How to Treat High-Flying Explorers
By David J. DesLauriers
12 Feb 2007 at 12:05 PM EST
resourceinvestor.com
TORONTO (ResourceInvestor.com) -- In mid-November of 2005, your correspondent profiled an unknown junior explorer with a tiny market capitalization and some interesting projects. At that time Colibri Resources [TSXv:CBI] was trading around 19 cents and seemed to offer an attractive risk to reward ratio. Fast forward to February of 2007, or about 15 months later, and Colibri is trading at 71 cents, up substantially from the price at which we put the story in front of readers.
The above having been said, Colibri was dead money for 14 out of those 15 months, having delivered its entire run over the course of just the last month. As a result it is quite possible that investors tired of the situation and got out, or sold as soon as the recent move started, happy to be out with their money back and a small gain. All of this leads to a discussion about the nature of exploration companies in general and given the current market environment.
As we have relayed countless times, the only time to buy a junior explorer is at a very cheap valuation. Unless a company gets really lucky and stumbles on a world class discovery or an economic deposit which will become a mine (odds of about 1 in 2000), chances are the stock will be coming back to down to earth.
Another thing to consider is the inherent delays and lack of news flow for these companies as they contend with chronic shortages of people and equipment, and backed up assay labs all over the world. When a company has nothing to say for a while, its shares inevitably languish and trend lower.
The good news about the ongoing bull market for resource stories, however, is that the market is paying for grades and excitement. This is exactly what has happened to Colibri, which has suddenly been discovered.
Fellow correspondent Michael DesLauriers has actively followed an explorer with a similar share structure and project portfolio. New World Resource [TSXv:NW] was first mentioned as looking cheap at the 20-cent level in October of 2005 when it’s tiny market capitalization made it an interesting bet from a risk/reward standpoint. Eleven months later in September of 2006, shares on New World exploded to the C$1.90 level on the back of some quite exciting drill holes.
At that time, in an article about dealing with drill hole plays, Michael told readers “New World still has a relatively small market capitalization and if indeed a discovery has been made could have quite a bit more upside. Nevertheless, with a return of that magnitude in hand, one would be well advised to take a good portion of the profits off the table, and salt it away for the next great risk to reward opportunity.” NW closed Friday at 65 cents.
Conclusion
The lesson is obvious but nonetheless worth repeating. Although we tend to prefer undiscovered companies that will or do generate cash, one can obviously make a meaningful score on an explorer in the current environment, provided one can enter the trade at a very cheap valuation, can be conscious of the risk/reward scenario and does not overstay one’s welcome when the time comes to move on.
An interesting way to get the best of both worlds (high-impact drill results as well as cash flow to underpin valuation ensuring low risk while maintaining high reward) may come in the form of Pershimco Resources [TSXv:PRO], an attractively aggressive junior recently profiled by RI. |
