While the junior mining stock market is slow at the moment, I thought this would be a good time to review how to pick a quality junior mining stock. Many juniors at this point are greatly undervalued, while others don’t deserve the valuations they have. If you are looking for bargains at this point, it is important to sift through the myriad of companies and find the quality plays.
In real estate they say that SUCCESS all boils down to LOCATION, LOCATION, LOCATION. And if you ask anyone who has been an experienced and successful real estate investor, they will confirm that statement to be true.
To succeed in junior mining stock investing, it all boils down to MANAGEMENT, MANAGEMENT, MANAGEMENT.
As a newsletter writer on junior mining stocks, I am constantly trying to find early stage companies that have the formula for success. The most important and biggest part of that formula is by far MANAGEMENT. In fact the longer I am involved with the junior mining sector, the more I believe that MANAGEMENT is practically everything.
While there are other points that you must understand to be successful, the attributes and experience of a proven management team is what you should trust in most. This of course discounts the fact that a bright new upcoming management team could acquire success in this field. But the odds still highly favor those who have already been there.
The Odds Are Against You
The first thing you need to understand is that the odds are against you. The statistical reality is that very few of the 3000 or so junior mining companies vying for your investor dollars will ever succeed.
Junior exploration companies are high risk scenarios that are fraught with constant challenges. If you go out and randomly invest in companies based on marketing literature and sales hype, your foray into junior mining stock investing will be very short-lived.
The facts are that only 6% of all working geologists will ever be credited with a discovery that goes onto becoming an economic producing mine. That means that 94% of all geologists will work their entire careers and never find such a mine. True mine finders seem to have a sixth sense that allows them to unlock the geological puzzles of certain properties.
Investors need to do their due diligence by scrutinizing the people behind the company. What you are looking for is an experienced management team that has had success in the past exploring for the mineral(s) they are hoping to find. How much background does this group have in doing this? Are they really qualified? If they have little or no experience then you should probably say, NEXT! You may have to evaluate quite a few companies before you get to one that is worthy of your investment dollars. I typically evaluate up to 20 or 30 companies a month, searching for just the right combination of circumstances that I feel could lead to success, before recommending a company in my newsletter.
The typical junior mining company puts together a team of players and a package of hopeful properties. If they tell their story well they can probably go out and raise a few rounds of financing convincing some investors that the chances of success are real. They basically have no assets to speak of, but control some highly speculative land packages they tell you contain some great "anomalies" they would like to drill. A great quote I recently heard about "anomalies" gives a more realistic picture of potential success and goes like this: Anomalies are like assholes. Everyone’s got one!
And don’t be surprised that so many want in on a game that can be so profitable, especially when the market is hot. A market that is having money thrown at it attracts many companies that have no intention of ever finding an economic mine, but who are simply trying to get a short-term profit before investors figure out the scam.
The bottom line statistical reality is that very few will succeed. You need to have this understanding clearly in you mind before you set out to invest your hard earned money.
Another important fundamental to watch closely as you are evaluating companies is their share structure, and your entry price. You would like to be able to invest in a company in the earliest stages when you can get your shares at a low price, before the crowd comes in. In general terms, I like to invest when I see that the number of shares outstanding is very low, fewer than 30 million and the share price is under $1.00. Private placements, if you are in a position to do so, can be an excellent way to participate in early stage companies because you are buying the shares at a discount to market and you get a warrant. This greatly increases your upside leverage if the stock does well, and protects your downside risk since you bought at the right level. Once the public finds out about a particular good company the share price can rise quickly leaving later investors with large downside risk as markets t end to have corrections. ! Later investors, who overpaid for a stock, often have to endure painful correction periods before the story of the company completely unfolds, and they are in a position to profit. Buying into a good company in the earliest stages is fundamental to your success. If you miss a certain company you wanted to invest in, have no worry, another opportunity will come along shortly. I always like to make the analogy that investing in junior mining stocks is like waiting at a bus station. The buses come and go all the time. You need to be choosey as to which buses you are willing to get on.
Some buses are simply better than others. You want the best quality bus you can find. I often like to ride a bus that already has some economic resource that is outlined. In other words, most junior exploration companies are starting from scratch hoping to find something. A good quality junior company may already have an existing resource of some sort that they are trying to expand. This kind of situation represents better quality and less risk than someone who has no resource and is just drilling holes to make a discovery. Your odds greatly increase in your favor if you invest in companies that already have an existing economic resource.
Another sign of a quality company is their ability to raise money. This again reflects back to our earlier statement emphasizing MANAGEMENT. Do they have a team in place that has the connections to raise the money? How, when, and the frequency they raise money is extremely important as well.
Junior exploration firms have a lifeline as long as they can raise money. Hopefully, they meet with some early success so that they can raise additional monies to continue on their quest for a discovery. A company that is not doing what it said it was going to do will quickly lose investor interest and have great difficulty raising additional monies to move their agenda forward. This brings up an additional point that also represents a quality play. Can the company get bigger players with deeper pockets to invest in their properties? This model is known as the joint-venture model and can be a very successful strategy greatly increasing you odds of success. If the company truly has a good property (anomaly) then one of the majors would be interested in putting some of their own money up to drill the project off. If a major is willing to invest, then maybe you should too. This is usually a good sign that you have a quality property.
A junior mining company that is self-financing, while rare, often represents exceptional opportunity and value since they no longer need to go back to the finance trough to raise additional funds. This stops the constant shareholder dilution that takes place with most juniors as they need to keep raising more and more money. There are good junior exploration firms out there that have cash flow to fund their activities. Right now in my newsletter I have two such recommendations that I believe are incredible values. This type of arrangement in a junior would be highly favorable to the other types of financing mentioned above, and would also increase your likelihood of success.
Lastly, you want to look for a company that knows how to market itself. A company that is having success can fail to get the proper appreciation of share price if they don’t let the marketplace know what they have. With all the difficulty in finding a successful economic resource, you don’t want to fail because the company does not know how to market itself.
As you can see most of the items I have mentioned above all point back to the quality of the management team, thus my emphasis upfront on MANAGEMENT! It takes a very talented group of experienced people to make a discovery and bring it to fruition for shareholder appreciation. This ability to put everything together in a cost efficient model is only seen in a handful of junior mining professionals.
Hopefully as you look to invest your money in the junior mining sector you will remember keep these points in mind.
– Greg McCoach
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