Three Revealing Questions to Ask Any Junior Miner
Having just spoke at New Orleans Investment Conference, I got to meet with a lot of junior resource companies — existing recommendations, future ones, and ones to steer clear of.
One of my presentations, along with Gerardo Del Real of Resource Stock Digest Premium, was about four stocks we think will do well in the new resource bull market.
Along with us were two videographers and editors who weren’t well-versed in the junior mining space. Their eyes glazed over with grades and tonnages and ores and never-ending project names… they asked how Gerardo and I get to the heart of these companies when the representative at each both made it seem like his or her mining or exploration project was the best there was.
After thinking about it for a bit, Gerardo and I came up with three questions our newbies could ask that would reveal much about not only the project, but the people involved.
Who Owns All the Cheap Paper?
This question catches a lot of people off guard.
When looking at a junior mining deal, it’s important to know who’s invested and at what price. A common junior mining ruse is to issue $0.05 shares or cheaper — so-called “cheap paper” — to a select group of insiders whose aim is more to blow out, or sell, that paper than it is to explore for minerals.
See if and for how long those cheap shares are locked up, or escrowed. That is, did their owners volunteer not to sell them for some period of time? The longer, the better.
Are they owned in actual people’s names or in random accounts?
And have those who invested in earlier, cheaper rounds also participated at higher prices? Or are they willing to?
Do any major mining companies own a stake? A major vote of confidence in a young project or team.
You can learn so much by asking a company — be it IR or management — ‘Who owns the cheap paper?’
They should be more than willing to answer openly and honestly, and perhaps even show you a full capitalization table of who owns what at which price.
Not answering candidly is almost certainly a red flag.
And speaking of capitalization, the second question we came up with derives more from a declarative statement…
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Your Share Structure’s All Out of Whack!
How many shares does the company have issued and outstanding? Fully diluted?
This relates to the first question, but ultimately is crucial in determining a stock’s ability to really get up and run.
It’s important to remember that share price alone cannot show you the value of a company. You need to know about its share structure to figure that out.
For example, a company with 10 shares out trading at $1.00 is worth the same as a company with 1,000 shares out trading at a penny.
But the company with 100x as many shares out is going to have a harder time moving up because it takes so much more buying to have an impact. There are simply more shares to move.
And watch out for warrants issued as part of past financing and excessive options granted. Those can create further dilution in the future such that the company with 10 shares out can double its share count to 20 and still have a market of $10.00 at $0.50… meanwhile your share price is down 50%.
These are oversimplified examples, but you get the point.
And finally another declaration that can yield so many questions…
This Will Never Be a Mine!
That’s a statement that can put people on the defensive really quickly.
Only 1 in 1,000 targets becomes an economic mine, so in many more cases than not that statement is 100% true. But it can be a gateway to so much more…
You can certainly make money off projects that will never be a mine. Where is it in the cycle?
A few good mineralized drill holes in the heart of a bull market are worth a helluva lot more than in the trenches of a bear market.
Derisking and advancing a project toward production in a rising commodity price environment will always yield a higher multiple on the underlying stock than if the commodity's price were debased.
If it’s an earlier-stage exploration play, this statement can be used to figure out what is being done that will drive value. Is the company actually drilling? What are they going to do with your capital?
You wouldn’t believe how far these few questions go into helping you conduct great due diligence on junior mining plays.
We had our two newbies putting seasoned mining promoters on their heels in no time.
Gerardo and I certainly have a deeper research criteria than these three, but I wanted to give you some insight into how we approach the sector.
We’re always looking for good people and shareholders, tight share structures that allow share price to advance, and projects with a plan to actually add value through serious exploration and development.
Call it like you see it,
Nick is the founder and president of the Outsider Club, and the investment director of the thousands-strong stock advisories, Early Advantage and Wall Street Underground. He also heads Nick’s Notebook, a private placement and alert service that has raised tens of millions of dollars of investment capital for resource, energy, cannabis, and medical technology companies. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.