Topic: Mining Stocks

How to spot the best junior mines

As the market has rebounded, more investors have been asking me whether they should invest in junior mines.

My answer is that you should always first ensure that your portfolio is spread out across the five main economic sectors (Manufacturing & Industry, Resources & Commodities, the Consumer sector, Finance and Utilities). However, junior mines can play a role in the smaller part of your portfolio that you devote to more aggressive investments.

Resource prices have been on the rise lately, and it’s getting easier for many junior mines to raise funds for exploration and development.

With that in mind, I’ve zeroed in on four junior mines that I think have promise in the latest issue of Stock Pickers Digest. One of these, Baffinland Iron Mines (Toronto symbol BIM), is a good example of a junior mine that is worth considering.

Five keys to profit in junior mines

More on Baffinland in a moment. First, I’d like to share with you the five main things I look for when I’m analyzing stocks in the volatile junior-resource sector:

1. I always look for well-financed junior mines with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests. Even better, I like to see a major partner who can finance a mine to production.

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2. I want to see experienced management with a proven ability to develop and finance a mine.

3. I avoid junior mines that trade at unsustainably high prices as a result of broker hype or investor mania.

4. I compare the market cap of the junior mines with the estimated value of their assets or future earnings stream. Some need to quickly find or develop a mine to justify the current share price and avoid collapse.

5. I automatically rule out investing in juniors that promote themselves too aggressively, or do so misleadingly. Success is more likely if the managers focus on finding a mine, rather than hyping their story.

Baffinland lines up well with these standards. However, it’s not a perfect match. That’s why I’m taking a close look at it.

Strong interest from global players

The company’s main iron-ore project is located at Mary River, on remote Baffin Island. Baffinland is still looking for a major partner to help finance Mary River, but the company does have agreements to sell iron ore from the project to a couple of heavyweights in the steelmaking industry. German steelmaker ThyssenKrupp recently tested a 27,702-tonne sample from Mary River. When it was finished, Thyssen said the resulting iron ore was above average for steelmaking.

Baffinland also shipped samples to giant steelmaker ArcelorMittal. There were positive results there, too.

These are certainly good signs. However, Baffinland still has some significant obstacles to overcome before it can bring Mary River into production. In particular, Baffinland still needs to raise billions to fund the start-up, and it has yet to confirm a partner to help finance the project.

Nonetheless, Baffinland still aims to start building an open-pit mine on the site next year, and to finish it by 2014. The company believes the mine has the potential to produce 18 million tonnes of ore per year for the following 21 years.

The project’s timing depends on an economic rebound and a rise in steel demand. And the question of a partner remains unanswered. But the agreements with companies like ThyssenKrupp and Arcelor could make this easier.

I’ve analyzed Baffinland and three other junior-resource companies in the latest issue of Stock Pickers Digest. If you’re thinking about investing in junior mines, you really shouldn’t be without it. Click here to find out how you can get your copy today.

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