If you're among the many who consider investing in the junior resource sector nothing more than a crapshoot, look into Ahead of the Herd Publisher Rick Mills' steps to derisk the inherently risky business of investing in junior resource companies. In this exclusive with The Gold Report, Mills not only spells out the steps involved in the derisking process, but also cites specific examples of juniors he especially likes and discusses the features that put them ahead of the herd.
The Gold Report: We have seen some incredible volatility in the market over the last three or four months, with many junior resource stocks on the Toronto Venture Exchange beaten down, even if they have proven resources and substantial cash treasuries. We have also seen some volatility in the price of gold and a disconnect between the price of gold and the price of juniors. In this environment, how should investors approach risk in the junior resource space?
Rick Mills: I agree with Baron Nathan Rothschild who became a legend during the financial crisis right after the Franco-Prussian War. As the story goes, a panic-stricken investor came screaming into his office yelling, "You advise me to buy securities now? Now? The streets of Paris run with blood!" Rothschild replied, "My dear friend, if the streets of Paris were not running with blood, do you think you would be able to buy at the present prices? Buy when there's blood in the streets, even if the blood is your own."
I'm pretty sure things today are not as bad as they were back then, but this market offers contrarian-minded investors an opportunity to take huge advantage of discount share prices and, as you pointed out, many are trading below cash in the bank. Many, many are way undervalued compared to what they have in the ground and what they will have. The thing to do is to even further derisk.
Everything we do has some level of risk, from flying in a plane to walking across the street. All our lives we identify and quantify risk, so it's second nature and part of our makeup. Everyone has his own risk profile, of course. For instance, maybe you won't bungee-jump off a bridge or willingly parachute from an airplane, but you'll happily get crazy driving around on an ATV or a snowmobile. You have a risk profile. You will do this; you won't do that.
TGR: So far, so good. So how do you derisk these stocks?
RM: The way to derisk investments into junior resource companies is to know your risk profile. Then wisely deploy capital into the right management team in the right stage, for you, of company development.
TGR: What steps would investors take to identify companies they're comfortable with? How can they make better-informed choices and thus create less risk?
RM: The most important things are to know yourself and to know that juniors are inherently risky. Understand how much volatility you can handle and how much patience you have to wait while a story plays out. Develop the discipline not to get faked out of your position or chase after hot tips or listen to the cheerleaders. Have a clear and complete understanding of why you're here in the first place. Know the different development stages of a junior, because risk lessens as a company moves a project through drilling and post-discovery resource definition, then into the various mining studies, and finally into raising money, building the mine, and ultimately, mining. You really have to know who you are invested with and the story. Monitor the progress of your management team with its project and make sure they're meeting goals and timelines.
TGR: And when you find companies that suit your risk profile and pass muster in terms of development stage and management performance, you jump in?
RM: You don't want to just walk in and buy all your shares. Develop a plan to buy shares over time . I don't use stops, because these stocks can make huge moves down in a day and you could get knocked out just before they move back up and go on a tear the next day. I'm here long term so short-term moves don't bother me; stops in juniors, for non-traders, create more problems than they solve.