Know WHY you own an exploration company

Know WHY you own an exploration company

by Nancy Curry
Marketworks Corporate Communications

Having worked in the resource industry for over 20 years, I have had many heated discussions

with investors as to whether buying an exploration company’s shares is gambling or not – my view is that it is not. It is a high-risk venture for sure and not appropriate for all investors. When you buy a stock you become a part owner of that corporation with protections, access to information and opportunities for capital gains. Buying a lotto ticket, betting on the ponies or walking into a casino gives you no ownership – none!

Owning an exploration company and gambling do have one similarity – the dream of the big win. Exploring for commodities is nature’s version of a treasure hunt – a powerful lure. However, share ownership provides an opportunity to implement strategies that can limit or reduce risk. As a shareholder, it is up to you to implement those strategies.

The most important question for investors is: Why am I buying this company? Sounds simple but I have found many investors aren’t able to answer that ques-tion, except that they want to make money. Spend some time to study exploration companies. This is a specialized sector and you need to learn to recognize the risks and opportunities. Then make a plan and stick to it.

It sounds easy but it is probably one of the hardest things to do, especially if your company is moving in the right direction. Investors can easily be drawn into the euphoria of a junior stock that is “running”. This is where people tend to abandon their strategies – emotion takes over – “the stock is going higher” and the greed factor takes hold.

History has shown that exploration is volatile and stocks don’t go straight up (or down). Keep to your strategy. A great thing about the resource industry is that you don’t have to feel like you have missed out. Selling at a profit is your objective and there is always another opportunity around the corner.

A strategy that can be helpful to reduce risk is to trade a portion of your position. As most resource investors know, the odds of finding an economic deposit are small – making a discovery that excites the market is far more common. Discoveries also generate many opportunities over the various stages of exploration to capitalize on that discovery before it is deemed economic or not. Your company does not have to find a viable mine for you to make capital gains. Trading a portion of your position can enable you to reduce your cost base while still participating in the company in case it hits the ‘glory hole’ or receives a take-out offer.

So how do you trade an exploration company? Here are some tips that may help you pick your comfort level and timing.

Pick a company that has a solid management team with a history of making discoveries, financing capabilities and a clear geological objective.

Understand the geological opportunity the company’s project offers. If possible, find a similar successful geological model and see how the market reacted to the different stages of exploration. Sell into volume and buy when the company is quiet. Be patient.

Learn the different exploration stages (property acquisition, target development, initial drill programs, discovery, resource estimates, and economic studies) and their timing. Various stages offer different opportunities and risks. What stage are you comfortable with? How does the market historically react to a company moving successfully to the next stage?

Is there is a seasonal work period? Can the company work all year and provide results or is there a quiet period when field work has stopped?

Whatever you do, don’t make the rookie mistake of riding a failing stock down to nothing in the vain hope of getting your money back – cut your losses and have some funds left over for the next opportunity.

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