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Resource Report: Learning from the Ups and Downs of Junior Resource Investing

Resourcex
0 Comments|February 19, 2007

How to profit from history


How to profit from history

A mentor once told me, "Trust the process," by which he meant that if you do the work the right way, things always work out in the end. As a junior resource investor, that means doing the due diligence, getting to know the companies, the minerals, the properties, the countries, and the people on the inside.

Since starting Resourcex Reports for StockHouse in 2006, we've been bang on about 70% of the time. In other words, of the 20 companies we've researched and analyzed, 14 are comfortably up.

Owing to unpredictable and often inevitable events - such as martial law being declared in Guinea where Cassidy Gold is exploring - junior resource investing is not a pure science. Nevertheless, our ROI is presently 21% for Resourcex picks here at StockHouse. (Our average overall since 2003 is 80%, which you can read about at our website www.resourcex.com).

Due diligence, smart decisions and patience. That's the game here. So let's look at a couple of our ups and downs over the past four months and see what we can learn.

First, it's important to note that the ups average 36.43% and the downs average 9.6%, which indicates that our downs aren't dive bombing, so much as they're drifting. Our ups on the other hand, are decidedly up.

NaiKun Wind Development up 136%

One such company is Naikun Wind Development (TSX: V.NKW) , BullBoards). Naikun is proof that a rapidly changing world represents incredible opportunity for the intelligent investor. After writing about Naikun in early January, I received an interesting response from a detractor: "Please spare us this "Global Warming" nonsense!" he wrote. "No sensible person believes this Al Gore fairy tale, and there's enough science on the other side of the argument to totally debunk Gore's thesis."

Personally, I'm not going to pin the whole empire to alternative energy yet (though I have a suspicion that my daughter will, in due time). Naikun nailed the wind energy concept bang on by addressing the majority of people's concerns with their business model. Investors perceive that wind energy is an eyesore and they believe that wind energy is unpredictable. Naikun's proposed wind farm is tucked way up in the Queen Charlotte Islands in one of the most consistently active wind fields known on earth, located between Haida Gwaii and mainland British Columbia.

According to an independent report by Helimax, the Haida Energy Field generates enough wind to produce as much electricity as BC Hydro currently generates annually. Naikun's first project will generate electricity for up to 600,000 homes. More recently, a study conducted by the BC Transmission Corporation (BCTC) has confirmed that up to 700 megawatts of NaiKun power generation can be accommodated on the existing main power grid.

Continuum Resources up 96%

Continuum Resources (TSX: V.CNU) , BullBoards) , was anything but a hunch, although the company was not on the radar for long prior to initiating coverage. Few were familiar with Continuum at 28 cents back in mid-December, though now at 55 cents and growing, CNU is picking up momentum.

Continuum is an excellent example of how important it is to read press releases. Resourcex.com posts only press releases with significant news, which certainly takes a bite out of the hard work.

The company caught our attention with two headlines around the second week of December: "Continuum drills 12.75 m of 2.33 g/t Au at San Jose" and "Continuum to raise $6.75-million for Natividad property." This news indicated that San Jose was good, but Natividad had to be at least as good, otherwise they wouldn't bother dumping almost $7 million into the Natividad property. When I later learned that Agnico-Eagle Mines (TSX: T.AEM) , BullBoards), which has aP/E Ratio of $34.61 and annual dividend/share of 14 cents, held about 25% of CNU's outstanding shares, I was sold. After all, Continuum was trading at 28 cents, which is an incredible deal for a company that is practically being walked to production by a major. Now at 55 cents, it's still a great deal.

First Nickel up 60%

We settled on three nickel juniors for a Resourcex Reports story dated January 2 this year. Nickel has been so hot this year some pundits began referring to it as a precious metal after it broke the $1 per ounce mark - the first of the base metals to do so. Since then, we're seeing a familiar trend occur. As with Uranium juniors last year, nickel exploration companies are beginning to attract incredible investor attention. As this happens, however, some become overvalued, while other excellent companies stay out of the limelight while building real value. We're in the business of finding the latter.

While all three of our nickel choices continue to shine (up an average of 35%), First Nickel (TSX: V.FNI) , BullBoards) has performed particularly well, jumping 60% to 91 cents since we began coverage. First Nickel took a beating last year, falling from highs of $1.90 in January 2006. The company has reinvigorated investor confidence with outstanding nickel and copper assays at Lockerby in particular, as well as solid fundraising efforts. In fact, a week after our first report, the Globe and Mail reported on First Nickel's rebound, noting results from the drill program on the Lockerby Depth zone, which are to form the basis of a resource and reserve estimate.

Never mind that, though. Lockerby is production ready. Forecast production for 2007 is 152,042 tons of ore grading 1.85 per cent nickel (Ni), 1.12 per cent copper (Cu) and 0.06 per cent cobalt (Co) which will yield approximately 4.7 million pounds payable nickel, 3.2 million pounds payable copper and 86,000 pounds payable cobalt. All that because the mine infrastructure is in place, the drilling results are in and the price of nickel is way, way up, and won't be coming back down to historical levels again for a long time. Of course, not everything is peaches and cream in the world according to Resourcex. We also make the occasional pick that causes us to scratch our heads in bewilderment. Not often: Of the 20 Resourcex Reports stocks, 14 are clear winners; three are in a holding pattern; three are struggling.

With investments that are floundering, we need to ask ourselves, "Why?" Tagish Lake Gold Corp (TSX: V.TLG) , BullBoards), for example, remains a solid pick even though it's down 20% since I wrote them up. Everything is right about Tagish: Great mineralization, ample funding, talented team, sensational property. Tagish has a mineral resource estimate due out any day now for its Skukum Creek gold-silver deposit, which the company is calculating with a 4 g/t Au cut off. Once this is out the company won't be looking back, and 20 cents will be a distant dream.

Sometimes you just can't control events on the ground at a project. Just ask any Cameco investor, whose Cigar Lake mine suffered a terrible flood causing completion of the mine to be delayed until 2009.

I wrote up Cassidy Gold Corp (TSX: V.CDY) , BullBoards) last week and didn't do my homework. While I did find out that the company is struggling through a lawsuit which they are expected to win, and that they have an initial 4.4 million tonnes grading 2.4 g/t Au, I neglected to thoroughly research the situation on the ground in Guinea. Last week Guinea's government declared martial law, and the army is now doing what ungoverned armies do best. Pillaging. As a result, Cassidy has had to put operations on hold there.

Doug Hadfield is the Chief Editor of the Resourcex Investor, an internationally distributed newsletter specializing in identifying as-yet-undiscovered resource companies representing the best in their class. For more information, visit the website www.resourcexinvestor.com.

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