Gold exploration stocks are highly speculative because there’s less chance of success. Since it often takes three years or more before an exploration property becomes a producing mine—if it happens at all—only lucky investors with long-term investments make money.
Gold exploration stocks and junior mining stocks are gambles. The odds of buying the next big gold producer are low. The odds of buying the next scam (such as Bre-X Minerals) or the next dud are much higher. So patience is needed and you should carefully consider the questions below before you buy a gold exploration stock.
Questions you should ask
1) Is it a real company? Some listed stocks are just shells—companies with no assets—or, even worse, stock promotions.
Many investors, excited by a story-teller’s tale of riches in far-away places (which are difficult to visit), buy in at a rich price. This usually occurs just before the self-promoting insiders sell their shares and leave others with big losses.
2) At what stage of exploration is the company? A mining firm in its initial exploration stage owns a land claim and does tests of ore samples to decide whether to build a mine. The grade of the ore and the price of gold must be high enough to justify building a mine. If not, the land remains ‘moose pasture’.
The further along a company’s exploration program is, the better the information you’ll have with which to make informed investment decisions.
3) What may be expected from a working mine? Once the mine is in production, consider the grade of ore in the deposit, the production costs relative to the price of gold and the mine’s reserve life.
The prudent approach
An investment in mining exploration is a hit-and-miss situation. Geology isn’t an exact science. Not even the geologists themselves can predict with any accuracy what one of their drilling projects may find.
If you have neither the time nor the inclination to stay abreast of an exploration company’s results, avoid them completely.
Buy mining stocks an intermediate or senior producer instead.
If you wish to gamble with exploration stocks, buy a basket of them—no less than five. If you’re very lucky, one may succeed and more than offset losses on the other four. Better still, buy gold funds, or a mutual fund, that specializes in these firms. The fund can give you professional management, spread your risk and let you limit the size of your investment.