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Nearology is one of the most common traps that ASX resources and mining stock investors fall for. This refers to the strategy of investing in mining companies that are located close to each other geographically.
In theory, just because a nearby company has discovered a nearby deposit, your own company should too. We’ve seen it several times before over the last several years with major deposits from Julimar to Nova-Bollinger leading to a dozen or two explorers acquiring ground nearby and/or investors buying shares in companies with nearby deposits hoping they will hit the jackpot too. It rarely ends well.
Why investors fall for the nearology trap
Obviously there is hope that companies will find a similar deposit. And if they do, there would be several advantages. Most particularly, the ability to share infrastructure and resources, reducing costs for all companies involved.
For example, if one mining company has a processing plant, other nearby companies could use it as well instead of building their own. This leads to significant cost savings in terms of construction, maintenance, and operations as well as a win-win situation for the owner of the plant because they would be paid for it.
It may even facilitate easier collaboration and knowledge-sharing between neighbouring companies. You might see farm-in agreements signed between companies whereby a big company may strike a deal to explore at a smaller companies’ deposit in return for the right to acquire a major stake in the project if and when it is successful.
In doing this, companies can learn from each other’s experiences and best practices, leading to more efficient and effective operations.
Additionally, being located in a mining-friendly region and having a larger companies’ help may also lead to faster permitting processes and smoother relationships with local authorities.
There are also benefits for investors when it comes to nearology. By investing in multiple companies located close together, investors have the potential to diversify their portfolio while still maintaining a certain level of risk. This is because the success or failure of one company may not necessarily affect the others significantly.
Investors must think of other factors
However, it’s essential to note that nearology should not be the sole determining factor in investment decisions. Other crucial factors such as the company’s financial stability, stage of life, JORC Resource (if any), key project metrics, leadership, and outlook for the company’s specific products must also be considered.
So while nearology may be a promising strategy, it’s important to consider all factors before investing in any resources stock.
Nearology can go right, but it usually goes wrong
Now yes, there have been some successful discoveries made. But these have not been companies that have projects nearby a recent major discovery and are hoping to find the same thing. No, in most cases these tend to be near longer-term operating mines. For instance, Chalice’s (ASX:CHN) Julimar deposit was near the Boddington gold mine and Ramelius’ (ASX:RMS) was located near the Penny West gold mine.
One of the few successful nearology companies finding a major deposit right nearby another small cap’s recent find was Legend Mining (ASX:LEG) which actually discovered a nickel-copper deposit right near Nova-Bollinger. But unfortunately, most other companies that set up near Nova-Bollinger were unsuccessful. And it has been similar with most nearology companies in relation to Julimar too, even though investors bought into many of these companies en-masse.
Companies that tried to find another Julimar but didn’t work out included Australian Vanadium (ASX:AVL), Burley Minerals (ASX:BUR), Caspin Resources (ASX:CPN), DevEx Resources (ASX:DEV), Lachlan Star (ASX:LSA), Minerals260 (ASX:260), Mandrake Resources (ASX:MAN), OAR Resources (ASX:OAR), Pursuit Minerals (ASX:PUR) and Todd River Resources (ASX:TRT). Yes, even Caspin that actually counted Chalice as a shareholder couldn’t replicate the success.
The lesson for investors
Investing in small cap resources and mining stocks on the ASX is risky but particularly nearology (gambling that a company will find a major deposit right near an existing one. Unless of course the deposit they are trying to replicate has been a major operating mine for decades.
You may be more likely to make money by investing in the first mover company in the first place, then holding onto it for a few years as it defines its resource and then either sells the project or brings it into production.
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