We’ve had lots of success with the junior mining stocks we recommend in Stock Pickers Digest, our newsletter for aggressive investing.
For example, in a recent issue of Stock Pickers Digest, we updated our buy/sell/hold advice on a junior mine that’s risen more than 300% for us in the past year. See below for further details on this up-and-coming diamond producer.
Keep risk in mind with junior mining stocks
Even though junior mining stocks have strong profit potential, they entail higher risk than more established mining companies, for a number of reasons.
For one, the odds that a junior mine will find an “anomaly,” or a geological formation that might attract a prospector’s interest, are slim. One rule of thumb is that you have to look at 1,000 anomalies to find one prospect. And fewer than one prospect in a thousand turns into a mine. In other words, finding a mine is a million-to-one shot.
Another reason is that it’s much easier to launch and promote one of these stocks than it is to build a profitable business. So junior mines attract more than their share of unscrupulous operators and stock promoters.
These 5 keys will help you cut your risk — and improve your profits — in junior mining stocks
Here are 5 guidelines we use to pick junior mines to recommend in Stock Pickers Digest. We’re sure they can help you find the gems among the rocks in this fast-changing industry:
1. We look for well-financed junior mines with no immediate need to sell shares at low prices. That’s because doing so would dilute existing investors’ interests.
2. We like mining stocks with strong balance sheets and low debt. Junior mines should have a major partner who can finance a mine to production.
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3. We want to see mining firms with experienced management with a proven ability to develop and finance a mine.
4. When we recommend mining stocks, we want to see positive cash flow, preferably even when commodity prices are low. Even better, we like to see mining companies that have cash flow from an existing mine that is sufficient for, or at least contributes to, the cost of developing a second mine.
5. We avoid mining stocks that trade at unsustainably high prices because of broker hype or investor mania. Instead, we focus on reasonably priced mining stocks with favourable geology.
Good news keeps coming for this junior mine
Stornoway Diamond Corp. (symbol SWY on Toronto), one of the junior mines we cover in Stock Pickers Digest, matches up well with our 5 keys. However, it’s not a perfect match. That’s why we took a close look at the stock in a recent issue of the newsletter.
The company owns 20 diamond-exploration properties across Canada. Gold producer Agnico-Eagle (Toronto symbol AEM) holds a 15.8% interest in Stornoway.
Stornoway’s projects include a 50% interest in the Renard diamond project in Quebec. The company recently revealed an updated preliminary economic assessment that predicts Renard could be nearly twice as profitable as expected.
Stornoway now envisions a bigger mine at the site. This mine would produce almost 30 million carats of diamonds over its 25-year life. At today’s prices, these diamonds would be worth a total of about $4 billion. There is also potential to further expand the mine’s reserves through exploration.
The company aims to complete a full feasibility study and make a production decision by the end of 2011. If it goes ahead, Renard could become Quebec’s first diamond mine.
For our latest buy/sell/hold advice on Stornoway and dozens of other companies that could be suitable for the part of your portfolio you devote to aggressive investing, you should subscribe to Stock Pickers Digest. Best of all, you can get one month free when you subscribe now. Click here to learn how.
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