Junior mining stocks are highly speculative, but here are 10 secrets that will help you successfully invest in them.
In mining exploration, an “anomaly” is a geological formation or find that might attract a prospector’s interest. However, one rule of thumb for mining stocks is that you have to look at 1,000 “anomalies” to find one “prospect,” and that fewer than one “prospect” in a thousand turns into a mine. In other words, finding a mine is a million-to-one shot.
That’s one reason why junior mining stocks are highly speculative, and are apt to cost you money. Another reason why junior mines are risky is that it’s relatively cheap and easy to launch a penny mine and sell stock to the public. So the junior mines promotion business attracts more than its share of unscrupulous operators and stock promoters. That’s increasingly the case in 2021 when unmined, easily reached deposit sites are harder to come by.
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However, junior mining stocks can play a role in a portion of your portfolio, specifically the part you devote to aggressive resource investments.
Here are 10 things we look for when we analyze junior mining stocks:
- We generally stay away from mining stocks operating in insecure and politically unstable regions like the Congo and Venezuela, or in countries with little respect for property rights and the rule of law, like Russia or Mongolia. Mining is inherently a politically vulnerable business; you can’t move the mine to another country, and local citizens sometimes believe that a foreign mining company is robbing them of their birthright, even though they need the foreign company’s capital and expertise to get any value out of the ground.
- When we recommend pure-exploration junior mines, we prefer those that operate in an area with geology that is similar to that of nearby producing mines.
- We look for well-financed junior mines with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests. The best junior mines have a major partner who has agreed to pay for the drilling or other exploration or development, in exchange for an interest in the property.
- We like mining stocks with a strong balance sheet and low debt.
- When we recommend mining stocks, we want to see positive cash flow, preferably even when commodity prices are low.
- Even better, we like to see mining stocks that have cash flow from an existing mine that is sufficient for, or at least contributes to, the development costs of another mine.
- We want to see favourable factors, like attractive geology, before we recommend any mining stocks that operate in hostile environments, like the high Arctic.
- We avoid mining stocks that trade at unsustainably high prices due to broker hype or investor mania about the underlying commodity (such as gold). Instead, we focus on reasonably priced mining stocks with favourable geology.
- High average daily trading volume is one positive factor to look for when picking junior mining stocks. The more actively traded junior mines are, the more liquid they are, which makes them easier to dispose of when it’s time to take profits.
- We always look at the market cap of junior mines versus the estimated value of the mineral resource they have in the ground. Sometimes, a company’s marketing efforts are so successful that they drive the stock up too high in relation to the size of its ore body. We like a mining stock’s market cap to be no more than half the value of the gold or other minerals in the ground. We assume that the company will be able to expand its ore reserves after the mine opens, but if the mineral reserves are double the mining stock’s market cap, it provides a margin of safety.
Have you been profitably investing in junior mining stocks? Share your experience in the comments.