Six for six. That’s an incredible run in the “junior mining” sector… one our readers have made a fortune on.

“Junior mining” is a term used to describe small (typically below $100 million market cap) companies formed to explore for resources like gold. They’re usually nothing but a collection of guys who might or might not find the next big deposit. The risks are high in the sector, but the potential returns are huge.

And I’ve found a way to spot the ones most likely to return several times your money.

Over the last 18 months, I’ve recommended six of these situations. None of those investments lost money. Four more than doubled. Three more than tripled. And one went up more than 500%. In sum, we averaged almost 360%… with no losers… in the riskiest sector in the market. Here’s how we did it… and you can, too.

[ad#Google Adsense]First, you need to understand that junior mining companies share more traits with biotech startups than with actual mining companies.

A big mining company – like gold miner Barrick – creates wealth through production… It’s not much different from a T-shirt manufacturer or a big carmaker. We know Barrick will produce about 8 million ounces of gold in 2011. And depending on where we assume gold will be, and how much it costs Barrick to get it out of the ground, we can forecast its earnings.

In other words, you can value big mining companies on their earnings. That’s not the case with junior miners at all…

Before they make an actual discovery, most junior miners aren’t “worth” anything. They don’t have any earnings. They don’t own any land (they usually lease it, so their land is actually an expense)… Even the cash they might have in the bank is emptying out like water through a sieve as they spend money to explore.

At this stage, investors risk being “diluted” to death. If a junior burns through money with nothing to show for it, it can sell millions of dollars worth of new shares. That dilution is like inflation. The more new shares sold, the less the old ones are worth. These slow deaths happen much more often than fast gains in the resource sector.

But when a junior miner actually makes a discovery, things change. And if you can identify the REAL discoveries with big potential and act quickly, you can book gains like we did. It’s all about the “discovery curve.” Let me explain…

When a junior miner makes a new discovery, it finds itself on the “discovery curve”…

This is a period in time where the market knows a discovery has been made. It knows the company isn’t worthless (like most juniors are), but doesn’t know the full potential of the deposit yet.

What you see is that the initial discovery can often send shares up 500%… Many investors see a move like that and think, “Well, that one got away.”

But what they miss is that, with a great discovery, shares of this company could go up hundreds of percent more as the company goes through several rounds of “confirmation” drilling. This is the drilling that determines if the deposit is large enough to consider building a mine around.

Granted… you don’t enjoy the initial surge in share price, but you reduce your risk of sitting on a stock that is essentially a “dream.” Even if you buy in the middle of the run, you double your money. And again, the most important thing is that you “derisk” the investment. You wait until a discovery was made, but not fully known by the market.

That’s how it worked with Mirasol Resources. In July 2009, I told a group of investors attending the Agora Financial Investment Symposium to buy Mirasol. It had just doubled in price from $0.19 to about $0.40, and my audience was skeptical there would be more to come.

But Mirasol had discovered a spectacular silver vein, and in 2010, at the same conference, Mirasol was $3 a share. Again, it was my top recommendation. Again, everyone thought I was crazy.

But after more confirmation drilling – and the discovery of a new silver vein – shares of Mirasol Resources now trade around $6.40.

Anyone who listened is up hundreds of percent… All they had to do was wait for the initial discovery and buy during the confirmation.

There are literally thousands of junior mining companies out there. You can’t invest in all of them. Even if you narrowed the field to the best 30, you could wait years for a discovery. Your money is at risk every day you are invested in juniors.

Our way, we buy after the initial discovery, but low enough in the “discovery curve” to make great returns on the confirmation.

That’s the system we used to identify six winners in a row AND book 360% gains on average. It’s simple to understand but difficult to perform. You must research the company’s project and its management – don’t just jump into any stock that rockets upward on a good drill hole.

But when you do your homework and get on the right discovery curves, the rewards are clearly worth the effort.

Good investing,

— Matt Badiali

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Source:  Daily Wealth