Strike Gold With Junior Mining
Properties and Projects
The first place for investors to begin their research is to examine the junior's portfolio of properties and projects. It is important to understand the nature of each property, and to ensure the company has just enough - but not too many - projects in the pipeline. While it is easy to find reams of technical details and photos on a company's prospective reserves, translating all that geological mumbo-jumbo is tough for the novice investor. Here are a few things to focus on:
Location, location, location: Companies with projects or properties that are near currently operating mines - or mines that were once in production - are usually a safer bet than those with pure greenfield targets where no known deposits have ever been discovered. The added advantage of properties near known mineralization is that there is likely to be existing infrastructure, such as roads, water and electricity. This makes it easier and cheaper for a company to bring mines into production. Weather is also a factor. For example, the northern regions of Canada can suffer from a short exploration season due to severe winters, while in southern countries, such as Mexico, drilling can take place year round.
Management, management, management: Most junior companies rely on very small management teams, yet the quality of the senior staff is arguably the single most important success factor. When evaluating management risk, ask yourself some important questions: Does the team include geological engineers with extensive experience in precious minerals? Has the team worked together in the past, and do they have a track record of finding the gems they seek? Can the CEO or President negotiate deals and raise capital? Exploration is a very chancy and capital-intensive business. The right management team makes a world of difference when it comes to gaining the confidence of investors in order to raise the funds and buy the time necessary to bring mines into production. (For more insight, see Evaluating A Company's Management and Putting Management Under The Microscope.)
Governmental and Environmental Regime: Not all countries or states are mining-friendly. Political pressures can cause governments to change their policies overnight, from one of openness to one with heavy restrictions and penalties. This is known as political risk. Junior companies that boast rich mineral reserves in a mining-friendly location with low governmental interference are good bets. Organizations such as the Fraser Institute rank the "mining attractiveness" of countries all over the world, and are a good information source for investors. (For more help measuring the risks versus the rewards, read What Is An Emerging Market Economy.)
Favorable Commodity Price and Supply/Demand Conditions: The outlook for share prices of junior mining companies can be volatile because these prices are closely related to the supply/demand and price characteristics of minerals. The key drivers of precious metal prices vary for each type. Gold, for instance, is both a commodity and an investment and its price is strongly affected by macroeconomic expectations, inflation, the strength (or weakness) of the U.S. dollar, and holdings of physical gold by consumers and central banks. For silver, platinum, uranium and other metals, different factors are important. Investors can turn to resources such as the World Gold Council, Gold Field Mineral Services, The Silver Institute and the World Nuclear Association to gain a better understanding.
Conclusion
Junior mining companies carry more risk than senior mining companies because they explore for new mine deposits. At the same time, their shares are priced more attractively and offer significantly more upside. Investors can profit by selecting those juniors that appear most likely to discover and exploit first-rate reserves in the ground.
Remember to look for experienced geologists and engineers, promising properties with historical mineral findings, favorable regulatory and governmental environments, constructive precious metals pricing and supply/demand conditions and strong management teams.
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