By Gwen Preston
Resource investing is easy, right? You just buy early, when the stock is still cheap, and sell high, after the market has rewarded discovery or development or production, right?
Except for every single part of it.
Let’s start at the beginning. The way to really buy early is to know when a new deal is being put together and get in on the early financing rounds. If there’s no room in the raise, knowledge of the new deal at least means you can buy in the market before the story – that proven team X is establishing a new gold co, that near-term project Y that got lost in the bear market is being revived, that resource savvy investment bank Z is backing a company because of a particular geologic concept – really gets out.
Of course, you can make good money buying later in the game, but really big wins usually start with cheap stock.
To that, every conversation I have with someone in the sector has two parts: update on the obvious (what their company is doing or what their group of analysts is seeing/thinking) and ask what else is going on.
That second question is essential.
Good opportunities take time to establish. And good people are often advancing new ideas on the side, while still focused on a public venture. By asking “What else?” you get insight into the ideas and opportunities of tomorrow. That matters, because when all the groundwork is done and the new company launches, you know the idea, have vetted the structure, and know what you want to do.
But I’m talking about a tactic that just isn’t available to most investors, who don’t have daily conversations with exploration and mining execs. So challenge #1 for retail investors is hearing the story soon enough.
Challenge #2 is knowing whether the story has any chance of success.
Success requires far more than geology. It requires capital and share structure and jurisdiction and infrastructure and management and metallurgy and metal prices and promotion and geology, plus a bit of luck.
Every step towards success on each of those fronts can create share price response, which is why you can still make money buying later in the game, but the opposite is also true: failure on one of those fronts can collapse the entire house of cards.
That risk is ever present. The only way to mitigate it is to keep constant watch for new information and be able to understand what each new fact means.
The “what it means” part also has to happen rapido. A company issues a news release, with drill results or metallurgical results or even something more obscure like indicator mineral sampling data, and the market responds right away. To be on the right side of the response you have to understand the impact and act (buy or sell) immediately.
Example: there’s a company that has been riding high this year on a silver discovery in Mexico. Then two things happened, in pretty short order: a comment about the mineralogy raised metallurgical concerns and an influential newsletter writer said Sell. The share price, which had been up 10-fold on the year, has come off more than 60% in six weeks.
Neither of the catalysts were obvious. The mineralogy description was buried in a news release about the start of metallurgical testwork. Only subscribers were told about the letter writer’s Sell suggestion. But the impact has nevertheless been very significant.
I think the sell off is overdone and has created an opportunity, but I’ll save that ticker for my subscribers. The point here is that few people understood that the mineralogy could possibly matter and only a few more are immersed enough in the industry to hear about Sell notes.
You can probably see where I’m going with this.
I spend all of my time researching exploration and mining stocks. Constant engagement with the sector is step one: you greatly increase your chances of seeing significant news if you are always watching. Of course, challenge #3 for the retail investor is that most have day jobs that make this kind of vigilance impossible.
Then there’s that need to understand and react. For me, years of assessing exploration ideas, development plans, mining operations, and corporate structures gives me enough experience and knowledge to stand a chance of understanding what the news means, whether it’s important, and how the market might react. It is very hard for investors – even those genuinely and deeply interested in the mining sector – to establish enough knowledge and context to handle the range of information that miners and explorers produce.
A good example of how this all plays out happened in early October, when a Canadian junior announced a very nice drill result: volcanogenic massive sulphide mineralization with good grades of zinc, plus some gold, silver, and copper. The hit came at almost 1000 metres depth, which might have negated the impact in some areas but in this jurisdiction only supported the idea that the hit was the beginning of something exciting and potentially economic.
The news came before markets opened. When they did, the stock jumped more than 50%. To benefit, you had to have seen the news (constant vigilance, challenge #3) and understood its significance (understanding odds of success, challenge #2). It’s a very difficult set of requirements for the retail investor.
Newsletter writers cover a wide spectrum. The way I see it, the spectrum ranges from subscriber-supported writers at one end to pay-for-coverage writers at the other. There are some good pay-for-coverage letters, from guys who only accept good companies as clients, but most just write glowing reports about companies writing cheques.
Subscriber-supported letters are different. They offer objective opinions on investment opportunities, from folks that can handle the three challenges I just outlined. They are usually about what the writer is doing with his or her own money, so their recommendations represent a connected and vigilant resource expert putting his or her money where his or her mouth is.
That drill result that popped a share price 50% in a day? Subscribers to at least one newsletter received news of the result, an explanation of why it was exciting, and a recommendation to buy the stock, all before the market opened.
It was not my letter, just FYI. This isn’t about tooting my own horn. It’s about explaining what good newsletter writers have to offer.
If this all makes sense, and if you can be in Vancouver this weekend, there’s an event taking place that you should attend. It’s called the Metals Investor Forum. It brings together a group of subscriber-supported newsletter writers and their Top Pick resource companies for two days of shop talk and investment ideas. Free food, more metals talk than you can shake a stick at, and presentations from explorers, developers, and miners that have earned a recommendation from one of the host writers – it makes for a great way to spend the weekend.
Fear propelled gold up…but correction ain’t over yet. (link: https://www.resourcemaven.ca/blog/rising-on-fear-but-correction-will-continue)