The Perfect Resource Exploration Stock
By Dr. Russell McDougal
Does the perfect resource exploration company actually exist? Yes, it does. In fact there are lots of them in various sizes and stages. And the more you understand what it is that makes them so ‘perfect’ the higher your odds of success and the greater your profits will be in the resource sector.
There are three predominant stages of junior resource explorers:
1. Start-Ups
2. Exploration progress
3. Discovery
This article will portray the “Start-Ups” and subsequent articles will delve into the other two categories of explorers.
As I elaborated in my recent article, “O Canada!”, the heavy lifting in global exploration is accomplished by the small, nimble and efficient Canadian companies labeled “Juniors”. Without these companies the pipeline of global resource production would soon be empty.
Our perfect explorer will, first of all, be headed up by the very best people... those with vision, a wealth of experience and a successful track record of achievement. A previous article entitled “Would You Write a Blank Check to Harold Pederson?” portrays such a winner.
The overall mandate of management is to “find something” (of economic value, of course). Yet, this doesn’t happen by accident. The ultimate success or failure hinges upon the way the company’s strategies are formulated and implemented.
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The ideal start-up explorer will have a large land package and/or multiple properties under contract. They should be seeking world-class deposits in mining friendly and politically stable countries or jurisdictions.
Employing grass roots exploration is another essential tactic of a start up company. They will be staffed with or have access to geologists that are proficient at continually turning up promising early stage exploration properties. It is cheaper, by an order of magnitude, to find unexplored or under explored properties, than it is to do the riskier and more expensive drilling of the project.
Examples of early stage geological work done by the start ups are soil, rock and stream sediment sampling or trenching. They also will do geochemical, geophysical, Induced Polarization, Magnetic and other surveys. Researching and re-analyzing historical records can also prove beneficial.
The most promising of these projects are then developed and showcased to larger and more financially endowed resource companies for further development. You will want to put the vast majority of your speculation funds into companies that espouse this project generation model.
How about the capitalization and share structure of these start up companies?
A Toronto listing is the typical starting point. NASDAQ, AMEX and other global listings come later for those that are successful in their efforts.
The company must be well-funded, with several million dollars in the treasury. They also must have the ability to raise funds on an ongoing basis.
You will want a tight share structure. For example, a company with a total of 30 million shares outstanding that is selling for at $0.50 per share would have a tiny market capitalization of $15 million. From this level, if they make a discovery the share price and market cap should begin to multiply.
It is imperative to fully understand the market caps of the companies you own or follow. For example, a company with a share price of $0.60 and 20 million shares issued ($12 million market cap) is in actuality “cheaper” than a company selling at $.40 with 40 million shares out ($16 million market cap).
A market cap under $60 million is a reasonable range where most start-up exploration companies will be found. As company events progress, so too should the market cap.
You also want frugal management that will not spend money or issue new shares unnecessarily. This will give the company the staying power it needs as it heads toward mega-success.
Company management must also own a significant percent of the company (minimum 10%). If they don’t believe in themselves enough to own a large portion of the company’s stock, neither should you.
Surprisingly, you can own a significant percentage of a start up company should you so desire. For example, you could own .5% of stock X (selling at $0.10 with 60 million shares out) by purchasing 300,000 shares for $30,000. 2% of this company would run you $120,000.
I am not certainly not suggesting this unless it would represent a very small portion of your overall portfolio and only if you have done extreme due diligence on the company. In most cases, it is far better to spread your speculative funds among numerous companies. I bring this up just to give you a perspective as to how small these companies actually are.
The risk / reward ratio is the highest in the start-up companies, and I always advise that you take the original money off the table when a stock has doubled. At that point, the position then becomes “worry free”.
Your odds for success will greatly increase as you learn the stages that junior resource explorers go through. And you will also want to form contacts and alliances to help you invest only in the most perfect juniors.
Invest Resourcefully,
Rusty
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Head & Shoulders:
It's Not Just A Shampoo
By Charles Delvalle
Head and Shoulders isn’t just a dandruff shampoo known for making your head tingle. It’s also an important technical chart pattern that shows when a stock is ripe for a trend reversal.
A Head and Shoulders pattern is made up of four essential parts:
1. Shoulder: The stock has to rise to a peak and then decline
2. Head: The stock has to rise to a new higher peak and decline again
3. Shoulder: The stock finally rises again, but to a peak which is not higher than the second peak
4. Neckline: The low points of the declines experienced from the head and shoulders pattern
Once you spot a head and shoulders pattern, you want to wait for a confirmation to happen. A confirmation is when the stock price finally falls below the trend line (neckline) of the head and shoulders pattern.
A recent chart of graphics chip maker NVIDIA, provides a textbook illustration:
Back in February of 2004, NVIDIA made a high just over $12 a share and then corrected to $10.50 a share. From there, the stock began rising and broke through its $12 high, establishing a new high around $13.50 a share.
Was this the beginning of a new uptrend? At the time, it looked like it. But after NVIDIA corrected again, it formed a second shoulder to complete the pattern. From there, it was only a matter of time before the stock began falling, crossing the neckline and plunging to just over $7 a share.
If you were able to spot the head and shoulders pattern, you would have made a substantial return by waiting for the confirmation and then shorting the stock or buying puts.
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