Welcome to the MFA Hot list junior Mining Companies
Selecting Junior Mining Companies
For a discussion as to why investors should own precious metal bullion and some well selected junior mining companies see the article here.
There is always risk associated with mining exploration, development and production. But by applying appropriate due diligence a large amount of risk can be eliminated or mitigated. In selecting junior mining companies that will likely offer the best appreciation there are various criteria I have defined. The junior mining company must:
• Have (or have the potential to have) multi-million ounce deposits (“elephant” hunters)
• Have experienced management
• Have skilled geologists
• Be attractively priced for the resources discovered or likely to be discovered
• Have low or no debt
• Have sufficient cash to operate or high probability can raise sufficient cash
• Operate in a low political risk country that is mining friendly
Once the above criteria are satisfied then the major remaining risk is geological. That is to say what is the risk to be able to find, expand or produce resources profitably? In order to rationalize and assess the risk the companies are ranked by risk category. The risk categories I have defined are as follows:
Risk Category 1 (lowest risk)
Company has NI-43-101 compliant resources and profitable production
Risk Category 2
Company has NI-43-101 compliant resources but no production (or no profitable production)
Risk Category 3
Company has made a discovery through drilling and has high potential to define large resources
Risk Category 4 (highest risk)
Company has good prospective acreage and has good indications from historical data, surface sampling and preliminary geological work that there is a good probability that exploratory drilling could make a discovery.
A good portfolio is one that is constructed with an appropriate mix of risk categories which should be chosen based on an individual risk tolerance profile.
Price of the Shares
Many investors think that if they have a choice between two highly attractive junior miners the best one is the one with the lowest stock price. The value is best determined by an analysis of what the effective price is for the company’s resources.
For example:
Company A
Stock price: $1
Market cap: $100 Million (i.e. 100 million shares issued)
Resources: 5 Million ozs gold
Value of gold: 100/5= $20/oz of gold in the ground
Company B
Stock price: $0.50
Market cap: $200 Million (i.e. 400 million shares issued)
Resources: 5 Million ozs gold
Value of gold: 200/5= $40/oz of gold in the ground
Company A is a much better investment based on how many resources ounces your money is buying.
Of course, not all resources are equal because the costs of extraction will vary as well as fiscal regimes from country to country etc, etc. However, one can over complicate the analysis. In general if one does the initial filtering of the prospective companies as explained above and then chooses to buy the most resources at the lowest cost this will usually serve to find well performing investments.
Comparison of Companies
For the comparison of junior mining companies the price of its resource ounces in the ground has been calculated by converting all resources to “gold ozs equivalent”. This means that a silver miner with 62 million ozs of silver of resources will be counted as 1 million ozs of gold. Where applicable copper and base metals are also converted to gold ozs equivalent.
Ideally the resources should be selling for tens of dollars per resource ounce to offer good appreciation potential. The upper acceptable limit has been set at $200 per resource ounce. If the company has a high probability of expanding its resources such that its valuation would fall to be in the tens of dollars per resource ounce then a valuation close to this limit would be deemed acceptable.
Junior Mining Companies Summary
junior Mining Companies Performance
Back to MFA Home Page
Disclaimer
The data and opinions regarding junior mining companies are provided for information only and it is not intended to be investment advice nor solicitation to buy or sell any particular security. Investors should factor in their own risk tolerance and consult a financial advisor before investing.