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Digging for Opportunity in Precious Metals, Part 3

Stocks in this article: GDXJ

However, these non-precious metals credits (typically copper) also dilute the business models of these corporations -- transforming them from true "gold miners" to "diversified miners." In turn, this undermines the valuations of these companies -- as analysts and investors alike reward "pure" producers with higher valuations, if for no other reason than their earnings potential is much easier to assess.

Similar dynamics apply to the smaller producers, the "junior miners." However, a close examination of these dynamics shows us that smaller is better in every case. Resource-scarcity -- in the form of declining grades -- is also a reality for junior miners. But there is a major distinction.

For the reason previously mentioned (along with simple, human greed) large mineral deposits are coveted and developed ahead of smaller deposits. This means the problem with diminishing grades is much more acute with respect to the jumbo-deposits to which the senior producers choose to limit themselves than with smaller gold (and silver) deposits.

Look around, and discriminating investors can find junior miners producing, or ready to go into production, with high-grade mines and even the occasional "bonanza-grade" deposit. High grades translate into both higher profit margins and much less dependence/vulnerability with respect to higher energy prices.

However, "smaller is better" goes well beyond higher grades in the mining industry. As previously mentioned, smaller mines produce a much smaller industrial "footprint" from their mine sites. This directly translates into quicker/easier permitting for these mines to go into production.

It also means less "land claims" issues with aboriginal groups, and generally quicker and more-amicable negotiations where mining operations do impact on such claims. Similarly, a smaller "footprint" means less opposition from environmental organizations/interests.

Smaller mines require significantly less infrastructure to support them. This usually translates into enormous differentials in the capital costs required to go into production. Indeed, declining grades and soaring capital costs are resulting in more and more of the grandiose mega-mines that had been planned by the senior miners being temporarily shelved or even permanently abandoned. Smaller is better.

Whether it's small, vs. large or ETFs vs. stocks, expect these investments to represent wild, roller-coaster rides, which require both steady nerves and a longer-term investment horizon in order to provide the time necessary for the fundamentals of these companies to assert themselves -- irrespective of any/all attempts to suppress their share prices. There is a "pot of gold" at the end of this rainbow.



This article was written by an independent contributor, separate from TheStreet's regular news coverage.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.
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