Investors wishing to buy junior mining stocks need to know that they are inherently risky. To invest wisely, it is important to be watchful of the company’s asset base, management, cash position, and ability to communicate with investors. Investors should avoid investing in juniors planning to mine a metal whose price and growth prospects are weak.
By Karan Kumar — Exclusive to Resource Investing News
The S&P/TSX Venture Composite Index (TSX:OSPVX) has recovered considerably in the past year and is down about 2.4 percent so far this year. With more and more investors betting on resource stocks to make a profit, experts say that while the time may be right to invest in junior miners, investors need the right knowledge to make a profit.
“The most important things are to know yourself and to know that juniors are inherently risky,” Rick Mills said in an interview with The Gold Report. “Understand how much volatility you can handle and how much patience you have to wait while a story plays out….Know the different development stages of a junior, because risk lessens as a company moves a project through drilling and post-discovery resource definition, then into the various mining studies, and finally into raising money, building the mine, and ultimately, mining. You really have to know who you are invested with and the story.”
The world’s economy is still recovering and commodity prices are volatile, but those wishing to invest in junior miners need to look at several factors before they invest, Siddharth Rajeev, head of research at Vancouver-based Fundamental Research Corp., told Resource Investing News in an interview.
He said those looking for mid- to long-term investments – a time horizon of about a year – need to find a miner whose commodity has a positive long-term outlook. Other questions that need answering are:
What is the management’s track record?
Does the company have sufficient cash?
What is the quality of the asset base in terms of geology, location, and infrastructure?
What are the near-term catalysts for the stock?
Is the company able to communicate its story to investors effectively and in a timely manner?
What is the quality of the company’s investor base? The price volatility of stocks with significant ownership by institutions, management, or long-term investors tends to be lower.
“The evaluation process we use for junior mining companies is totally different from what we use for majors,” Rajeev said. “This is because the value drivers, returns, risks, investors’ expectations, and valuation methodologies are completely different for the two categories.” However, he added that the criteria used to invest in a company are the same regardless of the commodity it produces.
Rajeev commented that investors should stay away from firms that have “less than three months of cash on hand, a management team with little experience in the industry and in raising capital, commodities with no strong fundamentals, companies that do not regularly publish results, and projects located in politically unstable regions or which could potentially have a significant negative impact on the environment.”
Doug Casey, Chairman of Casey Research, said that when planning to invest in juniors, investors need to focus on the eight Ps. His eight Ps are: people, property, “phinancing,” paper, promotion, politics, push, and price.
While many of the eight Ps are self-explanatory, Casey advises that on the theme of property investors should keep in mind that “between 95% and 99% of all properties controlled by mining companies will never actually become mines. That’s because finding a mineral deposit with the potential to host an economic resource is time consuming and expensive. The good news is that you can make a fortune investing in companies that, for one reason or another, will never go into the production stage. It’s all a matter of timing and knowing when to sell.”
Regarding paper, Casey says “analyzing the structure of the company is as important as the geology of a company’s property holdings. That’s because some companies will too quickly dilute existing shareholders by raising money from sweetheart financings completed through private placements, often with full warrants. While I personally think these are wonderful – and I have made more than a few dollars by participating in private placements myself – there is a right way and a wrong way for a company to do financing.”
Casey adds that “[p]ush is any important development that either adds value to the company or removes a negative.” And price refers to the price of the commodity. “[P]eriodically, as resource prices rise, we do a reassessment of the companies we have previously evaluated and found unattractive due to the Price factor.”
FRC’s Rajeev said his company initiated coverage of Sienna Gold Inc. (TSXV:SGP) on March 1 and the shares have risen 56 percent since then. It initiated coverage based on its investment principles. Sienna has identified three deposits in Peru, Rajeev said, adding that “there is significant potential to expand the resource base in the short- to medium-term. Most importantly, management has good proven exploration experience in Peru.”
Securities Disclosure: I, Karan Kumar, hold no direct investment interest in any company mentioned in this article.