By MoneyMorning.com.au
On Monday we wrote about Take-Over Targets and Treasure Hunters – and told you why we believe they’re your best chance to bag gains like 226% and 81% in resources stocks.
Today, we’ll show you some of the methods our editors use to track down these companies. It’s an easy formula to filter good stocks from bad stocks…
Finding Them
First, our editors will get their name on company mailing lists… or the mailing list of PR companies that run investor presentations. But they also know these guys are salesmen. They need to double- and triple-check the facts before they believe what they’re told.
Second, they go to mining conferences to hear about up-and-comers (Slipstream Trader, Murray Dawes and Diggers & Drillers editor, Dr. Alex Cowie are on their way back from the Sydney Mines and Money Conference today). Again, they’ll need to check any facts they’ve been told.
Many companies will tell you a project is only 18 months from production. But if you go back next year and hear them talk, they’ll tell you the same project is still ‘only 18 months from production’!
Another way is to painstakingly search the internet and company websites for under-reported stories. Most of the info they need is out there… it’s just a case of finding it.
So once they’ve found a company they like, and it’s exploring for a commodity they know is in demand…
How do they pick the right explorer?
There are a lot of stocks to choose from. And some of it comes down to luck – getting the right idea about the right industry and the right stock at the right time.
But there are five questions they ask that can help weed out the hopefuls from the hopeless…
1. Who’s in charge? Look for a team with a successful exploration record in the same field. If they’re looking at a small-cap potash explorer and the management team’s only experience is in producing iron ore, they’ll probably steer clear. There’s a big difference between exploring and producing. And an even bigger difference between mining iron ore and potash.
2. When will investors get their money? They ask the company to explain how its plans will increase the share price. If there’s no plan in place, it may be too early to buy. If the plan is too ambitious or things don’t add up, maybe the company isn’t being completely honest. Again, maybe that’s a sign to steer clear.
3. What about promotion? Without good promotion, most early stage explorers are as good as sunk. It costs a lot of money to sink holes in the ground and if the company can’t raise the capital it needs to explore, there’s a good chance it won’t make you any money either.
4. Where can it go wrong? If the management team can’t give our editors the downside of the project, they either haven’t thought it through or aren’t being straight with them. They need to make sure the company has a plan in place in case something goes wrong – a contingency plan.
5. How much is it worth? There are many ways to value a mining company. It can depend on how developed the company’s project is. And the potential size of the resource will have a big impact on the value. The less developed the project the riskier it is and therefore you’d expect a bigger return.
Most important, not every explorer hits pay dirt. It costs a fortune to pull commodities out of the ground. And many companies lose their investors’ stakes digging up a whole lot of nothing.
But the ones that do dig up a whole lot of something should make investors big returns. Sometimes it’s like looking for a needle in a haystack. But the reward for finding the right stock at the right time more than makes up for the effort of finding it.
Aaron Tyrrell
Editor, Money Morning
P.S. Looking for a small-cap explorer with the potential to make you big profits is fun but it’s tough. That’s why Diggers & Drillers Alex Cowie spends his days doing the hard work for you. To find out more, click here…
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From the Archives…
What Debt Crisis?
2011-10-07 – Greg Canavan
Enjoy the Rally, It Won’t Last for Long
2011-10-06 – Greg Canavan
Why the Fed’s Actions Make Perfect Sense
2011-10-05 – Murray Dawes
Too Big to Bail
2011-10-04 – Murray Dawes
What Can We Expect Next From Commodities?
2011-10-03 – Dr. Alex Cowie
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