I’ve been researching and recommending small-cap stocks and junior miners for over 20 years…
Over that time, some of the world’s greatest resource investors have become good friends.
I’m talking about guys like Rick Rule, who runs one of the most successful resource-based funds in the world.
Guys like Jim Rogers, who made billions riding the commodity boom back in the 1970s…
And guys like Jeff Phillips, who has more 1,000% winners in the junior mining space than anyone else I know.
They all have one thing in common that I believe is the key to their success in the resource sector…
They follow the same investment system.
What is this system?
It comes down to 5 simple rules for analyzing any small-cap resource investment.
If you follow all these rules, you’ll not only reduce your risk in this volatile sector…
But you’ll find the types of companies that could hand you 100%… 500%… even 1,000% or more in gains… no matter what happens to the price of the commodity.
So what are those 5 rules?
Let’s go over them one by one…
Rule #1: Experienced Management
Of all the factors that help determine the success of a small mining company, management may be the most important.
But keep in mind, you have to look for a certain type of experience.
You want a management team that has proven it can take a project from discovery to actual production.
The fact is, only one out of every 3,000 mines ever makes it from early stage to actual production.
Those are very bad odds.
But when you look deeper, there are certain teams that have long histories of bucking this trend and consistently creating profitable mines.
That’s why finding an experienced management team is one of the first things I look for when analyzing junior miners.
Rule #2: Plenty of Cash
The mining industry is one of the most capital-intensive businesses in the world.
Taking a small junior resource company from discovery to production requires millions of dollars in cash upfront before investors ever see a dime of revenue in return.
So you need to make sure the junior miner has enough cash to fund operations for at least 18-24 months. If not, the company will have to raise cash by issuing more shares. Sometimes a lot of cash. This dilutes existing shareholders’ stock and usually results in a lower share price.
Invest in companies that are already funded. You will be well ahead of the game. Plus, miners usually don’t trade below their cash value. This cash will act like a cushion during bear markets.
Rule #3: Stable Geography
It doesn’t matter how many potential ounces of gold a company controls if they can’t get it out of the ground cost effectively.
The two most important aspects to control these costs are geography and infrastructure.
Many potentially profitable mines are located in countries or jurisdictions that could be considered unstable.
A few years back, a company called Crystallex was sitting on over 16 million ounces of gold in Venezuela. For comparison, a two million ounce deposit is considered a major find.
The stock price soared to $6 a share. That is, until Venezuelan President Hugo Chavez nationalized the mining industry.
Crystallex lost all its assets and shareholders lost all their money.
The Crystallex story is not uncommon. Nationalizing industries (and changing tax laws) happens often – especially in places like Bolivia, Argentina, and several regions in Africa.
To reduce risk, invest in politically stable regions. This way, you won’t wake up one day and find the junior mining company you invested in is trading at zero. And you’ll be able to hold these early stage companies long term, until their catalysts fully develop.
Rule #4: Proper Infrastructure
This may be the most overlooked rule by investors. As I mentioned, mining is a capital-intensive business. It costs a fortune to prepare a property to take resources out the ground.
Infrastructure costs can include water, power, transportation, drilling equipment, plant equipment, and labor. And all that only accounts for roughly 60% of the costs to do business.
It could cost millions of dollars to build this infrastructure from scratch. That’s a lot of cash for these small companies, which don’t generate any revenue.
Invest in a company with existing infrastructure. This will result in much lower costs to the junior miner – and more money to acquire more assets.
If the company has to build the infrastructure, make sure it has enough money to cover these costs and still profitably extract the resources.
Rule #5: Insider Ownership
There are a lot of big promoters in this industry that will tell you how sweet their project is… only to go bankrupt a few months later.
The easiest way to distinguish the truly promising companies from the fly-by-night operators is to look at insider ownership.
If management and other insiders own shares of the company, they will be motivated to make it succeed.
By following these five rules, you’ll discover that more than 90% of mining stocks should be completely avoided.
That’s how the resource experts invest in this sector. That’s how they are able to reduce risk in good and bad times. And that’s how they are able to generate huge returns in this speculative sector for decades on end.
Founder & CEO, Curzio Research