As a general rule the most successful man in life is the man who has the best information

It's a fact in the mining world that most discoveries are made by a) junior mining companies and b) old time individual prospectors. Why are the juniors so successful at making discoveries and finding mines? Well, the good ones are lean mean boots on the ground exploration and development companies run by people who have been out there and know what it takes. They know how to raise money from the suits and they know how to get the story out to the retail investor.

They are not tied up in bureaucratic red tape and can make the important decisions without commissioning a six month study or running it up through 12 layers of pencil pushers and then sitting on their butts waiting for an answer while somebody else scoops the prize. They can and do make up their minds very quickly and can execute immediately on plans.

I believe junior resource companies offer the greatest leverage to increased demand and rising prices for commodities. There is also a very real and increasing trend for Mergers and Acquisitions (M&A) in one of the few bright spots available for investors - resources.

"As the potential for commodity scarcity escalates, M&A activity in the global mining sector will likely intensify, mimicking a 'global arms race. With few large targets in play and diminishing key resource reserves, we expect global miners will continue to scour the globe for projects and broaden their deal strategies." M&A in the Global Mining Sector - No Stone Unturned, PricewaterhouseCoopers

Juniors, not majors, own the worlds future mines and juniors are the ones most adept at finding these future mines. They already own, and find more of, what the world's larger mining companies need to replace reserves and grow their asset base.

Junior resource companies, the owners of the worlds next mines, are soon going to have their turn under the investment spotlight and should be on every investors radar screen.

If I was looking for superior investment vehicles to take advantage of what I think I know regarding the future for commodities I'd be looking at junior producers, near term producers and companies that are in the post discovery resource definition stage with the occasional green field exploration play thrown into the mix.

Remember, our junior resource companies, the same ones who today are so oversold and undervalued, are the present owners of the world's future commodities supply.

Company Stage - Risk vs. Reward

Juniors are risky, managing that risk is what investing in the junior resource sector is all about - in a nutshell it's all about when you invest. Some people invest extremely early because of management, some on the possibility of what a property might host, some people will wait and invest as you start to drill and build resources thus reducing their risk. You pay less because there is more risk or you pay more because there is less risk, only you can decide the level of risk you can tolerate and how much patience you have to sit while developments, the story, plays out.

The most upside (and by far the greatest risk) comes from buying a junior when they are exploring and make an initial discovery. Great drill assay results can send a juniors share price skyrocketing. The reverse can also be true. Junior explorers, the green field plays, are the riskiest plays by far. Strike out on assay results and it could be goodbye to a share price rise for a very long time - till the company finds another project they can work on. If you're buying into this kind of play make sure the company has another fallback project in its portfolio.

My favorite stage junior is a junior in the post discovery resource definition stage (also known as brown field stage companies). These companies have already found something, the share price has settled back after the initial discovery (never chase a company whose share price has already exploded, the share price has had its run, for now the moneys been made. I try and enter after the excitement has died down and the share price has settled back) and the company is going in to see what they have and hopefully produce a 43-101 compliant resource estimate and build upon it. The risk has been greatly reduced, the waiting time for a discovery non-existent and the reward very nice considering the much lower amount of risk.

For nearer term producers - for those further down the development path towards a mine - you have:

• Preliminary Economic Assessment's (PEA) or scoping studies are done to examine potential mining scenarios and economic parameters - A PEA or scoping study is an important milestone for a mineral project, it's the first step in a company's economic and technical examination of a proposed mine
• Preliminary feasibility studies or pre-feas studies are more detailed than PEA's and are used to determine whether or not to proceed with a detailed feasibility study. They are also used as a reality check to determine areas within the project that require more attention
• Feasibility studies will determine definitively whether or not to proceed with the project. A feasibility study or bankable feasibility provides budget figures for the project and will be the basis for raising capital to build the mine

Remember all these different stage studies are only yes/no decisions on whether to move to the next stage. NONE of them mean you are going mining, there's no mine till every stage is completed, permits approved and the necessary financing has been arranged.

Because these companies are well advanced along the development path a lot of the guesswork about grade, size, costs and metallurgy have been taken out of the equation for us. They have done sufficient work to give investors a certain level of confidence that their project will successfully move towards being a mine. The later stage companies (those doing feasibility, permitting and money raising) can have an excellent entry point for investors - they often enter a quiet period when they are doing the advanced studies and raising money to go into production. They often base (a flat share price) for quite a while through this period - possibly a good time for accumulation of their shares if you believe in the story. After the money is raised for production investors can see they are going mining - cash flow is just over the horizon - and the share price will often break out of its trading range.

With producers you have to look at the balance sheet, consider their plans for the future and judge for yourself the ability to meet those plans. Remember cash flow is king, but can they grow that cash flow? These large well established producers have the least risk and the least upside. But gains could be steady and maybe they pay a dividend.

The International Monetary Fund (IMF) recently published its report World Economic Outlook for October 2010 and in it they talked about commodity demand from emerging countries. "Because their growth is more commodity-intensive than that of advanced economies, the rapid increase in demand for commodities over the past decade is set to continue...the current era of higher scarcity, rising metal price trends and a balance of price risks tilted toward the upside may continue for some time."

Also consider the following:

• Population growth
• Scarcity of new resource discoveries
• Declining grades and ore reserves at existing deposits
• Resource nationalization

To me it all means we are going to see much tighter supplies of, and higher prices for commodities going forward.

Because of:

• Rising commodity prices
• Soaring share prices because of outstanding drill assay results
• Increased excitement being brought to the junior sector by increasing M&A activity for junior "fish"

The soon to be tidal wave of money coming into the resource sector is going to bypass the majors and roll right over the few surviving mid-tiers. This money is going to be looking for the greatest leverage to increased commodity demand, rising commodity prices and the potential for an extremely lucrative buyout.

This is going to happen at the same time senior miners are going to be buying, earlier in their life cycle, junior exploration and development companies.

New money is coming into the junior sector, bids are building and the asks are being taken out. Significant drill assay results are giving companies share prices a rocket ride when released.

Conclusion

It's an exciting time to be an investor in the junior resource market. Are there some quality junior producers, soon to be producers, post discovery resource definition, green field exploration companies and potential takeover targets on your radar screen?

If not, maybe there should be.

Richard Mills does not own shares of any companies mentioned in this report.