You know the scenario. A little known mining stock suddenly appears on your broker's website on the best performers list with a very large green number next to its name. And you think to yourself, “WOW” how do I identify them?
However, the reality is that just like a modern day Indiana Jones, if you want to find the holy grail you first have to roll around in the mud, dodge poisonous arrows and brush off the occasional tarantula.
Before I continue, I just want to make something abundantly clear... Most of these ‘businesses’ are NOT investment grade. They are high risk, run on hope alone and seem to be more keenly discussed in chat rooms, rather than in board rooms.
But c’mon… we’re Aussies and Kiwis… we love the punt! And it gets no more exciting than jumping on a junior looking to become the next BHP. Right?
The key obviously is to identify these businesses before they run. Often it’s too late by the time the price spikes, and playing with it then can often lead to an investors’ fingers being burnt
Just like in horse racing, once a filly shows promise, the odds on it will shorten.
The reality is that no one knows:
what's under the ground until you find it.
even when they do find ‘something’ how much of the price move is legitimate and how much is hyperbole.
Focusing on point 1 above, the only way to find out if there is something underground is if you dig (drill) a hole. And while you may burn time and company resources to find nothing, there is always hope right? Except for one thing - you need cash to pay for getting a hole drilled.
Drilling holes costs money
You don’t need to be told, but just in case you weren’t aware, junior miners consume cash like they are tickets to a Billy Joel concert…. In both instances they go quick!
The process of drilling holes is far more technical and complex than simply finding a few burly blokes and buying them shovels from Bunnings.
There are different types of drilling that complete different tasks in the discovery cycle and each stage costs a fair chunk. Though it obviously costs more the more accurate and deeper you wish…
