Understanding Risk: Investing in Junior Mining Companies

There are many lessons to be learned from investing in the mining sector. First, it’s inherently risky and many companies will disappear before mining a single ounce of base or precious metals. But it’s also an attractive sector for those willing to take chances and put in the work. Here are a few things I have learned over the years.

 

Do Your Research

 

Don’t go on a blind faith tip or even a rising stock price. Research the exploration project or mine you are interested in thoroughly and find out what others aren’t seeing before you put in a penny. There’s always something new to discover in a deep dive.

 

Find The Right Price

 

One of my last acts before leaving the position of president and CEO of Cornerstone Capital Resources in 2011 was to acquire the Cascabel project in Ecuador at a very early stage. At the time, it was believed to be a future source of gold and copper, but there was no proof. So the price was right. I got a bit lucky with Cascabel, as exploration has since revealed it as one of the largest gold-copper undeveloped mineral deposits in the world. But that was because I had done my research before making an offer.

 

Know When to Exit

 

Cornerstone was a small company and we needed help to get the Cascabel project up and running. I knew it would take years and hundreds of millions of dollars. So, making sure I left the company in solid financial shape, I turned it over to Brooke Macdonald, who remains CEO to this day.

 

The Truth About Cascabel

 

The Cascabel mine has gained the attention of BHP Billiton and Newcrest Mining, two of the largest mining companies in the world. They both have bought shares of SolGold, Cornerstone’s partner in the project. SolGold has the right to earn 85% of Cascabel by funding all exploration costs through to the completion of a bankable feasibility study. Cornerstone has the other 15% interest plus it owns about 10% of SolGold, effectively owning 23% of Cascabel. That’s one of the reasons I was happy to increase my already significant stake as a Cornerstone shareholder when the opportunity presented itself in 2016.

 

Although it was a risk to invest in a gold and copper early stage projects in Ecuador, the potential rewards were, and still are, tremendous. Even today, with all signs pointing to a positive outcome, Cascabel is still at the exploration stage. There’s a long way to go before the mine will see a profit. If you’re looking for quick and easy returns, the junior mining sector isn’t for you. But if you like doing research and have lots of patience, the risks can pay off in the long term.

 

Along the way, as a general rule, I sell enough shares to recover my original investment plus pay taxes on capital gains and then leave the balance of the investment until it hits my target price at which time I sell. Cornerstone has not yet hit my target price. However, I’m optimistic that it will within the next 12-24 months.