Three junior miners for the adventurous investor

I was recently in Islington, north London, to attend the Mines and Money Show. Here the movers and shakers of the mining and finance industries were gathered to tell their stories and share investment ideas.

It was the ideal place to gauge the health of mining sector penny shares.

The conclusion I came to was a positive one: if you want to make big money fast and don't mind a bit of a gamble, the junior resource sector of the London stock market is still a great place to look.

This is the third year that I have attended this annual event. Over the three years, the mood of the event has swung considerably.

In 2007 the mood was euphoric. Talk of the 'super-cycle' had financiers opening their purses and thrusting money at every mining start-up they could find.

A year later and things could not have been more different. Finance was impossible to come by. Mining projects were being put into mothballs. Cash was running out fast.

This year conditions were somewhere close to where they should be...

Financiers are now willing to back miners but they are choosy. Poor projects are hitting the buffers, but new finance is available for those that show genuine promise.

Mergers and take-overs are allowing smaller groups to pool their resources and economise on the costs of being a public company. There have been some failures, but equally there have been some newcomers.

The industry is sorting itself out after the boom and bust, and in this regard its situation today is comparable with that of the dotcom sector in 2002. This is a time when investors should be watching the sector very closely.

Why close attention will bring investors big rewards

As the weak go to the wall, the strong have survived and are starting to prosper. The winners are emerging. They have the financial backing that is essential, but most important of all they are making real progress on the ground.

With very few exceptions, the political climate for solid mining prospects has been supportive. In a sector traditionally fraught with political difficulties, small mining companies are generally being welcomed by governments of developing countries and treated with fairness.

Neither is the sector being blighted by a shortage of key resources. Two years ago it was hard to get hold of drilling equipment at any price. Qualified geologists could name their own salary. Rock samples sent to distant laboratories for analysis would not reappear for months.

Now this has eased and mining ventures around the world are moving forward. Holes are being drilled. Trenches are being dug. Samples are being collected and analysed. Roads are being built and power lines extended.

Now, bankers and shareholders can start to anticipate the time when these junior miners no longer simply spend money, but actually generate some revenue.

It takes three to five years to bring a mining project to fruition, so in 12 months significant progress can be made. So which companies at the event looked ripe for this sort of progress?

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The junior mining stars of the next 12 months

Among the miners attracting attention were Ariana Resources (LSE: AAU), which this year produced its first gold from its Kiziltepe deposit in Turkey; and Anglesey Mining (LSE: AYM), which expects to bring its 50% Labrador Iron Ore mine into production in 2010.

And there was another that attracted more attention than most. That was Mariana Resources (LSE: MARL). Mariana has just seen a five-fold increase of its share price after making a gold and silver discovery in the south of Argentina.

The dominant feeling at Mines and Money 2009 was one of 'business as usual'. But aside from a sense of relief that the financial storm has passed, renewed optimism is also coming from the recovery of metal prices. Up to now this has far exceeded predictions.

To an extent this has been caused by some opportunistic and far-sighted stock-piling by the Chinese. But it is also clear that the recession has done little to break the super-cycle.

The fact is that the world is using up natural resources at a much greater speed than they can be discovered in the ground.

The world wants more and more of these things, but they are increasingly hard to find and expensive to extract. Unless mankind can come up with alternative materials, the long-term prognosis has to be that prices will rise and successful mining ventures will be of ever increasing value.

This article was written by Tom Bulford for the free twice-weekly investment email The Penny Sleuth