should present itself on more than one occasion. . In order to achieve success, a primary investor goal should be to own shares in as many companies as possible, while having as little of his own money at risk in any individual junior. Further, patience is mandatory for an investor to profit from speculating in this field! It normally requires five to seven years from the time of a "discovery" to profitable ore extraction if a mine is built. Further, exploration is often hampered by any of a number of problems or conditions. They can range from weather, licensing, road building, or various negotiations that can delay a project's advancement. Additionally, even with the best of exploration experts, it often takes time to find and to acquire the right project. It can easily require a year or more for an exciting acquisition to actually be secured. This is the reason why I attempt to acquire shares in companies in the early stages of their development, that are managed by those individuals in which I have both the greatest confidence and trust. It allows me to purchase stock for pennies that have the potential to soar to dollars. I am prepared to wait patiently as it could take one, two or even three years before the right conditions present themselves. However, I will comfortably and confidently await the rewards, knowing that I have aligned myself with the best of the best. If one of your companies successfully proceeds to the point of performing either a pre-feasibility or feasibility study other opportunities and problems will arise. On the positive side, if investors believe that the project is nearing a mining decision they will bid up the stock with this anticipation. This gives the wise investor yet another opportunity to either recoup the balance of his investment in the stock, or to even book some profits. He does this with the knowledge that one of a number of potential problems still lurk in the shadows that may kill it. This might be caused by a metallurgical difficulty that might greatly impact the mining cost. It could arise from political, environmental or native problems. Or, the cost of building the mine might be too prohibitive due to the absence of adequate infrastructure, such as electrical power or roads, making the mine uneconomic. Additionally, the economics of the project might be insufficient to allow the management to acquire the capital necessary for the mine's development. In the event that a company announces a positive feasibility study and prepares to finance and build a mine, they're still not out of the woods. However, a mining decision will virtually assure another wave of investor interest and a surging share price. Again, this offers the aware investor an opportunity to greatly profit from his initial investment. His remaining shares should now be worth many multiples of their original cost. Among the potential pitfalls for the company as they proceed to production, are that they may realize that they have underestimated some of their costs. Further, they may find themselves in the throes of a declining price for the mineral or minerals that they wish to mine. Additionally, they may even become entrapped in a legal battle. These can arise for a number of reasons. Someone may claim that they hold title to the property or were somehow cheated by the company. Or the local inhabitants or prevailing government might interfere with the permitting process and delay or prevent the mine's construction. If you have properly retrieved your original investment in the company these problems will barely affect you. You will possess free stock in the company and can patiently wait until the problems are resolved. As you can see, the junior exploration sector has more than its share of problems and pitfalls. However, recognizing this and making one's mind up to utilize the periods that are destined to occur, when a company meets with success during any given exploration stage, can provide exceedingly handsome rewards. Further, if managed properly, speculating in this field gives one the potential to meet with major financial success if one of the companies in your portfolio either makes a mine or is taken over by a major producing company. I for one am confident that given the enormous amount of capital, over $3 Cd. billion has been acquired in the past year to fund the Canadian explorers, that major discoveries will soon be made. When these occur they will generate a substantial amount of excitement. This will attract what will likely become an unprecedented amount of money to this tiny industry. When this transpires, it will act to drive the majority of stocks to higher levels. In essence it will raise the value and therefore the prices of all companies that participate in the industry. Further, the Bull Markets in not only the precious metals but also the various base metals, will transform numerous heretofore uneconomic deposits into wildly profitable ones. This will greatly enhance the value of companies who benefit from this, and will bring additional excitement and investor interest to the junior mineral exploration companies. And with it higher prices for the majority of their shares. Dr Richard
Appel Appel Archives. I publish Financial Insights. It is a monthly newsletter in which I discuss gold, the financial markets, as well as various junior resource stocks that I believe offer great price appreciation potential. Disclaimer. Please visit my website www.financialinsights.org where you will be able to view previous issues of Financial Insights, as well as the companies that I am presently following. You will also be able to learn about me and about a special subscription offer.
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