No substitute for common sense

Mining Explained

— The following is an excerpt from Mining Explained, published by The Northern Miner.

The common-sense rules of investing are as true in mining speculation as they are for investment in any other industry. If a magic formula existed to identify the mining ventures that would prove to be spectacular successes, every speculator would have retired on his riches long ago. An earlier author of this book closed a discussion of investing with the words: “Above all else, investigate before you invest.” It was true then and it is true today.

Investing in large mining companies that have a number of mines and produce a number of commodities is much the same as investing in other corporations such as manufacturing, utility, or banking firms. Securities law in the countries where their stocks trade compel the companies to make their financial records public; analysts, investment dealers and the financial press study the quarterly and annual results and offer their opinions. The investor can use these professional opinions to form his own picture of a company’s prospects.

Anyone considering investing in the established mining companies, or in large established firms in any industry, should also consider whether the stock market as a whole is a good investment at the time. Many individual investors buy into the stock market when it is doing well, during a period of economic growth. It is during those times, however, that the market places a high value on shares. Buy then and you will pay a high price for stock. This creates the risk of being stuck with it or selling at a loss when the economy recedes and stock prices fall.

Investors laugh when they are told the old rule, “buy low and sell high,” as though the advice is so obvious it needn’t be said. Then they pick up the phone and buy a stock that has just traded at its all-time high on record volume. An investor will often get better results by buying shares when the market has declined and prices are low. It is also wise to seek out stocks that are not yet widely recommended — after all, if everyone has already bought Acme Widgets, there will be no one left to buy the stock and force its price higher. Forget Acme, and look for a better buy elsewhere.

Junior miners

Investing in the “juniors,” the small companies formed to explore for mineral deposits, is much more speculative than investing in larger companies. Junior exploration companies, as well as other venture-capital companies like small, high-technology firms and junior oil explorers, offer high returns if they are successful. The other side of the same coin is the higher risk that they will fail.

One very sensible rule is never to invest money you cannot afford to lose. Understand that the junior exploration game is a gamble, and keep the rent money out of it. The buy-low/sell-high bromide means more here than anywhere else in the market, for once the stock’s price is up and everybody is talking about a great mining play at Dead Cat Falls, the easy money has been made.

Jumping from one stock to another only makes money for your broker. Picking a good investment and staying with it is often a better strategy. One way of picking that stock is to look at its people. If they have a record of making projects go ahead, it’s a good sign that they are diligent and talented.

Beware of promotions. In particular, never buy a stock from a dealer who calls you up cold — you haven’t had time to investigate the company’s management or assets. High-pressure investment sales people are still around. Dealing with them will cost you money.

Be extremely wary of information from Internet chat rooms and bulletin boards. Some of the people posting bullish statements are long on the stock, while some of the negative messages may originate from professional short-sellers. The exchange of views may be entertaining, but they should not be relied upon to make sound investment decisions.

Remember, too, that there is little or no regulatory oversight of newsletter writers, and many hold positions and are on the payroll of the companies they are recommending. While some newsletters provide quality information, others are purely promotional. Stick with experienced, respected newsletter writers and avoid the rest.

If you have an opportunity to invest in a prospecting syndicate, keep in mind that these investment rules are comparable to those for investing in junior exploration companies. Invest only what you can afford to lose. Remember that prospecting is a gamble. Consider the management carefully; is there an experienced prospector or mining man (or woman) who can pilot the venture successfully?

Recall that the success of a prospecting venture depends on getting an exploration or mining company interested in the property. This is much easier to accomplish during good times; companies will never have money to burn, but they are more likely to have money and manpower to commit to a good-quality prospect when they are making money themselves.