Looking at the share prices of mining and exploration stocks it doesn't appear as if much has changed in the last twelve months, but insiders in the industry are seeing something completely different. For more than four years now, mining stocks have been in a slump. The exhilarating days of 1996 are but a faint memory, yet the losses incurred in natural resource stocks since then are still painfully evident on many brokerage statements.

Let's not forget that mining is fundamental to our modern way of life. Without mining there would be no electricity, no cars, no appliances, no houses, no medicine, no supermarkets…. In fact without mining our life style would resemble that of primitive man before the iron age, i.e. living in caves as hunter-gatherers and sustaining life from day to day.  There aren't many things a broker can say for sure, without getting sued at least, but this is one of them: Mining is crucial to sustain human life at current levels. Without mining, we could not even sustain a fraction of the current human population, never mind cope with an increasing population, and forget about progress and technology. There is not a single technology in existence today that does not require the efforts of mining.

Doug Casey often says that mining is the worst business in the world because every day that a mining company mines ore, it reduces its most valuable asset until there is nothing left but a hole in the ground. Exploration is the lifeblood of the mining industry and also an immensely capital intensive endeavor. Exploration companies continuously have to find new capital in order to stay in business. This capital comes from two sources, private investors and mining companies. Mining companies throw capital at exploration companies when commodity prices are high and the mining companies are flush with cash. This causes a boom in exploration stocks and that attracts private investors (actually speculators) who then bid up exploration company shares to dizzying heights. The last time this happened was during 1995 and 1996.

When commodity prices decline, mining companies earn less from their mining operations and the first budget item that gets cut is exploration, because at this point management is concerned with short term cash flow, not long term ore reserves. This leads to a collapse in the share prices of exploration stocks as they run out of cash and find it difficult to attract new capital. Of course, the private investors, who joined the feeding frenzy late in the first place, are still chewing on rotten carcasses when they realize the game ended several months, or years ago. This is what happened during 1997 and 1998. With an unpleasant aftertaste in their mouths, private investors are now loathe to buy exploration stocks. After all the money they lost, and considering the fact that they may have some of these carcasses left in their portfolios, the general sentiment is that should natural resources become the next hot market, then these leftovers should also increase in value and could then be sold for more than what they are worth today.

This is of course true only on the face of it. After all, if the wind blows hard enough even turkeys can fly. But it ignores the fundamental changes that take place during downturns in the exploration cycle. Remember, exploration is a capital intensive business, and most of these companies have run out of capital. Many of them have lost the properties that they once owned and many more have changed their focus. A good thing about the downturn is that it quickly gets rid of mediocre management teams and run-of-the-mill exploration projects. That also means that when the market turns up, these companies have to refinance, re-acquire projects and try to figure out what's hot and what's not.

The way to make money in the exploration game, like any other business, is to be one step ahead of the curve. There are exploration companies with excellent management, sufficient capital and good projects that are selling at a fraction of what they were four years ago, or in the case of new companies, what they would have been. These are the stocks you want to own going into the next resources bull market.

We have long maintained that exploration should be viewed as a knowledge intensive business; defer the capital intensive aspect of it to major mining companies that have the financial resources to foot the bill. Small exploration companies with entrepreneurial management teams are light-years ahead of bureaucratic mining companies when it comes to competing for early stage exploration properties. The smart thing to do is for these small exploration companies to acquire projects, develop the geological models that pertain to them, perhaps do some initial geophysical and/or geochemical analysis and then sell interests in the projects to major mining companies, in return for which the mining companies pay for the exploration costs. Simple as this may seem, very few exploration companies follow this business model. Many of them are just plain too greedy  to give up an interest in a potential discovery. Instead they raise money from private investors, spend all the money, raise more money, spend the money, etc., etc., until they are unable to raise any more money. And then they drop the project, find a new one and start all over again.

Mineral exploration is just about the riskiest business in the world, which is why it is always better to do exploration with other peoples money. In the case of the business model that we favor, joint ventures with mining companies, it's almost as if you go to the mining companies and propose a joint venture wherein you will pick a certain number of lottery tickets, the mining company has to pay for them and you split the profits. That's not to say that you'll be able to pick any winning numbers. But it is a great deal for the guy picking the numbers, in this case the exploration company.

Since 1996, major mining companies have retrenched their exploration geologists, closed exploration offices and dropped many exploration properties. But the mining goes on, which means that the inevitable day that the mining companies run out of ore to mine is approaching. The only way to prevent the inevitable, is to buy new deposits, which leads to shareholder dilution, or to engage in exploration again. While most junior exploration companies have been decimated and turned into dot com plays, and while many major mining companies have slashed their exploration budgets to conserve their cash flow, some exploration companies have acquired vast tracts of land and done excellent geological work. These are the companies that are in pole position to win the next round as resources become scarce and mining companies scramble to add to their reserves.

Even though share prices in general do not reflect it, we have already seen a major turn around in the exploration business. Some of the exploration companies we follow are inundated with calls from major mining companies trying to get involved with exploration projects. The major mining companies are openly looking for projects. The only reason why they are not doing more acquisitions and joint ventures with juniors, is because there just aren't any available.

We are in the midst of a typical crunch in the exploration cycle, where the lack of capital during the past four years has created a vacuum of exploration projects and hence a shortage of ore to replace existing production. The pressure is on to find and acquire new resources that will replace current mining. Some of the exploration stocks we follow have already doubled, or tripled in price during that past twelve months.

If you want to make the kind of returns speculating on junior exploration stocks, that you always read about in newsletters and such, now is the time to accumulate well managed and capitalized exploration companies with good property portfolios. That doesn't mean you won’t lose money, or that you will make a lot of money in short order. Investing is a business that requires analysis, patience and then a lot more patience and some more analysis. But in order to make money, you have to be contrarian and buy when no-one else is buying.

I have delayed writing this article because even though I cannot predict when the market will turn, I have always felt we may be a bit too early. However, events of the past few months have convinced me that we are very close to a major turnaround in commodity prices and hence mining stocks, and especially exploration stocks, could increase substantially in price. Therefore, I believe that this is an excellent time to position yourself in mining and exploration stocks. Don't hold on to yesterday's losers hoping to break even again one day. You have already lost that money. Face the facts, sell the losers and reposition your portfolio so that you will hopefully own tomorrow's winners. If we have not done a portfolio review for you recently, please call me at the office so that we can go through your account company by company.

I have enclosed a research report by our geologist, Brent Cook, regarding an exploration company named Virginia Gold. This is a prime example of the kind of company you should own before the next bull market in resources firmly takes shape. Please read the report and call me if you are interested in investing in Virginia, or in mining and exploration in general.

It' s time to re-evaluate your portfolio, re-allocate more capital to the resources portion of your portfolio if you can, and position yourself for what I think is the beginning of another extensive bull market in natural resources and related investments.