How Retail Investors Should Value Junior Mining Companies

Investing is about making money and keeping it. Investors in public companies make money by buying shares at one price, and selling them at a higher price.

It seems pretty simple, doesn't it?

Unfortunately, buying at a bad price and exiting at an even worse price is more common than you think.

At some point in their investing career, most investors will buy something they'd later regret. Perhaps they always knew it wasn't a good buy, perhaps they didn't actually do any research, maybe they knew what they were doing, but had no clear exit strategy to get out of it.

These kinds of mistakes happen in every sector, but they're especially common in the mining industry where it's easy to be bamboozled by drill results or inaccurate technical reports.

As we enter a super cycle for metals and minerals, investors are attracted to the mining industry by the consistent and growing global demand for its output and the risk & reward accompanying exploration. The tension between the two offers an opportunity for large returns on early investment.

In this  article we deal with the first part of the equation, how to value a junior miner. This can be challenging for retail investors. The geologic uncertainty, arcane language, and a lack of standardised reporting can obfuscate and divert.

We spoke with three experienced mining company heads to gain insights into key metrics investors should consider when gauging company value. Our guests were:

• James Withall, CEO of Rupert Resources
• Marz Kord, CEO & President of Wallbridge Mining
• Brad Langille, CEO & President of GoGold Resources

Meet our panel

Rupert Resources (TSX-V: RUP)

Rupert Resources is a junior gold miner based in Ontario, Canada, with operations predominantly focused in Finnish Lapland. The company's flagship operation is the multi-million-ounce Ikkari gold project on a 595 km2 land package, while also owning the adjacent 0.5 MTPA Pahtavaara gold mill. Rupert also holds two gold assets in Canada, the Ontario-based Gold Centre property and the Surf Inlet project in British Columbia.

Early metallurgical testing on Ikkari ore suggests excellent recovery rates using low-cost processes. Ready access to renewable energy and a predicted surplus of power in Lapland by 2030 bolsters the company's strong ESG credentials. A PEA is expected for Ikkari by Q3 2022.

Wallbridge Mining Company Limited (TSX: WM)

Wallbridge Mining is an exploration-development company headquartered in Ontario, Canada. Their wholly-owned flagship Fenelon Gold Project is located in northern Quebec, offering a potential multi-million-ounce gold deposit. In 2020 Wallbridge created the district-scale prospective land package through acquiring Balmoral Resources.

The company identified a large gold mineralised system over a strike length of 1.8 kilometres during a successful drilling campaign in 2020. Through 2021 a further significant drilling campaign has occurred, in addition to the start of a 10,000 metres underground development. Wallbridge presented a mineral resource estimate in November 2021 and, in 2022, has approved a $70 million exploration drilling programme of 160,000 metres to focus on growing the gold mineral resources, primarily at Fenelon.

GoGold Resources (TSE: GGD, OTCMKTS: GLGDF)

GoGold Resources is a Canadian-based silver and gold producer owning projects in Mexico, with one mine in development and three exploration properties. Its Parral mine has operated for eight years with seven years of production remaining. Its Los Ricos exploration development property is located in Mexico's Jalisco state and covers 42 concessions over 22,000 hectares.

Split into two projects, the Los Ricos South project announced a Mineral Resource Estimate mid-2020, with a PEA announced in January 2021 showing a base case NPV of $295 million at 83Moz Silver equivalent. The Los Ricos North project was launched in Q1 2020, with a mineral resource estimate announced in December 2021 of 160Moz Silver equivalent. A drilling campaign of 100,000 metres is underway through 2022 to expand the original resource estimate.

"Grade is King" may be cliched, but is it true?

Seasoned investors are familiar with the wild swings in mining company valuation applied by the market. Unfettered expectation, rumour, lack of understanding, over promotion and wild theories often bear witness to a dramatic rise in share price and a hoard of unsuspecting new shareholders jump aboard and join the ride. But too frequently, they are still on the ride all the way back down when the reality of geology and truth from the drill bit are revealed.

We questioned our panel on their insights, to coalesce some basic metrics investors can employ to separate emotion from fact when making investment decisions. Our guests selected three markers of company management, allowing investors to make informed decisions on potential opportunities, informing and smoothing valuation volatility.

1. Transparent and consistent communication

In 1997 the mining industry was shaken by a scandal involving a group of companies called Bre-X Minerals Ltd. With a share price of CAD$0.30, Bre-X announced the discovery of a large gold deposit in East Kalimantan, Indonesia. By May 1996, the company share price had risen to $286.50, valuing the company at more than $6 billion in today's money. The share price crashed when the announcement was revealed as a scam, and Bre-X folded in 1997.

The Canadian Securities Regulators (CSA) attempted to standardise the mining industries reporting of resources and reserves by introducing a National Instrument called (NI) 43-101 in the wake of the scandal. While applicable only to Canadian exchange-traded stocks, the standard is widely used with more than three-quarters of the world's mining companies Canadian based.

While (NI) 43-101 was a positive step, many argue that compliant reports do little to allow differentiation between marginal and high-quality investment opportunities. In an industry renowned for its technical language, investors can be excused for not having the skill or desire to sift through such reports and a company's geological data to understand the value proposition. Instead, they must rely on informed analysis and honest communication. James Withall was clear on his expectation of junior miner CEOs,

"...what you can do ... is to deliver as much information other than drill results into the market ... as an exploration company, you can deliver metallurgical work, you can show where the project is in the process... So when you put out sections that show when you've got 100m at 5g... If it is consistently mineralised throughout the 100m, show it ... because you've got to differentiate yourself from the guy that might have 1m at 450g and the rest of it's just nothing."

Marz Kord emphasised that Wallbridge Mining has employed a communications consultant and taken steps to standardise its messaging, allowing investors to identify improvements. He commented on some of the opaque announcements that confuse rather than clarify,

"...you see a lot of cryptic information and have try to figure out was this positive or was this negative? I'm not exactly sure, but it came out on a Thursday night or a Friday morning. Is that a good thing or a bad thing? "

Communications that are non-existent, irregular, changeable, obscure, or missing depth might flag a need to reset your views on a company's value, or allow you to apply a risk-weighting to your decisions. Investors need to feel comfortable with the senior management team and the messaging they hear, gaining confidence and investment insight from the detail and regularity of the company communication. It’s also about what the company chooses not to tell you and why.

2. Business Fundamentals

Our panel agreed that attention to some common-sense business fundamentals is key for investors to gain insight into a company's value proposition. James Withall suggests a simple check is to look on an internet world map to understand the project location and what's influencing it. He states,

"... look at where this resource is relative to a bunch of buildings or infrastructure ... Because often that gets missed, people say ... it's a really good location. But sometimes it might be a bit too close to a town... or it's in the back end of nowhere far from infrastructure like electricity, water, roads, or there's a national park. They don't want to tell you about that sort of thing. And by the time they build the infrastructure, which (will) cost them hundreds of millions, it doesn't work anyway. So there are really simple things that sometimes don't get put on the presentation or in the economics."

Withall also feels there are some basic calculations that investors can do to identify value. He says investors should be looking for companies with exceptional ground metres, citing the following example,

"...so (when a company) puts out an intercept (gram by metre), multiply one by the other. And if it's less than 40, well, it's ... not an exciting intercept, because you need 40g/m (in Gold gram metres) ... to make anything (economic). And so when someone comes in with an especially narrow vein ... you might have 3m at 5g. Well, it's only 15g/m. It's not going to make much money because you've got to dilute it. "

He warns of the influence small bands of super high-grade deposits might have in skewing the drill result average. They may be overly influencing the results, he says, "... (if) there's nothing in it apart from that, you know that it's some little spotty deposit which has been made to look good."

Finally, Withall warns that there may be high-grade deposits that are refractory. These reserves require more complex and more expensive treatment methods for oxide-ore recovery rates. Withall believes investors should be looking for some metallurgical recovery data to be presented with the grade announcements to allow investors to gauge the quality of the deposit.

3. A focus on business building

As investors, it's not unusual to hear business leaders talking up their company value. However, Brad Langille suggests that listening carefully to the narrative employed by a mining CEO will be a useful guide to their main drivers. He suggests,

"if that CEO, all he's talking about is how (he's) going to get the next trade on the stock to bring up the share price, and he's not talking about what he's doing on the ground and how he's building his business, you should run away, you shouldn't buy that company."

James Withall takes Langille's comment further by calling for clarity and consistency in business-building communications. He calls for miners to communicate a business plan and stick to it. Advising when and why there's a diversion from the plan and what's being done to recover.

"... if you have a strong business plan ... it goes to a strong systematic approach to what you're going to do, and you can put that up ... but then you have to commit to it and ... you have to fulfil it."

Marz Kord reiterates that while everything doesn't work out all the time, investors are OK with that if the explanation is thorough and timely.

" ... (if) we ... have provided that programme we're going to carry that out, right? And along the way, there is positive news or negative news, communicate that, explain that ... (we need to) make sure we are as transparent as we can be ... to me transparent communication is the key."

Summary

Without a good understanding of the technical aspects of the mining industry and some insight into the impenetrable language employed in reporting, retail investors can struggle to apply meaningful valuations to a company. Investors relying on the early-stage predictions of industry analysts often make investment decisions based more on faith than empirical data.

It’s also important to note that analysts, brokers and promoters have different business model to retail investors. They make their money in a different way. So validate the track record of the person you are listening to before you make your investment decision.

Our panel emphasises some rules-of-thumb investors should seek when weighing their options. The metrics should be transparent communication of plans from the company via the CEO, timely explanations on divergences, good business and financial fundamentals, and a focus on building the business through organic growth.

To round out the panel's advice, Brad Langille suggests that investors should look, listen, and then trust their instincts.

"I'd say that's the number one thing if you're a retail shareholder, look at the people you're dealing with. Can you trust them, or are they just really pushing hard to get you to buy the stock so that the next trade is there and it's an up trade. And look at their track record, look at the people they have around them, look at the board. That board is supposed to represent you and the shareholder. Those are some of the key things, and again, it's all about the people."