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2 Cardinal Rules of Resource Penny Stock
May 27th, 2008
Reserve Life Index (RLI)
When it comes to resource production penny stock (metals mining,
oil and natural gas production), the Reserve Life Index is king.
The RLI tells you how many years until the wells run dry. Or, at the current rate of mining, how many
years until there is nothing left to mine.
Often you can't find this out through the financial statements or their web
site. In such an event, you should call
the Investor Relations contact and ask. The penny stock company may be making boatloads of money, and be trading at attractive prices
(on the surface), but if they only have an RLI of 2.5, that stock may soon be
in for a world of hurt.
Now, the RLI can be extended if they actively pursue new deposits, but the
success of such efforts will only help if they are successful in their
exploration or acquisition strategy. A lot of penny stocks try to extend their RLI by
buying new mining rights or acquiring smaller players, only to come up short.
Personally, I like to see penny stocks with a double digit RLI (10 years or more) and
an active exploration and acquisition strategy.
Hopefully they extend the RLI faster than it is worn away over time.
Cost of Production
Another consideration for resource production stocks is the cost of production.
Each company can produce a barrel of oil at a different cost. It takes some
companies more money to mine an ounce of gold than others.
Since they produce a commodity, as opposed to a product, there are no
competitive advantages between one ounce of gold and another, or between one
barrel of oil and another. The company
that produces with the least cost wins.
Picture 'Joe's Mining' bringing gold to market at a cost of $500 per ounce. Now
compare that to 'Dave's Mining' bringing it to market at a cost of $550. Joe's
Mining will be making a lot more per ounce, and can use those profits for
further exploration, or to acquire more mining properties. If the price of gold
on the open market falls, there will be much less pressure on the lower cost
producer than the higher cost producer.
When dealing with resource stocks, as it seems that everyone is nowadays, keep in mind the two most important aspects of a company's operations: RLI and production cost. These two criteria are the most telling aspects for people looking to get involved with stocks that will outperform. They will likely outperform others in their field... or their mine.