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  • Junior Investing and Trading Basics 9 comments
    Jul 22, 2011 12:24 AM

    For the last seven years as a junior investor I have developed many strategies, like other long term investors, designed to select which juniors will produce with more reliability. My metrics are not unique and other investors likely use different strategies and different combinations that work for them as well. There is no one right way nor should that be the goal. Rather, I prefer to keep a running evaluation of things to determine my portfolio and overall confidence in each stock story I invest in.
    My approach starts with the underlying commodity. I try to pick a hot commodity. I like to choose a commodity with INCREASING END DEMAND, usually with a new technology or new growth story. Five years ago iron ore and copper were the story because of China and India. Then it was uranium and oil due to third world energy demand increases. Last year is became the rare earths due to China supply limits and strong technology uses for the rare earths.
    For Strategic Metals look at the end use demand and then look for Richard Karn's five forms of supply threat:
    1.) Sovereign risk;
    2.) Scarcity;
    3.) No substitute for the metal in a primary use;
    4.) Byproduct sourcing; and
    5.) Dissipative use in a primary application.
    Next I look at the juniors related to the product. Here I try to be a banker and determine if I would loan to the project, especially in light of the prior GFC. I look at:

    (For clarity I have blended my criteria with a list Jack Lifton made on SA- ) LIST IS IN ORDER OF IMPORTANCE TO ME:
    1. Timeline- Will the company produce soon enough to enjoy the increasing prices in the underlying commodity?
    2. Resource
    a) deposit composition (in rare earth I love low thorium Monazite and Xenotime)
    b) mining mechanics (flotation, extraction at mine site)
    c) deposit accessibility (geography, topography, politics, ect.)
    3. Smallest investment necessary for market an acceptable production rate- This is Jack's and it is spot on brilliant IMO. It eliminates the massive pie in the sky guys like Greenland in rare earths. I have yet to see a junior on such a grand scale that ever produced.
    4. Management experience in areas described in the company mission. Sometimes this is hard to know. But if you read the last few years of announcements and presentations and the story is unfolding as promised and in a logical order that is a good sign. Consider reasons for failure and delays and decide if the problems were understandable and if the solutions made sense.

    Then I look at the business model with an emphasis on:
    a. Mining engineering (mining is simple. I should understand what the company wants to do and I should understand why they will be able to do it.)
    b. Process engineering (for rare earths this is mainly materials processing. For other miners this might be logistics-rails, ports, ect.)
    c. Marketing- Long term supply contracts
    d. Finance- balance sheet

    Last I look at:
    Shareholder base to confirm above assumptions.
    a) Experts in management in the field (if the hands on experts in the field join management it is a good sign IMO
    b) Big banks in the top 20 are good news with juniors. They suggest to me that the all important funding issue should work IMO.
    c) Then if I'm lucky, if a big expert investor buys your stock or quality companies JV and contract with the junior it is a very good sign IMO.
    It is a stamp of approval that the rest of my work is probably accurate.

    Once I determine a good junior stock I move on to investment timing. Drill results are best played as a trade in most junior stocks. The following graphs show why. After a good drill if a stock hits its 50 MA it is time to take money off the table and wait to see the hardware on the ground in most cases. The period from drill results to hardware on the ground (The Development Investment Analysis Period on the US Global research graph below) is always longer than you think. It is characterized by great optimism giving way to painful issues like feasibility and funding.

    These are key concerns to the business. But shareholders going through this phase often see gains diluted away by share issuance and technical trading and market forces. Save yourself the hassle, wish the junior luck, and put them on a watch list till they start to build. Generally, juniors can be revisited for investment when they are about a year to eighteen months from production IMO.

    So by trading drill results and reentering at "first hardware" let me say upfront I know several guys that grab gems far sooner than I do. But after first construction I do hold the stocks for a long while. I may not make it to a dividend stage, but I am generally well past production. My investment strategy is to keep adding on the natural dips caused by the ups and downs of a big project. Here there is a judgment call regarding the problem and how well the junior (management) can handle the situation. In the simplest terms: I add when my conviction is going up but the share price is pulling back.
    Last, I look to exit. The exit is based when the growth factors or conviction start to wane. Share buybacks or dividend declarations can be high points in the share price, but may indicate an exit point. Any deterioration in the commodity story after all construction is complete is also a good time to exit. But the main thing that guides me is my interest in junior projects. When the development story is complete, the earnings oriented investors will support the price and I will most likely find a new junior to pursue.
    Having drawn a perfect picture, let me now talk about cutting bait. Leaving a loser is a BIG part of junior investing. Several common facts lead to leaving a loser not related to the life cycle of a mine. No matter how much you like a junior, you must leave it IF YOU:
    1) Lose faith in management execution;
    2) See Poor corporate governance;
    3) Doubt the commodities future;
    4) See a recession as imminent;
    5) See banks and businesses dropping contracts or large amounts of stock; OR
    6) See an event or disaster that hurts your conviction in the stocks near and mid term performance.
    Avoiding these problems and diversifying your picks are a key part of this type of investing. It also helps prevent "falling in love with one project" IMO. I personally like to put passion in my research. I will not keep up with all of the information if I don't maintain that interest. But ultimately, I know I will leave each stock and move on to the next one. Learning to do that after big profits is one of the most important lessons to this type of investing. And you learn it best by doing it a few times.

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Comments (9)
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  • H. T. Love
    , contributor
    Comments (19540) | Send Message


    What a fantastic easy-to-read article!


    I'm adding it to my "education" bookmarks.


    If the market ever again becomes a venue for *investment*, your article will play a major role in my decision-making process.


    I thank you for donating the time, energy and thought in putting this together and making it available!


    22 Jul 2011, 09:07 AM Reply Like
  • Love_ Money
    , contributor
    Comments (419) | Send Message
    Excellent read Chi. Thanks for educating many of us on the junior miners investing.
    22 Jul 2011, 02:08 PM Reply Like
  • chihawk
    , contributor
    Comments (2083) | Send Message
    Author’s reply » Thanks HTL and Love$.
    Love$, It's worthy of mentioning that NTU is about to start up the first hill and Lynas the second hill in the Life Cycle. Normally I would look for a top in NTU after drill results. Some peel back might make sense, but not a full sell IMO. There are two reasons for this. The first is that NTU has two HREE projects and will have alot more drilling to do. The second reason is the potentially JV with Lynas IMO. NTU has already said they will only sell concentrate. If they JV with Lynas the Development Investment Analysis Period could be too short to sell out and re-enter like I would normally do. Also, if the HREE continue to generally go up there may not be a great reentry point like most miners.
    22 Jul 2011, 02:56 PM Reply Like
  • Joseph L. Shaefer
    , contributor
    Comments (1749) | Send Message
    SUPERB Insta, Chi. Thanks for taking the time!


    BTW, do you know who the original source is for "The Life Cycle of a Mine?" I seem to recall seeing it years ago and being impressed with the clarity it brought even then...
    22 Jul 2011, 04:33 PM Reply Like
  • chihawk
    , contributor
    Comments (2083) | Send Message
    Author’s reply » Joseph,
    You are right that it has been around a long time. I know it was around before I started buying miners. There is a recent version of the chart I saw by Brent Cook I wanted to include but thought might be crossing a line since he is a pay site:


    Brent added a time line based on the normal mining stages (Chips & Samples/ Drill Results/ Pre feasibility /43-101 or JORC/ Bankable Feasibility/ Funding/ Development/ Startup/ Production.) By doing that Cook identified the Development Investment Analysis Period as from Pre feasibility to early Funding (He calls it the "Orphan Period" which captures the sentiment of the stage very nicely). This is also the main promotional period. So when the miners are selling their story for funding, their stocks are often least attractive. I agree with this in most cases. There is volatility during this time but claims of overvaluation tend to damper these rallies. Sadly, many young investors tend to give up on good companies as they go through the milestones of feasibility because they frustrate from the less rewarding share price moves in spite of the greater company progress. This is even more common when investors were in the stock for the rapid share price rises with early drills.
    This I think goes to the true wisdom of the Life Cycle. It teaches patience on entering when others erroneously think the train is leaving the station. And it keeps you in when the valuation doubters are strongest (near production). If you get those two issues right, it is almost certain that your mining stocks will outperform the rest of your portfolio in stable economic times IMO.
    22 Jul 2011, 10:10 PM Reply Like
  • Lafferty
    , contributor
    Comments (253) | Send Message
    Appreciate the synthesis, Chi, thanks. Maybe you should try to publish it on SA?
    22 Jul 2011, 06:31 PM Reply Like
  • chihawk
    , contributor
    Comments (2083) | Send Message
    Author’s reply » I use to try that, but then decided it was pointless. I write this stuff because I like writing it. And since I'm only a private investor I found the delays and approach by SA was taking some of the fun out of the process. I therefore just insta and avoid that drama.
    22 Jul 2011, 10:14 PM Reply Like
  • toly
    , contributor
    Comments (188) | Send Message
    I liked the attention you paid to the quality of the management… I know different investors have different perspectives… In the case of NC, IMO he is a great chess player that has brought Lynas to where it is…


    Also I am a student of quantitative fundamentals, financing is paramount and needs to be examined in any DD…


    Thanks Chi...
    26 Jul 2011, 03:59 PM Reply Like
  • chihawk
    , contributor
    Comments (2083) | Send Message
    Author’s reply » I very much agree toly.
    And frankly I am tired of the know nothing moralists that can't see that NC is thinking circles around every analyst in this space. That's what I want in a CEO. Not some "buddy" of the pumpers. I voted against Crown because it was a bad deal. I keep NC because he is the smartest guy in the rare earth space. Period.
    26 Jul 2011, 04:02 PM Reply Like
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