A Primer on Junior Resource Investing

I posted this on the Investor Village board in response to a poster on Oro Gold (OGR.V) so I thought I would repost it here as well:

Good points. I made the assumption that since this is a precious metals board that most board members have at least a portion of their speculative money in the Canadian Juniors. Since that''s not the case, I'm more bullish than ever that this gold bull run has years to go. If we were at the heights of the gold bull, every widow and orphan would have some of their money in the Canadian PM juniors. Personally I only buy precious metal stocks that are traded on the Canadian exchanges even though I live stateside.

On Oro Gold (OGR.V), if you don't follow the Canadian Juniors then DO NOT SPECULATE on this stock. Take some time (several months) to read the Northern Miner publication and get familiar with how these stocks should be played. Follow a few of them daily to see how they react to news as these stocks are mostly news driven. After a while, dabble in a few of them to build your confidence in the sector.

For those who speculate in the sector, the following below is nothing new but it may help those who eventually get into one of these stocks:


Managment is key. Only speculate on a junior exploration stock where managment has worked for one of the larger precious metal companies and have been involved in prior discoveries. This can be determined by reading the bios on the website. In Oro Gold's case, the three executives are from Placer Dome and were involved in multi-million ounce discoveries.

Property is key/. The best place to look for gold is next to a gold deposit (duh). The property should also be close to road access and power. In Oro Gold's case, Eldorado Gold mined an open pit for 2 years in the 90's andf shut it down after 2 years due to low gold prices. They never drilled down further than 100 meters during their exploration phase. Oro Gold drilled 150 meters underneath the open pit and may have found a major new discovery with much higher grades than were mined by Eldorado.

Share structure is key. Avoid companies with a large number of shares outstanding (over 100 million) and preferably they should be under 50 million (as is the case with Oro Gold). The lower the number of shares, the greater the potential near-term return on a discovery.

News flow is critical. Juniors live and die by news flow and in certain parts of the world, no drilling can take place for months due to rain/cold/etc which leaves the junior void of news. In Oro Gold's case, the can drill year round and just started a new drill program with the first assays due back in 30 days.

Timing is critical. Even if a company releases good news, the overall sector performance has a drastic effect on the likelihood of a rapid rise in price on any news. Since mid-2008, most juniors (including Oro Gold) are down 80% or more from their highs. Very few large gains have been realized. When Oro Gold released their initial drill results in October 08 hinting of a major discovery (to be determined), it was the same day the TSX had their biggest point decline in history. After an initial spike, the share price got hit with all the other juniors. Also, the juniors trade smaller volumes in the Summer so it is tough to make large gains past the end of May through August.

Cash is critical. In this environment, many juniors can't raise funds to explore. Oro Gold has over $3 million in cash to drill throughout 2009 without needing to go to market for funds.

Technicals matter. Avoid any stock that rises suddenly on no news as it is sure to come back to earth. The key is to find a stock near it's 52 week low and one that has based for a while and is starting to move slowly higher (as is the case with Oro Gold).

Promotion matters. Juniors are a lighted match. They only have so much time to make a discovery before investors get impatient and the stock slowly dies. Since the major institutions don't cover the junior explorers, it is up to newsletter writers and company management to get the word out as financings are a necessary evil (similar to bio-techs in the states). Before relying on any newsletter writer, make sure they disclose their holdings of any stock they recommend (see my disclosure). Some of the better ones are Lawrence Roulston, Doug Casey, Peter Grandich and John Kaiser. Sprott Investments is the best resource institution who covers the juniors and also listen to Rick Rule if you get the chance.

Country matters. Mexico (Oro Gold), Canada and Chile are the best in my book. Fraser puts out a list of the most friendly mining countries.

High grade matters. In this tough financing environment, high grade gold offers a lower cost, higher payback proposition. Drill results over 5 g/t over significant widths are preferable (Oro Gold fits this criteria).


There are many other things to look for in a junior investment but you will find these out as you explore potential investments and make and lose money in the process. That being said, the juniors are so under-covered that you can find a diamond in the rough every now and then before the rest of the speculators realize the potential and those are the ones where significant profits can be achieved. You must be prepared, however, to lose your entire investment as the risks are high as well as the rewards.