You don’t have to be the early bird to catch the worm!

Monday, 15th November 2010 16:36 - by Riddler

I have been in reflective mood of late, particularly with regards my ‘junior’ mining stocks. Commodity stocks are ‘red- hot’ at the moment, on the back of more QE (Quantitative Easing) from the U.S. and the rises in Copper, Gold, and Oil prices particularly. I have a number of junior explorers and recently-producing junior miners; all found on AIM (Alternative Investment Market). I believe that AIM holds the real gems if good screening processes are employed. I have touched upon this issue in previous Blogs, but would like to elaborate on this further. After three years of experience, research, advice, and reading publications, it is clear that one doesn’t have to ‘jump’ in on the first sign of spectacular Gold grades or early signs of a viable mine life. Instead, it may be worth noting the main ‘phases’ or ‘cycles’ that a junior miner/explorer might have to go through before actually being able to mine and sell their Gold, Copper, Uranium, etc. • Phase 1: A company has a licence granted or acquires a licence area where initial studies suggest promising ‘inferred’ resources. The company will then need to fund further drilling and scoping studies. • Phase 2: The company will spend 12 months or so trying to get some JORC (Joint Ore Reserves Committee) figures finalised in an attempt to quantify the resource size and grades. They will need to move from ‘indicated’ through to the far more reliable ‘measured’ JORC category. Again, the company might need extra funding to assist in these studies, so be on the watch for ‘Placings’ to raise extra capital. • Phase 3: The company will hopefully issue a JORC-compliant upgrade to their initial findings. For example, they may now have 2 million ‘measured’ ounces of Gold and a further 2 million ‘inferred’ ounces. • Phase 4: The company will outline a detailed plan as to how they will mine; how much it will cost, the life-span of the mine, the method of extraction, etc. This could take many, many months. • Phase 5: If they get the required funding and the mine is economically viable (many were not in the 1990s due to the decline in the price of Gold to c.$500 per ounce, compared to $1,400 today), the company will usually give an idea as to when the mine will commence production…BUT may still need extra permits, and will certainly need more cash. These are just some of the key phases, and while the ‘speculative’ money may be invested at Phases 2 - 3, it is actually more prudent to wait for Phase 5 and beyond to ensure that your metaphorical ‘juicy worm’ is indeed worth the effort. Otherwise, it could end up literally being a ‘money-pit’ that you are investing into. Or, as Mark Twain famously said, “a hole in the ground with a liar stood at the top”.