In the past nine months the ÂNedsec junior mining and exploration index has performed a massive 81% — with still more blue sky for those investors with an Âappetite for risk.
Paul Miller, resource investment banker at Nedbank Capital, says the sector has transformed in the past few years and offers a viable asset class for retail investors.
But be warned, junior mining companies are high-risk investments, with equally high volatility. Apart from being fully geared to the commodity cycle, they speculate mostly in the exploration and development of new mines.
These are the guys who go out looking for new ore bodies. If they don’t hit that ore body all the money goes down the drain, but if they do, they literally hit a gold mine. If you invest in five companies, maybe only one or two would hit jackpot, but this would be more than enough to offset your losses from the other investments.
In the past there were only a handful of junior mining companies to choose from and they did not provide the necessary diversification. Today there are more than 40 stocks.
“This increase in opportunities has meant that retail clients can now own a portfolio of shares. It is the first time an investor can consider junior mining as an asset class,” says Miller.
The kinds of returns that can be made from backing a winner are exponential. For example, in the past three years Metorex share price has gone from R2 to R26. A R10 000 investment three years ago would be worth R130 000 now. In this year alone Eland Platinum has run from R36 to R122, a return of far more than 200%. Wesizwe Platinum has returned just less than 200% since the beginning of the year.
The NedSec Junior Mining & Exploration Index (NSJME), which excludes mining companies with Top 40 shareholders, has 36 stocks. Although some have performed exceptionally well, Miller says across-the-board performance has been strong. “The companies are exciting, there is a lot of hype and they are also competing among themselves for investor capital.”
Miller says that in their drive for capital the chief executives of the companies are very accessible to investors. A retail client could quite easily phone the CEO for information. Miller says this is important because, at the end of the day, you are backing management and the fact that you have faith in their ability to find that ore body.
Mark Appleton, chief investment officer at BJM Private Client Services, says junior mining is definitely moving on to the radar screen and BJM is spending a lot more time identifying opportunities available in the sector. However, he also waves a warning flag. “There is a lot of risk involved. Typically, these companies are at the early stage of the production cycle and some are not even producing.” With this risk in mind, Appleton says they will use these shares as a sweetener for a client’s portfolio where the risk profile is appropriate. “There is a good story out there; it is not yet in the mainstream, but it is getting there. It is certainly becoming a potential investment destination depending on the investor’s risk profile.”
Miller says junior mining needs to be treated as a separate category and not simply lumped with other small-cap listings. This is blue sky investing with no previous earnings to back it up, so the investor needs to get to know the company. “Understand the junior mining company. Most of them have great websites and offer presentations at JSE seminars.”
Questions to ask
- Can the company go back to the market to raise capital? As these companies are not generating an income they will keep coming back to investors for more money. It is a bit like double or nothing.
- Are you satisfied with the management team? You must be satisfied with the management team; this is an intellectual capital business.
- Is the company exploring in the right area? Is there an ore body in the region already with reasonable quality?
- It is important to understand the potential production relative to the price you are paying. In other words, how much blue sky are you getting for your buck?