The information provided throughout this blog aims to provide investors with a framework of knowledge on how to evaluate a junior mining company as an avenue for investment. It’s important to note that past results are not indicative of future results. All investors should do their own due diligence prior to investing, you should seek financial advice from an independent financial advisor if there are any doubts about your investment strategy.
Mining companies can be divided into two general categories: juniors and majors. Juniors are small or microcap mining companies that do not produce any, or very little revenue or profit compared to their larger counterparts. Junior mining stocks tend to be more volatile and less liquid. Majors are larger companies that are already in the production phase, revenue-generating, and looking to acquire new mining projects.
A junior mining company is typically engaged in mineral exploration and development with their main goal being to discover significant mineral deposits and develop mineral resources. These companies may have promising properties or projects in their portfolio, but they tend to be speculative by nature. Junior mining companies also tend to be highly-leveraged companies with smaller market capitalizations compared to large-cap mining producers. Below are five characteristics of junior mining companies to look out for when evaluating your investment:
5 Characteristics of a Junior Mining Company
A qualified leadership and management team is important when assessing a junior mining company. A junior mining company that has a well-versed, experienced, and technical team in geology, operations, finance, and marketing is the backbone of any successful junior mining company. Management is responsible for securing capital and meeting financing requirements from the exploration phase through to a producing mine.
There are several tiers to a leadership and management team with junior miners and they tend to be structured as follows:
- Board of Directors (Independent and Non-independent)
- C-Level Executives (CEO, CFO, COO, and VP Exploration)
- Consultants and Advisors
The C-Level Executives typically oversee the respective functions of the business, the Chief Executive Officer will ultimately develop the strategic plan for the Company with input from the Board, oversee the overall business unit, and appoint consultants and advisors to execute the goals of the Company. The Board of Directors oversees C-level management, provides input on strategic goals, and ensures that management is complying with corporate governance policies, securities regulations, maintaining shareholder interest, and overall business performance. Without a strong Board of Directors that compliments C-Level Management, there will be limited decision-making ability thus less likely to generate a positive return on investment to its shareholders.
Investors and their independent financial advisors should review the background and experience of each board member and the C-Level Management to ensure there is a good mix of financial, legal, and mining expertise within the overall senior leadership team. For example, is the CFO a chartered accountant (CA), chartered professional accountant (CFA), or chartered financial analyst (CFA), or do they have a strong business and finance background? Does the CEO, COO, VP Exploration have an extensive background in exploration and/or mining with a proven track record of success and experience supervising mining operations and large exploration programs? Does the Board have at least two independent directors and adequate financial acumen? Does the mining company have at least one Professional Geologist (P.Geo.) or Professional Engineer (P.Eng.) within its senior leadership team that oversees all the technical matters such as exploration activities or mining operations and are they considered a Qualified Person? These basic questions are only part of any due diligence exercise and investors should obtain this information either through their own research or through their financial advisor prior to investing in any junior or major mining company.
Since junior mining companies are usually small with lower market caps and typically do not generate revenue they have a higher investment risk. This means that it’s much more challenging for junior mining companies to secure financing to run their operations compared to a major mining company which generates revenue, is profitable, and can invest in capital expenditures at their operations without constantly going to the market to raise funds. However, given their low share price and growth potential, there is significant demand for junior mining companies listed on stock exchanges such as NYSE, TSX, ASX, TSX Venture, CSE, and NEO Exchange. Junior mining companies can raise capital by listing on one these Exchanges and selling their shares. The influx of capital from share sales either through a private placement or public offering of shares via a prospectus (i.e. IPO) is used to fund exploration and mining activities as well as other ongoing operational expenses.
The precious metals and base metals sectors tend to be very cyclical by nature, the supply of minerals is directly correlated to the demand when the global economy is experiencing prosperity and massive growth, and vice versa when minerals are low in demand during a global economic downturn. The main reason why junior mining companies have been able to attract massive gains has to do with supply and demand driving up their share prices and an increase in mergers and acquisitions (M&A) by major mining companies during high metal prices and economic prosperity. As we’ve learned, global demand for precious and base metals remains high at this time, which allows these companies to continue making money on their operations. At the same time, production costs remain low with many mining companies producing gold, silver, and base metals at a much lower operating cost compared to the past due to improved efficiency and productivity, and new technologies on the mining and metallurgical recovery fronts.
Gold has been a hedge against inflation as investors will convert their cash holdings to gold to protect the value of their assets. Since gold prices increase with inflation, there is a strong correlation between a spike in inflation and demand for gold. In general, investors who are expecting inflation are anticipating rising prices. Since gold and other precious metals have historically risen in value alongside inflation, they make sense as investments during periods of high inflation or economic instability. This correlation becomes especially apparent when you look at historical data. The effects of inflation on the costs of gold are likely due to rising interest rates amongst the Federal Reserve and Bank of Canada, anytime the interest rates rise the cost of gold rises. Therefore, the value of precious metals like gold and decentralized currencies like cryptocurrency increases by nature. These commodities have no dependence on any centralized banking system – since these resources are limited.
Supply is key especially for junior mining companies. To determine what the future supply will look like with a mining project it’s key to determine the major producers of that metal, and where the major mining projects are located. Looking at the overall mining sector and seeing where the capital is flowing to for exploration projects, will give better insight into whether the supply is increasing or decreasing. Investors should be aware of projects in the pipeline as this will also affect supply levels when major mining companies and large institutions are looking for future acquisitions to add to their portfolios.
Regardless of the supply and demand of any mining project at hand, major mining companies will often spend less on exploration and development to focus on increasing the profitability and efficiency of their existing mining operations. In contrast, junior mining companies are inherently in the business to discover economic mineral deposits and develop them to a level that will attract a major mining company that will look at acquiring or enter an option and/or joint venture partnerships. In the junior mining sector this is known as a viable “exit strategy” for a project. These partnerships tend to be profitable for junior mining companies in the short term and are a strategic long-term investment for the major mining company once production commences. Investors should be cautious prior to investing in a mining project where a production decision was made without the benefit of a detailed economic or mining study such as a PEA, pre-feasibility or feasibility study. A viable mining project will have at a minimum a mineral resource estimate or reserve estimate completed by an independent mining consultant and done to the current disclosure standards and mining best practice guidelines. This should be followed by an economic study of some sort that outlines the mining and processing scenario, operating and capital costs, and environmental and social license requirements. If this information is not available for the investor to review, extreme caution must be exercised and the risk for project failure increases substantially without proper mining studies as many recent examples have shown.
Jurisdiction and the location of a junior mining company’s mineral assets is also a key component to an attractive exploration project to invest in. It’s very important that junior mining companies can prove the geology in the area is a lucrative investment. However, geography can pose a significant challenge even if the mining project appears economic based on technical studies but is located in a region that has political and/or social unrest or injustices thereby increasing the risk of project failure.
Metallica Metals is developing projects in areas that have proven economic mineral deposits in the Thunder Bay Mining District of Northwestern Ontario, an area known to be a strong contributor to Canada’s gold mining industry. The Thunder Bay Mining District contributed to 19% of Canada’s gold production in 2018, and the area is also rich in economic deposits of palladium, platinum, lithium, cobalt, zinc, lead, copper, chromite, and graphite.
5. Mining Project Development Cycle under NI 43-101
In Canada, all public and private exploration and mining companies must follow the National Instrument 43-101 (NI 43-101) standards and guidelines for disclosing scientific and technical information on a mineral project. They must also follow the CIM standards and best practice guidelines for reporting mineral resource and reserve estimates. All junior mining companies and some major mining companies (non-profitable) are required to hire independent geological or mining consultant(s) to confirm or verify the geology, mineralization, mining scenario, economic parameters and overall merits and risks for a mineral project and must complete a site visit or personal inspection of the property. Depending on the project’s stage of development, results may be reported as a Mineral Resource and Mineral Reserve Estimate, Preliminary Economic Assessment (PEA), Pre-Feasibility Study (PFS), and a Feasibility Study (FS) with those results typically disclosed in a NI 43-101 Technical Report. These technical reports outline the cost for exploration and development of a mineral project and provide the framework for eventually developing an active mining operation. A NI 43-101 technical report can be as simple as a property report for an early-stage exploration project to a full feasibility study for a mining project where a production decision must be made.
NI 43-101 is designed to protect investors and provide guidance prior to making an investment decision by providing all available technical information on a mining project under the supervision of an “independent Qualified Person” such as a Professional Geologist or Engineer. All investors should review the Technical Report(s) of a junior or major mining company’s material mineral projects (if available) prior to investing in the company. Even a brief read of the Executive Summary of a technical report should be sufficient to gain knowledge in a Company’s mineral project. A NI 43-101 technical report is formatted and designed for even non-technical readers and should therefore be a part of any due diligence exercise prior to making an investment decision.
Junior mining companies heavily contribute to the exploration and development of the mining industry in Canada, while also providing the groundwork for the future supply and demand of attractive exploration projects. As the mining industry continues to grow in Canada, evaluating a junior mining company prior to making an investment decision using these 5 characteristics will provide a strong framework to get started. High risk and volatility are always associated with any investment, however higher risks can be associated with higher profits. Always consult your investment or financial advisor if you have any doubts in your investment strategy and don’t forget to always do your own due diligence.