My Guide To Stockpicking in the junior mining universe
Chapter 1-5 of 16
As with anything else on this site, this content shouldn't be construed as investment advice as I am no registered investment advisor. Please read the full disclaimer here before proceeding further.
As a reader of my articles and other texts on this site, you could of course accept my opinions and views without any questions. As I am not that kind of a person myself, I could vividly imagine you would like to see more information about the backgrounds of those opinions and views yourself. After investing in mining stocks since the summer of 2010, certain elements surfaced as seemingly important to me when evaluating companies in this sector, and I thought it might be interesting for investors to read about my views.
After reading these first five draft chapters, you will probably notice why this sector is relatively intensive to analyze and understand. I have decided not to reveal all my insights for free, as I am planning to write more chapters in the future, and possibly joining forces with others for an extensive guide, maybe resulting in an E-book or even hardcopy. A work in progress so to say, in the meantime you can read and use these chapters and my articles, as each of them contains bits and pieces of latter chapters.
My method consists of many parameters, rules of thumb, ways of analysis, sources of information and guidelines, and I am not pretending to be complete, as I am no professional analyst, registered investment advisor, geologist, accountant, investment banker or mining company manager, but just an informed private investor. If you feel something should or could be different or you have questions, just fire away via the Contact form. Anything to finetune or improve My Guide or this site in general will be welcomed and enjoyed by me and probably all readers.
My guide is by no means the industry standard guide or represents a recommended order of doing analysis. It is just my own method, result of several years of failures and success. The objective is to write down all aspects I can possible take into consideration, and I combine company/project specific aspects (clear go/no go indications) in a (at least for me) useful, efficient order, together with more general aspects which will hopefully contribute to general knowledge/context. Subjects are discussed in a summarized way, geared towards usefulness when stockpicking.
Table of Content
- Listing, activity, news
- Market sentiment
- Share structure, institutions/insider holdings, financings
- Financial statements
A. Balance sheet
B. Cash flow
C. Income statement
- Indexes (holdings ETFs, rebalancing thresholds, dates, etc.)
A. Russel 2000
B. The Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) is an ETF administered by Van Eck and created to replicate the Global Junior Gold Miners Index which is a basket of small-cap gold exploration, development and production companies.
C. Several Van Eck ETFs and corresponding indexes
- Insider trading, short interests
A. Project stage, JV, royalties
B. Reserves & Resources
D. Geology & Potential
H. Local sentiment
- Peer comparison
B. Resources & Reserves
D. Market cap
G. Debt ratios
- DCF analysis (NPV, IRR)
- Transaction multiples
- Risks & Catalysts
- Technical Analysis
1. Listing, activity, news
It all starts here. Does the company have a decent NYSE (US), TSX-V or TSX (Canada) listing, of just an CSE/CNSX (Canada) or OTC (US) listing? In the latter case, your research is finished as an CNSX/OTC stock doesn't have much basic reporting duties or aren't subject to as much exchange oversight (IIROC/SEC) as its bigger brothers. You might have noticed that I sometimes take on sponsoring companies with a CSE listing, but they all must have plans to uplist within 3 or at most 6 months when contracting them.
Always look if a junior mining company has a decent, functional and up to date website, and has a continuous series of news releases published on it, preferably on material issues, and preferably the same news releases published on sites like tmxmoney.com through Marketwired, Canada Newswire or others. By continuous I mean at least once every month or two months. Every news release costs a company about $800-1000, so if it hardly announces anything on tmxmoney.com but still does on its own site, it's an indication of a severe cash problem. If it doesn't do this either, than it is probably completely out of cash and/or inactive. Also watch out for streams of almost/mostly (of course any of these subjects can have very material meaning in other cases but mostly they don't) meaningless news releases, like mentioning of contracting of engineering firms for a study, determining targets for a drill program, getting ready for a drill program, reporting drill cores without results, mentioning new but unknown directors, filing permitting applications, arranging syndicates for capex funding, signing LOI's, series of several high grade but very short (<1m) intercepts of for example 0.5m @80g/t, each intercept proudly presented in separate news releases. You will learn to recognize yourself which news release is material and which one is not after reading hundreds of them.
Also beware of companies using a trading halt very frequently, and/or for relatively unimportant news, but not advancing a project of any impact, they are just trying to get attention but usually have no good project on their hands.
Another red flag is mentioning third party promotion or an interview of the CEO (especially on some kind of IR firm channel) as a news release. This is just blatant promotion, and not many serious junior miners will ever do this.
There are a host of news examples that could indicate red flags, here are a few examples:
- very small private placements (PPs) (usually below $1M but for sure below $500.000, and/or a PP share price below the old threshold of C$0.05 which has been made possible by the TMX Group (owner of the exchanges TSX and TSX-V) so they still can collect listing fees from lagging juniors), just meant to keep the lights on and pay for management's paychecks. Those can happen of course, especially in a severe bear market, but preferably only as an addition/oversubscribed part on larger PPs (at least $1-3M). When you only see $200-500k placements and hardly any exploration action, it is a red flag in many cases. This is also connected to very small ($1-4M) market caps in many cases, but don't think this could be a "very cheap opportunity" because very often there is a good reason those juniors have these low market caps. Not always of course, it is a signal
- offerings taking a very long time to close (over 2-3 months or not at all)
- offerings don't raise the intended amount of cash by a significant margin (over 10-20%), provided that the companies don't intend to raise unrealistic amounts which is a bad sign in itself
- lots of changes due to short employment periods of key management or board of directors (BoD)
- patterns of ongoing debt extensions, debt conversions/payments in shares or option packages
- patterns of delaying/postponing of announced activities or studies. Delays are quite common in mining, but pretty manageable things like studies or resource estimates shouldn't take more than one or two quarters of delays max. Especially when cash is not the problem. When it takes longer, this is a serious indication things are wrong, for example the project can't be calculated towards profitability. Besides this, mine construction can experience all sorts of bad luck, combined with ramping up delays, 6-12 months are no exception. Just follow management very carefully, see if they can/are publicly willing to explain what's going on/wrong, and use realistic timetables for the future and achieve those deadlines. I must add that most timelines experience delays in mining, but a 2-3 month delay for a study or resource is acceptable, and for construction I would say 30% of the initial construction period. When things start to take longer it could be an indication of problems, but as always management should be on top of it to explain proceedings to investors
- stock consolidations (called roll-backs or reverse splits). This is usually a sign of management not delivering on exploration so the project is bad, or management uses the company as a way of financing salaries and expenses (the socalled lifestyle companies), and does nothing substantial with the raised cash.
- company name changes without any good reason. This often happens to erase some negative issues from the past. Sometimes a company truly does have a project with potential, and new, solid management comes in after replacing the former, sketchy management, and a new name provides a much needed break from the past. Beware of multiple name changes under the same management, but also beware of failed projects from the past (uneconomic, metallurgy, permitting, continuity of grade, rock competence) that could be recycled in different companies. This is a bit more tricky as those projects are often renamed as well, so when you see a project with a historic resource or mine (brownfield project, as opposed to greenfield, which is grassroots exploration) surfacing in a new company, don't assume management just has to confirm the historic resource and is off to the races, your due diligence starts with the history here
- sudden change of focus, especially from one metal/mineral what used to be hot, to the next hype. Beware of companies doing this multiple times, although it can be a profitable vehicle for investors to ride those hypes. But as there will often not be much underlying fundamental value, the timing to sell at the peak of the hype becomes very important. This refocussing can be substantial as such a company could decide to buy new projects based on the new metal/mineral and changes its name, but this also can be more subtle by such a company suddenly hitting mineralization of this new metal/mineral on its existing exploration projects, often in non-economic amounts or unfavorable geology.
- does the company strongly refer to "next door deposits/mines" when starting exploration or buying claims. These "nearology" plays often never return solid drill results or good projects. If the geology over there would have had very good potential, the company having the first look at that was exactly the owner of the next door deposit/mine, and usually is quick to stake the adjacent claims for a low price if it was any good. A radius of about 20-25km from a mill and plant is the usual maximum economically viable trucking distance for ore, so a company would most likely stake any claim in that area if it was prospective. Sometimes a company misses the opportunity for whatever reason and is surprised by a sharp junior, but this doesn't happen very often. Interesting variations on this theme are undermined and underexplored district scale mineralizations, where one big discovery could elevate the value of the entire claim package, shattered among many owners
- developers not mentioning after-tax or post-tax net present values (NPV) or internal rates of return (IRR), only pre-tax NPV or IRR, so their figures look (much) better. The fact is all companies have to pay taxes in the end so there really is no use to do so. A variation on this subject is the reporting of drill results in feet instead of meters
- producers not mentioning all in sustaining costs (AISC, all operational costs to produce metals/minerals which is becoming the standard now) but just cash costs or variants on it, or just production figures without any costs. The same goes for the all important metric for producers: cash flow. And not even this most objective metric is objective and comparable at all times. Sometimes (or should I say quite regularly) a lot of accounting tricks are going on to create optimized "adjusted" cash flow numbers. I am not a specialist on this subject, but I know others who are very experienced in this field, who might author the chapters on accounting in the future, so you can find out for yourself how to review financial statements of producers
- producers without solid guidelines/production outlooks or without comments on comparisons of earlier quarters
- for the more trained investors: when digging deep into newsreleases, finding bad news buried in huge amounts of positive text, possibly presented as nothing special or serious. It takes an experienced investor to see what is wrong, and usually, one has to know the history and activities of that company really well, just to understand something is wrong in the first place. For example, a company can defer a crusher from its economic study and switch to run-of-mine (ROM) ore to place directly on the leach pads, as one of many mentioned ways to enhance economics in a news release, to save capex and improve economics of a heap leach project, which sounds good of course. However, this can only be done if the average grade of the ore and/or the recovery of the metal allow this, as a flow sheet without a crusher can't downsize the ore to small enough particles and generates lower recoveries, and produces less metal in the end as a consequence. Other examples are leaving out the base case metal price when announcing economic study results, not mentioning if an economic study is in-house (not independent) or done by third parties, or promising a Pre Feasibility Study (PFS) after a Preliminary Economic Assessment (PEA) which is normal, but ending up with another PEA update, as certain "things" make it impossible to proceed with a much more advanced, smaller margin of error PFS. This sometimes even happens without further explanation why the company decided to change plans and abandoned the PFS, which is something very serious. Usually the normal sequence of economic studies is PEA, PFS and FS, and if the company is very confident they can skip the PFS. As the margins of error for a PEA are quite large (25-30%), there are companies who don't assign much value to it and want to skip it in favor of going directly to PFS. Personally I don't see this as very smart, as it takes much longer to indicate economic potential to investors, which in turn could complicate raising cash. It all depends on the quality of the study, a PEA can actually be very good, and a PFS very bad. How to determine this is the subject of a dedicated chapter on this subject
For example, a certain company was supposed to complete a Feasibility Study (FS) but they very covertly sneaked a sentence about an "updated PEA" into a news release about metallurgical testwork, without any explanation or introduction of such a study. It turned out later their existing resource estimate was about 50% overstated and a low quality trainwreck, and couldn't be used for their upcoming FS, so they had to redo the resource estimate all over again and released this updated PEA first, as a staged solution. The share price crashed on this news.
Otherwise it would have been very weird to see a FS containing a much smaller resource estimate out of the blue, this could even be against regulations if I'm not mistaken, as all material changes (like a smaller resource definitely is) have to be disclosed immediately. The integration of such a completely different resource estimate would take at least a few months, so this probably has been the reason to release an updated PEA plus resource estimate first, before the company could continue with its FS. They should have brought the disappointment on the resource estimate much more transparent. Needless to say I lost all confidence in management when I found out about this, and so should you. When things like this happen, management and BoD is immediately transferred onto my "blacklist".
- companies not quickly (1-2 weeks) following up on bad news which demands action to solve things. Here is an example of two recent cases, and its implications on share prices. For example, a certain company was announcing trouble regarding grade variance and a possible cash shortfall right before first gold pour (first stage of commencing actual production). Grade variance means the company detected different grades compared to their resource estimate which was used for their most recent economic study, in turn used to base the mine plan on), when testing the ore/leaching material ready for processing through the mine plant. In this case the grade disappointed obviously.
If this issue appears to be structural for large amounts of ore, the profitability of the entire project could be in danger. With a cash shortfall the company runs out of money and can't pay the bills and personnel, which isn't helpful either. So two very serious issues arose simultaneously. However, the company proceeded with other news releases in the next 4 weeks, without mentioning anything on these very important issues. Shareholders reacted immediately, together with speculative shorts which smelled blood, and sent the share price down in this period by 60%. The problems regarding the grade variance were serious, as the company filed for chapter 11 bankruptcy not much later.
A good example of another company who does this much better in my view is a developing company which had to initiate a construction halt at their project after local protesters damaged company assets after worries about possible damage to sacred places in the direct vicinity of the project. The company replaced the CEO, temporarily layed off staff and got into intense discussions, keeping shareholders updated all along. Since then the share price downfall stabilized on a -30% level for some time, construction has resumed and nearing completion, and the share price started a healthy recovery.
Bottom line: the company has to communicate with their shareholder base, even if it has no direct solutions for problems (could be prohibited in part by disclosure limitations), but only partial insights, or outlining efforts.
- drill results: as mentioned very short, high grade drill results, but also leaving out a lot of results, or information that explains the extent of the drill program. What are good drill results? As a rule of thumb, of course very much connected to metal prices at a given moment, more on this in a later chapter:
- gold: length x g/t > 50, so for example 10m of 5g/t Au, and lengths of at least 3-5m and grades of at least 2g/t hardrock/50m of at least 0.4g/t porphyry/25m of at least 0.5g/t oxide/sulfide; watch for an underground (-200m or deeper) cut-off of at least 5g/t, for open pit (0-200M depth) of 1g/t
- silver: length x g/t > 2000, so for example 10m of 200g/t Ag; OP 80g/t, UG 300g/t
- copper: length at least 40-50m, 0.5% porphyry/0.3% oxide/sulfide/ISR 0.20%; OP 0.3%, UG 1%
- iron ore: length at least 25m, 29% OP 29%, I don't believe there are underground iron ore operations, would have to check this. The high profile operations have over 60% grade
- tungsten: length at least 25m, 0.35%
- lithium: length at least 25m, 0.05% or 500Mg/L brine/ 0.40% clay/ 1.0% hard rock; 1% OP, 1.5% UG
- graphite: length at least 25m, 7.5%
- rare earths: length at least 25m, 0.5% hard rock
- uranium: length at least 25m, 1% hard rock for Athabasca Basin/0.1-0.2% other locations/ISR 0.045%
- resource estimates; very small and/or low grade deposits aren't economic. My thresholds are in line with those for drill results regarding grade, and I must say most of these estimates still hold up at current metal prices (2017):
- gold: hardrock: 0.75-1.0M oz Au @ 1-2 g/t open pit/ @5g/t underground; porphyry: 2-2.5M oz Au @ 0.5g/t open pit; oxide/sulfide (heap leach): 0.75-1.0M oz Au @ 0.5g/t open pit;
- silver: 20-30M oz Ag @ 80-200g/t Ag open pit/ 10-15M oz @300-500g/t underground;
- copper: porphyry: 1B lbs @0.4% Cu; oxide/sulfide: 0.5B lbs @ 0.3% Cu; ISR: 2B lbs @ 0.20% Cu; DSO (Direct Shipping Ore): 1B lbs @10% Cu
- iron ore: 1B tonnes @ 29% (at a 62%Fe price of about $80)
- tungsten: 0.35%
- lithium: 0.25Mt Lithium carbonate/hydroxide
- graphite: 1Mt graphite
- uranium: 10M lb U3O8 ISR, 50M lb U3O8 high grade (>1.5% overall)
2. Market sentiments
As I mentioned in my introduction article, the state of the markets is probably the most determining factor for the (relative) price action of a share price of junior mining stocks. Compared to 2009-2011, the volatility of the TSX Venture looks moderate over the period of 2012 until now, nevertheless the index lost almost 70%:
Also notice the lower overall volume of shares traded the last two years, despite considerably lower prices. This is a good indicator of low investor sentiment as people stay away. Mining stocks often hardly move on good news anymore, as compared to the pre-2011 period (except the 2008 crash of course), when a news release containing for example "excellent drill result", "Preliminary Economic Assessment", "commencing drill program" or "rare earth" in its title was enough to instantly send stocks up 10-30%, regardless of the actual content.
This was actually the time that investing in mining stocks appeared on my radar, as these returns didn't go by unnoticed, even in my homecountry The Netherlands (which doesn't have a single operating mine anymore for a long time if I'm correct, so Dutch people aren't exactly mining minded), Europe where mining oriented retail investors are as rare as a needle in a haystack. Too bad this period didn't last that long, but I made some nice profits as a novice and got out right after the spike in February 2011 as I thankfully already picked up that a very speculative market going hyperbolic is dangerous. I lost a decent chunk of those profits again unfortunately after assuming the Venture completed a healthy correction a few months later, but that is part of a learning process every investor goes through. Nevertheless, juniors were firmly on my radar after that, and I decided to gain as much knowledge and experience as I could on this sector, in order to be able to make money even in downtrends, but for sure be ready when the next uptrend arrives.
Back to market sentiments for now. A project can be profitable, the price of a metal can be convenient or even relatively high, but with the markets going down your stock will probably go down with it. This is also true on a larger scale for the US stockmarkets crashing during the financial crisis of 2008-2009. This dragged everything with it, metal prices, other stock indices and clearly the TSX Venture as well. Looking in hindsight, the beginning of 2009 was a golden opportunity to enter, as the underlying fundamentals were healthy, with China growing like never before which was the main driver of metal prices.
Another proverbial saying is a rising tide lifts all boats, and this is especially true in mining. However, there are some cases that go down regardless through disappointing developments, and others that manage to stay neutral or even go up when the index goes down, for example:
Share price increase:
- exceptional prospects
- growth story playing out soon
- positive catalysts playing out soon
Share price neutral:
- very illiquid
- dormant, share price close to zero for a long time
- the company has a very long horizon because of for example difficult permitting or law suits
- its story isn't known by the public, only with a very limited group of determined insiders/shareholders.
Sometimes a combination of these factors can coexist as well. My research and analysis focuses predominantly on the first three factors, and especially the third one: positive catalysts playing out soon. After years of stock analysis in a downtrend, I found this focus to be the most rewarding with the most asymmetric risk/reward ratio. With soft commodity sentiment and uncertain economic developments for BRICS etc, it is risky to bet on long term stories with a 1-2 year horizon. My own portfolio does contain a few of those long term stories, but these stocks have a strong and viable case, and have already proven their relative immunity for downtrending commodity prices/market sentiment, and have no trouble raising cash to continue advancing their projects.
The commodity and its price are very determining for the well-being of a junior mining company, next to market sentiment. Whether a company is searching for precious metals, uranium, rare earths, lithium or base metals, means the world for profitability, commodity pricing risks (supply/demand trends, free market or not), project risks like metallurgy, permitting, location, difficulty in finding solid deposits, finding financiers for exploration, economic studies or project financing, jurisdictions, mining risks etcetc. I will expand this chapter later on. Next up, I'll provide some information on one example of commodities: gold, the most illustrous of them all, maintaining a high value as long as it has been used by civilisations on earth. You can find more information on other metals in the Analysis menu.
Gold (chemical symbol: Au) is a precious metal, just like silver, platinum and palladium, and one of the most valuable and highly sought after on the planet. Its main purpose is for investing or preservation of wealth, or a hedge against inflation. As small deposits or operations can already be profitable, gold juniors are the most abundant among junior miners on the various exchanges, but certainly the Canadian TSX Venture and TSX. There are roughly 500 gold exploring/developing/producing companies listed on these two exchanges with a NI43-101 registered resource estimate.
Gold nuggets from panning, source The Claim Post
As gold has no fundamental supply/demand mechanism, but supposedly moves on the wildest drivers like banks and governments/central banks secretly regulating the gold price through large ETFs like GLD, India smuggling, India and China special occasions, European gold repatriation from the US, conflicts around the world, covert China politics to create a gold backed yuan based on gold reserves even secretly superseding those of the US, QEs, US debt, impending collapse of the US dollar or even all currencies for that matter, etcetcetcetc, pricing of the yellow metal is always surrounded with sentiment and speculation, and therefore is risky in itself. The trajectory of gold for the last 40 years is shown in this chart:
Source: Gold Price
Technically it could go either way really, a lot of analysts were predicting $800-900/oz only a month or so ago (summer 2015), looking at the LT chart it could siderange for 20 years but it could also resume the uptrend when a financial Armageddon arrives. I don't count on this as a viable scenario, so all calls for gold above $2000/oz are unrealistic in my view. And I am no gold bull either for that matter. When looking at this chart but corrected for inflation, it becomes clear that the 2012 top could very well be compared to the 1980 top, and a retreat to $600-800 levels in a few years doesn't seem completely out of line all of a sudden:
Market watchers assume that after the 2011 high of $1923/oz, the current AISC of $1000-1200/oz should be enough to provide a bottom under the price of gold (currently at $1073/oz at December 8, 2015), but as capital expenditures (construction financing for mines) and AISC are still falling because of less financing available for projects, and operations are downsizing or shutting down, and therefore less interest and demand for personnel, material and services, this bottom isn't exactly rock solid. Notwithstanding the fact that I don't believe in any fundamental for gold as it is total speculation, based on inconsistent sentiment drivers at most. Therefore I tend to look for solid gold projects, capable of being profitable at prices of $1000-$1100/oz. This "being profitable" isn't easy to explain, more on this in chapter 12.
Something a visitor of a mining company's website looks for first in over 80% of all visits is the management team and the Board of Directors (BoD), according to mining company staff I talked to. This shows you how important a good team at the helm is for investors or other mining company enthusiasts. At the same time this is one of the most difficult variables to analyze when researching mining stocks. For example, individuals can have one success story under their belt, but you don't always know if they were just lucky. On the other hand, there are also executives who saw a few big winners during good times, and decided to feed off of it during bad times but not achieving much besides filling their pockets. But it doesn't have to do with intentions of course, executives can be sloppy, make mistakes, follow wrong strategies, do nothing constructive, irritate colleagues, companies and shareholders with their behaviour, etcetc.
These things are all issues that aren't all that easy to spot. Usually it takes you at least a year to find out what an individual really is about, regarding promises, actions, intentions. Sometimes even more. It does help to meet executives in person, for example on mining conferences, and take some time for a private conversation, beyond the usual promotion chat. Just ask them difficult questions, and see how they address them, within rules of disclosure of course. Do they really listen to you? Do they provide actual answers which are to the point or do they revert back to their own favorite topics too quickly, avoiding hot potatoes? I found that the more you are informed about the project at hand, and the more you know about mining investing in general, the more open management is to you, and the more information you get. And of course the more difficult you can make life for them, which the good guys tend to appreciate as they have nothing to hide and like the interest.
What you can do immediately for desktop research is easy. Look for the stage the company is in at the moment, and start looking at the management team as a whole. If for example a company is planning on raising capex funding, do they have people on board with such experience, lots of financial connections as they were for example bankers in the past? If not, chances are there financiers wouldn't come up with the needed funds. Executives with financing experience and inherent network in the financial world are very important when raising capex, but to a lesser degree also for any junior in any stage wanting to raise capital in the markets for drill programs, economic studies, permitting, working capital, etc. I know of juniors with very good projects, but only geologists and mine managers on board and no financial guy, which have lots of trouble raising cash almost all the time. Another item is looking for nationality and location of management. Is management not Canadian, lives outside Canada and doesn't have a good financial network in their own country? Chances are, although the mining world isn't big, that they haven't such a good network in the Canadian minefinancing community, which decreases their chances on raising cash a great deal.
More specific for individual executives: look if they have experience in their current role at well known companies, or that they have a clear career path, leading to bigger market cap juniors or higher positions. If you don't know anything on the mentioned companies, Google is your friend as always.
Look for awards like "Northern Miner Man of the Year", "Prospector of the Year" or "Canadian Mining Hall of Fame", as an indication of industry wide acknowledgements for large achievements. You don't tend to find these kind of people very often in inactive juniors with bad management teams and so-so projects. These people also attract investors and cash, and they are often very picky when chosing projects as they have high standards.
To me, management makes a good start when it keeps its promises within earlier discussed thresholds on timelines, announcements, events. This can be checked when reading earlier statements in news releases, presentations or MD&A discussions. It is a lot of work. Repeated delays on just about everything you can think of are household in mining, with the consequence of investors bowing out after some time if this gets out of hand (at least if they care about their hard earned cash). Accepted delays to me are as mentioned earlier 2-3 months on resource estimates or economic studies of small/midsized projects(NI43-101 resource estimate of for example 2Moz Au, a PEA/PFS/FS capex of $100-500M) , 30% max or 3-6 months on construction of small/midsized mines (capex of $100-500M) and 6-24 months on larger to giant construction projects, and 3-12 months delays on permitting (this is in jurisdictions which don't have a known anti-mining reputation btw, otherwise permitting could take many years more or not being granted at all). Megaprojects with a capex over $1-2B could easily have permitting trajectories of 2-5 years, but delays of 12-48 months aren't uncommon either, as megaprojects often attract a lot of environmental activists who are specialists at obstructing and delaying permitting processes. Especially watch out for well-funded activists as they can make life very difficult for mining companies.
The management teams actually achieving their self initiated deadlines are not that standard, maybe 10% makes it in time. When you see teams beating their own schedule regularly with good outcomes, you have something special on your hand. Write down their names, and keep following them as they probably really know what they are doing, and sooner or later probably run into a genuine multi bagger success story. The best projects attract the best people in my view.
Another important thing to look for are buyouts of companies they led, and preferably founded. The bigger the buyouts, the more successful they were. Buyouts get interesting from about $150-200M and more, as significant value could have been added in most cases. Most juniors start their IPO listing with a $15-50M market capitalization. Multiple successful buyouts indicate very successful management.
These socalled "rainmakers" are a breed of its own. These are the most successful and often dominant players in the mining arena. Famous examples are Rob McEwen, Robert Friedland, Ross Beaty, Lukas Lundin, Frank Giustra, Keith Neumeyer and Robert Quartermain, but also lesser known persons like Greg Sedun, Sean Roosen, Paul Matysek, Walter Berukoff, Mark O'Dea, Patrick Anderson and Mark Morabito to name a few distinguished executives with great trackrecords of building successful companies and/or enjoying large buyouts.
When they start new projects, the entire investment community becomes interested, as it should be something special in most cases. This is no guarantee for success of course, but it is at least a signal of high potential. They are often early movers as well. For example, Lukas Lundin acquired the very prospective Fruta del Norte project in Ecuador from Kinross, right after rumours surfaced about Ecuador planning on being investor friendly (after being the opposite for many years). He wouldn't invest a few hundred million dollar without having talked extensively with the Ecuadorian government, talked through new tax regimes, permitting issues, politics, economics, etcetc. These moves could be a very valid indication of Ecuador returning to mining friendly territory, and as this country has a lot of very interesting deposits waiting in the jungle, chances are that other companies can start very nice projects by themselves, on the wings of the Lundin family.
A lot has been written about salaries of management and BoD. To get a good understanding of appropriate, industry standard salaries, it is best to compare the executive of the company you are analyzing, with similar peers (marketcap, stage, jurisdiction, resource, etc). It is an important issue, because it indicates good or bad allocation of precious cash, especially if there is not much progress on a project. There are literally hundreds of junior mining companies, which just do offerings or PPs to raise cash for the salaries of their executives, and pay for their listing fees and legal fees, and have no interest in developing an actual project. These are the socalled lifestyle companies. As long as the TMX Group needs those listing fees to be profitable, they can continue with this malpractices unfortunately, but that is another discussion. Another issue could be things like expenses. Some executives have their company pay for everything, cars, vacations, eduction of kids, housing renovations, etcetc. Usually you will find statements on this in the annual financial statements of a company.
Large option packages are also household in mining, and a focus on strikes is speaking volumes here: large packages and/or strikes at or very close to current share prices with very long (5 years) expiry dates, the options are simply giveaways without any incentive to achieve significant thresholds or share appreciation. Normal strikes are at least at about 25-50% of current share prices, with expiry periods of a few years.
5. Share structure, institutions/insider holdings, financings
The share structure of a junior mining company is also one of the starting points of solid due diligence. Juniors can have hundreds of millions of outstanding shares, but very small market caps as their share price is often just $0.01-0.05. This is something often seen in bear markets, and often not very positive. When you start looking at this number, always keep in mind the stage of this junior. Juniors need private placements, offerings or bought deals (brokered or non brokered) to raise cash for their operations, until the start of construction, and one last big capital raise in general (about 25-35% of initial capex) for capex funding. Especially economic studies in the end (Pre Feasibility Study and Feasibility Study) cost a lot of money (3-10% of capex) as a lot of detailed engineering and other studies have to be done, and usually permitting starts as well in that stage, which can be costly, too.
When a junior is in the early stages of exploration (no NI43-101 resource estimate completed, lots of drilling needed for this) it's immediately clear they will need a lot of dilutive capital raises in many instances. Make sure a junior doesn't have much more than 40-50M shares in that case. When it has a NI43-101 resource estimate, 80-150M shares are normal. There are certain exceptions regarding large deposits requiring lots of drilling, those can have shares up to 200-300M. When advancing to economic studies, the share price is usually appreciated from early stage levels, and dilution shouldn't have such an impact anymore. Usually it's the early exploration/capex financing that deals a huge blow to shareholders as far as dilution, only to see the share price recover soon after as construction reaches completion. After this last financing outstanding shares can increase to 300-500M shares. I must say this is confined to Canadian listings, in Australia and Great Britain I have seen sharecounts running into the billions for seemingly normal exploration companies, trading on fractions of pennies. In Canada those would be considered scams, like most OTC companies in the US. I have no idea why these countries don't use roll backs or don't seem to care about share structure as much.
When sharecounts for Canadian listings run significantly higher than the mentioned numbers, it's time to research the reason behind it. Didn't they have success with exploration? Why didn't they bring out a resource estimate? Why isn't anything happening for over a year (or more)? A lot of times it's an indication of a lack of quality of projects and/or management. Another issue is, that the share price of this type of companies gets so low that they are no longer allowed to do private placements. If I'm correct, the bar for this is set at a market cap of $1M, and the threshold for a private placement share price is $0.05, although there are exceptions here as well. Usually companies with share prices below $0.05 simply do the placement at $0.05 if they can get investors for this (a lot of times own management buys a lot).
Source: Greenland Minerals
Most of the times private placements are done at a slight discount of 5-10% of the share price at the time of closing, accompanied with one or a half warrant, to make things interesting for participants, or no warrant at all. Sometimes you see no discount or even a premium, which is an indication of lots of interest for a story. The term "oversubscribed" indicates massive interest as well. Only a few times I have witnessed placements with very large premiums (up to 1000%), and I suspect this has been done by shareholder related third parties, to keep dilution to a minimum. This is great for shareholders of course, but it always strikes me as very opaque. Why would any party pay 10 times as much as he can get shares in the open market for normal prices?
Large sharecounts can be dangerous, especially for early stage juniors, as they frequently do a consolidation of shares (also called reverse split or roll back). This is done in order to achieve a higher share price, so they get more interesting for investors, and can be able to do a normal private placement again, which attracts more interested parties. It's dangerous for shareholders because in 95% of all cases the consolidated share price goes down for some reason unknown to me, without any material news published during that period. This downfall can be quite substantial, to the magnitude of 20-60% in a lot of cases. I have no idea why this happens, maybe the stock had become completely illiquid before the roll back, or traded at a large spread, and shareholders already wanted to rotate to other stocks and could finally dump their shares on the back of this roll back and often new story/marketing and increased trading volume.
Other things to look for are institutional holdings, the socalled "strong hands". Big funds usually hold shares for investment purposes, and don't trade them very quickly like a retail investor would on some bit of bad news. Be careful when a stock of interest is included in ETFs like the Junior Gold Miners ETF (NYSEARCA:GDXJ) which is created to replicate the Global Junior Gold Miners Index which is a basket of small-cap gold exploration, development and production companies. Sometimes the listed stocks are changed for other stocks, due to different reasons (bad performance, share price or market cap not meeting certain thresholds). This happens at fixed dates, one or two times a year. The Russell 2000 is also such an index. When a stock is excluded from such entities, this causes huge sell offs, as a lot of institutions automatically have to sell the stock when it leaves the ETF or index. When these large volumes would result in a cratering stock as daily average volume wouldn't be able to handle this in a few days, often large block trades (aka crosses) are performed, usually at a discount of the normal share price, so you often see the share price being walked down by unknown parties until the block trade price is reached. Often when this rebalancing is finished, those stocks recover to a certain degree, so it could be an interesting trading opportunity for a 10-20% profit. No guarantees of course. Therefore it is important to ask company management if they are included and what the thresholds and dates for reshuffling are. It is recommended you do some research on this yourself as well. Institutions or large parties can also sell for other reasons, and I have seen newsletter recommendations or investment fund liquidations cause quite some stir as well in junior mining land.
Insider tradings are also useful in some cases. There are quite a few websites following insider transactions, so insiders are quite aware of the possible impact of their actions, and can use it to their advantage. To be honest, in 80% of all cases I followed, it meant nothing, but in some cases it showed good trading qualities of management, and in very few cases insider trading was done right before material news came out which caused the share price to soar or crash. Needless to say that management, which is selling right before a crash, and reports this trade after the bad news, takes a one way route onto my blacklist. It is possible via SEDI to track all insider transactions, and this could give quite a bit of insight in related transactions by insiders of interest. I did an extensive analysis of the transactions of Pinetree Capital in the past in relation to a stock I was analyzing, and I discovered a widespread dump on the market of a lot of shares in Pinetrees portfolio. This was all because of very acute liquidity issues of Pinetree, as it went bankrupt a few months later. As such, it was completely unrelated to the stocks itself, and provided an excellent entry point for many stocks. Another peculiar cause was the recommendation of a German newsletter with lots of exposure, which announced to "sell all mining stocks" at the end of 2014. A comparable crash was the result, providing a nice opportunity for retail investors like me as well. You can only hope for such godsent occasions, as they are rare.
Such recommendations and actions can send a share price down, so even on this you could make profits when shorting it first, if you have timely information. Other causes for downfalls are shorters. They sometimes have other agendas as well, for example when they find out that a company is about to raise capital in the markets, they bring down the share price, so the placement has to be done at a lower price as usually investors want a discount to the share price. Shorters use the tiniest bit of bad news to bring a stock down to unrealistic levels, and this happens especially at stocks with a US listing. Fortunately, Canadian juniors aren't a victim that much. To check short interests, use for example www.shortsqueeze.com.
Trading desk, source: Trading Hub