Leverage is the simple answer. It is not uncommon for junior mining companies to experience huge gains very quickly as news of a discovery is made known to the public.
Before we talk more about leverage, let’s go over some facts.
1. In the mining world the majority of economic mineral deposits are found by the junior mining companies or individual prospectors.
Why? Because junior explorers are not slow-moving bureaucracies like many senior companies which makes them able to make fast decisions both in the boardroom and in the field and because of talent, motivation and dedication of their management team.
2. It is often said in the mining business that if an exploration geologist finds one mine he will likely find others.
Why? Because, with fewer than 5% of all exploration geologists ever making a discovery that leads to a mine in production, those select, gifted, explorers who find numerous mines, seem to have a sixth sense that moves them to succeed.
3. Most of the true leaders in mineral exploration are geologists that don’t necessarily fit into the corporate culture.
Why? Because they are men and women who like to walk outside, kick rocks, and sleep under the stars. They do not want to sit behind desks, stare at computer monitors and talk on the phone. The majority of geologists may have a firm grip on the theory of mineral exploration, yet they cannot take it to the next level to unravel Mother Nature’s secrets.
4. Juniors are managed by men and women who have had success working for both senior and other junior companies.
Why? Because of the huge potential rewards that can come when a discovery is made. In a major mining company, a successful exploration geologist who made a significant discovery might get a pat on the back and a new credenza, if they’re lucky. As part of a junior mining company, the geologist who made that same discovery might get $10 million, $20 million, or a $100 million capital gain for their efforts.
In the life cycle of a mining share, it is the exploration phase that provides the biggest move (leverage) in share price. The best and brightest mine-finders of course know this and are highly motivated to search the world over to make a new discovery. When they do, the monetary rewards are substantial, for both the management team and its investors…
Richard Russell had this to say about the market in precious metals:
“I believe that fortunes will be made in the years ahead by those who are now establishing major positions in gold and gold shares. These primary moves last longer than anyone thinks possible…”
Any increase in the mineral prices not only focuses more attention on the sector, but also causes even more money to be spent on exploration thereby increasing the probability of finding new deposits. It also increases the value of any potential discovery through leverage. Mineral deposits are gauged by the net present value of future cash flow should the deposit be mined.
Say for example we find a million ounce deposit of gold and an engineering study suggests it could be mined over ten years at a cost of $600 an ounce, including capital. Let’s assume gold is at $1000 an ounce. At a 10% discount rate that deposit would be worth roughly $300 million. However, if the gold price were to increase to $1200 an ounce (a 20% increase) the value of the same gold deposit increases to $480 million (approx. 60%). That is over 300% leverage to the gold price (60/20). Imagine what a gold price at $1500 or $2000 an ounce would do!
The comments above & below are edited ([ ]) and abridged (…) excerpts from the original article by Luke Burgess
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