Digging for Opportunity in Precious Metals, Part 3

VANCOUVER ( Bullions Bull Canada) -- Part I and Part II of this series presented an overview of the precious metals mining sector. In those pieces, I noted that these companies have been (in the most neutral terminology possible) chronically undervalued in our markets.

The basic business model of these miners (and all commodity producers) was described/explained. Specifically, it was demonstrated that, over time, all such producers must "leverage" the price of the commodity they produce -- as a basic proposition of arithmetic.

However, despite being in the best-performing commodity sector for the past 12 years, and despite the superlative fundamentals for precious metals going forward, as the saying goes, all gold and silver miners "are not created equal." Notably, there is a dramatic schism between the large-cap corporations in this sector (which tend to attract the most investor dollars and attention) and the smaller producers.

As is frequently the case with "golden opportunities," there is a catch when it comes to investing in junior miners, and adopting a smaller-is-better investment strategy. In "tough times," there is one thing larger companies are generally much better at than smaller companies: Staying alive.

Investing in smaller mining companies implies accepting a higher level of risk on an individual basis, even though collectively, these companies offer superior profitability and superior growth profiles -- both in terms of production growth and the growth in their reserves. Thus to offset this individual risk and capitalize on their collective superiority, it's essential for investors in these miners to hold a "basket" of such companies.

This can be done in one of two ways. Those investors ready, willing and able to add a basket of these companies to their portfolios, one at a time, can begin to (cautiously) do so. Those not ready for that level of commitment can look to one of the miner-ETF's, which focus on smaller-cap gold and silver mining companies.

The original entry into this niche was the Market Vectors Junior Gold Miner ETF ( GDXJ), although there are now similar funds, offering competing collections of these smaller precious metals producers. Understand that these companies are not for "traders," nor the faint-of-heart.

To understand the night-and-day difference between these companies, it's best to begin by looking at the typical large-cap business model with respect to precious metals miners. As with large corporations in general, their philosophy is the epitome of simplicity -- in other words, utterly simplistic. Bigger is better.

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