Time to Rotate Out of Some High Flying Explorers?
By Michael J. DesLauriers
15 Jan 2007 at 10:05 AM EST
resourceinvestor.com
TORONTO (ResourceInvestor.com) In the face of a buoyant resource market with considerable capital commitments continually coming in from retail and institutional sources, the number of high-flying drill hole stock plays have been multiplying materially. On any given day one can witness a venture listed play pulling an interesting high-grade hole and subsequently sending share prices sharply skyward.
While this is a comforting sign of the strength of our secular bull, it also produces a perilous precedent for poorly advised players. In fact, the see-saw effect seen repeatedly in these names more than likely results in serious losses or underperformance for those uninformed enthusiasts that are late to the trade, or lack a sound concept of valuation.
In a pair of well-followed pieces published in the summer and fall of last year, your correspondent pointed out the pitfalls associated with ‘major new discovery’ hype, and suggested ways to protect one’s portfolio from the inevitable losses which ensue. The examples outlined therein deliver a powerful reminder of the immediate euphoria and subsequent panic and disillusionment which manifest themselves throughout the movement. Observation of recent trends indicates that the nature of the response has been quite similar across the entire metals complex, in defiance of obvious relative strength realities within the group.
In brief, only buy grassroots explorers at cheap valuations and take your bait back at the first available opportunity. Additionally, it is critical to evaluate and re-evaluate the opportunity cost and relative risk of holding one position over another, at all times.
Recent examples of names debilitating traders with whiplash include Noront Resources [TSXv:NOT] and King’s Bay Gold [TSXv:KBG]. These two Canadian explorers are positioned in relatively hot area plays and delivered multi-bagger returns in the month of December while trading huge volumes, and attracting numerous followers amongst which were newsletter writers and investment banks clamoring for fees. Although early investors that took their shot in the 10-20 cent level are surely laughing, investors entering the trade on the way up or at the top are probably sitting tight for more spectacular results because they have become believers, or are looking to break even.
The odds, of course, are that the desired outcome will not eventuate, as fewer than one in a couple of thousand projects ever become economically viable. Given that fact, it pays to carefully consider ones position rather than getting married to the story or becoming a ‘stuckholder,’ sitting on dead money while other opportunities pass you by.
The bottom line of the message/lesson that we are attempting to relay/impart is that there are very real fundamental differences between companies that generate cash or develop economic deposits, and stories which can perform briefly in the prevailing environment, regardless of where they will be in a year’s time. While there is nothing wrong with taking an educated shot at the right price, taking stock of one’s situation and dancing close to the door is always the best advice where this particular type of party is concerned.
With the above in mind, and in light of the recent performance of many of the types of potentially precarious plays discussed above, readers should keep their level of awareness high and not forget to constantly re-evaluate their relative position. |
