Two potential mining tearaways

Natural resources are getting harder and more expensive to find. So a small-cap miner that finds a big deposit will attract a swarm of major players, says Tom Bulford. Here, he picks two junior miners with decent prospects.

The great mining investor Julian Baring used to have a bit of advice for small miners. "Whatever you do", he would say, "don't try to get anything out of the ground!"

Strange advice for a mining company, you might think. But his point was this: small mining companies are explorers. They consist of geologists, adventurers and chancers who like nothing better than peering at maps, striding over sandy plains, picking up soil samples and drilling exploratory holes. This is what they enjoy. This is what they are good at. And it is the dream that the drill will encounter a ten-metre slab of solid gold that sends them happily to sleep each night.

The problems start when they actually find something. Then they have to work out how they are going to get it out of the ground. They have to talk to slick financiers and negotiate with hard-nosed machinery salesmen. If the mine is actually built - and the chance of this happening on time and budget is virtually nil - then they have to cope with breakdowns, with workers who go home each night with their pockets full of gold, and with government officials who think that they might like a bigger slice of the pie.

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It's much better to prove up a resource, sell it on to a major miner with experience of doing the dirty work of extraction, and swiftly move on to the next exploration project.

Where are the hottest mining regions right now?

This was one of the messages that came from this week's Mines & Money conference in London, and this is great news for penny share investors. You see, it is these bold explorers that can make investors the most money. This type of company is, according to leading Canadian resource investor Peter Grosskopf, "small and hard to find". And there is no guarantee of success.

The most important thing is to "look at the size of the deposit". The world's big miners, just like the world's big oil companies, have a voracious appetite for new resources. Unless they find some new sources of supply, they literally mine themselves to extinction. They need to find new reserves - and not small, bite-sized mines. They need to find big new mines, with the chance of extending reserves in the locality through further exploration.

A number of exploration companies made brief presentations at the conference, and one that seemed to tick the right boxes was Polar Star Mining(CVE:PSR). They are developing the Montezuma copper project in Chile, slap bang between massive mines run by Antofagasta and Codelco.

Another that is 'elephant hunting', this time in the Arabian-Nubian Shield, inSaudi Arabia, isKefi Minerals(LON: KEFI). "This looks like Western Australia in the 1890s", says the company's deputy chairman, Ian Plimer.

The size and quality of the deposit is the most important thing. As the Irish miner John Teeling has said, "politicians come and go but natural resources stay for ever". In terms of the political climate today, Henderson was wary of Russia, Venezuela, Ecuador, the Congo and Tanzania.

But he said that the Colombian government had treated foreign miners "remarkably well" and believes that Kurdistan, where oil companies such asGulf Keystone(LON:GKP) have taken a chance, was a country to watch.

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Why I think the penny mining bull will run and run

The world is certainly not about to run out of natural resources, but they are getting harder to find. Costs are inexorably rising as miners go to increasingly remote locations, dig deeper and tolerate lower grade resources, according to Professor Magnus Ericcson of the Raw Materials Group. The discovery cost of copper and nickel has trebled in recent years. The average grade of gold from the world's mines, around 2g/t ten years ago is now just 1.4g/t and heading lower.

So a penny miner that manages to scope out a big deposit will soon attract a swarm of big mining bidders.

This article was first published in Tom Bulford's twice-weekly small-cap investment email The Penny Sleuth.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.