Editor's note: After yesterday's Digest, you should have a good understanding of what the junior resource sector is and why it can be so profitable. That's the easy part. The hard part is finding the stocks that are going to make you 10, 100, or even 1,000 times your money.
The first step is building a solid Rolodex of the best management teams in the business. Having strong contacts in the junior resource industry is a must – what Matt describes as the "know-who" aspect of the business. We'll hand it over to Matt to discuss further...
I'm a geologist by training. In my monthly S&A Resource Report, I use "fundamental" analysis to get my readers into the world's best resource investments.
Fundamental analysis involves analyzing a company's balance sheet, its cash flows, its liabilities, and other types of data. This is critical to successfully investing in large resource producers. However, with the majority of resource exploration companies, the firm's most valuable asset is its management.
Often, a junior resource company is nothing more than a team of managers and geologists, a bank account, and some prospective property leases.
Here's where it gets tough for resource investors and traders...
The resource business is full of managers who are inept, crazy, corrupt, or a mixture of all three.
As my friend and master resource investor Rick Rule says, succeeding in the resource sector isn't just dependent on "know-how," but also on "know-who."
Thousands of mining company promoters around the world have wonderful stories to tell about how their companies have found incredible gold veins or oil deposits... and how investors are going to make a fortune.
Most of them are full of hot air.
What stock promoters don't want you to know is, most resource sectors have maybe 20 or 30 proven and knowledgeable exploration teams. (In some niche fields, like uranium exploration, it's even fewer).
The rest are just too inept or unproven to risk your money with them. It's critical you avoid these companies.
What we do in the S&A Junior Resource Trader is identify the handful of companies in each sector that have proven management teams with a track record of success, or have "up and comers" who are honest and smart.
Consider Kaminak Gold (TSX V: KAM). It's a tiny gold exploration company operating in Canada's Yukon Territory.
I've known Kaminak CEO Rob Carpenter since 2006. Rob is a stand-up guy with a Ph.D. in geology. He's also incredibly entrepreneurial. I knew his team had a great chance of success... and in early 2009, it happened.
The company found the "Coffee" project in the Yukon. Early fieldwork hinted at a huge gold system. When drilling results in 2010 confirmed the project, shares of the company rose 2,300% in just 18 months.
Mirasol Resources (TSX V: MRZ) is another example of smart people finding success... of the value of "know-who."
This company works in southern Argentina. I met CEO Mary Little in 2006. Her team spent years honing its skills with major mining companies before building its own company.
With this group, it was only a matter of time before they'd make a discovery.
Mirasol attracted major silver miner Coeur d'Alene to drill its Joaquin Silver Project. Today, the two partners are in later drilling stages. Here's a chart of Mirasol's success...
The partnership and drilling success at Joaquin sent Mirasol shares from 6¢ to more than $3 in just over a year. That's a 4,900% gain.
This is the "know-who" part of our system.
Separating the bit of wheat from the large amount of chaff in the resource sector takes a lot of work... attending conferences, talking with industry insiders, going on site visits, looking over company fundamentals, and meeting with management.
Fortunately, over the years I've developed quite a Rolodex of contacts that allows me to monitor and identify the small group of resource companies that make for great speculations.
I have dozens of mining CEOs' phone numbers in my cell phone. They are all willing to talk about the best projects around the world... from their own projects to their competitors.
And probably more importantly, I have access to their geologic teams (the smart guys who are trained to find gold).
I also stay in constant contact with a professional geologist I'll call "Rover."
Rover is one of my geology mentors. He's one of the most respected field geologists in the world. Large money managers often pay him huge sums of money to investigate projects they're considering.
Rover is constantly on the road investigating mining projects... and I'm fortunate enough to have him an e-mail or phone call away (when he's in a country with working phones).
I'm also friends with several of the world's top mining financiers... the people who decide if a deal gets done. After all, if a mining project doesn't have the money, it doesn't have anything.
I also stay in contact with a man I'll call "Indo." He's a professional geologist and one of the world's top resource investors and brokers. If there's a whiff of gold somewhere in the world, Indo hears about it before anyone else.
For example, Benton Resource Corp. (TSX V: BTC) is one of his favorite prospects (as of mid-2010). He said it reminds him of Altius Minerals (TSX: ALS). Altius went from 50¢ to $30 from 2000 to 2007... a 60-fold increase in value.
Companies like Benton Resources – with proven or smart "up and coming" management – are the only companies we will trade in the S&A Junior Resource Trader.
While this aspect of the S&A Junior Resource Trader might not sound important to some folks, only sticking with the best teams in the business is going to put you ahead of 99% of junior resource market participants who don't know what they're doing... or who they're doing it with. It's vitally important.
Now that you know what kind of companies we want to buy, tomorrow we'll discuss how important "cyclicality" is in the resource sector...
New highs: Keyera Facilities (KEY-UN.TO), Coca-Cola (KO).
Got any burning questions for us? Send them to feedback@stansberryresearch.com.
Hi... Props to your junior exploration adviser – I had lunch at Toronto Bay Street Club while listening to a talk by David Frum when he was still a Republican about three years ago. Next to me sat a geologist, Don Bubar. We started talking and I was eating my roast as he told me about Avalon. Quite a story. Fast forward to three weeks ago. An initial investment of 300K now worth 400M. They really have something special – a large, heavy rare earth deposit – but is it commercially feasible? And what is it really worth? Should I stay or should I go? Thanks for the advice. – Paid-up subscriber R.W.
Regards,
Matt Badiali and Sean Goldsmith
Zurich, Switzerland
November 16, 2010