When markets rebound, we tend to hear from more investors asking whether they should invest in junior mines. My first answer is that you should have your portfolio spread out among the five main economic sectors (Manufacturing & Industry, Resources & Commodities, the Consumer sector, Finance and Utilities). Still, junior mining stocks can play a role in that part of your portfolio you have for more aggressive investments.
Even then, it is important to realize just how long the odds against success can be before you proceed.
In mining exploration, an “anomaly” is a geological formation that might attract a prospector’s interest. However, one rule of thumb is that you have to look at 1,000 anomalies to find one prospect. And 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. Another reason is that it’s much easier to launch and promote one of these stocks than it is to build a profitable business. So junior mines attract more than their share of unscrupulous operators and stock promoters.
But there are little-known ways to cut your risk. Here are 9 “secrets” we use to pick junior mines to analyze in Stock Pickers Digest, our newsletter for more aggressive investments. They can help you find the gems among the rocks in this fast-changing industry:
1. We generally stay away from mining companies that operate in insecure and politically unstable regions like RD Congo, Venezuela and Colombia. We also avoid those in countries with little respect for property rights and the rule of law, such as Russia or Mongolia. Mining is particularly vulnerable to political instability. You can’t move the mine to another country, and local citizens may sometimes get the impression that a foreign mining company is robbing them of their birthright, even though the foreign company’s capital and expertise would appear to be the best way to get any value out of the ground.
2. We look at environmental constraints where juniors are looking for minerals. In Europe and certain parts of the U.S, they need a particularly rich find to justify the costs of overcoming environmentalists’ objections.
3. When we recommend junior mining stocks that only explore for minerals, we prefer those that operate in an area with geology that is similar to that of nearby producing mines.
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4. We look for well-financed junior mines with no immediate need to sell shares at low prices. That’s because doing so would dilute existing investors’ interests. The best junior mining firms have a major partner who has agreed to pay for drilling, or other exploration or development, in exchange for an interest in the property.
5. We like mining stocks with strong balance sheets and low debt.
6. When we recommend mining stocks, we want to see positive cash flow, preferably even when commodity prices are low.
7. Even better, we like to see mining companies that have cash flow from an existing mine that is sufficient for, or at least contributes to, the cost of developing a second mine.
8. We want to see mining firms with experienced management with a proven ability to develop and finance similar projects by working with other junior mining companies.
9. We avoid mining stocks that trade at unsustainably high prices because of broker or media hype or investor excitement about the underlying commodity (such as gold). Instead, we focus on reasonably priced mining stocks with favourable geology.
Investing in junior mining stocks can lead to a big payday when you make the right choice. But it is important to keep our nine points in mind in order to increase your chances of success.
COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members
Have you had a big payday with a junior mining stock that soared? Roughly how long did you have to wait between the time you invested and the time the shares began to rise? Have you also had disappointment with junior mining stocks? How long did you wait to dump their shares? Let us know what you think.
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