Here are the reasons why for a given amount of funds that I would want to allocate into a certain resource sector (be it strategic minerals, gold/silver or nickel), I would prefer to place them into discovery junior microcaps rather than producers:
1. I don't have to worry as much about day to day price movement for the underlying metal resource. With producers, their price movement zigzags with the day to day metal price movement, because such price change affect their bottomline immediately. But with juniors, they only start producing possibly 2-3 years down the road. To me, buying a good junior is a hedge against a possible adverse event 2-3 years down the road , including prospect of stagflation or even hyperinflation (that drives real yields lower).
2. Discovery stocks that make big and valued finds can become multi-baggers. Example has been CHN - it has gone up multi-folds without even producing anything just yet. With producers, you won't get multibags - e.g would you expect Newcrest or NST to double in price in a year? Plus, the issue with producers is that when their guidance is impacted or their production adversely impacted, their share price can also be materially impacted. With discovery stocks, as long as their licence and ability to progress their mining remains secure in a good jurisdiction, there is less of a risk once it has become de-risk with preliminary finds. So the better discovery microcaps are not too early but not too late and tend to hover between $30-200m market cap.
3. Have you noticed that share prices of most producers do not react favourably even when good results have been reported - especially in the gold space. But their share price are rather correlated with short term gold price trends. This may well to do with instos not being satisfied with the results despite being good and therefore their share price can still drop even with a good result outcome. With junior microcaps, there is no need for concerns over what instos do because they are not in the game. Which brings to the next and important point, we know that instos cannot participate in juniors if their market caps are below a certain threshold , most likely under $200m, in other words, retail participants early in a good microcap can be the early worm to make the initial gains and when they get up higher, they can enjoy a second round when instos get into the game.
4. With microcaps that have the potential to become multi-baggers, one does not need a significant $ exposure or a big position to make decent money. For example , if you bought 200k shares at 1.5c it cost $3k and say its market cap is $35m, if a re-rate happens due to a significant discovery, its value could go perhaps 5x higher, so your $3k becomes $15k, may not be life changing but gaining $12k with just $3k exposure is pretty good, with a risk of loss of say 50% at just $1.5k. So it can be a compelling risk-reward proposition especially if bought correctly (the right stock) at the right time (without too much premium included).
5. Prospect of making good returns with microcaps can be shorter. In other words, there is greater likelihood of making 40-50pc or even higher including 100pc or more under 6-12 month period, compared to a producer which would take a year or more (subject to underlying metal price going through a boom) if it even gets there. Of course, it does not just go one way, as we have seen, resource microcaps can also lose up to 80pc of their value. So it goes down to selecting the right discovery microcap and having a measured position and adding as it goes higher, this cannot be more emphasised.
