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 and that is 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.
There are ways to reduce your risk, however, and here are 9 “secrets” we use to pick junior mines which should help you find the gems among the rocks in this fast-changing industry:
1. Stay away from mining companies that operate in insecure and politically unstable regions like the Congo, Venezuela and Colombia. Also avoid those in countries with little respect for property rights and the rule of law, like Russia or Mongolia. That’s because mining is vulnerable to political instability. 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.
2. Look at environmental constraints where the junior mining companies are looking for minerals. In Europe and certain parts of the U.S., junior mines need a particularly rich find to justify the costs of overcoming environmentalists’ objections.
3. When looking at junior miners that only explore for minerals, give preference to those that operate in an area with geology that is similar to that of nearby producing mines.
4. Look for well-financed junior mining companies 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. Look for mining companies with strong balance sheets and low debt.
6. Look for positive cash flow, preferably even when commodity prices are low.
7. Even better, look for 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. Look for mining firms with experienced management that has a proven ability to develop and finance similar projects by working with other junior-mining companies.
9. Avoid mining stocks that trade at unsustainably high prices because of broker hype or investor mania about the underlying commodity (such as gold). Instead, focus on reasonably priced mining stocks with favourable geology.
The comments above are edited ([ ]) and abridged (…) excerpts from the original article, as written by Pat McKeough
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