Legendary investor Doug Casey calls them "the most volatile stocks on earth."
They can and do regularly undergo massive swings, both positive and negative.
It's a really tough business. Many flame out.
But all it takes is just one 10-bagger to make up for all the dogs in the pound.
Thanks to a new discovery, a takeover bid or full-blown investment mania, it's not uncommon for some of these stocks to return as much as 1,000%, 5,000%, and even 10,000%.
Those are not typos. In fact, there are countless examples.
Aber Resources was a $3 stock in 1993 before it made a big diamond discovery. Four years later, the stock hit $28/share, handing early investors over 900% returns.
Then there's Diamond Fields Resources. Its shares were $4 before geologists made a massive nickel discovery in 1994. Not long after, the stock hit a pre-split equivalent of $160 for a 4,000% return.
That phenomenal 4,000% return was repeated in 2006, when Aurelian Resources Inc. made a high-grade gold discovery in Ecuador. Shares of the junior miner went from $0.89 to almost $40.
So what makes a stock a "junior miner"?
In a pure sense, junior mining companies have market caps somewhere between $5 million and $100 million.
But here's the thing the makes them not for the faint of heart.
Usually, junior miners don't make any money. They just raise money from investors to explore properties for gold, silver, base metals, oil, gas, potash, or uranium, just to name a few.
And even if they make a significant find, junior miners rarely develop it themselves. Instead they sell the project to a major miner, who can more easily raise the required funding and has the experience to build and operate a mine.
OK, so now you're pumped with the idea that one of these little mining companies could help you retire in two years.
And you're right, they can. But not so fast.
The truth is you need to approach this mining subsector with a game plan -- an investment "toolkit" if you will - to help you to cast aside the dogs and focus on the "diamonds in the rough."
Essentially, there are four main areas you need to vet in order to decide if a given junior miner is one to add to your portfolio.
In fact, the Standard and Poor's Metals and Mining select industry index (INDEXSP: SPSIMM) is off 35% in the past year, while the overall market is up 2.5%.
Admittedly commodities prices are down, but only by 14% in the last year. Meanwhile, the cost of some commodities -- notably gold prices -- are much higher than they were.
Given the buoyancy of global monetary policy, this is surprising. For investors, the big question is: will the downturn in mining stocks last?
It truth, though, when you look more closely at operating numbers, the weakness in commodity shares is easier to explain.
Mining Stocks: Breaking Down Barrick GoldFor example, Barrick Gold (NYSE:ABX), a gold and copper miner that is generally well regarded, posted first quarter earnings which were up just 3% from the previous year. That was a surprisingly weak performance given that its gold sales price was up 22% -- even though its copper price realized was down 11%.
However, gold cash mining costs were up 25% and copper cash mining costs were up a startling 66%. So even though copper production and sales were also up sharply, margins on those sales were down 43%.
In other words, even though Barrick enjoyed a favorable operating quarter with good prices, mining costs for both gold and copper were up so sharply that Barrick enjoyed little benefit from this success.
The same picture is clearly seen around the mining sector, and indeed in the related energy sector.
Strong sales prices over the last few years have had two effects.