Natural resources shares offer numerous opportunities to double or treble your money – or even more – within relatively short time frames. However, to be in with a chance of making such gains, you usually have to be willing to live with correspondingly high risks and often rollercoaster rides through successions of elation and despair.
The highest risks and rewards traditionally lie with junior explorers that control a small number of potentially huge assets. These juniors are invariably constrained in what they can do by limited funding and may flourish or perish on the outcome of just a few holes drilled in the ground.
Witness the relative fate of Falklands oil explorers Rockhopper Exploration and Falkland Oil & Gas (FOGL), both classic high-risk, high-reward resources plays. Shares in Rockhopper rocketed over six-fold from 37p to 230p in just a few days after it struck over 100m barrels of oil in the North Falkland basin.
By contrast, FOGL's shares plunged nearly 50 per cent after it announced that its maiden well in the previously unexplored South Falkland basin was dry. FOGL remains well-placed as it has the resources and partner (BHP Billiton) to drill further wells, subject to being able to secure a deepwater rig – however, many junior explorers aren't so fortunate.
Indeed, Rockhopper essentially had just two rolls of the Falklands dice. Its second well was dry and its prospects would have looked very bleak had it not been for the exceptional success of Sea Lion, its first well. The chances of oil and gas exploration success typically range between one-in-five and one-in-10, on which basis, statistically, it would have been far more likely for both of Rockhopper's wells to be dry than for the company to have made a discovery.
Such can be the nature of investing in natural resources juniors that a single success or failure can mean the difference between a substantial – potentially total – loss and a six-fold gain.
