11 reasons why I love junior resource stocks

Junior resource stocks are companies that explore and develop mineral/metal resources. Junior resource companies do one or more of the following activities: They get a property, explore for a particular metal, and then (if they find something worthwhile) they develop the mineral resource into a mine that generates cash flow.

Here are 11 reasons why I love junior resource stocks.

1. IT’S HIGHLY ENTREPRENEURIAL

The junior resource industry is highly entrepreneurial with a lot of businesses starting all the time. All that is required is a promising property and you can pretty much set up a junior resource company. That doesn’t mean people are going to invest in it, of course, but it does create some really exciting buzz that I absolutely love about the industry.

(Naysayers will point out that the highly entrepreneurial nature of the industry increases the risk of scammy companies that are bad investments. This is true. But it is also usually resolved when investors do their due diligence. In my opinion, the advantages outweigh the disadvantages.)

2. IT’S EASY FOR INVESTORS TO GET INVOLVED

While there are resource stocks that have very high stock prices, many — perhaps most — resource companies are “juniors”. That is, they are small companies with penny stock prices. This allows investors to get in at a low price, spending just a few hundred dollars to get a few thousand shares.

(Yeah, there’s a downside here, too: Penny stocks don’t have far to go to fall to zero. So if you’re going to invest, make sure you can afford to lose your money. In my opinion, a few hundred bucks isn’t a big deal to lose. I’m not putting my life savings in one penny stock!)

3. THERE ARE RISKS

There are risks to any junior resource stock: The underlying commodity might suddenly bottom out. Investor sentiment might turn away from the commodity or the company or the region they are operating in. Political risk is always present — in third world countries, you might end up with a crackpot dictator who takes over the mine; in first world countries, you often end up with excessive regulatory obstacles. I like all of these risks! They pose a challenge for the junior resource company and for investors. Smart companies need to figure out how to overcome those risks as much as possible; smart investors need to figure out ways to mitigate against those risks through their investing.

4. THE POTENTIAL IS THERE FOR BIG WINS

If you buy a blue chip stock, the possibility exists that the stock might go up. But the moves aren’t huge. It might climb slowly, advancing a small percentage each day when it does go up. These stocks are famously stable. But in a junior resource stock, stocks worth pennies can increase at a greater rate — going up by a significant percentage when they do rise.

5. YOU CAN LIMIT YOUR LOSSES

Stocks fall, too. And people who want safety and security in their stock investments will choose blue chip stocks because they aren’t likely to fall as much. But just as junior resource stocks can climb dramatically, they can also fall dramatically, too. However, since they have a low buy-in, you are only going to lose as much as you invest. So if you invest only as much as you can afford to lose then your losses are limited.

6. THE LAW OF SUPPLY AND DEMAND ALWAYS WINS

The market is the jungle and the strong survive while the weak perish. What influences strength and weakness is the fundamental rule of the markets: Supply and demand. The more you understand supply and demand, the better you’ll do in junior resource stocks. Supply relates to how much of the commodity is being readily mined and stockpiled; demand relates to how the commodity is being used. Increases in supply feed demand and drive the commodity prices down, which makes it less viable for a junior resource stock to operate; Increases in demand eat supply and drive the commodity prices up, which makes it more viable for a junior resource stock to operate.

7. EVERYONE NEEDS MINERALS

In general, the demand for minerals is there so a well-chosen junior resource company that is focusing on a specific in-demand mineral has the potential to do well. Minerals aren’t going out of style. Yes, specific minerals might rise or fall in price because of supply and demand but minerals as a whole will always be needed. It is the responsibility of the investor to figure out what minerals will be in demand and to invest accordingly.

8. I UNDERSTAND IT

There are many penny stocks out there, not just junior resource stocks. There are tech and biotech and greentech, for example. The problem is, I don’t understand them. I’ve spent some time studying the resource industry and junior resource stocks in general so I’m comfortable working in this industry.

9. SUCCESS COMES FROM DUE DILIGENCE

I love due diligence. I love to roll up my sleeves and research companies to find out what makes them tick. It’s not easy and other people don’t like doing it, which is probably why I like doing it all the more. Here’s a blog post I wrote about how to do due diligence on a junior resource company. While you can’t eliminate all risks with due diligence, you can identify many of them and that allows you to deal with them as much as possible. The other risks (the ones you can’t mitigate) are just part of the fun.

10. THERE IS AN OPPORTUNITY TO SPECIALIZE

Junior resource stocks are basically their own category but within that category are sub-categories: You might specialize by mineral type (gold, silver, graphite, etc.), geographic location of mines (South America, Africa, etc.), where in the mine lifecycle a company operates (explorer, developer, etc.). By identifying a few specializations, investors will feel far more comfortable navigating the complex supply/demand equation because they are more familiar with a specific mineral.

Of course that doesn’t mean you don’t invest in other sub-categories, but a specialization helps you to focus bit.

11. THERE ARE MANY PATHS TO SUCCESS

I also love junior resource stocks because they have many opportunities for success, which (in turn) impacts the stock price. The most basic path to success for a junior resource stock is to find a resource and mine it, eventually earning cash flow from the production of the mineral. But that’s not the only way they can succeed. They can be a prospect generator, finding resource deposits and partnering with others who will bring those deposits to production; they can do a joint venture with a company to bring the deposit into production (which is similar to the prospect generator method but maybe with a bit more control over the process and skin in the game); they can sell the project to another company (we’re seeing a lot of this in the industry right now); they can be acquired by a major producer; they can split the company into multiple companies (which happened recently to one of my holdings — I know own three very good companies instead of one). There are even other creative ways to succeed as well — I just heard of one company that not only mines its own products but it also owns a mill that mills ore for nearby mines as well.

 
There are risks to junior resource companies and you should never trade these stocks if you aren’t comfortable with the risks. It’s not for everyone but I love the challenge, the opportunity, and the edge-of-the-seat excitement that comes with this kind of trading.

Aaron Hoos

Aaron Hoos is a writer, strategist, and investor who builds and optimizes profitable sales funnels. He is the author of The Sales Funnel Bible and he's a real estate investor and a copywriter for real estate investors.

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