The Location Risk in Mining Investing
By Dirk Masuch Oesterreich
(This article was just published at Dexterity News, a publication of Brookshire Raw Materials).
When choosing the right location for doing business mining is fundamentally different from other industries. Miners have to go to where the commodity is found. This often means building a mine in countries that are politically unstable, have poor infrastructure, and often have a certain level of corruption. Once construction begins or a mine is built, a miner is “extortionable” due to the very nature of the asset: immobility. Investors have to choose carefully where to put their money.
Location is among the biggest business risks for mining companies. However, the risk of doing business in under-developed countries must be balanced against potential rewards to gain perspective. With enough probabilities of adequate rewards going into the riskier parts of the world may very well be worth the risk.
There is one group of mining companies that can substantially reduce the location risk so that investors would mainly have to assess only geological and company specific risks. This group of companies is the highly speculative junior explorers. The reason is simple: they have no assets to lose. Furthermore, in the (rare) case of a major discovery the rewards can be tremendous. A good example is the success story of Aurelian Resources. Shareholders saw their stock go from 60 cents to a top of 40 dollars in a few months after last year’s discovery of the Fruta del Norte deposit in
There is another compelling reason for the juniors to make the move into risky areas. Typically, troubles for mining companies start at the development or production level. Problems mostly arise when a company is at a vulnerable time or when there are assets in place that are being mined. Once a certain amount of money is sunken into the ground, miners, out of necessity, mostly will arrange themselves with changing conditions rather than face the risk of loss of their upfront investments and future profits.
Junior miners avoid this kind of risk almost completely. As long as they don’t have any assets they can mostly go about their business of exploration undisturbed and unmolested, often being helped by local authorities and specialists. Once they find a mineral deposit is when they usually appear on the radar screen. The spot on the screen becomes bigger and bigger the more reserves are being proved. Meanwhile, profits for shareholders begin to materialize by way of an appreciating stock price. From an investment perspective it can be a difficult decision to stick with the company through the development stage, to wait (or hope) for a buyout, or to (partially) get out in order to protect the investment.
Now, does this mean that junior explorers are less risky investments than established producers? Of course not. However, a quick look at potential traps that can lock up your money invested in a producer may possibly make you reconsider the perceived safety of going with the producers:
1) change of the tax regime
2) challenges to land ownership status
3) delaying / denying of permits
4) strikes of the workforce
5) assault and robbery (you think that’s unlikely? Earlier this year the Cerro
6) lawsuits, renegotiations, legal action
7) NGO activities
8) environmental issues (perceived or real)
9) accidents and safety issues
10) government exclusions of prospective terrains
11) outright expropriation and confiscation
x y z) insert our own nightmare here
I don’t know about you but for me this is more risk than I am willing to take. Furthermore, all of these factors are completely out of your control. There is not much you can do other than to sell your shares or sit tight and hope for the best. The whole situation leaves you feel rather helpless all the while you have money tied up that could be better deployed elsewhere.
These are all reasons that make the junior explorers interesting because almost none of these risks apply to them. But don’t let me be mistaken here. An exploration company is among the ultimate speculations because there is exactly one way for your investment to pay off: the discovery of an economic deposit. This is, in one word, the geologic risk. And for most market participants this one risk factor is more than they are willing or allowed to take.
As a geologist the geologic risk of course does not prevent me from taking a look at this asset class. To the contrary, this is exactly what I take up as a challenge when I go over a new company. I am much more concerned about the quality and honesty of management and the credits and capabilities of the exploration team. However, evaluating the geological risk factor inevitably gets to the roots of a company and often allows conclusions about the people running the company. Being able to evaluate the geological risk is what makes you see through all the fog and hype built around most companies. It puts you, the investor, in control.
When you are ready to take on the high risk / high reward opportunities of junior mining investing at Servicios HidroGIS we offer you three ways to help you reduce risk and increase your possibilities of picking a winner.
In a few hours time we can take a look at the information on the website of the company that caught your interest and see if there are any red flags coming up. If the assets of the company are in
We can dig deeper and check for available geological information by means of a comprehensive internet research for relevant material (SEDAR, Geological Surveys, professional associations, scientific publications, geologic maps and articles, and wherever else the trail leads us) within two or three days.
And in case you need a reality check on the ground we can go there for you and take an on-site look at the property or the mine operation (within the Americas), including a full geological report supported by a complete photo documentation.
Mineral exploration is a risky business. However, for the astute investor the rewards can be outstanding. The best opportunities for high rewards are never without risk after all. Investing in junior exploration companies is all about balancing risk and reward which can be done to a great degree by getting a hold on the geological risk factor.
