We couldn’t fit all of our tips for novice junior mining investors into our “Share price primer” in the June 2010 issue of Mining Markets, so we’re offering a companion piece on navigating the junior mining space.
For new investors without a geology background, sorting out the technical information packed into the websites and press releases of junior mining companies can seem an overwhelming task. But with a few basics in mind, lay investors who don’t have a geology background can start to build a foundation for discerning the hopeful stories from the dubious, and begin to intelligently pare down their investing prospects.
We called upon experts including newsletter writer Brent Cook of www.ExplorationInsights.com; Michael Fowler, senior mining analyst at institutional equity firm Loewen, McCutcheon, Ondaatje; Craig Stanley, vice-president of research at Pinetree Capital; and Jeff Stuart, director of corporate development at Manex Resource Group, and they gave us these tips on how non-technical retail investors can make better investment decisions.
1: Know the odds
It may sound obvious, but the first thing to be aware of is the long odds of exploration. “People know that exploration is risky, but I don’t think people really get it,” Michael Fowler says. “Once they’ve invested in something, I think they believe that it’s going to be a mine 100%, but the odds are not all that good actually.”
Not having a basic knowledge of geology can make an inherently risky space downright dicey.
“The odds are stacked against any investor in this market,” says Jeff Stuart, a former broker. “Very few of these stories ever succeed — one in a hundred will ever find a deposit that’s of any merit that will ever go into production, if they’re lucky.”
Recognizing that any one story is a long shot and that failure is the norm in exploration allows investors to cast a skeptical eye toward all stories, and to avoid putting up cash they can’t afford to lose.
2: Enjoy access to the top
Junior resource investors enjoy unparalleled access to management of the companies they invest in – an advantage that shouldn’t be taken for granted.
While investor relations reps are a good place to start for information on a company’s property, most aren’t technical people, so don’t stop there.
“Most of the geologists and company presidents in these junior companies are pleased to hell to talk about their property,” says Brent Cook. “Call them up and ask what do these results mean?”
Management can walk you through drilling or sampling results, the type of deposit they’re looking for, and the sorts of grades they need in order to make it economic.
Craig Stanley, vice-president research at Pinetree Capital also suggests that lay investors should build up a network of trusted people with some technical knowledge who can advise on things like geology.
And a check on the credentials of management — basic research that can be done well before getting to the nitty gritty of geology — can weed out riskier investments or weaker prospects, Spooner says. It’s generally not a good sign if an accountant or lawyer is leading the company, he says. While the CEO doesn’t have to be a geologist, Stanley looks for management and technical people with experience and past success.
3: Check for full disclosure
Without knowing a thing about geology, investors can glean valuable insight into a company and its projects through its disclosure of technical information.
Cook says this test alone will screen out half the companies on your investing radar right off the bat.
“Make sure there’s documentation of everything,” he advises. “If a company is proud of what they’re doing, is proud of their deposit, they should do everything in their power to make it possible for you as an investor to understand what they’re doing and want to buy that stock.”
The geologist says there should be drill maps and drill sections (cross sections that show where holes are collared and the intercepts and grades they cut) of current work, as well as information about past work on the property.
“A lot of these projects have been recycled a number of times, so if this has been drilled before, what were those results?” Cook asks. “That should be somewhere available — if the company isn’t presenting that data, in my view, there’s only two possible reasons for that. Either they’re incompetent or they’re trying to hide something from you. Either way you don’t want to buy that because you can’t effectively evaluate it.”
4: Location, location location
Investors don’t need a degree in geology to appreciate that juniors exploring in producing areas have a better shot of making a discovery.
Pinetree’s Stanley says retail investors are likely on the right track if they look at proven areas – such as the Val d’Or region of Quebec, where dozens of mines have already been established.
“If I’m not a geologist I can at least say listen, there’s an area where there’s a proven trend and a bunch of mines – obviously, this company might have success in finding something there,” Stanley says. “Whereas if they’re out in an area that has no producing mines and has never really been explored and I don’t have the geological knowledge, how am I going to understand if they’re going to have success or not? For me, those types of companies are better left to people that actually have geologic understanding.”
5: Take it in context
Mining analyst Michael Fowler points to the main problem retail investors’ lack of technical knowledge poses: “Certainly the geological knowledge is not good, so they can’t translate what’s said in the press releases to what’s going on in the company, and translate that into share price value.”
Investors who do take the time and energy to bone up on geology will be better able to determine whether and at what price, to buy in. They are also better able to detect any funny business. And the more geology, the better, says Manex’s Stuart.
“A lot of our peers in this business will try and hornswaggle investors on their geology,” he notes. “They’ll say we’ve got 3 million ounces of gold, our stock should be going to the moon. Well if you look at how deep it is and the host rock it’s in, and all these other things, it could be 6 million oz. of gold – it’s still not economic. It’s not size, it’s quality, and that’s an issue I face with our companies everyday.”
So where do the non-technically minded start to develop geological knowledge – short of going back to school? Since drill results play a big part in investing in and evaluating juniors, developing an understanding of how to decode them and what they may reveal about a deposit is a necessity.
“It is very difficult for someone who is not into mining and geology and trained in that to effectively interpret drill results, but there are some generalities,” Cook says. “Probably the first thing to get together is a geologic context. Once you’ve got that context, then you can put the drill holes in place and know what to expect – what’s good and what isn’t good.”
The best way to get started is to focus on one company and one type of deposit, Cook says. Once you build a firm understanding of one type of deposit – be
it porphyry copper or high-sulphidation gold – you can compare it to other similar orebodies for an idea of the size, grade and depth that could render a deposit economic.
It’s likely that less than 5% of retail investors in the Canadian market actually go through this process to that detail, Cook says. “The rest are just gamblers and they more or less lose all their money – eventually,” he adds. “So you’ve got an advantage if you do the research — you’re ahead of 90% of the people.”
One last piece of advice on choosing that first project: “Pick a company that’s very honest,” Cook says.
6: Think 3-D
When looking at drill results, it helps to think like a geologist – in three dimensions.
“You want to look at the orientation of the hole relative to the deposit,” says Pinetree’s Stanley. “You can get a great result by drilling down the plunge or the strike of the deposit, whereas the proper way to drill it would be to come at it from an angle and try to hit it from a perpendicular way.” Management of less-reputable companies on occasion do this to get their share price up, rather than trying to test the deposit to find out more about it.
The location of a drill hole is also important to note. “Has it been drilled very near an existing hole that had a great result, which means you have to take that in stride, or is it what we call a stepout – is it 100 metres away, for example, or more from an existing hole?”
“Pincushioning” — where a company puts a lot of drill holes into a small known area of mineralization – which previous work has shown is limited to that area — can produce great, but “meaningless” drill results, says Cook.
Deposits that have potential to grow — that are open at depth, along strike or in all directions – are better bets.
And of course, examine the actual assay results.
One trick called “grade smearing,” when a company will report a narrow, high-grade hit as occurring over a longer, lower-grade intersection to create the impression of a minable width. For example, if the actual assay is 1 metre of 100 grams gold per tonne, it might be reported as 10 metres of 10 grams gold.
While the regulatory authorities usually catch such tricks, they do occasionally occur, and investors should be aware of them.
7: Take a step back
To see the big picture, investors need to get an idea of what the company is looking for.
“I think it’s real important to have some sense of what a deposit is likely to be worth if the company is successful,” Cook says. For him, that involves a back-of-the-napkin net asset value calculation when he visits a property. Cook then compares the potential value of the project if the company finds what it’s looking for to similar deposits that have been evaluated.
“I would say more than half the time, in my experience, companies are looking for something that if they’re ultimately successful, really isn’t worth very much and certainly doesn’t justify the risk in this really high-risk business.”
Cook adds it’s also important to look at how much it’s going to cost the company to prove they’ve got something. The triumph of discovery isn’t as sweet for a junior that has in the process ended up with 200 million shares out and a 20 cent stock – “You’ve been diluted out of your discovery.”
8: Be a skeptic
It’s important to scrutinize your information sources and bring a healthy dose of skepticism to your investment research.
Stanley notes that in the highly promotional business of junior mining, the wary are less likely to be swayed by practiced pitchmen.
“You always have to ask yourself if somebody’s giving you information, why are they giving it to you? What’s in it for them?”
Stanley notes that there is often a financial incentive when third parties cover juniors. Be aware, for example, that if an analyst is writing about a company, his/her firm may have underwritten a financing of that junior. If you look to newsletter writers for guidance, look for disclosures indicating whether they have a position in the stock or if they’ve been paid by the company to cover it.