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June 25, 2006 - The junior exploration
market is a minefield to most who enter it. This is because few individuals
are properly prepared to maneuver in it, and are
thus fated to suffer the inevitable consequences. Yet, if properly approached
I believe that junior stock speculation can greatly enhance an investor's
wealth.
An investor may wisely or luckily select a company's
stock that is destined for higher prices. Or, he may become entranced by one
of the over-zealous promoters who convince him that his company's future is
destined for a meteoric rise. In either instance the investor may enjoy a
roller coaster ride that takes his stock to dizzying heights, only to find it
returning to or below his starting point when the meteor falls back to earth.
The purpose of this essay is not to deter investors
from this market. My hope is to better educate and prepare the reader so that
he or she can reap the rich rewards that it offers, while minimizing their
losses.
In order to achieve this goal one must understand
the true odds for a company's lasting success, the players in this market,
and the application of risk vs. reward when choosing a company. Further, the
risk must be spread among a number of companies. In this fashion if one does
well it should more than compensate for any losses produced by the others.
Finally, and possibly of greatest importance is the absolute need to control
one's emotions, and especially our greed.
A successful mining stock has many meanings to
different people. This runs the gamut between promoters who are only
interested in generating excitement in their stock, so that they can sell
their cheaply acquired shares to the public, and dedicated mining people who
are interested in utilizing their skills to make a mine.
The ultimate goal for all participants is to take a
company's share price from pennies into the multi-dollar range. However, you
must first recognize that finding a mine is not the only fashion in which to
achieve this end. In fact, if this is your primary expectation your financial
future is likely doomed to failure.
A story was related to me several years ago by an
experienced and successful mining professional. Around 1990, a major mining
company Cominco, now Teck-Cominco, decided to
review all of the projects upon which they expended at least $1 million. For
newcomers to this industry, the vast majority of potential properties are
dropped long before this lofty expenditure threshold is reached. The result
was that only six or seven mines were actually brought into production across
a period that spanned nearly a century.
This should give you an idea of the industry's mine
finding success rate, which is nil. However, it also exposes the great
profitability that results should a company succeed. This track record
allowed Cominco to prosper for decades as one of the earliest and foremost
north American mining companies.
Correctly evaluating the market's players is of
primary importance and can determine your ultimate investment success or
failure. When I investigate a junior company my first goal is to determine
the quality of its management. I look for directors who have had past
exploration success and who hopefully were instrumental in developing one or
more mines. Unless a company is fortunate to already possess an advanced
stage project, it is rare that a management team with no earlier successes
will prove successful in their present venture.
I also desire to be assured that a company's
management has the ability to attract major projects as well as to finance
their development. Importantly, the more successful the individual or team
has been, the greater the likelihood that these goals can be achieved.
This results for the following reasons. First, their
earlier successes have made substantial sums of money for their earlier
followers. This will motivate their investors to again finance their
ventures. Next, vendors will offer them their better projects. In exchange
for their properties, owners benefit most when the acquired company's shares
either rise in value, or if production ensues and their residual interests
becomes valuable. In effect, they get their greatest opportunity to profit if
they sell to the best management teams.
The term promotion is normally perceived in a
negative light. Indeed, there are "unethical promoters" in this
industry who misrepresent their company's attributes through deceit. They do
this in order to attract buying to their stock with little concern for those
whose confidence they betray. Knowing this, it is the investor's duty to be aware
of their existence and to do your best to steer clear of them. The old adage,
"if it's too good to be true it probably isn't", should be kept at
the forefront of one's mind, and adhered to when you evaluate any company.
In the mining industry a certain amount of promotion
is mandatory! This is due to the poor dissemination of information that is
inherent in this market. It is virtually impossible for the various market
players to know and properly evaluate the progress that thousands of junior
companies achieve on a daily basis. This includes the resource market
brokers, analysts and other professionals.
For example, if an obscure company "pulls a
hole" or acquires an important project that has great implications for
its future, few individuals may initially recognize that fact. Those who do
will be able to make their purchases without increasing its share price to a
level that is commensurate with the company's new state. Therefore, it is not
unusual for a company to be forced to unnecessarily dilute its share
structure when they go to the marketplace to fund new work programs or its
major acquisition. This occurs because they will have to issue far more stock
due to its lower than justified price, and also reduces their shareholder's
profit potential.
It is for this reason that promotions that are meant
to make investors aware of a company's advancement are not only justified but
are crucial to the company's progress, and to their stockholders. If
performed successfully it will make a far wider segment of the investment
community aware of their progress. This in turn will attract sufficient
purchasing of their stock to raise it to a fair market level. When done
properly, without the primary motive to prey on the unwary, it will benefit
the company, its stockholders, and the industry.
Determining the risk vs
reward when evaluating stocks is crucial. As I noted earlier most companies
are doomed to fail in their quest to make a mine. Thus, a prudent investor
should only be interested in projects that have substantial upside potential.
In this fashion you will be greatly rather than lesser rewarded, if it avoids
all of the potential stumbling blocks, and your company actually succeeds.
I begin my risk vs. reward assessments by comparing
a company's fully diluted market capitalization (number of fully diluted
shares multiplied by its current stock price) with the value that the
company's interest in a project should reasonably be expected to be worth, if
they develop an economic orebody. I then arrive at
a multiple; the company's projected market cap if they prove successful,
divided by its current market capitalization. This helps me compare one
company with another and choose the one that should percentage-wise benefit
me the most if I am correct.
There are some intangibles that also must be
factored in. They include working capital and other project's already in the
company, their management's ability to acquire new projects, their overhead
and burn-rate, and the pluses or minuses of the country in which they are working.
As you can see this requires some work. There is
truly no easy road to riches! If you are not prepared to do your own due
diligence, you should avoid not only this but all investment areas. You must
remember that you are working with your hard-earned money. Do not be
deterred. After a while it will become an easier exercise.
Controlling one's emotions and a business like
approach to investing in this market are mandatory. The volatility of the
junior companies compares best with that of commodities. However, the price
movements of the juniors often pale those of even the most explosive
commodities. This allows for substantial profits, but also for great losses.
Many investors are drawn to purchase junior companies when they see the
excitement generated by some news announcement or a rocketing share price.
This is quite dangerous and is a primary cause why most investors lose money
in this field. They buy during a run-up only to later see their stock prices
whither away. Or, they ride a company from its lows to its peak only to have
their greed keep them invested as it crests and cascades downward.
I strive to acquire shares in companies that are
well managed and already have one or more projects offering great potential.
Further, I do this when their markets is quiet and its prices are low. This
requires much patience to allow their projects to advance. But, I believe it
is the best method that one can utilize to survive and thrive in the junior
resource universe. If you choose a good mix of stocks using these methods, I
believe that you will give yourself the best opportunity for success.
You must learn to sell into strength! Assuming that
you have picked a number of well-managed explorers you should periodically be
presented with exciting price rises. Given the fact that most projects will
ultimately fail for one reason or another, you should always take profits
when the opportunity presents itself. Some analysts suggest selling half of
your holdings when a stock doubles in price. It is my belief that if you are
fortunate enough to experience more than a doubling in a share price, you
should make a partial sale of your position if for no other reason but for
self-preservation.
The longer that you speculate in this market the
more times that you will see a stock explode in price only to later give back
half or more of its spirited advance. This will occur even if the company
ultimately achieves the greatest possible success. Remember, you can usually
buy back later. In fact, as time progresses, you will have more information
and the stock price will likely be lower after the initial excitement wears
off.
If you rigidly follow the above suggestions I
believe that you will have the best opportunity for success. Our greed is our
worst enemy! Its effect must be overcome if we are to succeed in this or in
any investment endeavor. Routinely taking partial
profits whenever they are offered to you is one of the surest methods to
survive and flourish in this field. I wish you all the very best of luck in
achieving this goal.
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______________________________
By
: Dr. Richard
S. Appel
www.financialinsights.org
The
above was excerpted from the July 2006 issue of Financial Insights ©
June 25, 2006.
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.
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.
CAVEAT
I
expect to have positions in many of the stocks that I discuss in these
letters, and I will always disclose them to you. In essence, I will be
putting my money where my mouth is! However, if this troubles you please
avoid those that I own! I will attempt wherever possible, to offer stocks
that I believe will allow my subscribers to participate without unduly
affecting the stock price. It is my desire for my subscribers to purchase
their stock as cheaply as possible. I would also suggest to beginning purchasers
of these stocks, the following:
always place limit orders when making purchases. If you don't, you run the
risk of paying too much because you may inadvertently and unnecessarily raise
the price. It may take a little patience, but in the long run you will save
yourself a significant sum of money. In order to have a chance for success in
this market, you must spread your risk among several companies. To that end,
you should divide your available risk money into equal increments. These are
all speculations! Never invest any money in these stocks that you could not
afford to lose all of
Please call the companies regularly. They are controlling
your investments.
FINANCIAL INSIGHTS is written and published by Dr. Richard Appel
and is made available for informational purposes only. Dr. Appel pledges to disclose if he directly or indirectly
has a position in any of the securities mentioned. He will make every effort
to obtain information from sources believed to be reliable, but its accuracy
and completeness cannot be guaranteed. Dr. Appel
encourages your letters and emails, but cannot respond personally. Be assured
that all letters will be read and considered for response in future letters.
It is in your best interest to contact any company in which you consider
investing, regarding their financial statements and corporate information.
Further, you should thoroughly research and consult with a professional
investment advisor before making any equity investments. Use of any
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