Risky Business
Risk, we manage it in every part of our lives, but it's most prevalent in our investments. The best in the business make it their goal to minimize it, while still maximizing profits.
In the junior resource sector, risk is managed by understanding a number of different aspects about a company, including: Who are the people, Where is the property, What does the balance sheet look like, and How much of the stock is owned by the company insiders?
Answering these questions will allow you to mitigate risk and maximize profits. The better the questions you ask, the better the results, I have no doubt!
"The art of investment has one characteristic that is not generally appreciated. A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability; but to improve this easily attainable standard requires much application and more than a trace of wisdom." ~Ben Graham - The Intelligent InvestorMr. Graham sums it up in this timeless quotation that applies to pretty much everything in life; mediocre results can be achieved by anyone, it's only those who strive to outperform and act differently than the crowd that can achieve spectacular results. Managing risk is a big part of success in the financial world and, therefore, it's very important to not only understand your risk tolerance, but also how to judge the amount of risk that exists in the investment you intend to buy. Disclaimer: The following is not an investment recommendation, it is an investment idea. I do own shares in some of the companies mentioned in this article. Please perform your own due diligence to decide whether any of the companies mentioned fit your personal investment criteria.
Portfolio Distribution
During that first period in my investing career, I didn't pay much attention to the risk associated with the portfolio I had assembled. I knew speculating in junior resource companies was risky, but I didn't consider the level of risk that was involved with the types of companies I owned. What do I mean? Well, in my view, there are a few different types of companies within the sector. Here are a few examples, plus some of the risks associated with each type of company:Explorers (highest risk)
These companies are drilling for discoveries on properties that hopefully have the goods. In most cases, some mineralization has been found, but it currently doesn't amount to much more than a hope or a dream. Risks Associated with Explorers: They are cash burners with nothing but the cash in the coffers and the potential of their property to prop their stock price up. Examples: Colorado Resources West Red Lake Gold MinesEarly Discovery (medium to high risk)
These companies have hit mineralization, but are looking to expand their discovery. These companies have not performed a Pre-Feasibility Study, Feasibility Study or Preliminary Economic Assessment. Risks Associated with Early Discoveries: Consider if there's further mineralization, whether that mineralization is economical, politics (unfortunately, always a risk), and how much money they need to further outline the resource. Examples: Auryn Resources Gold Standard Ventures Balmoral ResourcesOutlined Resource (medium risk)
These companies have found a resource. The value of the resource is directly linked to the Feasibility Study (or Pre-Feasibility) or Preliminary Economic Assessment. Risks associated with outlined resources typically relate to the commodity price, politics (permitting and taxes), and financing. Examples: Dalradian Resources Orezone Gold Corp. Lydian International GoldquestProspect Generators (medium risk)
These companies are explorers (high risk), however, they use other people's money to drill their properties, making it less risky than a typical explorer, but there's still the risk of not finding any mineralization. Risks associated with prospect generators are typically similar to explorers, however, they are less of a risk because they have access to other people's money. 'Other people's money' typically refers to senior producers, who will pay certain companies to perform exploration work for them. Examples: Lara Exploration Mirasol ResourcesProducing (medium to low risk)
These companies have a resource that they are harvesting. They can be further broken down into segments based on the amount of ounces they produce, with the low multi 100Ks ounces being mid-tier producers and those in the millions of ounces being considered senior producers. Risks associated with producers are political and production related failures. Examples: Endeavour Mining (mid-tier) Guyana Goldfields (mid-tier) Gold Corp (Senior) Barrick Gold (Senior)Streamers (low risk)
These companies generally fund juniors with an outlined resource. The deal works for both parties, as the funding company is able to buy a certain portion of the produced commodity at a fraction of the spot price, typically for the life of the mine and any future discoveries on the property. The junior benefits by acquiring funding without diluting shareholders and depending on perspective, receives a better deal on the financing cost of the project. Risks associated with streamers are political and production related failures, however, streamers typically have multiple streams and therefore dilute the risk associated with any one given jurisdiction or mine facility. Examples: Silver Wheaton Franco Nevada Royal Gold Sandstorm Gold When designing your portfolio, it's wise to choose the types of companies that fit your risk profile, whatever that may be. Keeping in mind that the value of the companies in any of the given categories may make investing in them less risky than if all of the companies are trading at what you could call "fair market value." Also, company type is only one part of the risk analysis."The bigger the discount, the bigger the margin of safety. Too small of a discount and the limited margin of safety provides no real protection at all." ~Marks, The Most Important Thing Illuminated, pg.25
