Setting the scene:
“The single most important thing to me in the stock market for anyone, is to know what you own. I’m amazed how many people own stocks they would not be able to tell you why they own it. They couldn’t say, in a minute or less, why they (own it). “
“If you really press them down they’d say that the reason I own this is the sucker’s going up“
“If you can’t explain to a ten year old in two minutes or less, why you own it, then you shouldn’t own it”
This simple truth is why I mostly stay away from grass root explorers. I am not a geologist and I have simply no idea if there is a 1/50 or 1/1000 chance for a junior to find anything of value so why even go there? What I do know is that there are PEOPLE out there who know a lot more than me. I find it very important to know what you DON’T know, and act accordingly. On that note I have no idea where the price of gold will trade tomorrow, a month from now or years from now. Since I don’t know, it shouldn’t really be factored into my investing decisions. I can’t control it. What I can control is to try and find the companies which should do well no matter if the price of gold is high or low. I can also control what I think something might be worth and what I am ready to pay for it. Lastly, we also know that the gold mining sector as a whole is on the way towards a supply crunch so that makes a rising price of gold more likely in the future.
Another thing topic that Lynch mentions in the video above and which I have done articles on before is the importance of knowing WHY you bought a stock. I think a good rule of thumb is that in the case that you get anxious and/or upset when a stock you own goes down then you don’t know it well enough. If you KNEW it should absolutely be worth at least $5, was trading at $3 and then drops to $2, you should be jumping with joy assuming you have some dry powder. If you instead ended up selling it simply because the stock got cheaper then you really had no clue why you bought it in the first place. Anytime I have capital to employ I am hoping that all stocks I am interested in will crash for no reason other than sentiment. This is why you never see me whine about a declining share price in whatever stock I am invested in or like.
I could boil down my junior mining investment strategy into two goals: I want to buy a) Something cheap with b) A lot of potential, and preferably even probable, growth.
If there is a lot of exploration upside I don’t need it to be extremely cheap in order to buy. If there is less exploration upside then I want it to be extremely cheap based on what they already got.
I am looking for “no brainers”. Companies that I think are run buy great people, who know what success looks like, who wants the company to succeed and not just want to work for work’s sake (a salary).
If I were to rank the criteria I find most important it would go something like this:
Now, every mining company has a lot of moving parts and geology is never simple. However, I don’t need to understand it all. I just need the management to understand it and I need them to have integrity.
If I were to sum up some of my favorite companies that even a ten year old would get it, it would go something like this:
Big prize. Multiple targets. Multiple projects. World’s largest gold miner likes it. Quinton Hennigh.
Enormous potential prize. One of the world’s largest companies likes it. Quinton Hennigh.
Lion One Metals
Very large potential prize. Got a mining permit already. Headed by Wally Berukoff who is one of the most successful businessmen in the space. Quinton Hennigh.
Cheap for what they already have. Simple open pit, but high quality project, with robust growth potential. Management have a lot of skin in the game and have done it before.
Very cheap based on what they have. Royal Gold likes it. Robust growth potential. Management has done it before.
Cheap based on what they have. One of the most economic areas for a mine. Management has done it before in the same area.
Cheap relative to the potential. High risk/high reward. Quinton Hennigh.
Very cheap relative to what they got. Got some growth potential. Diversified. One of the few producers that have been able to stay profitable multiple years in a row.
Sure, one could justify buying any grass root explorer by saying “It’s cheap relative to what they could find”. However, said grass root explorer does usually not have the People criteria ticked. If it’s an explorer, doe sit have a proven exploration geologist behind it? If it’s a developer, does it have a management team that have done it before? If not, then I got no good second opinion to back up that claim with. Remember, everyone will say they have a good project with a lot of upside potential. Only few actually have it.
An exercise I like to do is to think about how I would “sell a case” to a family member that knows nothing about mining. If I am on to something it usually/hopefully results in something simple and short like: “Great people involved with skin in the game and they got a lot of growth potential”. I am often willing to pay up for people who have done it before and know what they are doing since chance of success should be a lot higher compared to the average junior. There is a lot of cheap “crap” out there and usually it will stay that way unfortunately.
Simple is good. Not bad.
Note: This is not investing advice. I own shares of all companies mentioned. Lion One Metals, Novo Resources, TriStar Gold and Prime Mining are banner sponsors of my site. I might thus be biased. Do your own due diligence and come to your own conclusions.