One of the Best Sectors for Risk-capital Speculators

institutional investorsI’d like to reiterate my view that one of the best sectors for risk-capital stock market speculators to focus on is junior mining stocks. Now when I say junior mining stocks, I’m talking about a small stock market sector that virtually all investment professionals refer to as super high-risk. These are speculative companies (many of which don’t have revenues) that are pure risk-capital investments. In the past, the industry had a bad reputation for being over-promoted, which was true. Accounting standards, resource estimating, and reporting requirements among junior mining stocks are much improved now, but this is a stock market sector that you go into expecting to lose money. You don’t bet money that you can’t afford to lose in junior mining stocks.

At the one end, you have exploration companies that are raising money to acquire and then explore a particular piece of property. At the other end of this sector, you have small but growing producers that are mining, pouring ounces and exploring, all at the same time. This is the part of the sector that’s best for armchair speculators. If you’re looking for junior mining stocks at the exploration stage, you really have to be a geologist and/or be much closer to the story and industry.

I like to look at public companies that already have a track record of success—both operationally and on the stock market. Like in most other industries, a track record is very important among junior mining stocks, because it’s the only way to attract institutional investors to the story (which has traditionally been a tough thing to do in this specific industry). With the right management group, the right property and the right financing, a junior mining stock can become a major wealth creator for the investor.

My enthusiasm for this small and highly speculative asset class within the stock market is buoyed by the strength in precious metals. There is no bull market in junior mining stocks (or in any mining stocks for that matter) if gold and silver prices aren’t strong. That’s the prerequisite.

Junior mining stocks are like biotechnology stocks; they are event-driven. But without the underlying commodity strength, there is no follow-through from big investors and, of course, the big money is what drives the stock market.

As I said, from the armchair you want to find companies that are already producing, have known management teams, are discovering more precious metals on their properties, and are liquid on the stock market. (See Tips for Investing in Gold—What a Great Junior Miner Looks Like.) This company is a great example of a successful junior mining stock that’s doing very well.

The mining industry has a unique business model that’s highly cyclical. Everything rolls from the spot price of the underlying commodity. But, when the right package comes together, when the Street is hungry for it, wealth creation (or destruction, if the opposite occurs) happens fast. With gold and silver prices where they are, it’s a decent time for speculators who are knowledgeable about the sector.