The junior mining sector is a highly volatile but potentially rewarding investment arena. Many investors have proven that the rewards can outweigh the risks, but there are still many unanswered questions. How exactly did they pick the right stock? How did they know that the junior miner they’d invested in would succeed? How did they avoid the ones that failed? How did they win?
Some would argue it’s luck and timing - keeping a wide allocation of stocks in different commodities or investing in companies that fail again and again until one of them succeeds and the loss pays off.
Sounds too good to be true? Take a look for yourself…
1. Understanding mining stocks
Juniors mining stocks are low capital exploration companies searching for new deposits of natural resources. Junior mining companies are involved with exploration, development, getting the mine permitted with the goal of producing up to 300,000 oz/year. Anything over that would be considered a ‘mid-tier ‘or ‘major’ company.
Investments related to juniors are high risk as they are new in the market and don’t yet have a proven asset base. Juniors may still be in the exploration phase and might not find any resources at all. On the other hand, the potential is there for great reward and huge excitement if the exploration and development is successful.
To understand the function of one stage, it's necessary to understand the lifecycle of a mine as a whole. Typically, a successful mining story will start as a junior and progress through to a major, increasing in value and size along the way. The risk of an investment also tends to decrease, but so do the potential rewards.
There are 3 clear stages of progression:
All mining companies begin as "Juniors" or exploration companies - the first stage. These companies tend to be small-cap companies (< $500 million market capitalisation). Before a company can produce metals, they must first find them - a task easier said than done.
What defines a junior mining company?
- Small companies
- Exploration and development phase
- Small market cap < $500 million
- Production of <300,000oz/year
- High-risk but high-reward if successful
- Looking for funding and/or M&A (mergers and acquisitions) with bigger companies
How many junior mining companies are there?
There are more than 3,000 junior mining companies listed on exchanges globally, with new ones constantly appearing.
There are two types of development-stage companies: post-discovery and near-term producers.
What defines a mid-tier mining company?
- Annual revenue: between USD $50 million and $500 million
- Market cap: less than USD $1 billion
- Own more than one asset and produce multiple minerals
- Significantly less risk than junior mining companies
- Development and production stage
What are post-discovery companies?
Post-discovery companies have just found a deposit (good drill results), but do not know how much of the resource there is. These companies will carry out modelling studies and resource estimations, and produce a NI 43-101 Technical Report.
What is a NI 43-101 technical report?
The NI 43-101 technical report estimates the resource deposit size. Further studies will be conducted to see whether the resources can be mined economically.
The National Instrument 43-101, or the Standards of Disclosure for Mineral Projects, is a technical reporting standard defined by the Canadian Securities Administrators.
Essentially, it’s a set of rules and guidelines companies must follow when reporting information about mining projects. NI 43-101 standards apply only to companies traded on Canadian exchanges but are used worldwide, as many mining companies are traded in Canada.
Origins of NI 43-101
It was developed as a way to standardise reporting of mineral resource and reserve estimates following the Bre-X Minerals gold mining scandal in 1997.
Bre-X Minerals claimed that their property in Busang, Indonesia was home to a massive gold deposit – however, the deposit turned out to be nonexistent. Bre-X falsified drilling results from Busang by gold from other locations placed in the crushed core samples. NI 43-101 standards are a way to protect investors from similar fraud.
The technical report has become the standard for NI 43-101 reporting, although this format is not strictly required. Technical reports typically contain:
- A property description
- Exploration and drilling procedures and results
- Sample preparation and analysis results
- Mineral resource and reserve estimates
- Market studies and economic analysis
- Conclusions and recommendations
NI 43-101 standards
NI 43-101 standards include best practices for mineral exploration, diamond exploration results, and mineral resource and reserve estimates. These standards were defined by the Canadian Institute of Mining and Metallurgy (CIM). The NI 43-101 standards also define terminology commonly used in reports, such as “ore”, “property”, “effective date”, and “mineral project”. All of this is intended to remove uncertainty and ambiguity so investors can understand company disclosures.
The CIM has strict definitions for estimates of the amount of mineral present (mineral resources and reserves). A mineral resource is defined as a concentration of minerals in a form, quantity, and quality that has reasonable prospects for economic extraction. Resources are further divided into inferred, indicated, and measured. Inferred resources are unverified, while measured resources are well-established and can be quantified.
Mineral reserves are the economically mineable part of a resource that has been demonstrated by a preliminary economic assessment. Reserves must be demonstrated by a preliminary economic assessment. Indicated resources are classified as probable reserves, while measured resources are proven reserves.
Who can approve a NI 43-101?
A qualified person must approve a report for it to be NI 43-101 compliant. A qualified person must fulfill all 3 of these requirements:
- An engineer or geoscientist with 5 years of experience in mineral exploration
- Experience relevant to the project
- In good standing with a professional association
Mining companies will often hire outside consultants to serve as their qualified person and review the technical report.
By creating an NI 43-101 technical report, companies are providing investors with data that has been collected according to best practices and vetted by a qualified person. These reports contain valuable information, so investors should read them fully and take the time to understand the data presented. Similar to drilling program results, investors must investigate the data and analysis behind the NI 43-101 report results.
What are near-term producers?
Near-term producers are companies that are close to opening their mine. They have completed exploration and testing and have a good idea of the amount of resource present.
Economic assessments and feasibility studies
For companies in the near-term production stage, the next step is to conduct economic assessments and feasibility studies. Each study has increasing levels of confidence in terms of resource estimates and project economics.
Companies in the development stage already have a fairly accurate idea of the size, grade and abundance of the resource - meaning that there is more data to analyse and less risk. Economic assessments and feasibility studies are similar to NI 43-101 reports in that they are held to high standards. Investors can be more confident that these companies will move towards the production stage. Go Deeper →
- PEA: Preliminary Economic Assessment
- PFS: Preliminary Feasibility Studies
- FS: Feasibility Studies
- BFS / DFS: Bankable Feasibility Study or Definitive Feasibility Study
Production Stage: Majors
Companies in the production stage have moved through the lifecycle from the exploration stage to the production stage and are now fully established mining majors with reliable reserves. These companies tend to be well-capitalised, with many operations worldwide producing a slow and steady cash flow. At their mines, the life of mine timeline has been established and operations are steadily underway. Majors participate in some exploration activity, but it’s more common for them to buy junior or mid-tier companies who have successfully developed a mining project.
What defines a major mining company?
Major mining companies are typically diversified, owning and producing several commodities. Thus, new mineral discoveries tend to have minor impacts on their stock. Major miners are distinguished from junior and mid-tier companies according to:
- Revenue: more than $500 million/year
- Market cap: greater than $1 billion
- Diversification: Multi-asset, multi-commodity
- Low risk, stable cash flow
- Financially able to develop a major mine
How many major mining companies are there?
Major mining companies are the top players in the mining industry. Currently, there are less than 50 majors worldwide. Although mining is a global industry and many junior miners are based in Canada, a handful of countries and companies dominate the market.
Glencore, BHP, Rio Tinto, and AngloAmerican are among the top mining companies in terms of revenue and market cap. Glencore is based in Switzerland and the UK, BHP and Rio Tinto are both based in the UK and Australia, and AngloAmerican is based in the UK. Several Chinese companies are among the top majors as well: China MinMetals Corp, Jiangxi Copper, China Shenhua Energy, Zijin Mining, and Yanzhou Coal Mining.
How do juniors choose where in the world to mine?
Choosing a location to explore for ore deposits depends on two factors: is the resource and is the country friendly towards miners. Both must be present for junior miners to explore. Go Deeper →
Countries like China, Russia, Kazakhstan and Venezuela have vast natural resources, but their political climates make it difficult for foreign entities to explore. Mining is completely state controlled in Venezuela and China, and Russia and Kazakhstan are largely closed to foreign investment. Brazil, Argentina, the Democratic Republic of the Congo and South Africa are home to some of the world’s largest ore deposits, but each country has its own risks that may deter junior miners: political corruption and permitting issues in Brazil, high taxes and unclear environmental regulations in Argentina, infrastructure problems and high cost of operation in South Africa, and human rights issues in the Democratic Republic of the Congo (DRC).
However, there are countries with prolific mineral resources who welcome mining companies: Canada, Australia and the United States. Canada’s resources include uranium, zinc, nickel, copper, gold, silver, lead and platinum. Similarly, Australia is rich in uranium, gold, iron, copper, lithium and nickel. Both countries offer incentives to mining companies. Gold, silver and copper are the main mineral resources in the United States, with growing exploration for battery minerals. It’s no surprise that many of the world’s junior miners are exploring these three nations.
Understanding drill results
Geologists will conduct drill programs, producing drill results that provide the company (and investors) an idea of whether it is worth drilling there.
Drilling is a critical part of a junior miner’s exploration process. Good drill assay results can sharply increase the share price, whilst one set of bad drill results could topple a company until they find a new mine location. A savvy investor should know how to understand a junior company’s drill results to make the best investment decisions. Go Deeper →
Things to look out for when analysing drill results:
- Presentation of highlighted results
- Gaps in drill hole numbering
- Providing cross sections for the best holes only
- Drilling holes very close to a previous hole with very good intersection
- Projecting the strike extent of grade shells, and mineralising zones
- Mineralised intercepts much longer than true width
- Smearing of short high-grade intercepts
- Conversion of polymetallic grade in grade equivalent
Companies complete drilling programs to help prove the existence and quality of an ore deposit. In the exploration phase, companies drill many holes in close proximity to each other across a potential deposit. Drill holes are angled to intersect the mineralised zones of an underground deposit. Drilling methods include diamond drilling, reverse circulation (RC), and percussion rotary air blast (RAB).
Diamond drilling is the best – and most expensive – method. Diamond drill bits are used to produce solid, cylindrical pieces of rock, called core. Core provides valuable information about the structure and mineralogy of a potential ore deposit.
Geologists examine the core and take note of any missing pieces. Samples from the mineralised zone are sent to a laboratory for assay analysis. Cross-contamination between geologic zones is rare with diamond drilling, making it the most accurate method. The drawbacks of diamond drilling are the time (several months) and cost required.
Reverse circulation drilling
Reverse circulation (RC) drilling is a quicker and cheaper, although less accurate, alternative to diamond drilling. RC drilling can cover more than 100m per day. This method involves blasting air down a pipe drilled into the ground. An air-driven hammer is driven into the pipe and pounds the round, breaking it into small chips and pieces. The rock cuttings are carried by air back to the surface, where they are sorted by size. Cuttings are bagged and a portion is sent to a laboratory for assay analysis.
For assay analysis, three consecutive samples are combined to form a three-metre composite sample. This method is less accurate, but cheaper. RC drilling comes with the risk of sample cross-contamination, which occurs when cuttings from adjacent zones mix as they are pumped back to the surface.
Percussion rotary air blast drilling
Percussion rotary air blast drilling (RAB) is the fastest and cheapest drilling method, ideal for drilling a large number of shallow holes across a deposit. This technique uses an air-powered hammer to drive a heavy drill bit into rock, breaking the rock into fine dust and chips. The cuttings are driven back to the surface by air, where they are sorted and bagged for assay analysis. Like RC drilling, RAB drilling comes with the risk of sample cross-contamination. Another drawback of RAB is that the drill hole will clog with mud when groundwater is encountered while drilling.
For all drilling methods, samples are sent to a lab for assay measurements. Assay results are the amount of mineral per unit of rock – for example, 2.1g/t (grams per ton) of gold or 0.55% copper. Geologists plot assay results on cross-sections so that the ore deposit can be visualised in 3D. Drill holes are often drilled at an angle, so data from the drill survey is used to capture the actual path of the drill hole through the subsurface. The drill path provides critical information about the thickness of an ore body and the mineralised zone.
When a company notes that their drill results are in “true width”, they have corrected their data to account for the angle of the drill hole. Consider an oval-shaped orebody that is 10m tall and 50m long. A vertical drill hole, a horizontal drill hole, and an angled drilled hole will all show different thicknesses of the orebody, hence the need for correction. True width data is an accurate representation of the ore body’s mineralization. Data that is not reported as true width is less trustworthy and is likely an overrepresentation of the amount of mineralization present.
Context is crucial when it comes to interpreting drill results. Data quality varies depending on the drilling method, and drill results can be reported in misleading ways. Companies will often report the drill result highlights–the very best results.
Consider an assay result of 6g/t Au: promising, but not outstanding if this mineralization is only present over a 1-metre interval while the rest of the drill results are 1g/t. Understanding drill results is a critical component to an investment decision, so take care to fully understand the data.
How do drill results affect a company?
Canada Nickel Company is a prime example of how good drill results can cause a company’s stock to skyrocket. In July 2020, CNC reported initial results from infill drilling at their Crawford nickel-cobalt project in Ontario. The results showed a nickel grade one-third higher than their initial drill results reported: 0.42% Ni compared to original high-grade average estimates of 0.30% Ni. CNC’s stock price nearly tripled, rising from USD$0.76 to USD$2.60.
How do junior companies obtain funding?
Most junior companies need to obtain funding or be bought out by a larger mid-tier or major company. Issuing shares of the company is one of the ways to do this. Junior companies can offer shares through an Initial Public Offering (IPO) on a public stock exchange. In Canada, where the majority of junior miners are traded, institutional investments and retail investments only make up a small portion of junior mining equity. The bulk of funding comes from private placements, particularly from specialist mining investment firms.
If junior miners fail to secure funding through traditional methods, other options are available. Some of these options include debt instruments or production-based financing. Juniors who need cash to continue developing their projects may also partner with other companies, farm out the project, or sell the project to another company.
What happens when all of the mineral has been mined?
It is often unlikely that a junior mining company would mine a feasible deposit until the end.
Instead, many opt to sell the deposit or their company to a larger mid-tier or major mining company and continue to explore to discover a new deposit in a new location. Canadian junior miner Rio2 has had success with this strategy in South America.
Rio2 was formed from Rio Alto Mining, who had two gold projects in Peru: the La Arena gold mine and the Shahuindo gold project. Rio Alto was acquired by Tahoe Resources in 2015 and the Rio Alto management team formed a new company, Rio2. The team capitalised on their success at the La Arena mine to develop the 5Moz (million ounce) Fenix gold project in Chile. Production at the Fenix gold mine is scheduled to begin in 2022. Rio2 has plans for further exploration and development in Chile, with a long-term goal of merger and acquisition activity.
2. Why should I invest?
The pros of investing in mining stocks
Junior mining companies often form an exploration pipeline that feeds into the majors. The investment risks are undoubtedly higher, and juniors are famously speculative. So why would you invest your money here? Go Deeper →
1. Mining provides a resource that humans can’t live without
Natural resources are the backbone of all industries on earth, and the demand is only increasing as supply becomes scarce.
2. Well-established industry
Mining is one of the most established industries in the world.
3. Dwindling supply = increased profit
Demand for natural resources is exponentially increasing as a consequence of the increase in world population: more people = more demand.
4. Simple process to understand... if you do your research
Although complicated at first, the mining industry is relatively easy to understand and invest in. All mining companies generally follow the same lifecycle from the exploration stage through to production. Once you have a clear understanding of the process, it is easy to apply that knowledge to different companies.
The cons of investing in mining stocks
With big risk comes big rewards - many juniors fail, but this means the demand for those that succeed is high. Go Deeper →
1. The mining process can be complicated
Don't let this put you off - with a bit of time and focus, you'll be able to understand enough to do your own due diligence.
2. Lack of information available to retail investors
Retail investors often do not have access to the types of company reports that are paid for by institutional investors, costing up to $100,000.
3. Brokers taking advantage
The investing industry is comprised of many different types of investors, from hedge funds to accredited investors to insurance companies (collectively institutional investors) all the way down to retail investors at the very bottom of the investing food chain.
Retail/individual investors are thought to be less knowledgeable, less disciplined and less skilful than institutional investors (fewer sources available) so they are often presented with more risky investment opportunities.
4. Promotional language
A growing concern for both the industry and investors is the type of promotional language used by companies when trying to persuade people to invest in their company.
5. Confirmation bias
Confirmation bias kills profit - don't fool yourself. There's a lot of biased information online, paid for by the company that is intentionally skewing the facts of the company its promoting. Go Deeper →
4. Extreme volatility
There are more than 3,000 junior mining companies listed on exchanges globally, with new ones constantly appearing - some good, some bad. So how can all of them survive and make money? They can’t and they won't.
Why do so many juniors fail?
There are more than 3,000 junior mining companies listed on exchanges globally, with new ones constantly appearing. So how can all of them survive and make money.
The short answer: they can’t.
Worldwide there are less than 50 major mining companies, so clearly not all juniors progress to this stage - some must fail. Go Deeper →
The question is, why? Here are 8 key reasons:
There's a reason over two-thirds of the world's production of uranium comes from mines in Kazakhstan, Canada and Australia. The countries have a track-record of having a proven and probable resource. Choosing to mine in an unfamiliar jurisdiction could be exciting, but it could also be hugely disappointing.
A well-funded and robust drill program allows the company to produce a maiden resource estimate. Poor exploration drilling results could mean that there is little/no resource in the location.
3. Technical limitations of the orebody
Even if there is a proven resource, it needs to be economically viable to extract. If the cost of extraction is more than the potential profit from the orebody, the project would be unsustainable.
4. Mining permits not granted
There are many stories of companies that have been unable to begin exploration projects as they have failed to gain the necessary permits from the relevant authorities to develop, construct production facilities or mine. Investors money is spent instead on the overheads of salaries whilst they wait for permissions that may never come.
5. Running out of cash
Junior mines need to be well-financed at all stages. Exploration and development is expensive, and if companies fail to raise enough cash during these phases then they will not be able to make it to production and will have to seek alternative strategies like bringing in a partner, merging, farming the project out to another company or selling the asset or company.
6. Change in commodity price
Current commodity market price significantly affects share prices for near-term producers and mining companies in production. The lower the cost of producing and the higher the commodity price, the more money the company makes.
7. Social and environmental conflict
Mining can be a politically vulnerable business, so exploration assets in difficult areas or politically unstable countries can be problematic. Whilst mining companies bring jobs and boost the economy to rural areas, they can be the source of social and environmental conflict.
8. Poor management decisions
The management team of a company are responsible for its success or failure. Relevant experience is key. Also make sure that they follow through on what they promise.
So, does this increase the rewards for those that succeed?
Yes. The early stage of a mining lifecycle is a particularly risky time to invest in a junior company. At this stage, there is plenty that can go wrong with securing funding, permits, and asset viability. Companies are a long way from proving a deposit and earning profit. Despite all of this, the biggest rewards come to those who invest early – if the company succeeds.
Junior vs Major: which should I choose?
Investors need to evaluate which they are better suited to. Are you a...
Thrill seeker: Junior mining companies offer high leveraged returns on investment when investing at the exploration stage, but only a small percentage will succeed through to the development or production phase.
Investment in explorers and developers require more research and due diligence as many variables are yet to be proven. You need to be able to answer questions honestly before investing.
Play it safe: Major mining companies offer a more stable and steady investment, with smaller returns but the possibility of earning dividends (a distribution of profits by a corporation to its shareholders).
Can't decide? Some investors choose to split their investments between the two, offering both risk and stability. With a blended risk approach to their portfolio.
Why is it good to have a diverse portfolio?
It’s important to reiterate here that investing, even outside the mining sector, is inherently risky. A general investing guideline is to have a diverse portfolio: invest in different sectors and in companies with different market caps. Further, diversify within each sector. Junior, mid-tier, and major mining companies all offer different risks and rewards and a combination of three can be a healthy, diversified portfolio. While it can be tempting to go all-in on junior miners, the reality is that most juniors fail.
If your junior mining investment pays off, consider investing the money in one of the mining ETFs, instead of reinvesting in another junior. Invest in juniors who are exploring for different commodities, as commodity prices fluctuate based on a variety of factors. Company location can have a huge influence on stock too, as geopolitical and community issues at mines can arise seemingly out of nowhere. Choose companies who are at different stages in the development process, as the risks are different at each phase. Follow the companies you’ve invested in, read their technical reports, and track their development progress. This will preserve your money in the long run and still allows the chance of junior mining investments paying off.
What is risk capital and how does it relate to Junior mining stocks?
Juniors offer the potential for a lot of appreciation, making them the ideal investment to fill your risk capital quota. Risk capital refers to the portion of an investment portfolio allocated to speculative or high-risk, high-reward investments. These investments typically have above-average returns if they succeed. Risk capital is part of a diversified portfolio and junior mining stocks can fit into this category. Junior mining stocks are speculative and are often penny stocks. Despite the promise of high returns, junior mining stocks often don’t pay off. Make sure you understand and are comfortable with putting risk capital into junior miners, and remember to diversify.
Are junior mining stocks a good investment?
If you do the right research and keep an eye on your portfolio, junior mining stocks can prove to be good investments. The early stages are the riskiest when it comes to investing in junior miners. However, many of the junior miners who are traded on public exchanges have already reached the development or production phase. This inherently lowers the risk, as the resources at these mines have been proven and the companies are on their way to becoming profitable. Read about junior miners’ leadership, strategy, drill results, and reserve estimates. Invest in a diverse group of junior miners, so that the highest gainers will offset the poor-performing stocks.
Key things to consider before investing in junior mining stocks:
- The business model of junior mining companies is based on the amount of resource in their asset. There is no way to know how much resource is actually there until it has been mined.
- Investing in individual junior mining companies is risky. There are a multitude of factors that can cause juniors to fail: geopolitical issues, community issues, permitting issues, or simply not having any resources.
- Drill test and feasibility study results can make or break a junior. Stocks can rise sharply on positive results and plummet on negative results.
- Junior stocks are more commonly held by individual investors, instead of institutional investors. Individual investors often make emotional decisions, causing volatility in junior stocks.
- Junior stocks correlate with the overall stock market.
Junior mining stocks success stories
When junior companies succeed, the rewards can be well worth the risk. Kaminak Resources is a recent example of a TSX-V listed junior who made it big. The company discovered the Coffee Gold Deposit in the White Gold District, Yukon Territory, Canada. Exploration began in 2009 when Kaminak acquired land in the White Gold District. Kaminak followed the steps of mining development, starting with chip sample analysis and diamond drilling programs. Drilling programs indicated high-grade gold deposits and Kaminak shares shot up in 2011 after these announcements. They continued exploring and proving the deposit, despite the gold price crash of 2012-2014.
In 2016, Goldcorp (now part of Newmont) acquired Kaminak and the Coffee Gold Project for $520 million. The project has measured and indicated reserves of 2.17 million ounces and an estimated life of mine of 10 years as of December 2019. The original Kaminak team is still in the junior mining business, having used the proceeds from their sale to form a new company called Tectonic Metals. They are currently exploring for gold in Alaska, just over the border from the Yukon Territory.
How to get started with investing in junior mining stocks
- Decide if you want to invest in mining.
- Be clear about your own investment strategy and stick to it, write it down.
- Work out what your risk appetite is.
- Study the markets and see which commodity you think shows the most potential. Where in the cycle is the commodity?
- Identify a handful of companies to study and follow.
- Take your time - there are always more deals looking for your money.
- Decide your method of analysis.
- Research that company until you've got a thorough understanding.
- Listen to the companies explanation of the business plan, does it make sense to you? Has the company continually done what they promised to do?
- Invest a little initially, and see if you're comfortable and add more over time.
- Remember the way you make money is by selling shares at a profit. They are spending your money, they report to you and the ONLY way you make money is if you sell your shares at a profit. You're not investing in a friend, company or the individual.
3. Picking the right stock
If you’ve decided to invest in junior mining stocks, use the following criteria to evaluate companies.
How to read a mining report
Mining company reports are so full of technical information it may feel like you need to be an expert to understand them. Ultimately, the information in the report will help you understand if the deposit is economic or not. Pay attention to the following when reading a mining report:
To know if drill results are good, you need to know what the company is looking for. Learn about the project’s deposit and mineralization style. Remember that the type of drilling can affect the drill test results. Research other mines in the area to see what the average grades are. How do the drill results compare? Companies should publish locations of their drill tests and the trajectories of the drill holes. Be cautious if this information isn’t in the report, as the company may be trying to hide something.
Assay testing determines the composition of a drill test sample and the quantity of each element present. Quantities of both the economic mineral and any impurities are measured in assay testing. Results are expressed as mineral grade, typically in grams/tonnes for gold and silver, or percentage for other minerals. These results can indicate the potential value of an ore deposit. Good assay results and a high-grade ore are good news for a mining project, while poor assay test results can stop the project before it starts.
How to analyse a company: Identifying green lights
Company management’s relevant experience
Companies management with a proven track record and experience in the mining cycle are more likely to succeed, highlighting the importance of looking at the background and experience of the management and technical team.
It is important for the management team to have relevant experience for the project they’re about to undertake, just as management teams with exploration experience are unsuited to build and operate a mine, likewise it is unlikely that executives from a major company will be used to the rigours and budget limitations of junior companies.
Whatever stage of project the team is working on, they must advance them in a timely manner, control share structure and complete financings at progressively higher share prices.
Research the company’s founders and leadership team before investing. Junior miners typically have small teams, so it’s important to make sure the group is skilled and trustworthy. Look for companies whose founders have extensive experience in the mining industry and a proven track record. The budgetary, technical, and logistical challenges faced by mining companies vary widely depending on location, commodity, and deposit type. Management experienced with similar projects will know how to address any logistical or engineering problems that arise.
Attractiveness of the geology and economics
Geology is fundamental to the success of a mine. Simply put, if there’s not enough resource in the ground, the mine will not be successful. Companies who have a thorough understanding of the geology of their deposit can make more accurate estimations of mineral resources and reserves. The more certain resource estimates are, the less risky the project is. Resource estimates determine how long the mine will be able to produce from the deposit before it runs out. Pay attention to the predicted longevity of a mining project and make sure it is comparable to similar successful projects.
As previously mentioned, there are two types of mineral exploration: brownfield and greenfield. Greenfield projects are far riskier than brownfield projects, given the lack of existing data and modelling uncertainty. They also require more time and start-up capital for exploration, licensing, permitting and construction. Only a fraction of greenfield projects actually make it to production. However, when the risks are higher, so too are the rewards–discovering a brand new mining district can be worth the risk.
The success of a mining company depends upon multiple variables including exploration results, jurisdiction and corporate structure.
Securing finance is a representation of the market’s trust in the ability of the management team to deliver what they say they can.
Ultimately though the risk is amplified by the fact that they are trying to find something that is buried deep underground. If the management team is lucky enough for all of the data to indicate a high likelihood of success underground, they will be able to secure financing.
As the management team continues to de-risk their business plan, the likelihood of money becoming available to them increases. Typically in the exploration/development stage (pre-revenue), this is done through the issuance of shares in the company.
Once a company gets into a near-term revenue or revenue-generating position, it's able to reduce the dilution of issuing shares and instead use debt instruments as a means of financing the development, Capex and Opex of their operation.
It is preferable to have a strong balance sheet, low debt and a positive cash flow, especially when commodity prices are low.
The permitting and licensing process
Obtaining permits and licenses for mining can be an onerous process. Licenses and permits are required at every stage of the lifecycle of a mine, from exploration to ore processing. Before a company can begin exploration, it must secure proper permits from the local government. Permits are intended to avoid and mitigate any potential environmental risk from mining activities. They are required for mineral exploration activities, infrastructure, land access, and construction.
To receive permits, mining companies must submit environmental impact assessments and pre-feasibility studies to the local regulatory agencies. Permit requirements and timeframes vary significantly by country and state/province. In the US, it can take multiple years for companies to receive exploration permits. Multiple agencies are involved and companies must resubmit permit applications if they make any changes to the mine design or processes. The process speeds up significantly once development is underway, but it can take 7-10 years total.
Permitting is faster and more efficient in Australia and Canada and is usually complete within two years. In countries with unstable governments, the permitting process can be difficult. Corruption and unfair permitting policies can delay projects or prevent them from progressing.
Before investing in a junior miner, check to see if they have the required permits. Research the permitting process and policies for their jurisdiction so you can understand where the company is in the permitting process. Investing in a company without permits can turn out to be a costly waiting game.
Potential mergers and acquisitions
The goal of most junior miners is to be acquired by a larger company. It’s become increasingly common for major and mid-tier mining companies to dedicate their extra cash to acquiring junior miners, rather than exploring for new deposits. M&A is the best way for junior miners to survive. The costs of building and operating a mine are so high that only mid-tiers and majors can sustain them. Keep this in mind when evaluating junior mining companies. Good juniors will complete all the technical and logistical work required to get the mine into production, positioning themselves for acquisition. Look for juniors who are transparent about their data and financial status, and are open to working with partners.
Finding a project with excellent deposit geology doesn’t guarantee that it will be a success. Jurisdictional problems can prevent projects from moving forward or even shutter them altogether. These risks include political instability, lack of infrastructure, lack of skilled workers, unfriendly economic policies towards foreign companies, and community problems. When evaluating a junior mining company, do some research on the mining climate in the country where they plan to operate. Traditionally, Canada, Australia, and the United States are welcoming to mining companies. Policies and ease of permitting vary by state/province in these countries. Finland and Ireland have recently emerged as mining-friendly countries.
Some South and Central American countries, like the Dominican Republic, Guatemala, Nicaragua and Venezuela, are particularly difficult for mining activities, due to political instability and economic policies. In Africa, Tanzania, Zambia, the Democratic Republic of the Congo, and Mali have their own political and humanitarian issues. Tanzania recently changed its mining rules to keep more of the mining profits in the country and the Democratic Republic of the Congo is dealing with child labour issues.
When evaluating junior mining stocks, look for politically stable countries with a history of successful mining projects with foreign companies. Review the country’s current mining licensing and permitting policies and their economic policies when working with foreign companies. Pay attention to the exact location of the mine, as different states/provinces have different policies and localised community issues. Make sure the country has access to infrastructure, construction, and a skilled workforce to develop the mine.
How to analyse a company: Identifying red flags
Read the financial statements and technical reports of any junior mining company you’re considering investing in. Be wary if any of these red flags pop up:
- The CEO has been with the company for years but has no accomplishments to show
- The board is made of the CEO’s friends and family
- The CEO and management team own very little company stock
- There are no institutional investors
- The company is run by a corporate promoter who takes fees
- The company frequently releases newsletters, even when there’s nothing new to report
- The company’s geologists are overly excited about the asset, but can’t provide a detailed explanation of why
- The company does not release negative drill hole results
- The company re-drills historical drill holes, releasing old information to generate excitement
- The company is exploring in a politically unstable company or one where bribery is common
- Team members have excessive salaries and expenses
- The company spends heavily on investor relations and marketing
- The company switches focus to the current hot commodity
Should commodity prices affect my decision?
Like all commodities, mineral prices fluctuate. These fluctuations are driven by several factors, including supply/demand, market conditions, and the global economic situation. Mineral prices will decrease if the market is oversaturated, or increase if demand outweighs supply. Commodity prices also account for predictions of future supply and demand. Overall market conditions and global geopolitical situations also influence commodity prices.
Pay attention to market analysis and commodity demand. For example, demand for battery metals and uranium is projected to increase as the world seeks out clean energy sources.
Commodity prices have the greatest impact on companies who are currently producing or near-production. Operational costs are relatively fixed for mines in production and are not affected by commodity price. Thus, if commodity prices increase, the company will earn a greater profit on the ore. If the commodity price decreases, the company will earn less. However, mining operations are not easily shut down if commodity prices decrease. Active mines continue to operate during commodity downturns until the operation costs become unsustainable. If this happens, the mine will go into care and maintenance mode, potentially reopening once commodity prices recover. Changes in commodity price also influence stock prices, although this effect is not as significant for junior miners.
Investment decisions should not be solely based on commodity prices. Look for a company with effective cost management strategies. Companies whose all-in cost of mining is less than the cost of the mineral being mined are well-positioned. It can take years for mines to reach the production stage and commodity prices will likely change over that time period. Operationally efficient companies are positioned to stand up to commodity fluctuations over time, making them a good investment.
4. How to invest
Do retail investors have the same opportunities as institutional investors?
Institutional investors are those who invest money on behalf of other people–pension funds, mutual funds, investment banks and some private equity investors, for example. They trade securities in huge quantities, which can have a significant impact on the market. Retail investors are individuals who buy and sell securities through a brokerage firm for personal goals, like retirement or education savings.
Institutional investors are at an advantage compared to retail investors. They can negotiate lower trading fees and aren’t subject to the same regulations as retail investors. Since institutional investors have a higher purchasing power, they have access to investment opportunities with large minimum buy-ins. Market regulators consider retail investors to be less sophisticated and educated than institutional investors. They charge higher fees and commissions to retail investors and prohibit them from making certain complex investments. While retail investors simply can’t compete with the big firms, there are plenty of options for individuals to get in on the junior mining stock action.
What are the different methods of investing in junior mining stocks?
- Buy Canadian stocks. The vast majority of junior mining companies are based in Canada and traded on the Toronto Stock Exchange (TSX) or the TSX Venture (TSX-V).
- Buy individual junior mining stocks. Build your own portfolio of junior mining stocks – this is a great place to use your risk capital. Work with a professional advisor who is experienced in the mining sector and can research individual companies.
- Buy an ETF – with a caveat. The most well-known junior mining ETF is the VanEck Vectors Junior Gold Miners ETF (GDXJ). Although the GDXJ is advertised as a junior miner ETF, it has very few true juniors.
What is an ETF?
An ETF, or an Exchange Traded Fund, is a collection of securities that tracks an underlying market index. These securities can be stocks, bonds, or commodities. ETFs are traded on an exchange and differ from mutual funds in that they are traded throughout the day. There is a variety of ETFs in the mining sector, including ETFs that focus on gold, copper, lithium and batteries, and juniors.
What are flow-through funds?
Junior mining companies issue flow-through shares as a way to raise funds for exploration and development. Flow-through shares are issued at a higher price than normal, providing companies with the extra cash they need for mineral exploration. Investors are incentivised to pay the higher price because they can claim deductions on these shares and lower their Canadian taxes. Resource companies in Canada receive tax benefits from exploration and development expenses, called CEE (Canadian Exploration Expense) and CDE (Canadian Development Expense). Companies at the exploration stage often have no net income and therefore no way to claim these deductions. With a flow-through funding structure, a company issuing flow-through shares forgoes these benefits and passes them on to the investor. This practice is unique to the Canadian resource industry.
While the flow-through shares structure is a tax shelter for investors, there are a few things to be cautious about:
- The allure of the tax benefits could convince you to make a risky investment you wouldn’t make otherwise.
- Companies issuing flow-through shares typically have very little income and are short on financing.
- If you purchase flow-through shares through a partnership, a portion of the shares are set aside for the fund’s brokers and managers.
- Fund managers might make hasty decisions to get money to the company and tax benefits back to investors quickly. Hasty decisions aren’t always the best decisions.
- Additionally, flow-through shares are illiquid and must be held for 18-24 months to get the full benefits.
Before purchasing flow-through shares, research the company the same way you would any other junior mining stock. Weigh the tax benefits against the possible drawbacks, and make sure you are comfortable with this type of investment.
Can I invest in the juniors by buying GDXJ?
The GDXJ is a junior gold miners ETF that tracks a market-cap-weighted index of global gold and silver mining companies. It is made up of 91 small and mid-cap mining companies who generate more than 50% of their revenue from gold or silver mining. It was created to allow investors to invest in a diversified group of junior mining companies.
However, there are very few true junior companies on the GDXJ. The majority of junior mining stocks are traded on Canadian exchanges, and Canadian securities laws prohibit a single entity from purchasing 20% of a company’s stock. The laws define this as a takeover, in which case the investor must offer to buy the shares of all of the company’s stockholders.
Junior companies are so small that listing them on an ETF would trigger a takeover. In 2017, the VanEck changed the index to include larger companies and avoid violating securities laws. This means GDXJ is no longer truly dedicated to junior gold miners, despite being advertised as the world’s largest junior ETF.
If you want to invest in true junior miners, avoid the GDXJ and develop your own portfolio of juniors.
Which stock markets are most junior companies listed on?
Most junior mining stocks are listed on the Toronto Stock Exchange (TSX) or the TSX Venture Exchange (TSX-V).
TSX: the largest stock exchange in Canada and the 9th largest exchange in the world based on market cap. It has more mining and natural resources stocks than any exchange in the world.
TSX-V: an exchange for small-cap and emerging companies, particularly in the natural resources sector. More than 50% of the companies listed on the TSX-V are in the mining sector and the exchange is the world’s largest home to micro-cap start-up mines.
Similar to Canada, Australia has massive mineral resources and is home to mining companies of all sizes. Some of the world’s largest mining companies, like BHP and Rio Tinto, are listed on the Australian Stock Exchange (ASX). Over 500 small-cap mining companies are listed on the ASX, including juniors like Jervois Mining, Alacer Gold, and Volt Resources.
Junior mining stocks are also traded outside of traditional stock exchanges. Companies who do not meet the requirements for standard market exchanges – like the TSX, ASX, or NYSE –can be traded on over-the-counter markets (OTCMKTS). Over-the-counter (OTC) trading is done through a broker-dealer network. Broker-dealers negotiate directly with one another using listings from the OTC Bulletin Board or OTC Pink Sheet.
Can I invest in companies on the TSX if I don't live in Canada?
Investors living outside of Canada have several options for buying stocks on the TSX and TSX.V exchanges.
- ETFs or mutual funds: these are made of stocks from a variety of exchanges. Purchasing shares of an ETF or mutual fund is one of the easier ways to purchase shares for a foreign exchange.
- Brokerage firms: purchasing foreign shares is easily done through brokerage firms and online trading platforms, like E-Trade and TD Ameritrade in the US, IG in the UK, and CMC in Australia.
- Interlisted stocks: another option to purchase TSX shares is to purchase shares that are interlisted on other exchanges. Many TSX stocks are also listed on the LSE and ASX.
How much money should I invest?
Like many other factors in investing, the amount of money you put into junior mining stocks is up to personal preference. Think of this money the same way you think of risk capital: it’s not where you want to put your retirement or long-term savings. Decide what percentage of your money you’re comfortable investing in a speculative, risky stock.
You may choose to invest different amounts in different companies, which is good too. Consider everything we’ve mentioned already: do you trust the company to move the project forward? Is there enough resource there and can it be mined economically? Does the company have low operating expenses? Will the shares appreciate or be diluted? All of these factors should influence your decision. The more confidence you have in the company, the more you can invest.
5. Monitoring your stocks
You’ve done your research and chosen some promising junior miners to invest in – now what? Junior stocks are not a long-term buy and hold stock. They tend to be volatile, so investors who want to make a profit need to keep a close eye on them, make sure they have an exit plan in place for junior mining stocks.
While you’re holding the company stock, there are several things to monitor. Pay attention to the company’s press releases. They will contain information about management changes and updates on financing, exploration, testing, and permitting activities. It’s also important to consider the overall movement of the stock. Information about insider trading, management issuing stock options, share dilution, and timing of previous share issuances are all available online.
How do I know when to sell my shares?
Knowing when to sell any stock, much less a volatile junior mining stock, is a tricky business. The ideal time to sell varies for each stock and each investor. Remember that a junior miner’s stock price is affected by the overall market and commodity prices. The company’s activities and stage in the lifecycle also determine if it’s a good time to sell the stock.
Junior mining stock prices are cyclical. During the exploration phase, particularly for greenfield projects, the stock price is dormant. As the company secures financing and progresses through the exploration phase, the stock price gradually increases. The price of junior mining stocks can skyrocket in the days after a company makes positive announcements. These announcements include milestones like promising drill test results, JV partnerships, and resource estimates.
The best time to sell is at the peak of the stock price increase. It’s hard to know exactly when the peak will occur, but it is typically within a few days of the announcement that caused the price to increase. Stock prices will settle and eventually decrease if the discovery does not pan out. Before selling, consider the company’s history and how it got to this point. If the company is in the early stages of mine development, prices could continue to increase with future positive announcements. However, projects in the early stages can face future challenges, like permitting and licensing issues.
Despite all of the volatility, some investors choose to hang onto their junior mining shares for longer time periods. This strategy can pay off big if a junior miner’s discovery gets into production and they sell the project to a mid-tier or major. Ultimately, it’s up to each investor to decide when to sell.
Analysing quarterly announcements
Similar to press releases, quarterly announcements contain valuable information about a company’s status. Quarterly announcements focus on the company’s finances: how much money they earned or lost during the quarter, and why. Net adjusted income and loss data will give you a good idea of how the company performed. The report’s tables and charts provide a detailed financial breakdown of expenses, earnings, and debt levels. Pay attention to where the company is spending money–exploration, development, construction, operations – and make sure it’s in line with where they are in the lifecycle of their mine. If the company is at the production stage, the report should contain production numbers.
Take all of this information into account with current commodity prices and market status. A mine’s all-in sustaining cost (AISC) should not exceed commodity price. Most importantly, read the entire report. The best news is often at the beginning, with less favourable news at the end.
Watch out for changes in the management team
A strong, experienced management team is vital to the success of a junior mining company. Companies will announce any management changes in a press release. If a company announces management changes, pay attention to which roles are changing. Is it the entire management team or the CEO? If so, that could be a sign the company wasn’t performing well. A junior miner’s management team should be well-rounded, with experience in exploration, raising capital, and opening a mine. Make sure any changes to the management team are complementary to the existing team members.
Looking at press releases
Company press releases contain a wealth of information: management changes, exploration results, drill test and assay results, construction and permitting updates, and financing announcements. All of these events can affect a junior’s stock price, so it’s important to keep up with press releases. You can find them directly on the company’s website and mining news websites. Press releases often show the company in a positive light, so do your research and read between the lines if you have to.
Keep a regular eye on the stock
Monitor the stock prices of the individual junior mining companies you’ve invested in. When you see sudden changes in their stock price, read recent press releases and quarterly announcements to see what caused the change. If a company released excellent drill test results, a sharp increase in stock price is expected. But some stock prices can rise to unsustainable highs because of investor hype. Read the reports carefully and make sure the data backs up any changes to a stock price.
Similarly, look for downward trends and sudden decreases in stock price. They could be reactions to unsustainably high stock prices, commodity prices, or overall market actions. Positive exploration results often cause a stock price to increase, but investors can react in unpredictable ways. Stocks can decrease after positive results if the results weren’t as good as investors were expecting. Research the company’s recent actions before making any decisions about buying or selling in reaction to sudden increases in stock price.
After reading this guide, you should feel confident in your decision to invest in junior mining stocks. Follow these guidelines from the moment you buy to the moment you sell:
Pick the right company: research companies before you invest. First, is there enough ore in the ground and can it be extracted economically? Look for management teams experienced in exploration and development. Choose a company with a proven track record of opening and operating a mine. Make sure operational costs are low so the mine will be profitable.
Build a portfolio: instead of investing in a few junior mining companies, build your own portfolio of companies in the sector. Choose a variety of companies who are at different stages in the mining life cycle and extracting different commodities. Many will fail and few will succeed, and a well-rounded mix of companies will protect your capital investment.
Monitor the stocks: once you’ve invested, keep an eye on your stocks. Stay up to date with company announcements and press releases. Keep track of their exploration and development progress, drill test results, and finances. Watch out for any sudden increases or decreases in their stock price.
Have an exit plan: as soon as you invest, have a plan for when you’re going to sell. Junior mining stocks are highly speculative and subject to investor mania. An exit plan will help you look past the hype and get to the crux of the matter.
What do I do next?
As discussed in this report, the junior mining industry is full of many opportunities to get caught out. Whether it’s misleading language in company press releases, the persuasion techniques of brokers or the minefield of information available online, it’s becoming harder and harder to determine what’s the truth.
So do your homework before investing your money. Be clear about what your investing strategy is and be honest with yourself when assessing an investment. And in 2021, for a good night's sleep, invest in stories with strong fundamentals, not momentum.
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