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Directors have been buying Amaroq shares. Should I?

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What colour is Greenland? The old trope goes that Iceland looks green, while Greenland looks icy. But at least one company – Amaroq (LSE: AMRQ) – is hoping that Greenland turns out to glitter with gold. The company’s plans to develop gold mining on the North Atlantic island are gathering momentum. As part of a recent fundraising, directors have been buying Amaroq shares. Should I do the same?

Funds for exploration

Directors buy and sell shares for all sorts of reasons. What makes sense for them may not be the right thing for my own investment objectives and risk tolerance.

In general, though, directors spending their own money on shares in a company they understand well grabs my attention.

Amaroq has been busy raising money to help fund its exploration work in Greenland. Last month’s share sale grossed proceeds of around £30m. The money will help the company further explore and develop its Nalunaq gold project in southern Greenland. The miner has built access roads to enable this.

Long-term prospects

Nalunaq is a proven mine, which produced approximately 350,000 ounces of gold between 2004 and 2009. That explains some of the investor enthusiasm for Amaroq.

Just as with shares, though, past performance of a mine is not necessarily a guide to what will happen in future. Knowing there is gold in the ground at Nalunaq is not the same as having a cost-effective plan to get it out and sell it profitably. That is why Amaroq has been raising money. By developing the mine further, it hopes to identify promising gold seams it can mine commercially.

That could turn out to be a very profitable enterprise. Whether it does depends on a couple of factors. One of them is the quality and ease of extraction of the gold at the site. Another is the price of gold. Although Amaroq is looking for other minerals too, its main focus is gold.

I’m not buying Amaroq shares

Despite the apparent promise of the Nalunaq site, I will not be following company directors in adding Amaroq shares to my portfolio.

One reason is that a key determinant of the company’s financial performance – the gold price – is totally outside its control. I prefer to invest in companies that have more direct leverage over the success or failure of their commercial model.

But the main reason is the concentration risk. Amaroq is essentially a way to get exposure to a single territory. Within that territory, it offers me exposure to one large project. Mining is littered with disappointments. The fact that Nalunaq has been mined before gives me some confidence about its prospects, but exploration and development is a costly business, as the fundraise shows.

The project is not guaranteed to yield positive or commercially attractive results. In a diversified portfolio of dozens of projects that risk may be less important. But Amaroq lacks that diversification. If its key project succeeds, that could make its shares even more rewarding than a miner with lots of sites. But if it fails, it means the risks for shareholders would also be amplified. That is not within my risk appetite as an investor.

The post Directors have been buying Amaroq shares. Should I? appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.