Hope springs eternal for junior explorers. For most projects, the highest value comes before a single assay is taken. The fact is most of the world is cow pasture or goat hills and will never become a mine. Among the 1,400+ junior mining companies on the TSX alone, maybe 100 have economic projects. If you talk to every CEO, he is sitting on the next Eldorado Gold Mine. In reality, most aren’t.
It all sounds like common sense, but the extraordinary returns from the few results-delivering projects spur the mania of all half-failed projects. Of the billions of dollars spent, most is wasted hunting for good ore bodies that do not exist. Investors remember the few wins, forget the painful losses, and grow to hate the lingering half-dead companies in their portfolios.
We’re not advising people to forego investing in exploration plays. We do, however, want to remind people to ask a few basic questions when looking at whether a project makes sense:
· Historically, has the location hosted similar deposits?
· Is the management qualified and not recently out of the adult film industry or some other non-relevant background? Any exploration play on the grassroots level without a geologist in one of the top three jobs scares us.
· Could the ore body be material? What is the shape and size of the ore body? Does the grade make economic sense? Is it open for expansion?
· Can you imagine a mine in the location? Look at everything from infrastructure to the inverse NIMBY issues. Are locals mining friendly? Is there water? Is it too hot/cold?
· Who are the directors, and have they seen a project or two before this one? Don’t expect rocket scientists, as there are relatively few world-class directors to go around for all 1,400 companies. Big company experience can come from the accounting or HR departments of the majors, so not all ex-Noranda or BHP “executives” were created equal.
Good projects tend to be excellent risk-reward bets, but they’re rare. You must understand the limitations and that even the best management team in the world cannot always find an ore body with the right combination of the aforementioned factors to turn it into a viable mine. Profit from the winners, sell the losers, and be skeptical about drinking the Kool-Aid about gold in the hills.
The other option is the lemming game. Get in early, enjoy the ride, sell the shares, and find the next ride. Lots of money is made in mining retail investors and never building a mine.