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Mining is a high risk, big reward business: Investors can learn a lot from the sector’s famous winners

Mining's leading minds have all built up considerable wealth and expertise over a time scale that spans several mining cycles - it makes sense for every investor to pay attention

Private investor interest in the sector is returning

The mining sector is littered with successes, and littered with failures too.

The most famous faces in mining investment are people like Eric Sprott and Rick Rule, have made careers and fortunes in the sector and seem to do it with consummate ease.

Serially successful operators can stand beside these successful investors too: men like Lukas Lundin, the founder and backer of several successful resources companies including Lundin Mining Corp (TSE:LUN), Adonis Pouroulis, the progenitor of Petra Diamonds Limited (LON:PDL), Rainbow Rare Earths Limited (LON:RBW) and the privately-held Toro Gold.

Another is Robert Friedland, famously the most successful promoter in the business, and the man behind Ivanhoe Mines Ltd (TSE:IVN).

These men have all built up considerable wealth and expertise over a time scale that spans several mining cycles.

An investment from Sprott, Friedland and Lundin is a marketable event in itself, and the networks of these men, and men like them, reach right around the world, and run right up to the biggest companies and down into the smallest, as yet unlisted exploration play.

Start-ups and early stage miners

Sprott in particular, has made a speciality of incubating start-ups and early-stage companies.

He was into UK-based Altus Strategies (LON:ALS) years before it listed, for example, and Altus itself is a specialist project generator.

It may be years before any of its projects actually start producing.

Get used to seeing failures along the way

It’s a complex industry and investors like Sprott have to be prepared to have their investment tied up for years and often to sit on large paper losses along the way.

And they also have to be prepared to take their share of losses.

For every discovery like the recent A$1.8bn Nova nickel find in Australia, there are hundreds of failures.

At the smaller end of the market, it’s not unusual for mining companies to go through several iterations as the attractiveness of various of their projects waxes and wanes as exploration work proceeds.

Chasing industry fashions and rare romances

Some chase the fashionable metals of the moment, which allows cynics to speak of company directors “mining the market” rather than the ground.

But others, like Landore Resources Ltd (LON:LND), which is also run by old market stagers keep persisting until hopefully something, in the end, pays off.

In Landore’s case, its Canadian discovery was made with the last drill hole, what was probably set to be the company’s last drilling campaign for a good long while, if not for good.

But such romantic outcomes are rare, and belie the hard science that actually goes into a discovery.

Dealing with dilution

Even when a discovery is made, it’s not always a sure thing that investors will benefit, as dilution inevitably plays a part in raising the funds required to undertake follow-up work.

For the likes of Sprott, this isn’t a problem.

He can control how much dilution he takes in any given junior, and indeed the juniors themselves are highly likely to ask his permission before considering such a move.

But for the less influential investor, this is a rocky road beset with landmines.

Not only will companies spring unexpected dilution upon hapless investors, but new shares issued are likely to be placed directly into the market, meaning that not all investors get to participate.

There’s also the question of liquidity at the junior end: should investors wish to buy or sell mining shares they might not actually find it that easy.

And when investors do finally manage to get into the company of their choice, they may well find that market sentiment has a greater effect on share prices than more fundamental valuation methods. 

It is a harder game for retail investors, but they’re returning (slowly)

Professionals like Sprott and Rule find it fairly easy to navigate these waters, but then they are big fish in a relatively small pond. Retail investors, on the other hand, find it much harder.

They were heavily wiped out in the crash of 2007-8 in all the major mining markets, and it took them the better part of a decade to regain any sort of real appetite for the sector.

Even now, retail interest isn’t what it once was, at the height of the last mining boom. It’s returning only very slowly.

But it is returning. New listings like Group Eleven Resources (CVE:ZNG), Cora Gold (LON:CORA) and Erris Resources (LON:ERIS) have shown that there is appetite.

Whether it will ever return in quite the same way, is open to question.

In the middle part of the last decade, the boom was fuelled by the newly emerging Chinese economy.

There’s no such comparable story now. The nearest thing is electric vehicles, but that is very company and commodity specific.

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