Doing due diligence: What to know before investing in a mining junior

For the past several years one of the biggest challenges facing junior mining companies has been raising initial capital. Investors are wary, and are doing due diligence before injecting funds into projects spearheaded by junior explorers that are going after mineral deposits disregarded by the majors, who typically invest in PEA-evaluated, high-grade projects with a nearly guaranteed rate of return.

But junior explorers going into uncharted territory are on the map – and making a mark, especially in the gold and copper sectors.

Siddharth Rajeev, head VP and Head of Research at Vancouver-based Fundamental Research, the largest independent resource shop in North America focused on junior resources, has covered over 450 companies with a focus on mining.

Take into consideration the target commodity and the fundamentals of the proposed project, such as location, geology, the economics of extraction and production forecasts

Rajeev said when evaluating mining juniors, they first look at management teams, their track records, past positions, whether they have any red flags, and spend a lot of time interviewing executives to get a vision for their companies.

Rajeev said they also take into consideration the target commodity and the fundamentals of the proposed project, such as location, geology, the economics of extraction and production forecasts.

“We look at the resource stage or PEA stage our risk analysis also changes, management, then we look at the commodity forecasts and the project then the last thing we look at is the capital structure to find our who owns the company shares, investors involved to see will work in the best interests of the investors. We need to know if they have a decent balance sheet, cash on hand.”

Rajeev said that juniors usually focus on the gold and copper sectors, because traditionally, they are the biggest commodities in terms of exploration spending and also market size.

“Capital is fired up big time and that’s why it doesn’t seem like the market is bullish on any particular commodity, especially gold, or copper. Investors are extremely scared and skeptical so its very difficult for juniors to raise money,” he said.  

“When there is no money it writes off exploration and the beauty of this is that in an environment that lasts longer and there is more capital, that eventually turns out to be a bull-run after that,” he said.

Rajeev remains positive on the near future for junior explorers with a focus on gold.

“I think gold projects should be trading at significantly higher valuation because these prices are attractive for large companies out there. I think the market is overly sceptical. I am expecting a better performance by the gold juniors. We do expect a weakness in the US dollar which should impact commodities across the board. So overall, we are expecting an even better performance over the next 12 months,” Rajeev said.

Fundamental Research has authored three courses on Edumine, a leading mining industry training platform.

  • Intro to Evaluation of Junior Mining Companies
  • How to conduct Due Diligence for juniors in 15 minutes
  • And lastly an Introduction to Forecasting commodity prices

“We saw a surge in interest in our courses on junior mining evaluation starting this spring,” said Marc Borbas, VP Talent Solutions for Edumine. “The courses from the team at Fundamental Research are a great way for investors to educate themselves on how to evaluate junior mining companies.”