Diversifying across high-risk projects

How many positions?

If each project has the same chance of becoming a mine, independent of the others, the chance that a portfolio holds at least one success is 1 − (1 − p)ⁿ:

The odds are the site's illustrative figures from the stage guide. Two lessons follow. The earlier the stage, the more positions it takes before success becomes likely. And even at maiden-resource odds, a portfolio of five has close to a coin-flip chance of holding no future mine at all.

Why success is not the only win

A project does not have to become a mine to make money. Shares can re-rate on a discovery, a resource or a study, or on a takeover at any stage. The Lassonde curve shows value peaking after discovery and again near production. A portfolio approach can take some profit at each re-rating rather than holding every position to the end.

Juniors are correlated

Real portfolios are less diversified than the table suggests, because juniors tend to move together:

• Metal prices: a gold bear market lowers every gold junior at once.
• Sector sentiment: risk appetite for small mining shares comes and goes in waves.
• The financing cycle: in weak markets, every junior needs cash at the same time, and many raise on poor terms.

Spread positions across:

Sizing and follow-on reserves

• Size for failure. Each position should be small enough that losing all of it is acceptable, because most will.
• Keep reserves. A project that succeeds needs more money at the next stage. Holding back capital lets you join later rounds and avoid being diluted out of a winner. Participation rights from a placement make this easier.
• Add at milestones, not on hope. Increasing a position after a published result, such as a resource or a study, buys better odds. Adding to a project after a disappointing result is averaging down on a failing option.

A worked example

An invented investor has $10M for early-stage projects.

If three projects advance, the reserve funds their next rounds, keeping the investor's share from being diluted just as the odds improve.

Liquidity and time

• Junior shares often trade thinly, and private positions, royalties and placement shares in their hold period may not trade at all.
• Moving from discovery to a build decision usually takes many years. Plan on a long horizon and do not rely on selling quickly.

What to take away

Hold enough positions for the odds to work, size them so failures are survivable, spread them across commodities, countries and stages, and keep money back to support the winners. Diversification does not remove the sector's shared risk, so plan for long periods when everything is down together.

The success odds are illustrative and assume projects are independent, which real projects are not. This is educational material, not investment advice.