Why invest in high-risk AIM MINING companies?

This is one of the most common questions we receive — whether retail minnow or ultra-high net worth individual, why invest your hard-earned capital into risk assets, and specifically those in the junior resource sector?

Let’s consider.

The S&P 500 has delivered an average annual return of 11% per year since 1957. This includes 2008 where it lost 38.49% and 1997 when it rose by 48.9% — over time though, investing in the US has always delivered a healthy return, doubling your investment roughly every seven years. 

The FTSE 100 boasts dividend stocks that pay a healthy 8-9%. Then there’s everything from bonds to real estate, all of which can be used to build a diversified wealth base. 

But here’s the thing. Let’s say you’re doing better than most and can afford to put aside £5,000 a year into investing. And let’s say for the sake of argument this is capital you have left over after tax and pension contributions. You invest £5,000 a year and get a 10% annual return — compound this and after a decade you will have circa £81,000.

Give it 30 years and you’ll have £900,000, with £749,000 of this generated through the magic of compound returns. Congratulations! If like most you started investing in your mid-30s, you’ve made enough to retire at 70. The problem is that you then have less than 10 years to enjoy old age before you drop dead — on average.

Okay maybe you can scrimp and get out of the rat race a little earlier, but the bottom line is that investing in index funds is not going to let you stop working much earlier than usual; it simply means you won’t retire in poverty. 

But small caps are a different kettle of fish — and especially in the junior resource sector, where a few million invested into the ground can return hundreds of millions in profit. Greatland Gold remains the most recent sector victory, with its share price rising 71x after the discovery of Havieron in Australia — invest £5,000 in GGP before the rise at the end of 2019 and and you’d walk away with £355,000 if you sold at the peak a year later.

But what about other risk plays? There are the biotechs, but these come with a very specific problem. Every single one requires masses of research for their individual niche — it’s extremely difficult for a retail investor, or even a medical researcher, to truly understand what each company is up to. Many CEOs in the sector have complained that UK fund managers lack sufficient independent advice to invest in biotech rick plays — but it’s also true that no matter what, you are really only investing based on limited knowledge.

Whether it’s Avacta or Genflow, Cizzle or Poolbeg, the reality is that understanding how their asset works requires a very specific working knowledge of multiple biomedical research segments, which is practically impossible. Even if you focus on oncology in particular, there are dozens of different branches, and you could spend your entire life attempting to research just one.

It’s different with junior resource companies, because you can apply a generalised knowledge base to multiple companies. Let’s say you want to understand copper companies — the same knowledge base will apply to Arc Minerals, Asiamet, Phoenix, Galileo Resources, African Pioneer, Xtract, Bezant, Jubilee Metals and any other in the sector — so if you put in the effort, you can make realistic peer comparisons and understand the strengths and weaknesses in the investment cases vis-à-vis each other.

Then there’s crypto — which has sucked up a lot of risk capital. But there are two types of cryptocurrency. Bitcoin, which can be likened to a store of value like Gold, and then all the others. The others are not investing, especially at the smaller end of the market. They’re gambling. If you invest in a start-up altcoin and make 300% in a week before the rug gets pulled, this is no different to playing blackjack and winning a few hands in a row.

Emerging markets are also popular — but they’re emerging for a reason. Your capital is always at high jurisdictional risk and no IFA will allocate more than 10% of your money to these markets because the wheels can always fall off.

This leaves venture capital schemes in private companies through EIS and SEIS; these are exceptionally tax efficient, if prone to a high failure rate. The problem with them is that in order to realise any increase in share value, you need a liquidity event including someone else to buy the shares from you at the company’s generally inflated valuation.

Of course, mining has its own risks and reward — for example, ignore the bluster and you realise that all companies live and die by the drill bit. 

But if you’re investing in popular companies listed in London then you have exit liquidity, a regulated exchange (no laughing please), and the ability to build up transferable knowledge over time that will make you a better investor.

With a decent chance that the right pick could change your life forever.

- Charles Archer, 22/7/24