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Junior miners – a ‘ridiculously underpriced’ sector

Whilst many investors have turned their back on the struggling resources sector, Rick Rule, a successful investor in the industry, believes that now is the opportunity of a decade to pick up discounted stocks.

Rule has been investing in the sector for around 40 years and has realised enormous success in that time. He recognises the potential of certain companies and stocks up on shares when other investors get cold feet – a strategy that he successfully employed in 1990 as well as in 1998-99 prior  to Australia’s mining boom.

After a decade of enormous returns from the sector, investors have fled the resources scene in recent years to the extent that even companies with decent prospects are struggling to stay afloat, signaling that the sector may currently be “ridiculously underpriced”.

Rule said “The idea that we can invest in the sub-$500 million market-cap space in absolute best-of-breed management at what are, from our (Sprott Global Resources Investments) point of view, world-beating valuations, is very attractive. We can’t do it mid-market and top market. We have to do it when the locals are on strike.”

However, before investors get too excited, Rule also warns that there are more than 800 junior miners listed on the ASX that are “truly valueless”, highlighting that investors must still look out for quality projects and management teams.

As reported by The Australian, Rule’s fund boasts a range of Australian-based investments, which include Sirius Resources (ASX: SIR), Orbis Gold (ASX: OBS), Papillon Resources (ASX: PIR), Hot Chili (ASX: HCH) and Peel Mining (ASX: PEX).

Regis Resources (ASX: RRL) is another company that Sprott Global Resources is “extremely attracted to the management team” of, suspecting that it will be the ‘must-own name’ when the industry returns to favour.

Foolish takeaway

Although there is certainly potential for the resources sector to deliver enormous gains in the future, investors should be wary of the risks that the industry is still facing and only invest in those companies that are well managed and maintain good prospects.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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