A small gold mine will never make you big money - Rule

When investing in junior gold miners it is worth looking for those with a large production potential and long life projects.

Author: Lawrence Williams
Posted: Monday , 12 Oct 2009

LONDON -

In a recent interview with Swiss web publisher, The Daily Bell, Rick Rule who is founder and Chairman of U.S. specialist natural resources broker, Global Resource Investments, commented that a ‘small mine will never make you big money' while expressing his views on gold and silver and the value of a contrarian investment policy in the natural resources sector.

How does this tie in with an often held view that it is junior miners and explorers whose stocks may provide better returns at high gold prices and in a rising gold price scenario?

It does fit well in fact. In any investment - and in mining stocks in particular - one needs to be selective in one's choice. It doesn't make sense just to buy the sector. And in junior stocks this is doubly true, particularly with the explorers who may be operating on a wing and a prayer. Sometimes they find something significant and money can be made. Often they don't. Caveat emptor.

Basically Rule is correct. There may be exceptions, but in general a small gold mine - say one that is only ever going to produce a maximum of say 30-40,000 ounces of gold a year - will never make big money, yet still exposes you to all the risks inherent in investing in gold mining. Small producers are also usually those with short lives as there are insufficient reserves to prolong mine life. Again there are exceptions with some managing to work on a hand to mouth basis for a considerable amount of time, but generally these are the exception rather than the rule.

The lesson is be careful in your choice. Do your homework. Don't necessarily believe everything a junior miner or explorer tells you. They mostly present everything in the most favourable light they can - and there are some real snake-oil salesmen in the sector. Pick operators which have at the very least the potential for significant expansion, even if they are only a small producer at the time of the investment - and also those run by people who have a good track record in the industry. That should help mitigate some of the inherent risks.

If one looks at the recent high flyers among junior stocks in the market, these are invariably those with the prospect of developing large long life mines - or at the least offloading the projects at a fine profit to a bigger outfit which may have the financial muscle to generate the large amount of capital necessary to bring a sizeable mine to production. If you can find these you won't go far wrong in a rising price scenario - and the downside could be much more limited in a declining one