Have a plan going in

On the rare occasions, Junior mining stocks can deliver truly mind-boggling percentage gains and "life altering" profits. Most times, they don't find the mother load, so by their nature; exploration companies are extremely risky ventures. But that doesn't mean there aren't profit opportunities in them as well. Significant discoveries that never become mines can still generate 5 to 10 bagger profit potential for shareholders of the company making the discovery and sizeable gains for the surrounding claim stakers as well depending on the significance of the discovery. But if a person wades into this sector without a plan, with no concept of where they are within the promotional and sector cycles, they can lose big time.

To start with, there's a time when we shouldn't bother with junior mining stocks at all. Like starting in 1996 the year Bre-x peaked and the following four years as metal prices declined and technology took center stage. There's no speculative appeal during a severe, prolonged bear market and therefore few if any speculative profits to be had. But in 2000, the trends completely reversed. Once it's determined that it's a good time for the metals sector, then there's a matter of utilizing a strategy to chose which juniors to buy and when to buy them. By employing some strategies instead of going in and buying haphazardly, with a little luck speculators can "mine" enough gains to offset the inevitable losers. It's been a number of years since we've played the junior mining stocks and some subscribers might be new to the game, so I felt it was time for a refresher since it looks like there's an across the board revival getting underway in the metals markets.

Spreading the risk, improving the odds The chances of determining which stock will be the next Ekati Diamond Mine or Eskay Creek high grade Gold mine are a thousand to one, maybe even less. A truly rare event. It's very much an odds game. So to increase the odds, a person might spread the total amount they want to devote to the group over a basket of say, 3 to 10 carefully chosen and timed stocks purchases. Ten juniors have ten times the number of chances of hitting something sizeable than one. The odds are still very low, but better. Carefully timing acquisitions Unless one is as careful about WHEN they purchase these juniors, as they are at selecting WHICH juniors they buy, they could easily get burned. One might be attracted to a story due to news at the time and buy high. The secret here is to understand where the stock is in relation to its promotional cycle and seasonal cycle. Many times it pays to watch the stock for some time until the cycles are near their lows. This reduces risk and improves the odds of taking out some trading profits.

Another way to look at this, albeit oversimplified, is to attempt to buy as many of these juniors as you can as close as you can to their annual lows. Pull up a chart on these penny stocks and you'll see a multi-month period where the promoters simply give up and throw in the towel. At one time, this used to be simpler as most of the time this would happen in November and December. But now with exploration occurring any time of the year, these stocks often have lives of their own and the annual lows could be at different times of the year. And don't buy in the middle of a drilling program when the stock's all hyped up but months before.

Selection criteria. These are the characteristics we look for in promising junior explorers. The stronger a company is in each of the following areas, the more it is worth. The game is paying the least amount possible for the greatest amount of quality going for it.

1. Management - I look for the following characteristics in management; first they must be capable of finding deposits based on their previous records of performance. Next they must have the Integrity put shareholders first. They must be Aggressive - in the pursuit of new opportunities and financing to acquire and explore them. Finally, I like to see management holds a Large stake in the company. The shareholder's gains or losses should be, as Warren Buffett puts it, in line with the success for failures of management. Not like John Roth who walked away from Nortel with $120 Million, leaving shareholders holding the bag.

2. Location, location, location - Even before Bre-x bombed, we had a preference for stocks of companies exploring in the Americas. We were and still are hesitant to buy stocks of companies exploring in corrupt or declining regions such as Africa and many parts of Asia. The closer to home, the better. This is not an absolute rule and there will be exceptions to it. For instance, British Columbia may host exciting new exploration opportunities, but we now need to be extremely concerned about Native Land Claims. Then there are other factors to consider - how remote the property is, how expensive a deposit might be to develop.

3. The Target - Investors are looking for companies with potential for large deposits. In the case of Gold - multi-million ounce deposits, either bonanza style high grade underground targets, or large tonnage lower grade open pit situations. The old prospector's saying - gold is where you find it (i.e. where it's been found in the past) may sound like a motherhood statement, but it's true. Of course there is way more to evaluating a property than that, something we may expand on in a future issue.

4. Financing - The company must either already have funds to carry it through several stages of exploration, the ability to raise such funds without excessive dilution at low prices, or the ability to attract a senior mining partner to finance exploration and possible mine development.

5. Share Structure - Simply put - the "tighter" the share structure, the better. In other words the fewer shares out the better. Also consider what price the company has been financing operations at in relation to the current going price for the stock on the open market. Of course the closer one can buy to the financing prices (which is often where the insiders buy at) the better.