The junior resource space is one of the highest-risk/highest-reward sectors in the investment landscape.
Double-digit gains and losses are common - often in the same day.
Early in my career, a mentor and friend asked me if I knew the fastest way to make a small fortune in the junior resource space.
I eagerly waited for my dose of wisdom and he replied, "by starting with a big fortune."
I didn't laugh. He thought I didn't get it. I got it, it just wasn't funny because I had neither a big or small fortune to part with.
The joke taught me a very valuable lesson early on about the importance of focusing on minimizing the risk part of the risk-reward equation.
The real money in the sector is usually made by getting ahead of a trend early, identifying the best teams, and letting those teams go to work.
Despite an increase this year in exploration spending, exploration companies are still hesitant to drill in a significant manner.
In part, because the drill bit - known as the 'truth machine' - can kill a project - and subsequent funding - if drilling doesn't deliver positive results and the company is counting on just one project.
I've said it before: of the thousands of companies that claim to be explorers, most are marketing oriented with very little geologic expertise.
It's hard to increase the discovery odds if the company that's supposed to be in charge of doing that isn't even taking the time to physically look at the targets it is presenting to shareholders as prospective.
The armchair geologists in the space will always lose out to geologists who are actually in the field doing real work.
One of the best ways to minimize risk is by finding quality prospect generators that are actively drilling using other people's money.
The benefits of the model include less shareholder dilution, jurisdictional diversification, leverage of intellectual capital, and multiple shots on goal for a significant discovery.
The downside is that many times the prospect generator gives up so much of a project in order to secure a joint venture that even if a significant discovery is made, the reward isn't material.
Here is Rick Rule providing an excellent summation of the prospect generator model.
I've repeatedly said 2018 is a contrarian's dream because the trends are clear - reserves being depleted and not enough discoveries - there are excellent companies doing excellent work, and the market has yet to reward most juniors, which makes picking winners in the space a "when" question not an "if" question.
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One recent example is Avrupa Minerals (TSX-V: AVU) (OTC: AVPMF) (FWB: 8AM)
Avrupa Minerals is a growth-oriented junior exploration and development company focused on aggressive exploration, using a modified prospect generator model, for valuable mineral deposits in politically stable and prospective regions of Europe, including Portugal, Kosovo, and Germany.
The company recently negotiated one of the better deals in the junior space with a major international mining group and, yet, the market yawned.
Avrupa will be optioning out three copper-zinc exploration projects located in the Pyrite Belt of South Portugal to the group.
In exchange, the funding partner will provide a first-stage earn-in amount of 13 million euros (approximately C$20.3 million) for exploration programs over the next three years to acquire a 51% interest in the projects.
The licenses cover some of the most prospective areas of the Pyrite Belt in Portugal and over the past three years - while everyone was asleep at the wheel - Avrupa did an excellent job of staking, developing, and drill testing the properties.
The focus now will be further drill testing with an aim to demonstrate sufficient scale to justify large-scale mining operations.
Avrupa is not only drilling those three projects, it also recently began drilling at the Alvito Project in South Portugal with JV partner OZ Minerals, which is spending A$1 million on exploration to earn-in up to 51% of the 300-square kilometer project.
Despite commitments with major mining companies for over C$20 million in exploration, the company still has a market cap of approximately C$8 million.
The 40,000-plus meters of drilling will provide significant news flow for the remainder of 2018 and well into 2019.
If you can find another junior with an C$8 million market cap with the type of partners and funding commitments that Avrupa has secured, buy it.
To your wealth,
Gerardo Del RealEditor, Junior Mining Monthly and Junior Mining Trader.
For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.