4th Essential for Successful Investing in Junior Gold Mining Companies: Capital
Last but not least, when investing in junior gold mining companies, the discerning investor needs to look at the how the firm has deployed its capital. Has most of the money gone into General and Administrative expense or into Investor Relations expense suggesting the management team is more interested in mining the firm’s stock certificates than the ore body? Or has most of the money gone into drilling, assaying and ore body evaluation and the preparation of corresponding reports? If the former, it must be a red flag to investors that management is more focused on promotion than production. If the firm has completed a CNI 43-101, or a Preliminary Economic Assessment or, even better, a Pre-Feasibility Study, that includes a definitive resource calculation and some estimates of a project’s economics, then that is an excellent sign that management has spent its capital wisely and is looking to build shareholder value through development and exploitation of the mineralized material.
The other thing an investor needs to consider when investing in junior gold mining companies is the level of the firm’s debt. Long term debt in the form of convertible debentures, can be a fast lane to bankruptcy court if the firm has no immediate cash flow. Frequently these debenture holders want to drive the share price down so they can convert into greater amounts of equity and this can send the company’s shares into what’s known as a “death spiral.” This set of circumstances is a common outcome among the juniors that are constantly strapped for cash.
Most juniors an investor will encounter are not in a strong cash position, which represents opportunity when investing in junior gold mining companies. Investors need to determine if the firm has enough cash on hand to sustain minimum levels of operation when investing in junior gold mining companies. This leads us back to our first point – look first to the experience and track record of the management team when investing in junior gold mining companies. If they pass muster then additional work and time spent on other aspects of the firm’s business is probably justified.
