It is easy to see why Stellar Resources (STG:AIM) is one of the best performing small caps today (7 Feb), rising 57% to 2.62p. Its high-grade gold sample results are simply stunning. The highest result was 263 grams per tonne of gold. Even the lowest, 11.65 grams per tonne of gold, is better than most results from your average gold mine.


Stellar hopes to revive the Welsh gold mining industry by re-opening at least one old mine that sits on its large licence holding. Today's results clearly show there are rich grades of gold in an area which wasn't subject to historical mining at the Clogau deposit. But one cannot help remaining cautious on the company's prospects until actual drilling work is done and there is more clarity on its ability to finance work.


Time after time we have seen Aim-quoted miners report bonanza gold grades when doing sampling, which is a primitive form of exploration. You can't truly get a sense as to the quality and quantity of the ore body until drilling is done. This will show you any continuity of mineralisation and whether the gold discovered through samples is a one-off hotspot or, to excuse the pun, the tip of the iceberg.


Shares is an avid supporter of the Great British mining industry and all efforts to return the sector to its former glory. We wish Stellar every success; yet investors should still heed caution over today's results. They are excellent, yet we do not want anyone to believe that this level of gold will continue throughout the mine. No-one knows at the moment.


Part of the appeal with investing in mining stocks is taking on the risks of backing an unknown entity, as the rewards could be spectacular if the mineralisation is good. Yet small cap miners are very risky investments by nature as the success rates are relatively low.


Many companies have found high-grade deposits but haven't taken them into production because they are too small in size and therefore not economically viable to restart. But if they can find several small deposits in close proximity, the economics change as they could provide multiple feeds to a central processing plant.


In Scotland, Scotgold (SGZ:AIM) has good gold grades and admits its Cononish prospect is small in terms of mines globally. Yet studies show it is economic to bring into production. Scotgold remains confident of finding a series of deposits of similar scale which will give the company a long life producing Scottish gold.


Stellar's appeal lies in Welsh gold having historically sold for a large premium to the spot price. Therefore you could argue it doesn't need as big a deposit as 'normal' mines as its potential profit margins would be much greater than operations found in places like South American and West Africa.


A report by independent consultant Snowden reckons there could be between 130,000 ounces and 500,000 ounces of gold across Stellar's 120 square kilometre licence area. So on the scale of mines globally, that's not much gold spread across a very large area. Yet speaking to Shares last summer, Stellar reckons Snowden's estimates are conservative, focusing on two existing mine sites and not the wider region which presently lacks detailed exploration work.


Perhaps of interest to the financial regulators will be the way in which Stellar has communicated its exploration work. The company has, until this week, been silent in terms of official stock market announcements since November. Yet if you take a glance at the Twitter account of its subsidiary, Gold Mines of Wales, there's some potentially price-sensitive information which has trickled out over the past few months. Is it a coincidence, therefore, that the share price – prior to today's rally – went up 49% between the start of December and yesterday?


On 4 December, Gold Mines of Wales tweeted (via @goldmineswales) '10 of the most Gold heavy samples I've seen going to the lab! Bonanza grades in this section'. And on 17 January: '9 of the finest samples we have seen yet, really really excited to see the assay results!'


Next up for Stellar will be the all-important drilling, so expect this stock to be watched closely by the market in the months to come.


Issue Date: 07 Feb 2013