Canadian Junior Resource Sector Investing - Ask the Tough Questions

If you are looking at the Canadian resource sector and starting to salivate over all those beaten down share prices, thinking “ if I buy now, I will make huge profits when these markets turn higher”…..STOP !!! Don’t move !!!

On a recent trip to New York I was informed that a certain analyst in New York has compiled a list of nearly 100 Canadian juniors that are earmarked for failure. The list is apparently making its rounds in New York right now. So, if we are in a Commodity Supercycle, how can we be talking about companies in the resource sector failing?

Sadly, it all comes full circle to the concept of a “one way bet”. Just like the financial institutions in New York took a one way bet and thought that the housing market would just keep going higher, the investment bankers who help finance
(and the investors who participate in these financings) the resource sector took a one way bet and thought that commodity prices would keep trending higher. Nobody ever thought that the US Dollar might stage a rally and knock the wind out of commodity prices.

Every cycle, (be it a cycle in tech stocks, financial stocks, airline stocks, railway stocks or resource stocks) always has a period of reckoning where the cycle mentality comes under duress and weaker participants in the cycle fail. We have now hit that part of the Commodity Supercycle and Darwinian Capitalism will manifest itself. With Darwinian Capitalism, the weak species will die off and the stronger species with better DNA will thrive. So, when an analyst in New York compiles a list of potential failures, he is to be taken seriously.

So, what then do you do if you are contemplating an investment in the junior resource sector at this time? You ask questions, that’s what you do. Here now are some questions you should ask when you start calling companies you are interested in:

#1: How much cash does the company have in the bank? If it has less than $500,000 there will have to be a financing done quickly. Ask how the company plans to do the financing. Will it be offering common shares at beaten down prices or will it be using a more innovative strategy?

#2: How close is the company to issuing a 43-101 compliant resource estimate? If such a resource estimate is not in the cards, it is probably best to steer clear of investing in the company. Grass-roots exploration stories will be sure to struggle for the foreseeable future.

#3: If there is no 43-101 compliant resource estimate, is there at least a historical resource estimate from previous company’s who may have worked on this property in years gone by? If no such historical estimate exists and if no 43-101 resource estimate is in the cards, don’t waste your time any further.

#4: If a resource estimate is forthcoming, what plans have been made for a feasibility study to further examine project costs and economics?

These are un-precedented times that demand caution and prudence. Be careful out there. Ask the tough questions. Do your due diligence. The resource sector will recover and the Commodity Supercycle will get back on track, but the train will be leaving the station with far fewer passengers…..