Graphite Investing E-course

One of the areas that I write about a lot is investing. And within that large category, I tend to write a lot about metals and mining investments. I was interested in a bunch of different approaches, from looking at specific metals to areas of the world. For example, I did a lot of writing on mining in Manitoba for a while (when I lived there), and I’ve done a lot of writing about junior resource stocks.

One area of focus that was really hot for a while was graphite, and I built up a fairly popular graphite investing e-course at a site I used to own in 2012 (you can read more about that now-defunct project here). Of course the graphite industry, like a lot of metals, declined significantly so interest waned… subscriber interest AND my interest!

The information here is still relatively accurate (a couple years later) although investor interest (which tends to drive junior resource stock prices) has moved elsewhere so I think the fundamentals remain relatively compelling for the long-term but as a short-term play graphite is maybe not the right investment for a lot of junior resource investors.

But now that it’s been a couple of years, I have this really interesting (to me at least) graphite e-course that I did a bunch of writing for. I gave it away free to subscribers a few years ago and now I’m releasing it to anyone who wants it.

(Remember: This information is a couple of years old now and may no longer be relevant now. Not all the links will work. Always do your due diligence before making any investing decision. I do own a couple of the companies listed below but I am not making any buying or selling recommendations.)

Enjoy.

THE GRAPHITE INVESTING E-COURSE

Graphite is so much more than the stuff in your pencil. It’s used in consumer products, industry, tech, energy, and the military.

You rely on graphite every day (without even realizing it). But supply can’t keep up with demand.

One expert says global graphite production will need to double.

Another expert calls graphite “the next big thing”.

Keep reading for the free graphite investing course to learn about the mineral that governments, military, and industry are clamoring to own.

You’ll learn why a bad economy is even better for graphite investors (hint: The demand for graphite isn’t dampened because the economy is down).

You’ll learn why some countries (including the US) might be willing to go to war over graphite.

You’ll learn why graphite is going to become even more critical in the future (hint: Someone just won a Nobel prize for their cutting-edge work on this future product that nearly everyone will own).

And, you’ll learn what it means that nearly every person in the US relies on graphite even though there aren’t any graphite producing mines in the US.

Ready to get started? Let’s go! The entire course is free and it’s posted on this page, no strings attached. (So why am I creating this course, you might ask? Well the reason is simple: I initially did a bunch of research for myself because I love junior resource investing and was particularly interested in the graphite space. Then other people started asking for the information so I posted it. At first I posted it as an email-based course but I’m not interested in making money from the site. It costs me nothing except a few bucks for the domain name so I’m happy to keep this for other people as well. I’ll add to this site from time to time as I do further research.

Sincerely,
Aaron Hoos

Metals and Investment Writer

INTRODUCTION: WELCOME TO THE GRAPHITE INVESTING ECOURSE

When most people hear of graphite, they think of the stuff in their standard yellow HB pencil.

Because most people think of that, they completely overlook graphite and don’t know that it is an essential metal used in more places than you might realize – it’s so important that the governments around the world consider it an essential metal, perhaps even one they are willing to go to war over!

In this e-course, I’ll explain what graphite is and why it’s so important to our lives, and I’ll show you why it could be the next big investment opportunity for smart investors to exploit.

This course is about graphite investing – not just about specific graphite stocks (which we will cover) but also about graphite investing in general. We’ll talk about the thinking behind graphite – as a commodity and as “product” explored and developed by miners.

The basis of all successful investing comes down to this: Understanding supply and demand. Low supply and high demand tend to drive prices upward. High supply and low demand tend to drive prices downward.

Graphite supply is low but graphite demand is high and growing. I’ll show you why and how you can potentially profit from it! But first, we need to know a bit more about graphite.

LESSON 1: WHAT IS GRAPHITE?

As a graphite investor, I want to understand graphite better – not only the market and the mineral itself but also how graphite fits into the larger picture.

I never really paid attention during science class in high school so I had to go back to the basics to learn. Here’s a simple “big picture” view that you might find helpful. I realize it might seem boring at first but keep reading to the end of this lesson because I’ll show you why we investors need to know this stuff.

Okay, so do you remember the periodic table? The last time you probably saw it was in high school.

The sixth element on the periodic table (nestled comfortably between boron and nitrogen) is Carbon.

The chemical element Carbon is one of the oldest known elements and one of the most abundant in the universe. The hardest known substance and one of the softest known substances are both Carbon.

Carbon doesn’t just exist in one form. The atoms of Carbon bond together in different ways. These are called allotropes. When Carbon atoms bond together in one specific way, we get one allotrope of Carbon, and when the Carbon atoms bond together in a different specific way, we get another allotrope of Carbon. There are several known allotropes of Carbon right now, and it all depends on how the Carbon atoms are bonded together.

The best-known and most “mineable” forms are…

  • Diamond
  • Graphite
  • Amorphous (this is where we get coal from)

There are other forms of graphite, as well, but they are not necessarily something you can pull from the ground (and some of them need to be produced in a laboratory).

  • Buckministerfullerenes (sometimes called “Buckyballs”)
  • Glassy Carbon
  • Atomic Carbon/Diatomic Carbon
  • Carbon Nanofoam
  • Carbide-Derived Carbon
  • Lonsdaleite
  • Linear Acetylene Carbon

And even beyond these types of Carbon, there are proposed/theoretical forms of Carbon that scientists believe could exist. I’m still learning about these forms of Carbon. Honestly, I don’t know a lot about them until I started to research this topic but I need to know more about all forms of Carbon!

So why does it matter to us as investors? I think it’s important to know the “family” that graphite is part of. And, it can (and should) prompt questions like “can graphite turn into a diamond? Or, can a diamond turn into graphite?”

Read this great answer at Scientific American and this great answer at Technology Review.

And another great question: “What’s the difference between natural and synthetic graphite, and how much graphite is synthesized?” Read one answer in this PDF from the United States Geological Survey (PDF). (Note: This PDF from the year 2000 so the answer may be dated now).

Researching the answer to these kinds of questions gives investors a better idea of just how rare graphite is and whether or not it is likely to be replaced – either through increased resources in nature or replicated in the laboratory.

The short answer to some of those questions above: Allotropes don’t change from one to another, so you’re not going to see a big coal deposit turn into a big graphite resource any time soon. But it is worth knowing what the different allotropes are because scientists are always experimenting and may someday discover a better Carbon replacement for graphite or a way to augment graphite into something different (which they’ve already done with graphene). And on the topic of synthetic graphite, it does count for a large part of the graphite market and it is worth studying just how much of an impact that synthetic graphite has and how big of a risk this is to graphite miners.

LESSON 2: WHY GRAPHITE DEMAND IS HIGH, AND RISING

You might not realize it but you rely on graphite every single. Its use is almost “invisible” because of a simple case of mistaken identity.

Lithium Ion batteries are used in consumer electronics, electric vehicles, military applications and the aerospace industry. They are popular because they are long-lasting and rechargeable.

Here’s where the case of mistaken identity comes in: Those Lithium Ion batteries are actually made up of 10 times to 20 times MORE graphite than they are made of lithium! (Some people argue that those batteries should be called graphite-lithium batteries).

As an investor, this is exciting news: Graphite demand is rising because the use of graphite-heavy lithium batteries is on the rise with no chance of this demand slowing down in the near future. (Are we likely to see FEWER consumer electronics or electric vehicles on the road in the future? Are we likely to see the military choose to rely on shorter-lasting non-rechargeable batteries? Not likely!

Chances are, we’re going to see more… a lot more.

For this reason, I’m really excited about the graphite opportunity. But this isn’t the only reason! We see graphite at work somewhere else, as well! Watch your inbox for in a couple of days for another high-demand use of graphite.
You’ve read about how graphite is a huge component in Lithium Ion batteries, which are powering our devices and our electric vehicles. That’s only part of the demand-side of the story. There is yet more demand for graphite that you might not realize.

Let me ask you this: In the near future, what do you see as being the biggest trend in the energy industry?
The answer is simple: Clean power. Right now, we are reliant on coal and oil and natural gas but those resources have gained a bad name for the harm they potentially do to the environment. Clean power, even if it won’t power an entire city right now, is gaining the attention of power companies, politicians, and venture capitalists because of the promise it holds for the future.

Here’s the good news for graphite investors: Graphite plays a role in wind power, solar power, wave power, and nuclear power! It is used to conduct, shield, and store energy. So although your home might not be powered by these methods today, the question investors need to ask themselves is: Will these energy-generating methods increase in the near future? You bet they will!

So that’s yet another key reason why the demand of graphite is growing.

But there’s still one more reason that graphite demand is growing.

If there’s one thing I’ve learned from Warren Buffett, it’s this:

Boring is good. Buffett loves boring because it’s predictable. He avoids the chaos of what he doesn’t know or understand.

Well, I’ve got a bunch of boring reasons that you will like graphite. These help to prove that graphite demand is hot (and likely going to rise).

Ready? Here they are in no particular order (plus scroll down to the bottom of the email for an important question)

Graphite is necessary for…

  • Lithium Ion batteries (you knew that already)
  • Fuel cells
  • Refractories
  • Antiknock gasoline additives
  • Chemical compounds
  • Drilling mud
  • Industrial diamonds
  • Magnetic tape
  • Paints and polishes
  • Soldering/welding
  • Brake linings
  • Steelmaking (such as blast furnaces and implements)
  • Seals and gaskets
  • Antistatic plastics
  • Electromagnetic interference shielding
  • Electrostatic paint and powder coatings
  • Electrostatic paint and powder coatings
  • Fly wheels
  • Polystyrene thermal insulation
  • Silicon chip heat dissipation

So here’s the question: Do you see any of these needs going away?

Are we suddenly going to stop needing brake linings? Will we stop needing steelmaking instruments and blast furnaces? Will we stop needing flywheels or thermal insulation? You don’t need to be an expert in each of these industrial applications to know that they all aren’t likely to vanish any time soon.

There is still another reason why demand is going up.

Around the globe, governments invest a lot of time in researching something that most people never think about.
Governments ask themselves 3 important questions:

1. “Which metals are necessary for our country?”
2. “Where do we get those metals from?”
3. “What happens if that metal source is no longer available?”

The United States government calls it the Critical Materials Strategy and they publish their research findings regularly. A public version is available for anyone to download off of the internet.

In the Critical Materials Strategy, the US government looks at metals that might be important to energy, industry, military, and consumer use.

And guess what it identifies in that document.

Yes. Good old graphite.

The Critical Materials Strategy identifies the use and necessity of graphite. Not only that, it also points out that the European Union has labelled graphite a “strategic metal” (which means that it should be considered absolutely essential to the country).

As more and more countries pay attention to graphite and as governments realize their reliance on this metal, more and more of them will name graphite as an essential resource for their country, further driving up demand.

When we look at trends in computing, what are we seeing? Smaller, portable, mobile, always accessible.

Right now we clip our mobile devices onto our belts or put them into our pockets or purses. And they are slowly becoming hands-free and more durable… but it’s not perfect yet.

Imagine a day when your computer is even lighter, easier to use, and it won’t break when it falls. That’s just the cusp of tomorrow’s computer trends. Trend experts are seeing wearable computers as something in the not-too-distant-future. (We already wear those Bluetooth headphones and Google is experimenting with web-enabled glasses).

Believe it or not, graphite will play a role there, too.

Scientists have invented something made out of graphite called “graphene”. It’s so groundbreaking that people are calling it “the miracle metal” and its inventors (Geim and Novoselov) won the Nobel prize for it in 2010.
Graphene is stronger than steel, harder than diamonds, it’s invisible and nearly weightless. It’s incredibly thin so you can bend it without breaking it. Imagine an iPad… that is as thin as a sheet of paper and you can crumple it up like a piece of cloth to put it in your pocket. That can be possible because of graphene.

Of course, it’s not just personal devices. Imagine bigger, flatter televisions. Lighter airplanes. Clothes that change color. Military camouflage that can change with the environment. Graphene will change industry, commerce, and the military.

By now, you’re probably sick of me asking this question: If graphene can be developed into these devices, do you see the need for graphite going up? You better believe it!

LESSON 3: WHY GRAPHITE SUPPLY IS SMALL, AND DECREASING

I’ve showed you the demand side of the graphite business. I showed you why I believe demand for graphite is big and it’s going to get bigger.

But savvy investors know one important lesson that unsuccessful investors do not know: Demand only turns into profitable investing if there is an imbalance in the supply/demand equation.

If supply CAN keep up with demand, prices are driven down and profits are low.

If supply CAN’T keep up with demand, there’s opportunity for investors to profit.

But here’s a hint for you: In 2012, the US Department of the Interior and the US Geological Survey co-published a report about graphite. In their report, they quote a metals expert who said: “Current graphite capacity may not be adequate for the increasing demands of these new energy applications, which may require double the current graphite supply when fully implemented”.

So current graphite supply will meet only half of the anticipated American demand. Wow.

Graphite is so critical to every country that…

  • has citizens who rely on mobile devices
  • has citizens who drive vehicles that use brake linings
  • has a steelmaking industry
  • has industry that uses industrial diamonds
  • has a military

… in other words, MOST countries rely on graphite.

The problem is, graphite production is limited. In 2010, there was NO mining of graphite in the US!

Adding to the inadequate supply, graphite deposits are found in limited places around the world:

The lowest-value graphite (called “amorphous” graphite) is found in China, Europe, Mexico, and the United States.
Middle-grade graphite (called “flake” graphite, which is worth up to 4 times the amount of amorphous graphite) is found in Austria, Brazil, Canada, China, Germany, and Madagascar.

The highest-value graphite (called “lump graphite” or “vein graphite”) is only commercially mined in Sri Lanka, as of 2010.

That’s not all. There’s more to this supply story.

We’ve been examining the supply-side of the graphite supply/demand imbalance. We’ve seen that countries are realizing their dependence on graphite by studying it and even adding it to their list of critical strategic metals.

When countries realize their dependence on a strategic metal, they tend to tighten up their exporting policies. This reduces the available metal on the global market as countries make sure their interests are served first (and they even stockpile some metals just in case. The National Defense Stockpile is the program run by the Defense Logistics Agency).

One of the most recent examples of export tightening was in 2010 with rare earths. China is a huge producer of rare earths for many countries and China tightened up their export policies and caused a bit of a panic in the rare earths market. (Note: In 2012, the World Trade Organization found China had violated free trade policies on reducing exports… but that was a couple years after the fact).

It also happens with other metals, too: Export-tightening has occurred in bauxite, zinc and coal. And that’s just exports from China. There are many other countries (including the US) who watch their exports very closely and are always balancing the revenues from exports against the availability of metals.

Since the US doesn’t mine graphite, exports from other countries could prove even more detrimental to the US.

One thing to consider when investing in any material is: Will this material be replaced by a cheaper material that is just as sufficient? Obviously, this will have an impact on the supply/demand imbalance by increasing the supply of graphite and decreasing the demand.

I don’t think this will happen any time soon:

Graphite has many uses and my research hasn’t revealed any significant alternates that might suitably replace graphite. Even if another metal is found to be better for some applications, it’s not likely that there will be a significant sweeping, overnight switchover from graphite to its replacement across all applications.

Safety standards will require that these metals are tested for suitability (i.e., no one is going to switch the metal on brake linings without first making sure that it does as good of a job as graphite!)

Some applications will be easier and faster to switch over than others. (Steelmakers aren’t likely to replace their blast furnaces right away).

In other words, IF there is a switch away from graphite, the timeline will be in years (or even decades). And that is only IF a superior replacement metal is found.

So I see graphite being a high-demand/low-supply metal for quite some time.

In the examination of the supply/demand imbalance of graphite, many investors see the opportunity and they consider investing in the metal. But they ask a very good question as part of their due diligence:

“What if a big number of graphite companies come on stream right now and supply the world with graphite? Won’t that solve the supply/demand imbalance and drive prices lower?”

That is a very good question! But here is the answer to remember when investing in resource companies:

Assuming you already know where a resource is in the ground, you still have to raise money and get permitting and set up a mine.

Assuming everything goes according to plan, you’re still looking at a minimum of approximately 2 years from discovery through exploration and 43-101 reporting and permitting and mine development.

So companies who are starting today to address the graphite demand won’t be mining graphite for at least 2 years.

Maybe more.

That’s a huge and growing demand, with an increasingly restricted supply, and not enough companies coming on stream fast enough to meet the remaining demand.

There’s one final piece to the supply/demand puzzle that you absolutely need to know about.

The news is almost too depressing to watch. Every time I open a web browser or turn on the TV, I’m bombarded with bad news everywhere.

But bad news is good news for savvy investors. This puts added pressure on the supply/demand imbalance because it means new companies are less likely to go to market to get funding. (Some will, but many will wait for better times). So there is an even greater strain on supply since those waiting companies will still have 2 years to production when they finally do go to market for funding.

The dampened economy also makes everything cheap right now… even high-quality companies operating in a sector with a favorable supply/demand imbalance. So investors can buy good companies inexpensively, and potentially enjoy a rise in prices as the supply/demand imbalance becomes more acute AND as the economy improves.

LESSON 4: WHICH GRAPHITE COMPANIES SHOULD YOU INVEST IN?

Some of my readers have been asking me to recommend some graphite companies to invest in. I just want to let you know that I legally can’t recommend anything — I’m not a licensed investment advisor and the regulatory agencies are very strict about that kind of thing (for good reason!).

Also, I don’t want to recommend anything to you anyway because I don’t know you personally and I don’t know what your own portfolio is like. We all have our own portfolio goals, risk tolerances, and time horizons (plus a million other factors) so I would be doing you a disservice to just tell you what to invest in.

With that said, I will tell you the kinds of companies that capture my attention:

I really like companies that…

  • Have already made some exciting discoveries in graphite.
  • Are located in predictable, mining-friendly jurisdictions.
  • Have a share structure that is nice and neat and not too diluted.
  • Have money in the bank, joint venture partnerships, or cash flow from operations.
  • Have a management team with experience.
  • Are close to production. The closer to production the better! (i.e. If I have a choice between a company with an early-stage discovery that isn’t yet NI 43-101 compliant OR a company that has a producing graphite mine, I prefer the latter… that’s not to say I won’t invest in the first one but the second one is likely going to be making money sooner to fund future expansion).

There are other things to look at, of course, but those are the big ones for me. Not every company is going to achieve each of those points but the more points that a company achieves, the more I like that company!

LESSON 5: WHICH GRAPITE COMPANIES SHOULDN’T YOU INVEST IN?

I’ve given you the list of qualities I look for in a graphite company. I also promised you a list of qualities I don’t like graphite companies to have. When I see these things, I might still invest but I am VERY cautious about it.

  • No cash and no income. This tells me that the company will have to raise money soon (either by borrowing money or by diluting their shares… neither of those options are ideal).
  • Bandwagon-jumpers. This is a tricky one and people who are smarter than me will pick holes in my logic but here’s what I think: Some companies are in graphite for the long haul. I like those companies. But other companies have recently switched to graphite because it’s popular. MAYBE that’s okay because there happens to be graphite where they were exploring anyway but I feel like a lot of companies that have recently added graphite to their business model are just doing it because graphite is hot. Yes, there are companies who have successfully switched from one metal to another but I’m wary when I see a struggling company switch to the flavor of the month. I want to know why they switched and whether this is truly a good fit for the company.

Those are the big ones for me. If either of those two situations occur, I take a longer look at the company to decide whether or not it’s one I want to invest in.

Hope you find that helpful!

LESSON 6: WHAT I LOOK FOR IN A GRAPHITE INVESTMENT

I’ve told you what I look for in a graphite company and what I run away from when I see it in a graphite company. Now

I want to tell you about the thing I absolutely love to see in any junior exploration company (not just graphite), I have a HUGE WEAKNESS for that company. It’s like my investing Kryptonite!

I like to see ongoing cash flow.

I almost drool when I see companies with ongoing cash flow because it means they aren’t likely going to borrow and or dilute their shares further.

Some explorers find a deposit and try to bring it into a production. That is very expensive and time consuming and it takes a completely different set of skills. So I don’t get very excited when I see a junior explorer with that as their plan.

Some companies look for deposits and then do a deal with a larger company (some kind of merger or property sale or something). That’s okay but it tends to put big spikes into a company’s income creating a feast or famine mentality.

I don’t think that’s very efficient.

I like companies that can make money — either through a joint venture that provides ongoing cash flow or because they are selling their minerals or because they are producing a marketable product themselves. Those activities provide ongoing cash flow, which can provide some consistency and stability to the business’ finances, and (more importantly) fund future expansion.

Cash flow in the junior resource market is frankly very rare (when compared to other industries)… and cash flow in the graphite space is even rarer. If you find it, make sure the company is doing everything right (obviously you’re looking for more than just cash flow) but that’s something you should pay attention to.

LESSON 7: ONE GRAPHITE COMPANY YOU CAN’T INVEST IN

It might surprise you to learn that I’ve been watching a graphite company that you can’t actually hold in your investment portfolio.

Let me tell you a bit more about them and then I’ll tell you why I’m watching them…

Timcal is a graphite company that mines its own large flake graphite in a mine in Quebec and then turns it into products that it has branded as Timrex(R) graphite. You can learn more about those products and where they come from here.

The company was founded way back in 1908 and it started producing graphite products in 1917.

You can’t actually hold Timcal in your portfolio because Timcal isn’t a publicly traded company. They are owned by a company called Imerys and THAT company IS publicly traded (under the symbol NK on the Paris exchange). I haven’t looked into Imerys itself as a potential investment but they have broad holdings in a variety of minerals and products and processes.

So why am I paying attention to Timcal? Here are the reasons:

1. Timcal has been around for over a hundred years and have been in the graphite biz for almost the entire time, so they clearly know how to function profitably in this business.

2. Timcal demonstrates a very rare “mine-to-market” model where they take the graphite out of the ground and turn it into a saleable product that can be sold. That is almost unheard-of in the world of publicly traded graphite companies so I’m paying attention to what they’re doing and how they’re doing it.

3. Timcal has mines and facilities all over the world. I want to know where and who they’re dealing with and I’m keeping my eye out for other companies that are operating in the area.

Although I don’t expect other companies to achieve the exact same results as Timcal, I use them as a type of “benchmark” for a company that I think has been very successful.

LESSON 8: WHERE ARE THE BIG GRAPHITE DEPOSITS IN THE WORLD?

One reader asked, “Where are the big graphite deposits in the world?”

I went to the United States Geological Survey (USGS), which produces annual assessments of different metals. Here is a PDF report of their graphite analysis.

They found that the world’s resources of inferred graphite is estimated at over 800 million tons of recoverable graphite. (That might worry you about overwhelming the supply-side of the graphite investing equation but remember that this stuff still has to be mined, milled, and turned into a marketable product!
Here are the world’s top producers in order of tonnage (according to 2011 numbers, which were the last ones they provided)

  • China 600
  • India 140
  • Brazil 76
  • North Korea 30
  • Romania 20
  • Canada 25
  • Sri Lanka 8
  • Mexico 7
  • Ukraine 6
  • Madagascar 5
  • Norway 2

Note: Other deposits that have been discovered more recently than this might change these numbers but I wanted to give you the published USGS numbers, which I think give a generally decent overview. As you hear about new deposits being discovered, you can fit them into this framework.

This map is also helpful. It looks like it might have slightly different numbers than the USGS report above. I’m not sure why although I wonder if the USGS made some changes to the PDF I downloaded because it looks like they have updated the numbers. But you have some pretty good information to build from.

By now, we all know how graphite is being used in various industrial applications, automotive applications, military applications, and cleantech/greentech applications today. These are the applications I consider to be foundational to the demand side of graphite right now.

And some of you have asked that I talk about the future uses of graphite — the stuff on the horizon that might further increase the demand of graphite or further decrease supply.

So let’s get into our time machine and visit the future and see how graphite is being used. Notice that many of the current uses of graphite are increased or are more widely adopted:

  • As the middle-class grows throughout the world (especially in India and China and Brazil), there will be more cars on the road, driving up the requirement for graphite in the brake lining.
  • As awareness of ecological problems grow, we should see an increase in cleantech/greentech, and many of those technologies rely on graphite as a key part of the equation.
  • Electric cars will become more widely adopted (since prices will fall and the travel range and performance will increase), which will increase the need for Lithium-Ion batteries to power them. According to The Street,there was an estimated 600% increase in the electric car market between 2011 and 2012. I don’t have the most recent numbers but if it continues to grow at even half that adoption rate, we’ll see more electric cars on the roads and, subsequently, more need for graphite to power those batteries.
  • And personal devices that run on Lithium-Ion batteries should grow, too: Right now, the ubiquitous cellphone/smartphone/mobile device comes to mind. Laptops are still in widespread use. iPods and other media devices continue to be hot. The tablet market has been reinvigorated (which includes iPads but also includes dedicated readers like the Kindle). There continue to be new consumer electronics products coming onto the market (like the iPad mini) and although not all of them will catch on, the importance of portable connectivity will continue to be widely adopted.

LESSON 9: ONE BUSINESS MODEL I WOULD LIKE TO SEE IN THE GRAPHITE INDUSTRY

I see this business model in many different metals but I haven’t seen it very commonly in the graphite industry yet. (It’s there; just not as widespread or explicit as with other metals).

My favorite business model is the prospect generator model. In this model, junior explorers look for deposits and when they find something promising, they work out a joint venture with senior partners who fund the project’s further exploration, development, and production.

In this way, the junior explorer earns an ongoing income from projects they’ve explored without incurring the massive costs of development and production. As you’ve heard in the past, ongoing income is key for me.

Some companies are accidental prospect generating companies. By that I mean: They find a deposit, can’t afford to bring it to production, so they shop it around and get a partner. But I like the ones who clearly and plainly say they are prospect generators — and state as such on their websites and annual reports — because they don’t waste their efforts on trying to bring the project to production first, and they don’t try to sell the entire project to another company. Their business model clearly states how they intend to make money.

So, why don’t we see the prospect generator model very much in the graphite industry? My theory is: There hasn’t been a lot of money in graphite for many years so there hasn’t been a lot of exploration, and we don’t see a lot of “major” graphite companies with a lot of money to swoop in and grab the most promising deposits. I think we’ll see more of it in the future but not right now.

I really like this model because it brings in that ongoing cash flow that I’ve talked about but it also allows a company to focus on the one thing it does well — exploration — without diluting its focus with other things.

LESSON 10: REASONS TO BE BEARISH ON GRAPHITE

I’ve told you that I’m bullish on graphite. I’m EXTREMELY bullish on graphite. I know many of you are as well. But I don’t ever want to be the kind of investor who is so bullish that I have blinders on and miss the warning signs.
So this is my “devil’s advocate” lesson in which I try to look at the other side of the coin. What would be the reasons that you WOULDN’T want to invest in graphite?

Briefly, I can think of a few:

1. Resource stocks are often speculative — there might be nothing in the ground or there might be something in the ground but it’s not economic to extract!

2. The prices of publicly traded companies aren’t only driven by the value of the company. As we’ve seen with some graphite companies, stock prices are also influenced by overall confidence in the economy.

3. Graphite might be replaced by another material that is better… but just hasn’t been discovered or perfected right now.

4. Graphite stocks might be overhyped, driving prices higher than they should be valued (which may have been the case in 2011 and early 2012.

5. Between the mine and the market are a lot of steps (i.e. mills and production facilities) that might create a false bottleneck.

It’s good to know what the risks are. Here are four articles that I think all graphite investors should read. The make a good case to pause and seriously consider whether or not graphite is the right investment for you. Check them out:

The Next Resource Investment Fad (at ASXNewbie)
Graphite: Time to Invest or Flavor of the Day? (by Casey Research)
Will Graphite Go the Way of Rare Earths? (at Reuters)
Only a Few Graphite Companies Will Win (at Resource Investor) (Note: Mickey Fulp is bullish overall but not on every company out there).

Every investor — even those as bullish as me — should read these articles and keep them in mind when investing.

But don’t worry. I’m not saying that I’m turning bearish. I’m actually more bullish than ever. I just think it’s worth looking at the other point of view.

LESSON 11: REASONS TO BE BULLISH ON GRAPHITE

I am more bullish than ever on graphite and here is one of the reasons: Graphite is gaining popularity on the strength of its use in high tech products and batteries but I don’t think this demand has been factored into stock prices yet.

What many people are missing is just how important graphite is to the more boring industries, including refractories and steelmaking.

According to the US government, 33% of the graphite production went into refractories and crucibles, and an additional 26% went into steelmaking applications (in 2011). A whopping 59% of graphite demand is not driven (yet) by some of the flashier industries. Instead, it is driven by industrial use. (Source)

So if you want to know what the demand of graphite is going to be in the near future, consider what these industries are doing. Are they on the decline? Are they on the rise? Although we’ve had global economic turmoil lately, there is still a need for these industries. And as global economies improve, the need for these industries will rise.

And THEN we can factor in batteries, which Roskill Information Services says will grow at 10% to 12% per year through 2016.

But what about the long-term future of graphite? I’m bullish on the long-term future of graphite because of graphene. You’ve heard me mention it before. It’s an innovation for which two scientists from the University of Manchester won the Nobel Prize in 2010.

So what’s the big deal about graphene? Well I don’t want to get too boring or technical here but graphene is basically a one-atom-thick sheet of graphite. It’s a strong, bendable, two-dimensional material.

So what are the uses for graphene? Well I did some reading around the web and there are some very interesting potential applications for graphene, including:

  • Improved distillation for the biofuel and alcoholic beverage industries
  • They have the potential to revolutionize the electronics industry with better circuitry and transistors, as well as solar cell development
  • Graphene can transform food and water availability because of graphene’s anti-bacterial qualities and its potential use in desalination
  • The aspect of graphene that I’m most excited about is its potential use as a durable, flexible touch-screen material, which can turn your iPad or smartphone into a super-thin cloth-like material. In the not-too-distant future, we’ll have wearable computers integrated into our clothing, or we’ll have smartphones that can be folded like a cloth in your pocket… and graphene will play a part in those applications.

Graphene is still relatively new and scientists are finding some exciting ways to use it. While many of these applications are proven or surmised based on the properties of graphene, it still has to be practical and profitable before it will become a reality.

But this is cutting-edge stuff that we might see in the future, which can drive up graphite supply.

LESSON 12: ARE GRAPHITE STOCKS SPECULATIVE?

I received a great question from one of my readers. He asked something that I think might be on the minds of many of you so I’ve included it here as an excellent question for all of us to think about.

He asked (and I’m summarizing a little)… “We’ve recently seen some graphite stocks increase their share price dramatically, and this seems to be because of the discoveries they’ve made. Are these companies becoming less speculative because they now have results?”

And here’s my answer… Companies that are basing their results on specific data of indicated deposits (not just initial drill results and not just inferred results) are less likely to be speculative because they are actually sitting on a deposit. That’s good news and definitely something I like to pay attention to! But there is still some speculation-related risk in those stocks, though. Specifically, the graphite still has to be mined. It might be an excellent deposit but until there is cash flow, the company is a speculative stock. That cash flow might come from a joint venture partner or from actually mining the deposit or even from mining and then milling the deposit.
Of course, that’s just my opinion. You might disagree but I believe that a company is typically speculative until it starts earning money from its deposits.

This is good news and bad news for those of us who are investors: It’s good news because it helps us more easily find stocks that match our investing portfolio. (Hey, I happen to like speculative stocks!). But it’s bad news because it can take a lot of potential investments off of our shortlist if we’re looking to minimize the speculative quality of our portfolio.

LESSON 13: THE DIFFERENCE BETWEEN LUMP GRAPHITE, FLAKE GRAPHITE, AND FINE GRAPHITE

I’ve received a few questions from you about the difference between lump, flake, and fine graphite — what the differences are and why it matters.

Here’s my attempt to explain that… WITHOUT boring you!

First, graphite comes in 3 forms: Lump graphite, amorphous graphite, and flake graphite.

You can think of them along a spectrum: One the one side of the spectrum is lump graphite — it’s bigger. On the other side of the spectrum is the very fine amorphous graphite. And somewhere in the middle is flake graphite.

Now let’s look at them a little closer…

LUMP GRAPHITE
Lump graphite (sometimes called “vein graphite”). This is larger chunks of graphite, and it’s very rare. Approximately only 1% of the world’s graphite production is lump graphite. Most of the lump graphite is mined in Sri Lanka.

AMORPHOUS GRAPHITE
Amorphous graphite (sometimes called “fine graphite”). This is very fine particles, almost like coarse dust. Approximately 50% of the world’s graphite production is amorphous graphite. Amorphous graphite is used in low-end applications and this is where we get graphite for pencils.

But the real key to the market is the third one — and this is where investors need to pay attention the most, in my opinion, is…

FLAKE GRAPHITE
Flake graphite (sometimes called “crystalline flake graphite”). As its name suggests, this is flaky and angular. Approximately 49% of the world’s graphite production is flake graphite. This is the most important part of the graphite market because most graphite usage that we talk about here at GraphiteInvesting.com (such as lithium ion batteries, for example) comes from flake graphite. I believe that current and future demand will impact the supply of flake graphite the most.

The flake graphite market is further subdivided into multiple categories based on the size of the flakes.
Flake graphite is subdivided into different categories based on size. Companies typically report their graphite size based on “mesh”, (the size of the mesh sieve that is used to screen the graphite) or based on “microns” or “micrometers” (which are measurements of the size of the graphite itself).

Here’s a mesh-to-micron chart to help you convert if you find a report that doesn’t provide both pieces of information.

When reading about a company’s graphite projects, you’ll see words like “jumbo flake”, “large flake”, “medium flake”, and “fine flake” (sometimes called “small flake”) and beside that, you’ll see a number… like “80 mesh” when they measure the mesh or “160 µm” when they measure micrometers.

According to Technology Metals Research, there are no industry standards to determine what makes up a “large” mesh size or a “medium” mesh size or a “fine flake” mesh size but as I did some research around the web, I found some pretty consistent numbers.

Jumbo flake: 50 mesh or higher
Large flake: 50 mesh to 80 mesh
Medium flake: 80 mesh to 100 mesh
Fine flake (also called small flake): 100 to 300 mesh (anything smaller than this is considered amorphous)

As I mentioned, there might be some small variances in what companies are calling “large” or “jumbo” or “medium” so always check the mesh size or the micron or micrometer size.

Mesh size relates to the number holes per square inch in the mesh used to filter the graphite. One research source (who works for a graphite exploration company) wrote: “80 mesh means 80 holes per square inch. 200 mesh means 200 holes per square inch.” This helps people to understand the exact size of flakes. Large flake graphite doesn’t mean like the size of your corn flakes in your cereal bowl. He also pointed out a great comparison: A typical screen door has about 30-40 holes per square inch, which would make it a “30 to 40 mesh” screen. By comparison, large flake graphite is 2 times smaller than that, or about the width of a human hair.

I’m going to illustrate what we’ve learned so far by comparing a few different companies and the graphite sizes that they report. (Note: This information may change and not all of this information might be an indicated resource. This is provided only as an example and shouldn’t be considered a recommendation to buy or sell)…

Energizer Resources (EGZ) posted on their website about their Molo project: “… the Molo contains flake graphite including jumbo (+50 mesh), large (+80 mesh), medium (-80 to +100 mesh) and small flake (-100 to -200)”.

Flinders Resources (FDR) posted on their website about their Woxna project: “Woxna mine… flake distribution was 40% large flake +160µm, 28% medium flake 75-160 µm; and 32% fine -75 µm”.

Northern Graphite (NGC) posted on their website about their Bissett Creek project: “Almost all production will be high carbon, +80 mesh large flake and over 50% will be +48 and +32 mesh jumbo sized flake”.

Strike Graphite (SRK) posted on their website about their Deep Bay East project: “Recent testing of graphite from Deep Bay West achieved >95% carbon content for all flake sizes +32+50+80+100 and -100. Further treatment was able to achieve >99% purity (Noble Bay Mining Development Inc.)”.

I’ve just provided these as examples of how different companies present their information. You’ll notice there is quite a bit of variation between how they present it so investors need to dig in a bit further to learn more.
Mesh size can range from jumbo flake (which is above 50 mesh) to fine flake (which is 300 mesh and below).

But sometimes while you are looking at different companies and checking out the mesh size of their graphite, you’ll notice that some mesh sizes have a plus sign in front of them and other mesh sizes have a minus sign in front of them. The plus sign means that the particles remained in a sieve of that size while the minus sign means that the particles pass through a sieve of that size.

I tried to find some examples and the very best example I could find is right in Wikipedia: If graphite “…is described as -80/+170… then 90% or more of the material will pass through an 80 mesh sieve and be retained by a 170 mesh sieve”.

So, when we look at Energizer Resources’ mesh size, we see: “jumbo (+50 mesh), large (+80 mesh), medium (-80 to +100 mesh) and small flake (-100 to -200)”

This means that the jumbo flakes stayed in the sieve when the mesh was 50 mesh The large flakes passed through 80 but stayed in 100 mesh The small flake passed through 100 and 200 mesh sieves.
(I’m only mentioning Energizer Resources here as an example, not as a recommendation to buy or sell. I think they do a good job of showing what their graphite results are so I’m using them as an example and I wanted a real company to illustrate this lesson.)

In the big scheme of your due diligence, you might think that the plus or minus signs are a small point but I wanted to at least mention it in case you saw them and wondered what they were all about.

LESSON 14: GRAPHITE PURITY

When measuring the purity of graphite, it’s the amount of carbon in the graphite that is being compared to the amount of other stuff… so sometimes you might see a purity measurement of “92%C”, which means it is 92% carbon.

Purity is important because the purer a graphite product is, the more specialized its usage can be and, therefore, the more that can be charged for the graphite product. However, it costs money to purify graphite and during the purification process as much as 70% of the graphite can be lost. So graphite companies need to decide at what purity their graphite will provide the best return on investment for them and their shareholders.

A lower purity graphite will cost less to produce but will earn less money when sold. A higher purity graphite will cost more to produce, will diminish the supply as it is purified, but will earn much more.

I’ve listed a few of the graphite purities below. It can get quite a bit more detailed than this but I think this is a good start:

  • Battery-grade graphite (which will drive up demand in the years to come) requires 99.9% purity.
  • High tech (but non-battery uses) can require purity around 99.5%.
  • Commercial flake graphite, which can be used for a variety of industrial applications, can be bought for as low as 80% purity but will probably need to be refined further before usage.

So now you should probably be wondering: What are the graphite purities that are being pulled out of the ground? I haven’t seen anything definitive or comprehensive but one company.

Asbury has this posted on their website and I think it’s pretty helpful: “Flake graphite from Madagascar is typically 85-90% carbon… Graphite from Canada runs 90-97% carbon and graphite from China 90-96% carbon.”

To pick on Energizer Resources again (since they helpfully post this info on their site), they are actually showing a higher purity of graphite out of Madagascar than what Asbury reported. You can read on their website what their purity is and how they are planning to improve purity: “Deposit possesses a unique metallurgical characteristic that delivers ‘jumbo’ flake (+50 mesh) with simple mechanical separation at 93% purity… Energizer’s process flow sheet is being designed with 2 additional streams; one to include a flotation circuit for upgrading remaining material to 95% purity as well as an end-module for upgrading to 99%+ purity for battery applications…”

So when you are looking at different graphite companies, compare the purity of the graphite that they are pulling out of the ground and watch for what their plans are to possibly add value to the graphite by purifying it further.

LESSON 15: US DEPENDENCE ON FOREIGN GRAPHITE

One of the reasons that graphite gets a lot of attention is because the US is almost entirely dependent on graphite imports to serve its needs. Adding to the problem is that China supplies somewhere between 70% and 80% of the graphite market… and it is tightening up its export of this essential mineral.

There are several graphite companies around the world in mining-friendly jurisdictions (i.e. Canada and Madagascar, for example).

But some of you have been asking about graphite companies in the USA. There ARE graphite companies in the US that are actively exploring for graphite.

I’ve listed them below in alphabetical order:
Alabama Graphite Corp (CNSX: ALP) [http://alabamagraphite.co/] – Mining in Alabama
Graphite Corp (OTC: GRPH) [ http://www.graphite-corp.com/ ] – Mining in Alabama and Montana
GraphiteOne (TSX-V: GPH) [ http://www.graphiteoneresources.com/ ] – Mining in Alaska (Disclosure: I own this)
USA Graphite (OTC: USGT) [ http://www.usa-graphite.com/ ] – Mining in Nevada

Before you rush out to buy them to cash in on the US graphite market, here are a couple of things to keep in mind:

  • These companies are thinly traded and/or traded over-the-counter or on alternative exchanges.
  • If they are exploring now, be aware that it can take YEARS and a lot of money to get a mine into production… assuming that there are results
  • Humorously, a couple of these companies have been promoted as “the ONLY US graphite company”. Although they might be slicing the market in different ways, you should be aware that there is more than one graphite company at work in the US.

Obviously you have to do what is right for your portfolio but I think there are better investments out there right now that have a better chance of growth in the shorter term that you probably want to look at first.

LESSON 16: GRAPHITE INVESTING DUE DILIGENCE

A while ago, I was talking with a group of friends about various stocks that we were invested in. After our discussion, one friend went out and bought some graphite stocks. (Note: I never recommend stocks. I think you know by now that I’m a huge advocate of doing due diligence).

So he bought one particular graphite stock and guess what happened: It went down. And then down again. And then down some more.

The last time I talked to my friend, he was quick to point out that his stock had gone down, not up… the opposite direction he wanted it to go. Although he was polite to me, I think he was a little annoyed at the direction the stock had taken.

I know he’s not the only one who has been frustrated by the direction of graphite stock prices. I think most of us have had the same experience with at least some of our graphite stocks. We bought the stocks hoping they would go up but they went down instead.

He asked me what I thought about the stock and what I was going to do with my holdings since the price went down, I told him an answer that I think annoyed him a little: I said, “Great! I’m going to double-down on the stock!”

My reasons were simple:

1. The fundamentals for that particular stock hadn’t changed and yet it was cheaper. (According to Warren Buffett, that’s a good time to buy!)

2. My timeline for holding the stock (based on my research) was not a few weeks or a few months… but rather a few years.

Honestly, there are some times when I see a stock go down and I think “I just need to sell this dog and take my losses!” But that is a knee-jerk reaction to owning stocks and it’s not always a smart thing to do.
Some of you have been asking me for guidance about when to buy or sell stocks. Obviously I can’t give you SPECIFIC advice (I barely know you) but next week I will give you something I think you’ll find useful. It’s a sort-of framework I use to help me figure out whether to buy or sell a stock that I already own. Before I give you this framework, I want to hammer home this critical point: Every investing decision needs to be an informed decision. Do your due diligence first… and always.

My friend was a little annoyed at the direction of the stock price of a graphite stock he bought. Perfectly understandable. Frankly, he didn’t do any due diligence and he bought it with the naïve expectation of an immediate pop in price.

So he was frustrated when I told him I was happy with the price going down because I was buying more of the stock: The fundamentals hadn’t changed (actually, they had improved) plus my timeline to hold the stock is years, not weeks.
How can investors value a junior resource company so that they know whether or not they should invest in it? On my personal blog, AaronHoos.com, I’ve written two blog posts that you will find helpful to answer these due diligence questions…

How to do your own due diligence: This post is a good general post that guides the potential investor through a series of questions to examine how they are likely to invest, what their risk tolerance is, what their timeline is, etc.

How to do due diligence on a junior resource company: This post guides the potential investor through a close examination of a junior resource company. (It was written to help you look at any junior resource company, not just graphite companies).

Prerequisite: I have done my due diligence on the stocks in my portfolio. As a result, I understand the fundamentals of that stock (such as: The resource being mined, the supply/demand fundamentals for the resource, the management team of the company, the development plan of the resource, and the financials of the company). And, of course I pay attention to the stock price.

I try to stay on top of this information – both the fundamentals and the stock price. When one of those elements change, that is a signal to me that I need to make another buy/sell decision and I go through this framework to help me make the decision:

If the stock price has gone up, I ask whether the fundamentals have changed.

  • If the stock price has gone up and the fundamentals have changed in a way I don’t like, I will probably sell.
  • If the stock price has gone up and the fundamentals have stayed the same or improved in a way that I like, I will consider holding. (Or, if the price is still within range of what I’m comfortable with, then I might choose to buy more). Some people choose to sell at this point, and that’s okay but if I feel the price is going to continue to rise, I want to ride the elevator as high as it can go.

If the stock price has gone down, I ask whether the fundamentals have changed.

  • If the stock price has gone down and the fundamentals have changed in a way I don’t like, I’ll probably sell.
  • If the stock price has gone down and the fundamentals have stayed the same or improved, then I will probably hold or even buy more.

It’s not a perfect framework. But no decision-making tool ever is. Its purpose is not to decide for me. Rather, its purpose is to make me slow down and think before I act rashly. I may choose not to do what this framework concludes but at least I stopped for a minute to think about it.

One of the biggest risks of this decision-making tool is that market sentiment can sometimes impact stock prices without regard to the fundamentals (at least, in the short term). So a crappy company can become a big winner in the short term while some of the good stocks stay depressed. But in the long term, I’m a big believer in these things working themselves out.

So some of you are asking me what I’m doing since graphite stocks haven’t skyrocketed in price. Here’s what I’m doing: I’ve revisiting my due diligence and I’m seeing if the fundamentals have changed. And if I’m happy with the fundamentals, I’m doubling down.

LESSON 17: WHAT IS THE FUTURE OF GRAPHITE?

The graphite markets haven’t been kind. Graphite stocks have gone up and then plummeted. Not really a crash but kind of a slow fizzle.

When a stock is blowing up, it’s hard to keep your cool. I was working at a stockbrokerage when the tech bubble burst in 1999/2000 and the phones rang off the hook as investors jumped ship. When the markets (or specific stocks) blow up, it’s easy to just sell out and grab what cash you can.

(Disclosure: I am not a stockbroker anymore. I never recommend to buy or sell specific stocks).

When I buy a stock for the first time, I know that there will be days when I think “why did I ever buy that stock?” and “I need to SELL SELL SELL!!!” I know there will be those days because, frankly, we all have them, don’t we?

Doing your due diligence is good but that doesn’t completely erase the risk of owning a stock (i.e. a company can do something stupid or the uneducated masses of investors can turn against a stock or the whole market by overreacting to a small piece of bad news).

So one of the first things I do as soon as I buy a stock is this: I write down why I bought the stock and how long I want to hold it for before I think it will increase in value.

For one graphite stock I bought, I wrote the following while I was waiting for confirmation that my order was filled: “I like the graphite story in general, I like this company’s management team, they have a great deposit and the infrastructure is already there. I expect to hold this until at least 2015.”

I also sometimes make notes about the stock price, financials, the mesh size of the graphite, and other notes.
At the time, it’s just a nice reminder so that I don’t get buyer’s remorse as soon as I buy.

But later, when the market is crumbling or that specific stock price is going in the opposite direction, I look at my notes and I ask myself: “Has any of this changed?” And I go through the framework I sent last week.

There have been several times when this review has helped me to keep my wits about me when I want to cash out and run away.

Have you written down why you hold your stocks? If you haven’t, you might be more susceptible to the influences of bad news and negative market sentiment. If I can make a suggestion to you, it’s this: Take a moment right now to go through your portfolio and write down the reason why you bought specific graphite stocks.

4 qualities that a junior resource stock speculator needs

I think there’s a rule in the stock market that says: “If you buy a junior resource stock today, it will immediately decline and then falter for quite some time.

I’m joking, of course, but I think most junior resource investors will tell you that this has happened to them at least once (more likely: a dozen times).

I love junior resource stocks but they are not easy stocks to own! If you own junior resource stocks, or think you might like to own them, here are 4 qualities you’ll want to have. Trust me when I tell you: If you don’t have these qualities, don’t invest in junior resource stocks!!!

A PASSION FOR DUE DILIGENCE

It sounds like an oxymoron to put “passion” and “due diligence” in the same sentence. However, junior resource stocks are speculative and there are a lot of unknowns when investing in them. You’ll reduce the risks and increase the potential of gains by doing your due diligence first. Don’t make the mistake of just investing because someone you know has also bought that stock and is doing well with it.

Also: Due diligence is not a one-time even that you do once just prior to buying a stock. I believe due diligence is something you need to do over and over and over again — before you buy, before you sell, and regularly in between. Due diligence activities should be “triggered” by your own decisions and by external market forces. You should always be asking yourself: “Does this event change the reason that I bought the stock in the first place?”. Click here to learn how to do due diligence on a junior resource stock.

A B.S.-O-METER

There are many many many good people in the junior resource industry. They mean well, they’re hardworking, they’ve made some exciting discoveries, and they have some good insight to say. But there are the losers, too; the ones who see a junior resource stock as a great way to make some fast cash from an IPO before letting the company fall in value, or those who pump and dump stocks, making money on the gullibility of investors rather than the stock’s fundamentals. You need a very sensitive BS-O-Meter that can detect the slightest whiff of something being off.

EXTRA MONEY THAT YOU CAN AFFORD TO LOSE

I almost didn’t include this one because it is the most depressing of them all. But junior resource stock speculators should really be investing money that they can afford to lose. I’ve seen too many people who dump their life savings into stocks, only to watch those stocks decline. Don’t do it! The entry point to buying juniors is pretty low. So buy only with money you can afford to lose. This isn’t an alternative to buying a lottery ticket.

COURAGE

This is probably the biggest one. It was originally inspired by Rick Rule of Sprott Resources, an articulate thinker in an industry where those qualities are far to rare. He referenced courage in a talk he gave at an industry conference a couple of years ago and although he didn’t go into great detail about it, I think he was referring to these two types of courage.

Investors need courage to look past the unknowns: There are many unknowns in the industry and anything from politics to natural disasters to public sentiment can suddenly shift the stock price. So you need to do as much due diligence as you can to eliminate as many of the unknowns as possible, and then you need courage to live with the rest of the unknowns.

Investors need courage to act when their emotions are advising something different: All too often (and even in stocks that aren’t junior resource stocks), investors will buy when the price is high because everyone is excited about the stock, and then they’ll sell when the price is is low because they’re afraid of losing even more money. This all-too-common practice (ironically, even among conservative investors) is the exact opposite of what should happen. Investors should buy when prices are low and sell when prices are high. Of course, that sounds good in theory but it’s much harder to do in practice. Write down the reasons you bought a stock and then remind yourself of those reasons when you’re wondering “should I sell this stock?

 

Investing in junior resource stocks is not for the feint of heart. It’s not for the weak-willed or people who love to jump on bandwagons. Only invest if you have these 4 qualities! I think it’s fun. But it’s also worrisome and time-consuming and mind-boggling at times! Invest at your own risk!

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.

How to do due diligence on a junior resource company

How can investors value a junior resource company so that they know whether or not they should invest in it?

While mowing the lawn, you see your neighbor so you walk over to him, lean on the fence, and chat for a while. He asks you, “So have you heard about ABC Gold Exploration Inc? They trade on the TSX and I hear they have just discovered the world’s greatest deposit of gold… EVER.

What do you do?

Some investors (too many, in fact) will run to their online self-directed brokerage account, check the symbol, and then stick some money into the stock. After all, their neighbor seemed pretty sure of himself.

Sure, we might SAY that we never do this… but it happens. MANY investors do exactly this.

In my experience, people love the idea of risky stocks but they hate risk, and they want to be cautious investors but rarely examine stocks closely before buying them (and instead are guided by emotion and the momentum of a stock’s popularity or unpopularity). Yes, that last sentence seems full of contradiction but it seems to be how people tend to trade.

So let’s say you hear about a junior resource stock. What should you do?

Regardless of the source (whether it’s an completely uninformed source, like your neighbor, or the most trusted source like an industry expert), you need to do the following 3 types of due diligence investigation BEFORE you a penny into that stock.

STEP 1: AM I READY TO INVEST?

Before you ever invest in anything, you need to do some due diligence and the first part of your due diligence is to take a close look at yourself. What kind of investor are you? How much risk can you handle? How much volatility can you handle? Will you lose sleep if your stock goes up by 25% one day but drops by 50% the next day? What happens if your stock drops by 75% and then stays that way for a long time? How much do you want to gain and how much are you willing to lose? What is the timeline that you want to make your money back?

So, before you jump into a stock just because your neighbor’s friend’s cousin knows a guy who heard something good about the stock, here’s what you need to do:

  • General due diligence action: Start by performing a personal assessment about your financial portfolio. The first 28 questions on my How to do your own due diligence blog post will help you with this.

It’s a good idea to revisit these questions periodically (schedule time to think about them once a month or once a quarter. It will go quickly because most of the answers will stay the same but it’s worth figuring out if anything has changed and how that impacts your investing).

If your due diligence reveals that you are okay with the risks and rewards that junior mining companies present, then you can move on to the next step…

STEP 2: WHAT IS THE MARKET LIKE?

Next, you look at the two elements that drive the stock market in general (and the prices of the specific commodity you’re looking at). Those two factors are: The supply/demand ratio and emotion. Examining the supply/demand ratio helps you understand the underlying fundamentals of the company while examining the emotion in the market helps you understand how excitement or fear can impact the price of a company.

You will gain a large advantage over other traders when you examine these two factors at the stock market level and at the more specific resource market level (because they are not always the same but they can influence each other).

The supply and demand ratio: Current metal prices (“commodity prices”) have an impact on the progress of a junior resource company, and metal prices are determined by supply and demand. If a company is operating in a market that has no demand or too much supply, commodity prices are low and it doesn’t make sense to explore, build, and operate a mine. However, if demand is high or supply is low, commodity prices might make it worthwhile to explore, build, and operate a mine. So it’s critical to understand supply and demand, and commodity prices.

Commodity prices are easy to identify – there are many sites and resources that provide that information, and this commodity returns table is a really good at-a-glance way to view commodity returns for the past decade. But for a great site that lists plenty of historical commodity prices and other information, IndexMundi is a good source to bookmark.

Slightly more difficult to identify are the underlying factors that drive supply and demand. Understanding what those factors are doing, and will do in the future, can help you know what the supply and demand is going to be like. For example, copper and molybdenum are driven by industrial growth and infrastructure growth. Graphite is driven by growth in the automotive industry, tech industry, and in the growth of Lithium-ion batteries. (Learn more about the underlying factors driving graphite’s supply and demand at GraphiteInvesting.com). Gold is driven by a sense of unease in the market (so people buy gold as a hedge). And so on.

  • Junior resource due diligence question: What are the underlying factors that drive the commodity price?
  • Junior resource due diligence questions: What has the commodity price done in the past? (See IndexMundi for the answer) And, does it confirm what I’ve just discovered about the underlying factors that drive the commodity price?
  • Junior resource due diligence question: What are those underlying factors doing right now? (Further research might be necessary to determine the answer to this question).
  • Junior resource due diligence question: What do I think those underlying factors will do in the future? (Further research might be necessary to determine the answer to this question).

Emotion: Although individual stock prices might reflect a lot of the information available to investors, the stock market is largely driven by sentiment. Happy investors who feel like there is plenty of money to be made will invest. Scared investors who are afraid of losing their shirt will keep their money out of the stock market. This supply of money in the market (high during good times and low during bad times) drives prices up and down. And contrarian investors who understand the concept of buying when prices are low and selling when prices are high can benefit. This excellent article explains the cycle of market emotions.

  • Junior resource due diligence question: Using the cycle of market emotions, where is the overall stock market currently?
  • Junior resource due diligence question: Using the cycle of market emotions, where is the underlying metal of the junior resource you are examining?
  • Junior resource due diligence question: Using the cycle of market emotions, where is the junior resource company you are examining?

So, we’ve looked at supply/demand and emotion in the market. Here’s how I like to use the information when I invest: In general, I like it when there is a lot of ongoing demand but little supply, and I like it when there is a lot of fear in the market. The reason is: The fear drives the price of the stocks down, which makes it perfect to buy low, but then the ongoing demand brings prices up. Then, as the emotion in the markets becomes less fearful, the prices go even higher.

Just because I invest like that doesn’t mean you have to invest like that. There are other equations of supply/demand and emotion that might influence your trading. But it’s what I like to do (and it’s why I’m investing in specific parts of the junior resource industry right now when I can find good demand, low supply, and a lot of fear.

This step gives you the “context” or the “climate” in which you are investing, and it helps you understand some of the factors that will affect your price that are larger than the company you are investing in. Now it’s time for the last step…

STEP 3: WHAT IS THIS JUNIOR RESOURCE COMPANY LIKE?

Now that you’ve spent time figuring out how comfortable you are with risk, and what the larger investing context is like, now you are finally ready to take a closer look at the junior resource company itself.

Some investors want one single number to determine the value of the company but there are many factors that will influence that number and that might work for Warren Buffett but he doesn’t deal in junior resource stocks. It is possible to find undervalued stocks but you can’t always easily compare one company to the next because there are political and commodity considerations to take into account.

For us junior resource investors, it’s not easy to compare one company with another. A gold company in Bolivia needs to be valued very differently than uranium company in Saskatchewan Canada. Instead, investors need to examine the following factors to determine whether they feel those factors are acceptable to them.

Business model of a junior resource company: A business model is the way a business is structured to use its competitive advantages to operate and make money. Different companies will bring different strengths (and weaknesses) to a business model. You can start answering these questions now but you might refine them as you continue through this part of the junior resource due diligence.

Junior resource companies have business models like “Prospector” (where a company searches for resources), “Explorer” (where a company acquires a claim from a prospector and explorers it further, perhaps bringing the mine through the feasibility stage), “Developer” (where a company takes an explored resource and builds a mine), and “Producer” (where a company mines the resource and brings the product to market). Many junior resource companies do more than one of these roles (some are prospectors and explorers, some will prospect, explore, and develop, others will take a mine from discovery all the way to production). There are also hybrids of this model. A “Project Generator” business model is a good example – where a company will explore a resource and then partner with a senior company to develop the mine and extract the resource. And some mines don’t just take stuff out of the ground, they have a “mine-to-market” business model where they hope to extra minerals and then mill them into sellable metal.

I haven’t found a lot of information written on junior resource business models (and different companies might use different language to describe what they do) but each model has its own opportunities and challenges. For example, an explorer might not have a lot of cash flow so it might have to go back to the market frequently for money (until it sells its deposit or partners with a larger company). And a developer/producer might make some good cash flow but it is expensive to build a mine, so they need a lot of money up-front. Knowing what the model is gives you a point to start thinking about the opportunities and challenges that the company faces.

  • Junior resource due diligence question: What is the business model of that junior resource company?
  • Junior resource due diligence question: what strengths and weaknesses does this business model represent (and how will these strengths and weaknesses impact the company and the price of its stock)?

Life cycle of a mine: All mines go through a pre-defined lifecycle – from the point where a prospector takes a closer look at a big piece of empty ground, all the way through to the point where a giant mine is in operation. (This is related to the business model, above – often, companies derive their business model by specializing at a point in the life cycle of a mine).

There are several stages in between the prospecting and the finishing mine, and each stage has its own risks and rewards and opportunities and challenges. (Note: Some companies have several mines in one stage of the life cycle while other companies might have several mines that are each in different stages.) To familiarize yourself with these risks and rewards, a good place to start by taking a look this video below…

And be sure to check out this simple interactive mining lifecycle page from The Global Speculator.

Then, for more detail, check out what Brent Cook wrote: Life Cycle of a Junior Explorer and then to go read the five-part series about mine life cycle at GoldInvestingNews.com: 1. Staking a Claim; 2. Regional Exploration; 3. Resource Definition and Feasibility Study; 4. Assessment and Approval; 5. Mine construction; 6. Operating the mine.

  • Junior resource due diligence actions: Using the above information, figure out what the company is doing now and will need to do in the future to move forward in the process. Then determine the impact on the company and the impact on the stock price. You’ll also need to think about the level of risk at each stage – what the risks are and how the company is handling those risks.

Resource: Now it’s time to do some due diligence around the actual resource of the mine. You’ll want to pay attention to the following three factors (assuming that you have already done the other due diligence listed above):

  • The amount of the resource (how much is there?)
  • The extraction plan (how easy or hard it is to get the resource out of the ground?)
  • The purity of the resource (how much work is required to make the resource ready to turn it into a product?)

Each type of metal measures the resource differently – some by tons, some by ounces; some use open pit mining; some have very pure minerals that require little separation from the impurities while others need to be separated out of the ore. So don’t be dazzled by the individual numbers without getting some comparisons.

A really helpful resource that is written about gold (but is useful even if you invest in more than gold explorers) is this PDF entitled Models and Exploration Methods for Major Gold Deposit Types. It gets pretty detailed and scholarly (you WILL scan some of it instead of reading it because it’s not very exciting) but it’s about as close as you’re going to get to digging in dirt without getting dirty.

  • Junior resource due diligence question: What is the geology of the area of the world where the junior company is working?
  • Junior resource due diligence question: How much resource is claimed to be there?
  • Junior resource due diligence questions: How does this amount of resource compare to other companies in the same area? (How much resource do those other companies have? Are they finding more? What is the purity? How hard is it to get out of the ground?)
  • Junior resource due diligence questions: What is the company’s plan for making money from that deposit? How far away are they from achieving their goal?

Politics and Location: Junior companies operate in different jurisdictions – both politically and geographically. Each one will have an impact on how successfully a mine operates.

Political jurisdictions might be mining friendly, mining unfriendly, or unstable (politically unstable examples include: A country might unexpectedly nationalize a mine that has just been discovered, or a government might collapse during a coup). So investors need to determine what the political landscape is of the area that the junior resource company is operating in.

  • Junior resource due diligence question: Is the political landscape stable or unstable?
  • Junior resource due diligence question: Is the political landscape pro-mining or anti-mining? (Along with political leaders, consider different interest groups that might have a strong say in whether or not mining work is completed in a particular area).

Part of the location question is the question of infrastructure. If there is water, power, roads, and a potential workforce nearby then it is much easier and cheaper to set up a mine, compared to those situations where a mineral deposit is discovered far from civilization and diesel generators have to be barged in only when the water isn’t frozen.

  • Junior resource due diligence question: What is the infrastructure like? (No infrastructure can mean higher costs to develop a mine).

Management: Next, investors need to look at management. Since just about anyone can start a junior resource company (no experience necessary!), it’s important to know what the background of the management is and whether they are experienced and skilled at operating the company with the business model, life cycle, and location that they are working in.

Look at the website to get a list of management and the directors. Then look at the following:

  • Junior resource due diligence questions: What is the experience that each person had? Although longevity in the industry is one helpful indicator, it’s certainly not the only one. Also ask: How much experience has this person had with this particular type of business model?
  • Junior resource due diligence question: What connections do management and the board of directors have with larger companies? Is there a potential joint venture relationship possible?

Financials: The financials of a company will also help you to value the company and they are essential for you to review. I’ll go into detail in a moment, but here is a bird’s-eye-view of the numbers you want to pay attention to:

  • Are there ways that the company is making money right now? Do these support exploration?
  • How much cash does the company have right now?
  • How much is the company spending right now?
  • If the company doesn’t get any more money, how long will it last until it needs to find more?
  • How will the company get more money if it needs the money?

Below, I’ve provided a number of really helpful resources. Each one gives you a slightly different perspective or way to value a company. I don’t think there is any one single right way. I prefer to do several of these methods and decide how I feel about the company based on a collection of numbers.

So, to get started, go to the company’s website or to a site like Yahoo Finance to get their latest financials. Then go through the list of videos, websites, and PDFs I’ve provided below to piece together a picture of the financial health of the company.

InformedTrades.com provides the following 3 excellent videos about how to understand financial statements of mining companies. Watch these! They are very good.

Roger Montgomery shows us how long the mine will survive at the current amount of money it spends:


The really good stuff is between 1:20 and 1:45

His advice is to look at a company’s expenses over the year, divide the number by 12 to determine the cash burn rate. Then look at the how much money the company has in the bank.

This PDF from Mining.com helps investors use financials to find the real value of junior mining companies.

Although the content of this site has nothing to do with mining, they have devoted a page to this really helpful mining calculation: Enterprise Value Per Ounce and Cost Per Ounce.

Check out Paul van Eeden’s articles How to value a mining stock and How to value an exploration company.

If you want to get really advanced, this 81-page PDF from basinvest.com gives a lot of detail about using financials to value a mining company.

Each company will need to be weighed on its own financial strengths and weaknesses. You are looking for the answer to this question:

  • Junior resource due diligence question: When will this company become profitable and will it need to dilute its share price or borrow more money to get to that point?

Answer that question and you will have a fairly good idea of what to expect. Ideally, you want a company that has cash flow coming in from operations (perhaps selling or JVing properties or selling ore). If you don’t have that, then you want a company that has money in the bank that can afford to explore or extract the deposit for a while before it needs more money.

ADDITIONAL MUST-USE RESOURCES

8 Page Guide: Resource World Magazine put out a great 8-page guide to valuing a mining stock. This guide gives a good introduction to various aspects of a junior company – including geology, mine life, and financial calculations.
Excellent video from BuchanBullBullion: This guy does an amazing job of outlining great tips, ideas, and websites that investors should look at when they are doing junior resource due diligence:

Some highlights from the above video:
1:35 – 2:03: How to research management
3:10 – 3:54: How a little knowledge can help you profit from volatility
3:57 – 7:05: Fundamentals to look for in a junior company
7:05 – 14:00: Understanding the lifecycle of a mine

ResourceInvestor.com: This article from ResourceInvestor.com called How to value a mining share goes into greater detail and lists 8 factors that investors need to be aware of when they are valuing a mining company.

WHAT YOU END UP WITH

After doing all of this research, what do you end up with? Unlike some stock research, you don’t end up with a single, simple number that indicates whether or not you should buy the stock. Instead, you end up with a sense of the company’s short-term and long-term health, and short-term and long-term opportunities. You end up with enough information to either feel comfortable about owning the stock because you reasonably expect the price to go up, or uncomfortable about owning the stock because you reasonably expect the price to go down.

Of course there will always be things you didn’t consider — a CEO who goes rogue, a crazy investor who gets the jitters and sells their holdings and drives the price down, etc. But in general, you gather enough information to feel overall bullish or overall bearish… for good reason.

If and when you decide to invest, the next step is to “screw your courage to the sticking place”, as they say in Shakespeare, and be confident in your purchase. If a stock price falls but nothing has changed in the information you gathered then there is no need to sell. To help with this, I suggest you develop an exit strategy for each stock.

An exit strategy consists of the following elements:

  • A profit thesis (the reason why you own the stock and expect it to go higher
  • A best-case-scenario exit strategy (the point at which you will exit the stock or at least re-evaluate whether you should continue to hold the stock). I like to include a share price and a date.
  • A worst-case-scenario exit strategy (the point at which you want to jump off of the sinking ship).

Here are a couple of examples of my profit thesis: I hold one company because it has an amazing gold resource that is increasing in size, is run by management with plenty of experience, and is in a politically stable area. My profit thesis is that as long as gold is in demand, and as long as this company can find more and then extract it, they are going to do okay. But I’ve also set a price and a date in the future. If either of those become true (the price rises to the price I’ve identified, or the date arrives that I’ve identified) then I will re-evaluate.

Another example: I hold a company that owns a past-producing mine and on-site mill. They have all of the infrastructure and they have a new deposit. My profit thesis is that I believe the stock price is going up as soon as they can get their new deposit out of the ground and into their on-site mill. Again, I have a price and a date and I’m just waiting for either of those to be true before I do anything. The stock has gone down — (it dropped by 30% this spring!) — and there were many days when I had to go back to my profit thesis to remind myself why I bought the stock. Nothing had changed except for market emotion so I stayed the course.

CLOSING THOUGHTS

As you can see, there are many things to consider when doing your due diligence in in a junior resource company. Look at as many facts as you can and decide whether you believe the stock’s potential risks and potential rewards are right for you. If they are, buy with confidence and courageously hold your stock until the facts change.

Improve your junior resource investing with this tool

Junior resource companies are like the many-headed Hydra: One dies and two more will take its place. Every time I turn around, another junior resource company is proclaiming that it has struck a bonanza-grade deposit of whatever resource it’s exploring for, the deposit goes ALLLL the way down, and they’re neighboring the greatest producing mine of all time.

As an investor, it’s easy to get caught up in the hype and to spread yourself too thin as you look for compelling investments – in one day you might look at a gold explorer in the Abitibi belt and then a silver explorer in Peru and then a graphite company in Mozambique and then a rare earths company in China and then a uranium company in Saskatchewan.

I realize that I was almost overwhelmed by choice and it was actually making my investing less successful and less enjoyable.

What I wanted was a way to focus my research, tune out the noise, and figure out how to become a better investor.

So I put together this simple chart as a starting point. I created 2 columns, “Preferred” and “Not paying attention”, and in these two columns I sorted jurisdictions and resources that I was interested in paying attention to and jurisdictions and resources that I’m not paying attention to right now.

Here’s the chart:

Preferred Not paying attention
Jursdiction Canada

  • Alberta
  • Saskatchewan
  • Manitoba
  • Ontario
  • Quebec

US

  • Alaska
  • Nevada
  • California
  • New Mexico
  • Arizona

Mexico

South America

  • Peru
  • Argentina
Africa

Asia

Australia

Europe

Resources
  • Aluminum
  • Coal
  • Lead
  • Nickel
  • Rare earths
  • Molybdenum
  • Oil/Natural Gas

HOW A SIMILAR CHART COULD BE USEFUL FOR YOU

  • By identifying which jurisdictions and commodities you’re interested in, you’re helping to focus your attention on some of the things that best capture your attention, which is a great place to start when looking at different investing opportunities. When I hear about a new gold mining opportunity in Ontario, I’m giving myself permission to take a closer look because it’s the jurisdiction and resource that interests me, so I’m presumably more familiar with the details. (Even if I’m not an expert, I am at least starting from a base of familiarity). If you’re familiar in just a few areas, you can make better apples-to-apples comparisons of mines that explore near each other… compared to learning what makes a good uranium mine in Saskatchewan and then having to relearn what makes a good molybdenum mine in Australia.
  • By adding something to the “Not paying attention” column, I’m not sweeping an entire continent or commodity into the trash can, never to look at them again. In fact, I do own companies that mine in these jurisdictions or work in the resources listed in the “Not paying attention” column. However, this chart serves to keep my euphoria in check when I hear about an AMAZING new exploration story. If it’s an aluminum mine in Asia, the chart is a reminder to me that these aren’t in my “Preferred” category so I need to do an extra check during my due diligence because I might not be as familiar with the jurisdiction or the resource. In the case of Flinders Resources (TSX: FDR) it was in a jurisdiction I was not as familiar with but I invested in anyway… I just needed to do some extra legwork ahead of time.
  • This chart also becomes a curriculum to help me learn to be a better investor. I can identify some of the jurisdictions and resources in my “Preferred” category and learn more about them. For example, I can see by looking at this chart that I’m woefully uneducated in the states/provinces of Mexico, Peru, and Argentina so that might be a good place to start. Or perhaps I can build on my interest in gold and dial in more information about gold-copper-zinc plays. And, I can do the same in my “Not paying attention” category. If I feel that I want to range out into a new jurisdiction or commodity, I can be more strategic in deciding what to look at next. For example, perhaps I’m willing to take on a little more political risk in my portfolio so I could look at some explorers in Africa or Asia.

I should also note that just because something is ON the chart doesn’t mean I’m invested in it. Copper is a good example right now. But it does mean that I’m familiar with the resource and that familiarity helps me trade more effectively. And I’ll keep an eye on copper for when I might find another opportunity that interests me.

A chart like this helps you to sort through the barrage of exploration companies, tune out the noise, and find exactly the kind of companies you are most likely going to get excited about.

You don’t have to just use the two categories – jurisdiction and commodity – that I’ve done here. There might be other elements you can also include to help you focus even further: Some others I might consider would be: Type of company (explorer, developer, producer, etc.), business model (prospect generator, mine-to-mill, etc.), market cap, stage in the mine lifecycle,