Jul. 28, 2017 4:12 PM ET|3 comments| About: Hummingbird Resources Ltd (HUMRF)
Deep Value, contrarian, Gold&Silver, long/short equity
When junior exploration and development mining companies become actual producers they get re-rated.
Position yourself strategically ahead of the crowd and acquire free shares for the long term.
Hummingbird's Yanfolila mine is still on track and expected to achieve "first gold pour" within the next five months.
Today, I'm presenting you with an article that is focused on putting your initial capital at risk during one specific part in the history of a precious metals mining company. I'm talking about when they transition from "exploration and development companies" into "first-time" producers. Over the years, I have come to understand that this is not just a big step for a junior mining company, it's a giant step.
When junior mining companies are still exploring, they are selling you a beautiful story about the blue sky potential that is to be discovered. Their drilling rigs are doing over time and whenever they "hit gold," our deepest greed and hopes tend to push their stocks towards early stardom. At that particular time at the peak, it is clear that many investors tend to overlook the potential pitfalls that lie ahead. Poor management, uneconomic resources, insufficient funding, regulatory or permitting troubles, just to name a few.
The graph below gives a nice view on a common cycle for successful juniors. I personally do not tend to have too much exposure to pure exploration companies as I find the big haystack too large for finding the needle. While I do appreciate the tremendous leverage that exploration plays can have for your portfolio, I prefer a 'lowered risk' phase to position myself, but still early enough to be ahead of the crowd. When looking at the graph below, I'm talking about early on in the third zone. Please remember that 'lowered risk' does not at all mean low risk. Building a mine is no small task, but I love the risk/reward ratio.
The main reason I love this transition phase is that in my mind, it offers an ideal moment to try and acquire free shares of promising quality companies. Many other investors will stay away from upcoming producers and plan on buying when they actually deliver the project and then hold for the long term. I'm willing to take some risk here and count on a successful completion of the building phase, production ramp up or target other intermediate milestones in order to profit.
Applying this strategy is obviously easier said than done. You should be serious about wanting to hold the shares of the target company based on their actual fundamentals and monitor the progress of the build phase constantly. Something might go wrong and you could be forced to exercise more patience or have to exit your position altogether. If your bet pays off, however, your reward could provide you free shares as new investors push the price higher as new milestones are achieved. Through this process, you often get multiple opportunities to withdraw your initial capital and let the 'gains' ride.
There is definitely more risk involved in this strategy, but in the end, mining will always be a high-risk business, no matter when you invest. Only recently, the precious metals complex got smacked with this elemental truth when Tahoe Resources (NYSE: TAHO) got their mining license suspended for the Escobal mine in Guatemala.
Tahoe was not at all considered to be so risky, yet it has been losing a lot of market value dropping to a 52-week low of 4.93 USD recently, since its peak mid-August 2014 around 27 USD. Tahoe resources reached this peak valuation about 7 months after announcing commercial production on the 14th of January 2
Important message from the Financial Conduct Authority:
Posting inside information that is not public knowledge, or information that is false or misleading, may constitute market abuse.
This could lead to an unlimited fine and up to seven years in prison.
If you have any information, concerns or queries about market abuse, click here.
The content of the messages posted represents the opinions of the author, and does not represent the opinions of Interactive Investor Trading Limited or its affiliates and has not been approved or issued by Interactive Investor Trading Limited.
You should be aware that the other participants of the above discussion group are strangers to you and may make statements which may be misleading, deceptive or wrong.
Please remember that the value of investments or income from them may go down as well as up and that the past performance of an investment is not a guide to its performance in the future.
The discussion boards on this site are intended to be an information sharing forum and is not intended to address your particular requirements.
Whilst information provided on them can help with your investment research you need to consider carefully whether you should make (or refraining from making) investment or other decisions based on what you see without doing further research on investments you are interested in.
Participating in this forum cannot be a substitute for obtaining advice from an appropriate expert independent adviser who takes into account your circumstances and specific investment needs in selected investments that are appropriate for you.