The Perfect Resource Exploration Stock: Part II

By Rusty McDougal

An article I wrote last week detailed the genesis of perfect resource exploration stocks. This week we will delve into the subsequent stages through which start-up companies evolve, from concept to implementation.

Again, the companies that perform grass roots exploration provide the highest amount of leverage, but of course they also come with the greatest risk. But that risk can be reduced through diversification and prudent research.

The perfect exploration stock will be adept at finding grass roots projects with vast potential. They may control as few as six such properties or as many as thirty.

The properties will ideally have a broad spectrum of target minerals… gold, silver, diamonds, zinc, lead, copper, uranium, molybdenum etc.

Oil and gas explorers should also have multiple irons in the fire by holding several properties. This provides more chances for success as well as a degree of diversification for you.

Our perfect explorers will now perform early stage exploration on these properties. The goal is to find promising results so as to interest a larger company in footing the bill for the more expensive development of the property.

The following quote is from AuEx Ventures, Inc., a Canadian junior that adheres closely to this joint venture model:

“AuEx Ventures, Inc. is a Nevada focused precious metals exploration company with a current portfolio of 15 exploration projects in Nevada controlling over 40,000 acres of unpatented mining claims and fee land. Ten of the projects are in joint venture agreements with seven companies who provide exploration funding. The company applies the extensive Nevada exploration experience and high-end technical skills of its founders to search for and acquire new precious metal exploration projects that are then offered for joint venture.”

You want as many quality joint ventures as you can get within your company portfolio. It’s hardly surprising how many more discoveries are made when funds are being spent and drills are turning.

What are the terms of these joint ventures?

It’s pretty much “Let’s Make a Deal” as you will see a broad spectrum of arrangements made. Often the major company will buy in to the project by committing several million dollars in exploration funds over a two or three year time frame. This will entitle the major to a 60% or so interest in the ultimate value of the project. Our smaller grass roots explorer will often get a carried interest from that point forward.

There may also be incentives for the major to earn an additional percentage of the deal by paying for feasibility studies, mine construction, etc.

With joint ventures in place our start up company will start receiving more market attention. The share price and market cap should respond accordingly as the market understands the company’s potential.

Exploration progress may now take the company’s market cap towards the $150 million range. As an early investor you may have purchased stock when the market cap was as low as $15 million to $30 million. That would be a five to tenfold return, and we’re not yet at the discovery stage. Prudence would dictate that you take some profits off the table during such an opportune time frame.

Some of these joint ventures will eventually lead to key discoveries and some will not. Either way, our project generator will continue to fill the pipeline with more projects and more joint ventures.

The goal is to continue moving forward until there is an actual discovery. As the following quote from another Canadian junior, Cornerstone Capital Resources, Inc. suggests, frugality is a key factor:

“Of the $7.5 million in 2006 projected expenditures, fully 90% is provided by our joint venture partners, maintaining Cornerstone’s Treasury position at a very healthy level. As of September 18th, 2006, our Treasury stood at $7.1 million and we expect to finish the year in a similar position.”

Is it OK to stray from the joint venture model?

A start up company must have an extraordinary reason for going it alone. If initial exploration results are clearly of a world class nature it actually can be prudent to hold on to 100% of the deal. Virginia Gold did exactly this with their Canadian Eleonor gold property and ended up selling it outright to Goldcorp in a deal valued at $644 million to Virginia shareholders.

Whether you invest in start-ups or in companies further along in the exploration process you will come to fully appreciate this project generation and joint venture model. So, too, will your bank account.

These are the companies to find!

Invest Resourcefully,

Rusty

P.S. If you are interested in investing in highly promising, early stage resource exploration companies, the folks at Global Resource Investments are particularly adept at finding companies that adhere to the model I described in this article. The number there is 800-477-7853 and you can ask for Luke Smith or Ben Miller.

This does not constitute an endorsement from Investor’s Daily Edge, and no remuneration shall be received, should you decide to do business with Global Resource Investments.

Continue to Part 3