Can big risks lead to big rewards for these 3 tiny resources shares?

Every investor dreams of finding that one jackpot speculative stock, something like a Liquefied Natural Gas Limited (ASX: LNG) that will, within a few months of you buying it, spike 1,595% and leave you as happy as a pig in mud.

Unfortunately I’ve heard from several different investing gurus that such a share is literally a ‘once in a life-time event’, and if you’re really lucky you might get it twice.

However that doesn’t stop investors taking on more risk to seek that potential jackpot reward.

You can improve your chances of striking it big by buying shares where a number of different factors – rising commodity prices, closeness to production, ample resources, low production costs, etc – combine in a way that will multiply the share price once the wider market becomes aware of its potential.

Today I’ve compiled a list of three companies fitting these criteria that I think look quite promising:

1. ABM Resources NL (ASX: ABU) – last traded at $0.425

ABM Resources is an ASX300-listed gold explorer with extensive tenements in the Northern Territory, southwest of Tennant Creek.

The company has had considerable exploration success, finding buried treasure at a number of sites with the likely names of Buccaneer, Old Pirate, Golden Hind, and Old Glory.

Economically viable gold deposits have also been found at numerous other locations, with some recording up to 161g/tonne of gold (1g/t is, as a rule of thumb, economically viable) in drilling samples.

A lease with Tanami NL for their Coyote gold-processing plant moves ABM closer to production, and with $18 million in cash and no debt they’re highly likely to get there. Even modest production figures leave plenty of scope for upside in price.

2. Cape Alumina Ltd (ASX: CBX) – last traded at $0.035

Cape Alumina is a tiny bauxite explorer with tenements on the west side of Cape York, with a 19.85Mt JORC inferred DSO (direct shipping ore) resource, and a 22.1Mt beneficiated inferred resource.

A DSO resource is great news for the company, allowing bauxite to be sold with a minimum of processing, and will reduce the initial investment required to commence production.

Cape Alumina is currently being bought out by Metrocoal Ltd (ASX: MTE) and together the companies will have cash resources of approximately $6 million to work with. I’m not excited about the long-term future of coal, so hopefully the newly combined company will focus on the considerably more lucrative bauxite market.

3. Australian Bauxite Ltd (ASX: ABX) – last traded at $0.24

Australian Bauxite is my pick of the three shares today, sitting on over 100Mt of indicated and inferred high-grade bauxite resources, with a high likelihood of finding more in its (primarily Tasmanian) tenements.

With only $2 million in cash, the main obstacle to the company is raising enough capital to begin production (estimated to cost around $12 million), but its resources are very high quality and can be extracted at a low cost base.

The market for bauxite is favourable at the moment thanks to constrained supply and rising demand throughout China and the Middle East.

With such extensive resources indicating a long-term future, and an ambition to become the third largest supplier of bauxite to China over the next six years, ABX is the horse I’ve hitched my wagon to.

At The Motley Fool we’re not big on speculative explorers, because we think the best way to become wealthier is to buy companies with steadily growing income streams and dividends.

However we know that most investors like speculating (hey, we’re human too), and even if you’re cautious by nature you might occasionally want to take a punt on something a little more spicy than your usual fare.

That’s why our team of analysts has written a free report on three tiny resource companies with solid upside potential. If you’re interested, simply enter your email address in the link below and we’ll send it to you, completely FREE.

3 "under the radar" resources tips for your portfolio

Oil, copper, and gold continue to be in high-demand -- and their popularity doesn't look to be slowing. We've uncovered three companies poised to benefit from the rising prices of these commodities. Get our brand-new report -- "3 'Under-the-Radar' Resources Companies That Could Win Big" -- FREE!

Motley Fool contributor Sean O'Neill owns shares in Australian Bauxite Ltd.

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