So you want to buy a lottery ticket, eh? Or maybe you're looking for that little something special, a treat to round out your portfolio of steady, dividend-paying workhorses. Here are 3 speculative companies that I think come with some promise – as well as a whole lot of risk:
Galaxy Resources Limited (ASX: GXY)
Australian-based spodumene (lithium) miner Galaxy Resources is in a good position to benefit from the anticipated boom in lithium demand. With an already-established mine at Mt Cattlin currently producing spodumene, and guaranteed volume and price agreements with a Chinese buyer, Galaxy has ticked most of the boxes required to become financially stable. Improved recovery processes and a renegotiation of the current price agreement after 2017 see potential for both lower production costs and higher realised prices.
The downside is that it is very difficult to tell whether the forecast growth in demand for lithium will be enough to keep prices high, given the surge in supply that I can virtually guarantee is coming.
Equator Resources Ltd (ASX: EQU)
A high-risk, early-stage cobalt explorer in Canada, Equator's main drawcard is several promising silver-cobalt and nickel-cobalt prospects, as well as newly-appointed Chairman Paul Matysek, who has a track record of growing small miners. With a market capitalisation of just $50 million (including escrowed shares), Equator is reasonably priced if it is able to discover a meaningful amount of cobalt with decent prospects for extraction.
The downside is that the company has limited funds, and that some of its tenements have already been abandoned by previous silver miners. This could affect both the amount of cobalt available, as well as making it less likely that Equator can produce silver or nickel as a 'by-product', which would reduce the average cost of cobalt extraction.
Australian Bauxite Ltd (ASX: ABX)
Another high-risk prospect, my investment in Australian Bauxite ('ABX') is a cautionary tale for all get-rich-quick buyers of small miners should consider. This is a company that ticks many boxes, with high quality, low cost resources, adjacent rail and port facilities, fiscally prudent management, and a no-cost off-take partnership with a large-scale bauxite miner.
Yet in the ~2 years since I first recommended the company to readers, ABX has been unable to sell large quantities of bauxite due to several factors, including a glut in the metallurgical bauxite market. That could be about to change, with ABX currently stockpiling ore, and several customers in the concrete and fertiliser industries conducting trials with company bauxite. I remain confident in the company's prospects, but patience is the name of the game.
Foolish Takeaways
There are 5 things that all investors should keep in mind when buying speculative miners.
1) Most will be unprofitable (if not outright unsuccessful), especially in the early years.
2) Most will require additional capital (diluting shareholders), be bought out by larger miners, or be forced to strike unfavourable 'partnership' arrangements that can erode their potential. Alternatively, they'll wind down to nothing and then reinvent themselves as technology companies.
3) It can take a lot longer than you think to actually start mining minerals and making money.
4) Even with less transparent markets like bauxite, pricing is visible enough that times of high demand (read: high prices) spur huge increases in production from miners all around the world. Soon enough, supply catches up to demand and prices normalise – and the opportunity vanishes, especially if you paid a high price for shares.
5) As ever in the mining industry, long-term success will to go the most shrewdly operated player; those with the best resources and the lowest costs.
