Tuesday , 16 April 2024

Extent of Management ‘Skin in the Game’ & ‘Smart Money’ Involvement In Junior Miners Is CRUCIAL! Here’s Why (+4K Views)

 [The following is presented by Lorimer Wilson, editor of www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]

Desjardins goes on to say in further edited excerpts:

When searching for opportunities in the junior sector, we like the focus to be on quantitative and empirical data…The most difficult aspect of a company to quantify is the management team. In a previous article, we highlighted one measure that we use called the General and Administrative Expense Ratio (G&A) which is one way of getting a glimpse as to how management puts shareholder money to work. In this article, we’ll first look at why management and institutional ownership are important. Then, we’ll break down our data to show what the average numbers are like throughout the entire exploration life cycle from green fields all the way to production.

‘Skin in the Game’

Incentive options and warrants have their place, but when we are looking at management ownership, we are talking specifically about common shares. How much capital has the management team taken out of their pockets and put directly into the company? This vested interest, or ‘skin in the game’, shows:

  1. how much the team believes in a project….and also is usually a sign
  2. that the company will respect shareholder dollars when making spending decisions.

If management has no skin in the game, they don’t care if the share structure gets diluted or if the stock gets rolled back again. They can just re-issue incentive options when it looks like they can make a quick buck.Using data from the 400+ precious metals companies we cover in Tickerscores, we took a look at the average common share ownership of companies. These average numbers are important benchmarks to consider when exploring buying opportunities in the market.

Quick note on the sample size: we used info on 413 companies based on Q2 financial data, and excluded majors from the analysis. These are mostly companies on the TSX and TSX-V.

Aside from the management team, another important ownership statistic we look at is institutional and fund ownership, which is what some would characterize as “the smart money”.

‘Smart Money’

In our analysis, we typically add both fund and institutional ownership together into one metric. This number represents the amount of shares of a company owned by funds or big financial institutions. Typically, this includes any ownership by banks, mutual funds, investment advisors, hedge funds, or similar firms. There are arguments towards both the pros and cons of fund ownership, but in the junior sector we mainly see it as a positive sign. The reason for this is that the junior sector is populated by many small and unproven companies. For a small junior to be backed by a sophisticated financial organization, it lends credibility.

If a respected group such as Sprott, Sentient Group, or KCR Fund (Katusa, Casey, and Rule) is buying shares of a company, this should be a signal to the retail crowd. It means that a sophisticated group has gone through extensive due diligence and is confident in the project and management team. These institutions and funds are big for a reason: they’ve made money in the past.

Here’s the frequency chart for institutional and fund ownership. Note: an astounding 23% of companies have no such ownership at all.

For both management and institutional/fund ownership, the above distributions are very broad and encompass all types of companies in many different jurisdictions.

To narrow it down and make the data more interesting, we’ve broken it up based on the exploration life cycle.

Not surprisingly, the average management ownership is highest when the shares are the cheapest (exploration) and the percentage is diluted as the company matures. Conversely, fund and institutional investment is at its lowest when the company is “riskiest” and increases as it gets closer to commercial production.

Let’s drill down even further and break each stage into smaller stages. For exploration, we’ll divide it into “Pre-drilling”, “0-30 drill holes”, and “30+ drill holes”. For development, we’ll break it into “NI 43-101 Technical Report”, “Preliminary Economic Assessment (PEA)”, and “Feasibility Study”. For producers, we’ll just group them as one category now.

Here are a few things worth noting.

  1. First, it looks like management ownership stays fairly constant through the development stage (11.2%, 10.1%, and 10.8% in Technical Report, PEA, and Feasibility sub-stages). This means as projects moves forward, on average, management is maintaining their interest. In contrast, the projects are now de-risked enough for funds and institutions to increase their ownership dramatically through those stages from 19.1% to 31.3%.
  2. Another interesting point is that the rate at which institutional and fund ownership increases stays constant from pre-drilling all the way to the PEA. However, as soon as the Feasibility Study is completed, the “smart money” buys in at an increased rate. It jumps by over 8% between these two stages.

There can be big differences within each stage. In this case, we compared small producers vs. medium producers….

Quick data note: we arbitrarily defined small producers as those companies in commercial production with quarterly production below 30,000 oz Au or 1,500,000 oz Ag. Medium producers were any that produced above those benchmarks (but are not considered majors).

[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]

*http://www.tickerscores.com/blog/key-metrics-before-you-invest-skin-in-the-game-and-smart-money/ (If you haven’t already, hop over to Tickerscores.com as we have a free 14-day trial of our service available. It’ll give you access to all of our data that we used to compile this article.)

Related Articles:

1. Here’s How to Choose Gold & Silver Stocks With the GREATEST Chance of Major Returns

Which gold/silver mining companies own quality undeveloped gold and silver deposits in safe stable countries – and are extremely well managed? Such companies offer exceptional value in that they provide the best exposure to a rising precious metals price environment. Below are a number of things to look for when considering an investment in such companies. Read More »

2. Don’t Invest In a Mining Company Unless You Get the Right Answers to These 11 “Must Ask” Questions From Management


90% of the management teams you interview will be unable to present a reasoned argument for pursuing their project and to justify the approach they are using so let’s examine Rick Rule’s 11 “must ask” questions, one by one.

3. Country Risk Ratings Ranked 1 – 47

risk Precious metal miners operate in a large variety of countries and our interest in these mining companies on the one hand and country risk exposure on the other led us to compile a comprehensive list of jurisdictions of concern to precious metal investors….[numbering 47 in total. All 47 countries are ranked below]. Read More »4. Focus on Quality Junior Gold & Silver Companies to Maximize Returns – Here’s Why & How

The outlook for many junior resource companies in 2013 is grim so investors should focus on those who own quality undeveloped gold and silver deposits in safe stable countries. Such companies offer exceptional value in that they provide the best exposure to a rising precious metals price environment – and the assets the world’s mining companies desperately need. [Let me explain.] Words: 1328; Charts: 15 Read More »

5. The Five “M’s” for Picking Gold Mining Stocks

With gold miners, in general, so attractively valued relative to the gold bullion price, the question becomes which stocks are the most compelling and have the best leverage to robust precious metals prices…In order to find the diamonds in the rough, I use what I call “The Five M’s” for mining stocks… Market cap, Management, Money, Minerals and Mine life cycle. [Let me explain each .] Words: 1146

6. 8 Criteria For Choosing a Top-Notch Gold Mining Company

When gold goes up again, I believe we’ll find that the junior miners that have been crushed into the dust will be tomorrow’s value plays. Your  goal, then, is to identify these “diamonds in the dustbin” today. Below are 8 ways I’m finding tomorrow’s gold value plays today. Read More »

7. 9 Things to Look for When Choosing a Junior Mining Company to Invest In

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. Words: 504

8.  Jeff Nielson: What to Look for When Considering Which Gold Mining Companies to Buy

While investing in gold mining companies is not quite as simple as novices to this sector might at first conclude, neither is it so overwhelmingly complicated as to make these companies inaccessible to individual, retail investors. Below are a number of things to look for when considering an investment in such companies. Words: 2745

9. Jeff Nielson: More of What to Look for When Investing in the Gold Miner Sector

With gold recently trading at its nominal high it is only natural that investor curiosity about precious metals mining companies should start to grow and the fact that relatively few investors know much about the various types of companies in this market sector is an indication that this market is many years away from peaking. [This article will change all that.] Words: 1912

10.  Gold & Silver Miners: What’s the Best Time to Invest in the Producers – and in the Juniors?

While juniors, mid-tiers and large producers will usually bottom around the same time, they each outperform at different times. In this missive we look at some charts to decipher when its time to buy [each category and when one or the other] should be avoided. Words: 470

11. Country Risk: ALWAYS Discount the Value of Companies Operating in Risky Jurisdictions – Here’s Why

There is enough risk in investing without the added risk of political instability so why does the investment community often use the same metrics to value the shares of exploration and production of resources companies regardless of their location in the world? This is so very wrong, yet it continues. Frankly, when investing in the stock market you should ALWAYS discount the value of the stock that you are considering buying if the jurisdiction is not historically safe, stable, and economically strong. [Let me explain further.] Words: 746

12.  Why Invest in Junior Miners?

Leverage is the simple answer. It is not uncommon for junior mining companies to experience huge gains (10x or more) very quickly as news of a discovery is made known to the public. Words: 893

13. Here’s How to Value a Junior Miner’s Gold in the Ground

At any given time, we know the international spot price for an ounce of refined gold but what about the gold an exploration or mining company has in the ground – how do we value that? [We have the answer. Read on.] Words: 833

14. It’s Crucial to Challenge ‘Commentator Credibility’ When Evaluating Gold ‘Mining’ Companies – Here’s Why

Every day now there is Media and Internet commentary on the current prices at which gold mining stocks are trading. Some of this commentary is excellent, some seems to be written from a “vested interest’ perspective and some is very simplistic. [This article discusses unstated underlying assumptions that some commentators base their views on, endeavours to provide a greater understanding of the gold ‘mining’ sector and influences on pricing of sector stocks and what investors need to do before investing in said sector.] Words: 2030


  1. Hi! I know this is somewhat off topic but I was wondering if you knew where I could get a captcha plugin for my
    comment form? I’m using the same blog platform as yours and I’m having trouble
    finding one? Thanks a lot!