As a speculator I have put most of my money in developers, but I also have a small (about 3%) allocation to explorers. Today I thought of how I would position size a portfolio of uranium explorers if I was to do it from scratch.
Before I start I just have to make some disclaimers:
Explorers basically have zero value until they find anything of value in the ground. There is a reason why many say that exploration companies are only buying hunting ground in Saskatchewan. Still, exploration companies are exciting for speculators. A great drill hole can be the first step in finding a deposit with value in the billions. Therefore many look to explorers to get the big multi baggers.
For my part, I find that allocation to explorers should be a lot lower than I have to developers. If the exploration company is not able to find anything they will not be able to raise money and survive.
A qualitative selection of explorers based on the team and geology is not what I will go through today. That is a whole other subject. I do not have a background in geology and exploration investing. I however follow some great people on Twitter that do. This is more of a quantitative selection.
My suggestion for position sizing:
For my example I have $10,000 I want to spread among 10 uranium explorers. Because exploration is not the easiest thing in the world, I want diversification in terms of the number of companies. (The shotgun tactic).
I will, although begrudgingly, rely on some of the assumptions behind the Efficient Market Hypothesis. In this case, the assumption that the different companies are fairly valued, for the most part. The companies that have hit targets already are valued higher than companies that have not hit anything of value yet. The higher valued companies are further along in their journey in terms of de-risking the project.
I am looking for a company to find a deposit that will value the company between $300 or $500 million in the future. To achieve this with the lowest possible risk I should invest more in a more de-risked company than a more risky one.
For my portfolio I have selected 9 exploration companies from John Quakes´portfolio and added one of my own. (I do however not own, or know all of these companies myself):
- Fission 3.0 (FUU)
- Baselode Energy (FIND)
- Skyharbour Resources (SYH)
- CanAlaska Uranium (CVV)
- 92 Energy (92E)
- Purepoint Uranium (PTU)
- Forum Energy Metals (FMC)
- Kraken Energy (UUSA)
- Standard Uranium (STND)
- Strathmore Plus Uranium (SUU)
The important input for allocation is the market capitalization of the company (in yellow). The higher market value, the more de-risked the company. The more de-risked the company, the higher score, and amount allocated of my imaginary $10,000 amount. (The score is calculated based on “Goal MCAP” divided by the “Bagger” number needed for reaching the “Goal MCAP”).
The winner (at this time) is Fission 3.0, which the market tells us is the winner for now. They need only to do a 3,2 bagger from today’s valuation to reach “Goal market cap” of $300M. Strathmore Plus Uranium is at the bottom for now, and the market finds the highest risk with this company. With a market cap of just $8,5M they need 35,2X to reach a market cap of $300M. Because of the higher (perceived) risk I should invest a lot less in this company than in Fission 3.0.
I am happy with this allocation as a starting point for an exploration portfolio. The list will however change from day to day, based on the valuations of the selected companies.
I do not know all the companies I have used in this example. You should try to bring in as many qualitative measures as you are able to and tweak the list based on other factors. The most important one: Is the company fairly valued? (Is the market wrong? The smaller and more illiquid the sector, the bigger chance for this. Has the company found anything the market has not valued enough already)? Does the team have a track record with finding uranium? Does the company have a drill program for January/February? Has the company put most of the dollars in the ground, or have they spent most of it on G&A?
Not every company will find anything. I therefore have a very small allocation to explorers altogether.