How to Find and Evaluate Junior Mining Companies for Investment Purposes


The process of finding and evaluating junior mining companies can be both a science and an art. This article will endeavour to outline the primary considerations for investors when investing in junior mining companies. These brief descriptions will be a guide for further research and investigation.

Junior mining companies, as the name implies, are early stage companies that take advantage of the new opportunities for mineral exploration and discovery that arise constantly. These prospects surface thanks to new technology and exploration methods that allow previously isolated areas to be explored in a cost effective manner. Changes in the political climates in many parts of the world have also opened up vast opportunities for investment in past, existing and new mining development and exploration projects. Even global warming has opened new opportunities, by allowing access to remote areas and through exposure of outcrops through glacial melt.

As a result of the factors mentioned above, new investment ideas are born daily and they come from several different sources. The most common sources are articles in newspapers, newsletters, mining related websites, research reports, your friendly broker and, of course, tips from friends.

There are many newsletters published every week, usually authored by writers with a financial or geological background. The track record of these authors is the most important factor. It would be worthwhile for new investors to familiarize themselves with past recommendations. Be aware that some newsletters are written by members of sophisticated investment groups, investment funds and public relation companies closely affiliated with public companies. Some newsletters are actually advertorials and are paid for by the listed companies.

Management

While research reports, analyst recommendations and online newsletters are great sources of information and investment ideas, the single most important consideration when evaluating a junior mining company is management.

From an investment perspective, a good management team can make the difference between owning a stake in a successful mining company or having a worthless stock certificate. Good management can ensure that a company survives in bad times and excels in good times. Successful mining entrepreneurs surround themselves with the right people and have a clear vision of how to run and grow their companies. This vision should include ambitious but achievable goals. These milestones provide a good way for both management and investors to monitor a company's progress. If a company has missed its targets without good reason, investors should re-evaluate their investment.

A clear vision is exceptionally important. Management has to know, from the outset, how to proceed and accomplish its stated goals. One-on-one meetings and conversations with senior members of management are the best ways to learn, understand and get to know their philosophy and methods. After all, shareholders own these companies. Every president of a successful public company is different in his or her approach, management style and a whole slew of other tangible and intangible characteristics.

We feel that some common characteristics and traits of successful mining entrepreneurs include perseverance (bullheadedness to the point of bankruptcy), unwavering belief in their theories and risk taking.

Past experience, knowledge and specific expertise are of great importance. Quite often, senior professionals from global mining companies leave their employers, after decades of dedicated service, to start up a new venture. They are often successful, but sometimes lack the experience and know-how to run a small exploration company with a limited budget. Their biggest downfall is usually their lack of a public presence and the ability to raise funds. Some very successful mining companies have started as a combination of established mining groups creating the right combination of circumstances to attract these senior mining professionals.

Good management, because of its inherent nature and reputation, will gravitate to the better and more prospective mining properties. Through past experience, management will know fairly well where and what to look for in mining properties. Prospectors, small miners and property owners will be more willing to sell and joint venture good properties with known and capable mining entrepreneurs.

An investor's evaluation has to include percentage of current shareholdings and options held by senior management. Senior officers and directors should have a significant stake in the company. High salary levels should be commensurate with performance and ability to raise capital. Insider trading reports provide a good way to keep track of shareholdings.

Properties Quality

The next step in evaluating a junior mining company is to determine the quality of the properties in its portfolio. As a rule, new mines or deposits are found near or along a trend of existing ones. Initial work on the property includes geological, geochemical and geophysical work. Old data consisting of sampling, past exploration and previous mining are also good indicators. Based on these results new work programs are determined until drill targets are defined. News of good surface assays or geophysical indicators sometimes affect the price of the stock. It is important to follow the work programs and news closely. The assays from the drilling program will almost always determine the viability of the project. Keep in mind that several mines were not discovered until many holes were drilled. If good results are announced, the price of the shares will obviously react accordingly. High volatility can ensue depending on several factors such as understanding of the geology, shares outstanding or further drill results pending. Some of the best opportunities for share appreciation lie in the time from initial announcement of property acquisition to just prior to the commencement of drilling.

Commodities Cycles

Another integral part of successful investment is market timing and knowing where we are in the economic cycles. Unless you are smart or lucky enough to have invested in a company with a new discovery, all stocks will react to the general vagaries of the market. We are in the midst of a multiyear boom in commodities. This bodes well for mining companies and explorers. All commodities are affected at different times and degrees in this cycle. During the initial and shorter term cycles, commodities have been very volatile. The prices of Uranium, Potash and Molybdenum are good examples. Tremendous opportunities exist if you invest (speculate) early in these commodity specific cycles. Currently Lithium explorers and producers are in vogue.

All stocks and commodity prices depreciated considerably during the last overdue correction late in 2008 and early 2009. On the positive side, the correction levelled out the playing field, by creating an indiscriminate selling panic. After the panic subsided, the better managed and more profitable companies and those with longer term outlook and prospects recovered quickly and remarkably well. These turn-around stories give us very good examples and teach us lessons on what to look for in a company. Longer term outlook is essential for successful investing in mineral exploration and development companies.

The only commodities that act a little differently during these cycles are precious metals. Gold and silver are considered by a large number of investors a hedge or insurance against inflation and devaluation due to the printing of fiat currency. Different geological settings and structures hosting gold and silver deposits are more easily understood and explained by analysts, newsletter writers and investors. New discoveries will receive more and immediate attention in the media, especially those with large potential. This usually creates liquidity, allowing for easier purchase and sale of the underlying shares. There are many ways to compare junior gold and silver companies. Some of the factors used are: ratio of oz. Au in the ground and market cap, market cap and annual production, etc.

Political Risk

Political risk is also an important aspect in determining the economic viability of a project, especially in third world countries. A multimillion oz deposit might not be feasible if the local or federal government imposes punitive restrictions or taxes.

Location and infrastructure are also important determinants. The economical viability of a project is directly related to its closeness to infrastructure. The remoteness to power, transportation or manpower will have to be weighed against the size, grade and capital requirements of the project.

As in all investments, determining the risk reward ratio should be an integral part of your process to determine which junior mining stocks to buy.

This article is solely the work of its author, Rick Langer, a Senior Investment Advisor at Canaccord Wealth Management.  The views (including recommendations) expressed in it are those of the author alone, and are not necessarily those of Canaccord.  The information contained herein is drawn from sources believed to be reliable, but the accuracy and completeness of the information is not guaranteed, nor in providing it do the author or Canaccord Wealth Management assume any liability. This information is given as of the distribution date of this material, and neither the author nor Canaccord assume any obligation to update the information or advise on further developments relating to the information provided herein. The holdings of the author, Canaccord Wealth Management, its affiliated companies and holdings of their respective directors, officers and employees and companies with which they are associated may, from time to time, include the securities mentioned.

Canaccord Wealth Management, a division of Canaccord Financial Ltd., Member – Canadian Investor Protection Fund

Links and References

An Introduction to Mining Investment

Canaccord Wealth Management

Controlling Political Risk in Mining Operations

Investing in Community: Canadian Junior Mining Companies, Corporate Social Responsibility and the Communication Gap

Junior Miners

Junior Mining Companies as Investment Opportunities

Quality Investing Junior Mining Stocks

Strike Gold with Junior Mining

Sector Investment Managers' Junior Mining Fund

Top Australian Junior Mining Companies