Understanding the exploration cycle and milestones are key
Investing in junior mining (also called exploration companies or explorers), i.e. in companies involved in the discovery and development of new deposits of gold, copper, lithium, etc., is still a niche market. This exiting and high-income-yielding sector is publicly notorious for being too complicated, not beginner-friendly or extremely volatile or risky, and there are various prejudices attached to it - all of which are largely incorrect.
In this blog, I explain why this is the case, and how you can exploit the huge upside potential this industry offers.
PUBLISHED JUNE 17, 2024
Why you should consider investing in Junior Miners
Today I will show you how you can make profits ranging from 15% to 1000% (and even beyond) time and time again with such investments. It sounds incredible, and I often don't dare mention such figures. Although the 1000% mark is somewhat exclusive, it happens again and again. But that's not the point. The point is that there is an incredible number of opportunities for a junior mining investor to profit from their efforts while a project is being developed. Whether that's 15%, 75%, 325% or 750% and beyond, all of these rates should make investors rejoice. And...such returns are often achieved within a very short period of time (but that depends in the end on your strategy, and the stage where your project is).
Now many investors believe 'high risk - high return' - that sounds like gambling. I will demonstrate however that well-considered and thoughtful investment in exploration companies can be a reason-based strategy. Also, you may significantly reduce risk if you invest in certain companies with distinct qualitative characteristics that significantly increase the chances of the above-mentioned returns.
And the best and most important thing maybe is this: In order to make substantial profits with Junior Miners, by taking into acount what I outline in the blog, the company that you invest in doesn’t even need to hit it big and find a deposit and/or build a mine at the end. Your RoI and the end result of the explorer’s undertakings are independent!
Because this is perhaps the biggest prejudice I would like to dispel here: many sceptics say that the chance of an exploration project becoming a mine is less than 1:100. Yes, that is correct. It's a needle in a haystack. But the exploration process is more complex than that:
At the beginning, it may be enough for the company to show that there may be indeed a needle hidden in its haystack. Just the presence of the needle counts here, not so much its precise location, size and quality. The mere fact that a capable company can credibly demonstrate this with scientific data can result in huge price jumps of 100% and more.
And so there is a sequence of disctinct phases, all of which have a specific goal. If the junior miner successfully approaches and accomplishes these goals, substantial price jumps are likely to occur. And all the goals taken together will eventually result in having found (and assessed) the needle.
But by the time this needle is found, you may have already achieved high returns and sold your shares long ago, regardless of whether the needle was ultimately found or not!
Why explorers?
Comparing data from 2023 between different investment options shows the enormous opportunities that Junior Mining investments can offer. I have taken two explorers for this example, namely Ophir Gold (now named Ophir Metals), and Viridis Mining. Both companies have achieved share price increases over 700% within these ten months of 2023.
While admittedly comparing apples with pears, the graph nevertheless highlights what's possible with Junior Mining investments. The two junior miners dwarf other investment destinations by a significant number.
In this blog, I would like to show you the steps that are important in order to accomplish these returns. This will show you that there is no magic involved. Rather, investing successfully in Explorers can and should be done rationally, wisely and with a view to minimizing risk. The most important steps are explained below.
Selecting your explorer and determining its status
Before you decide on a junior miner, you should determine whether it is an 'early', an 'advanced' or a 'late' explorer. There are different approaches and strategies for all of them. Because in the end, an early explorer wants to get enough data and information to start drilling (i.e. progress from early to advanced), while an advanced explorer will drill a hell of a lot in order to fully understand size and grade of the deposit, and come up with the total volume of contained metal (the reserve). The late explorer in the end is working on all details to acquire funds through the market to build a mine in the end.
For each, there are corresponding 'milestones' or key achievements
When a first delineation of a resource exists, (aka maiden resource estimate) we are talking about an ‘advanced’ exploration project from that time onwards.
In principle, we are distinguishing between three phases during the exploration process:
Note 1: PEA = Preliminary Economic Assessment; PFS = Pre-Feasibility Study; FS = Feasibility Study
In real-life pictures, the three phases may look something like the below:
Prospecting / early exploration
Drilling, post drilling and advanced exploration
Construction
Note 2: As I have pointed out before, there is no need to start at the very beginning, and follow through up to the end (which could be either building a mine - or disappearing from the market). That would, beside the high risk, also mean to spend many many years until your investment pays off. Probably 15 to 20 years. In reality though, we can make money within a few months, sometimes in even shorter time periods (but sometimes also longer).
Now that we know the three main phases, lets look at what happens with the value of an exploration project during these phases, to understand where investment opportunities are located.
I will therefore introduce you to the so-called ‘Lassonde-Curve’, which depicts the development of an exploration property from the beginning to the end. You can see the different stages on the horizontal axis, and the value of the project on the vertical axis:
The Lassonde curve pitches the absolute value development of an exploration project against the specific phases. Note however that in the early phases too, relative share price development can equally be substantial, with 3-digit growth rates being possible (but of course, losses are possible as well).
Key information for you to take:
- The total value of the project and the explorer increases over time: When just starting, the Junior Miner might have a market capitalization of below 10 mio USD. When it is undertaking its feasibility studies, it might increase to anything between 100 mio USD and even 200 mio USD.
- The highest increase in value normally occurs during the early drilling phase, until a discovery is made (first hump), and then continuing until the first estimate of the overall resources underground, the Maiden Resource Estimate (MRE), is being undertaken.
- Value development then tends to cool down: This is because the early investors (sometimes referred to ‘speculators’ – but I find the term inappropriate) leave. They do so because a lot of money was made until this point. They sell and leave.
- In the orphan period, the explorer either sells the property to a major who will build the mine, or, the company is looking for investors to lend money to build the mine themselves.
- Only when construction starts, and when all economic numbers (ounces in the ground, ore grade, extraction costs, life of mine, profit rate etc) are determined, will institutional investors step in. From that point on, the value will start to increase again, and, because it now reflects the total value of a known mineral deposit, finally will surpass the value of the drill-stage project. The value of a new mine can be in the hundreds of millions of USD, or even in the billions.
Interested in reading more about Junior Mining, and some case studies? Just look up below
Alternatively, we could distinguish between two, rather than three phases: Before drilling, discovery and the MRE, the project is ‘speculative’ in nature. That means we have more unknowns than knowns. After discovery and the MRE, we have a quantifiable project (in terms of resources).
Example of how a Junior Miner is providing the relevant news about its MRE on his homepage: Erdene Resource Development
Because of this distinction, we can also apply different strategies that are tailored precisely to these two forms. But don't let the term 'speculative' impress you. As we will see in a moment, this form of investment also offers rational and risk-conscious opportunities:
2. Early Exploration
A few things to note: Early explorers are the riskiest to invest in. This is simply because we have very few information about what’s below the ground to start with. On the other hand: The opportunities for share price increases are also very big. We are in a classical ‚high risk – high reward‘environment.
Often, depending on the market sentiment, not a lot of ‘real’ work (such as complex geological tests and data analysis) is needed to send share prices skyrocketing. When we had the big lithium hype in 2019 to 2020, and then again in 2023, it was sometimes sufficient for companies to add a territory that was somewhat ‘conducive to host lithium-bearing pegmatites’ (note the very vague formulation). I have seen cases where companies adding such territories with producing lithium mines nearby had experienced hundreds of percent of value increase (we’ll talk about that a bit further below with the case of Lithium One).
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As such, this early phase already provides you with many opportunities to buy and sell again. In case you have found a project that really looks promising, and not only on a short term, and you keep on holding, you of course also have a nice long-term prospect for huge gains. This is because the upside potential is of course the biggest when you start early: As I explained further above, you start off with a company worth a few million bucks, and might end up in the advanced drill phase with a property that is valued by the market at 50, 90, 100 or 200 mio USD!
I personally like early explorers a lot – mostly because of this huge upside potential. But you can not just brush the risk component aside. You need to have a few fundamentals in place that you need to check for:
First of all, you should check whether your selected explorer meets the minimum quality requirements (see table below). This is because there are actually many projects that are unsuitable for offering added value to investors.
Experienced Top Management
You want a lot of experience, no beginners. The team information should list previous success cases in Junior Mining. Look this information up, and see if the top people have found and developed a deposit before. They also should have some experience in the metal or the region.
Additionally: Market capitalization below USD 10 mio.
Number of shares issued (fully diluted): max. 50-90 mio
Especially when you just are starting out to invest in Juniors, you should see that all of these conditions are met.
Now you may be wondering what an explorer actually is doing at such an early stage, and what this means for you as an investor. The explorer wants to find out:
o location, extent and mineral composition of the deposit, i.e.
o Location of the mineralized layers, and
o The grades of mineralization (e.g. how many grams of gold per tonne of rock)
- Whenever the company can show that there might be something of interest in the ground and can answer the above questions convincingly, it will publish the result and the share price will rise.
- The aim is to find out if there is a deposit, how large it is, and how much metal it contains. In addition, whether the deposit can be extended in length and depth. The larger the deposit, the better for the market value of the company.
Lithium One: When success-parameters as listed in the table above are met
Lithium One increased from 9ct in August 2022 to 76 cents in February 2023. That is almost 750% in just half a year. The main ingredient next to a good management and a hot lithium market at the time, was to buy a property next to one of the most successful lithium projects of recent years (namely Patriot Battery Metal's Corvette project).
As of now (Spring 2024), Lithium One has yet to undermine the price increase with a successful drill campaign. But if you had invested USD 2,000 in mid 2022 and sold again in February 2023 with a then value of almost USD 17,000 (profits of USD 15,000), you maybe don’t care any longer.
A lot of detailed research work is required of an explorer. Once drilling programs have begun, every centimetre of the drill cores (shown in the picture) must be precisely located in order to be able to analyse the deposit.
You should know exactly what the company is planning in the coming months. Stay up to date by regularly visiting your explorer's website. If the company announces or conducts a research program, you should also be able to expect one or more results within a few weeks.
Even if grand share price boosters such as in the Lithium One example are missing, you should find numerous occasions during an early exploration process to make profits.
The increase from 18 cents in May 2023 up to 56 cents in July 2023 by early explorer Ophir Gold (see chart below) are largely based on (successful) surface testing, spectrometric surveys and drill permits for a lithium project they have acquired just before. That is a nice 211 percent growth. So contrary to the Lithium One example, this increase was based on real work typical for an early explorer.
Reducing your exposure and risk:
One could of course sell after such a raise. Or, depending on how much you think the property still has to offer, you could also neutralize or limit your risk:
The stark oscillations are clearly visible with this Explorer: Increases of 100% and beyond are not uncommon in this business.
The principle of this type of risk-minimization is simple. You take advantage of the frequent upward swings by partial selling your stocks, thereby reducing or limiting your initial risk exposure. What's more, if the project is performing well overall, you can use the equally regular periodic dips to buy again.
Why does this work for explorers? Because the swings are quite simply more extreme. The only thing you need is an overview of your explorer's activities and, if necessary, a little patience, because not everything always happens in quick steps.
3. Advanced Exploration
When the junior miner starts a drilling program, an important milestone is reached. Because discoveries are only made if they are confirmed by drilling.
After a discovery is made, the Junior Miner is having more data at hand to delineate the resource over time, giving investors higher levels of confidence about what’s below the ground.
When you invest at this stage, there are in principle two options:
3.1) Expecting good drill results
A very popular, but not risk-free, method is to enter immediately before your explorer carries out a drilling program. If this is reasonably successful, there are big profits to be made. But note, this should not be approached like a lottery ticket. Do your homework, and estimate if the project has reasonable chances of doing a successsful drill campaign. The tests carried out so far should have met expectations. With a little experience, you will be able to back up your assumption with the existing information about the project.
Above, you see that explorer ATEX Resources is announcing a 'DISCOVERY' (hurray!!). The whole announcement is a 7 page PDF file providing details of the successful drill program that led to a gold discovery in Chile.
This is what happened with the share price in the subsequent weeks and months:
Being slightly above 10 cents for many months before the discovery, the price rose from 14 cents in July 21 just ahead of the drill campaign to 89 cents by June 2022: That is 535% within roughly a year. Sometimes such increases can be substantially swifter, but this increase on the other hand was steady throughout the next 11 months.
Another example comes from SQR Resources. You find the announcement of the discovery below:
And this is what happened to the share price:
The share price of SQR incresed by more than 3 times, within a very few days, after the announcement of the discovery.
To buy an advanced explorer, you should apply the same minimum standards as given in the previous table.
3.2) Riding the post-discovery wave
But even after this first big step has been completed, it is still worth getting involved. This is because the junior miner may be in a position to continuously increase the deposit through further test drillings. Hence, there may always be opportunities for further price rises. Note however that sometimes the share prices declines after the initial post-discovery hike, giving you a better entry-option. This however does not always occur. In the end, you need to make assumption based on how much you think the value of the project could develop before considering entering after the initial discovery success.
Coming back to ATEX resources, our Junior Miner from the gold discovery, we can see that option in real life. Because it turned out that the discovery was indeed a deposit of considerable size, enabling the company by way of added drill campaigns to increase the resources at length and at depth over a whole year. The share price continued to climb after the initial discovery up to 1,70 USD in May 23. That means that even if you had started to invest right after the discovery you could have increased your return on investment by round about 10 times, depending of course on the precise timing of your entry.
Of course not all initial discoveries end up like that. You have to make your judgement based on the announcement and the other information that the company provides in order to decide if there is indeed a wave that you can ride.
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Once we have an initial estimate of the reserves and, related to this, an overview of the economic key figures to be expected in the future, the actual planning process towards the construction of a mine is now initiated, and the company will put together important studies that outline the profitability of the potential future mine. These are the Pre-Feasibility and later the Feasibility Study. Sometimes a PFS is even preceeded by a Scoping Study or a Preliminary Economic Assessment (PEA). A FS is owever only the last in a series of important key studies that provide the investor with increasingly certain information about the deposit and the future mine project. They allow the investor to quantitatively evaluate, compare and rank the project in question.
Evaluate your deposit
Once we have the first set of economic data, we can start to evaluate the deposit, and make assumptions on the upside potential of the explorer, depending on if the valuation is considerable below the assessed value of the deposit. We have two evaluation methods at hand:
- Comparing market capitalization with deposit value. -> Is net worth lower than value of the deposit?
- Comparing the market value of ounces in the ground -> How is the market pricing the ounces of your project?
By taking in the quantity of the resource or reserve, multiply it with a specific factor, and detract the recovery rate (which is never 100%), we arrive at a certain deposit value which we can juxtapose against the market value (i.e. the market cap). You should invest in projects where there is considerable upside potential, i.e. the deposit value should be below the market cap.
The second method works similarly, and is best applied for gold or silver deposits. Based on the market cap, we can calculate how the market is pricing an ounce in the ground of your project.
Take note of the fact that what‘s below the ground does not have the same value as what‘s above. But there are differences even within peer groups, which can be of interest to us as investors. Here too, the more interesting investment destinations are those where we have identified upside potential based on the market price per ounce.
Finally, it is also important that projects that are priced very low, even in comparison to their peers, might also be priced because they, well, because they suck. So, be careful when your evaluation is considerably lower than anything else.
It is important to only buy explorers that fulfil the qualitative requirements (as described above) and that have turned out to be undervalued after the evaluation, i.e. that have a lot of room for improvement.
For explorers that keep on drilling and that are defining their resources, you have an additional option to make profits, aside from the two we have just discussed:
3.3 Aiming for milestones
Important opportunities arise via the so-called milestones that every explorer has to pass through. These are usually large and increasingly complex studies that not only look at the deposit, but also at the economic factors of the mine to be built and the further processing methods (as explained above). This means that the geology is taken into account, as well as the metallurgy and the political and infrastructural factors.
These are the milestones that are important to understand:
As a rule, the share price often rises over a period of several weeks (but sometimes even shorter), especially after the announcement or sometimes only after the actual publication of one of the studies or milestones, and then falls again until the next milestone.
The example below shows how a share price (Crown Mining) reacts positively to the announcement and publication of the preliminary economic assessment - PEA (of course only if the study delivers positive results overall, i.e. fulfils expectations for the project):
Overall, the share price rose by well over 50% between the announcement in November and the publication in February. However, for the investor with a little experience, a PEA is not a surprise, hence the announcement is no surprise. In this case, you could have started buying already in summer or early fall, and then enjoying almost 150% or 200% share price increase.
Here too, depending on the market situation, you sometimes have to be a little patient. The markets do not always react immediately. Sometimes a study and an extended resource or reserve have to come together to really heat up the market.
However, you can take the following saying to heart: Quality usually surfaces, as the Candians say. A good project will pay off sooner or later!
In the end, there is a fourth possibility to make very good profits, namely if your explorer is taken over by a major (i.e. an established producer).
Above-average deposits are frequently the target of purchasing. Above-average must be given in terms of size, expansion potential and ore grade. Mining costs are also important here. Such a project can then attract the interest of a major. A takeover, even the announcement of such a takeover, will generally have a very positive effect on the share price.