Essential for our strategy is the premise that a rising tide lifts all boats. Inherent in that, is that small boats move farther (in both directions) than large boats, given the same wave. While large miners in gold, silver, or uranium could be priced in the tens to hundreds of dollars, many juniors could be priced in dollars, if not pennies. One strategy, employed by many, is to buy a large basket of penny miners, and just wait. This has the advantage of greater upside than owning individual, large miners, while at the same time protecting against negative, extreme price action in one or more juniors.
Keep in mind, these are still companies that have to manage mining infrastructure, staff, differing resource deposits, expenditures, and on and on, not merely the transaction of selling the base metal. There’s a lot that can go wrong in any business, and the younger / smaller the company, quite possibly, the greater the hurdles they need to overcome.
So owning many of them over a long period of time is a great hedge against ignorance. But it doesn’t necessarily reduce exposure to whipsaw moves and sharp price declines - moves you wouldn’t have exposure to in our strategy, beyond a predefined position size with acceptable risk.
That said, precious metals stocks are high leverage plays on the metals themselves, because miners have close to fixed costs, whereas their product has massive price variance. In a bull market, margins skyrocket, making miners extremely profitable.
The commodity, the miners, and juniors, are all riding the same wave. They’ll all move in the same direction. But the miners will move farther, and possibly faster than the commodity. And the juniors will move farther, and possibly faster than their larger counterparts.
Why does this matter?
Because we’re looking for leverage on leverage that can net us 100X returns. Junior miners are essentially a high beta options play on the underlying commodity, where company profitability doesn’t grow in proportion to the increase in the price of the commodity, but grows by multiples of it.
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