THE SURGE of mineral exploration and development taking place in the northwest has created new opportunities for investors looking to make a profit.
But the lure of a healthy return also has to be tempered by the high risk that goes along with speculation, say experts in the field.
And while the high degree of risk might conjure up images of fast-talking mining stock promoters, one analyst says that does not have to be the case.
“Risky doesn’t necessarily mean it’s not legitimate,” cautions Ted Munden, an Ottawa-based mining and natural resource development investment veteran.
Still, Munden, who has 30 years of investment experience behind him, advises only to put money into a high-risk investment if you are then prepared to lose it all.
This year’s approval of the Northwest Transmission Line, which will bring stable and cost-efficient power up north, has helped provide both an actual and a psychological base to spur on exploration and development.
Before diving into the world of mining investments, Jayelene Catala says it is important to understand some fundamentals.
Catala, an investment and retirement planner for RBC, says a company is a high risk investment if upwards of 75 per cent of its value is made up mostly from its shares and not tied to any quantifiable ore bodies it may have under control.
She also says volatility in market demand for minerals and other resources can quickly affect a company’s performance and outlook.
“Exploration starts with a concept,” adds Munden, emphasizing the speculative nature of investing at the start of a project.
“Usually, it’s going to be a smaller company and usually they’re going to be exploring in areas where there has been mineralization found,” he said.
What they’re looking for depends on what’s market-hot, said Munden, and smaller exploration companies need dollars before knowing if they’re dreams might come true. Investing at this stage bears the most risk, but the expectation is to make the highest return on a dollar, Munden explained.
And unless someone has money to throw in, this would be in the form of public shares.
To raise money for raw exploration, a junior company will either list an initial public offering on the Toronto Stock Exchange (TSX), join an existing company in the TSX and collect money through them, or offer shares that are tax-deductible with limitations called flow-through shares.
In each case, the venture will be financed primarily by stock, and prices go up or down depending on how good the future looks.
“It just takes one good press release,” Munden said, “that might cause that stock to go to 50 cents from 30 cents.”
Exploring in an area with developed mines gives hope to the cause, but doesn’t promise anything, Munden said.
“Penny stocks, that’s what they’re going to be. They can be here today, gone tomorrow,” he explained. “Buy low, sell high. That’s the idea.”
And from here, it’s a long way until what looks like a sunny future turns into a commercial mine, and it’s rarely by the company who started it.
“Because the timeframe from the dream of a geologist to the first drill hole that finds some actual mineralization to a mine can be 10 years, 15 years, it can be a very, very long time,” said Munden. “And there’s no cash.
“So it takes small companies to put out a lot of press releases... to try and pump up their stock,” he said, “so that they can turn around and use that money to continue to fund their exploration or their drill program or whatever else.
“That goes on for many years before there’s going to be any assets or any value for what they’re doing or any cash. And that’s the risk portion,” he said.
By commercial-mine development time, usually a larger company will buy out the smaller one’s interest.
“A more mature mining company, a lot of people will have these companies in their investment portfolios,” said Munden.
While the chances of doubling your money is far more likely in a penny stock, mature companies selling shares in the dollar figures are more stable, he said.
“However if an investor’s time horizon is not long enough to be able to ensure short term fluctuations, they could be in a situation where they could lose capital,” said RBC’s Catala.
According to both Munden and Catala, the general rule for high-risk investment is it shouldn’t amount to more than 10 per cent of an investment portfolio – a diverse basket of investments intended to balance risk and profit.
Both Munden and Catala stress research as part of a risk-taking decision.
“Read everything the company puts out,” said Munden, explaining that public companies are required to put out press releases.
“Look at annual and quarterly filings,” he said. “And a lot of it comes down to people, people, people.
“If I was looking at a junior, I’d be looking at management, where they are located, their backgrounds, whether or not they’ve been successful in the past, are they technical?
“If you can’t find anybody on the management team or on the board that have any geological or technical experience,” he said. “Then I would avoid it.
“Because a bunch of financial types out of Vancouver can start up a company and put a lot of press releases out and a glossy website up and that doesn’t mean they really understand anything about the mining game.”
Also, public companies generally bear less risk than private ones because they are more accountable.
“A public company is easier to do research on because they are required to file and to disclose,” Munden said. “Whereas private companies are not.
“A public company, you’ve got stuff to sell. You give your money to a private company and there’s no market for it. You can’t get out unless that company becomes public in some way, or, is bought out by somebody.”