Four Tips for Investing in Junior Miners via The Vancouver Sun
Published in January 31, 2012on
Junior miners: Worth the investment? (Source)
The replica bull on the floor at the Vancouver Resource Investment Conference last week symbolized the type of market that suffering resource investors hope is about to break out. The imposing animal's lack of motion was also apt - the TSX Venture Exchange has plummeted almost 30 per cent in the last year and a staggering 50 per cent from highs reached in March 2007.
It's been a prolonged period of pain for junior mining investors, but the suffering certainly hasn't been limited to Howe Street. Canada's benchmark S&P/TSX Composite Index, made up of Canada's largest stocks, lost 11 per cent in 2011.
Apple shares have had a great ride, but most investors who parked money in blue-chip American companies a decade ago are barely ahead.
The rock star of asset classes over the last decade has been gold. The much-maligned yellow metal has increased in U.S. dollar terms every year since 2001, rising from $270 to $1,700 an ounce and confounding skeptics. However, the share prices of both juniors and gold mining companies have not kept pace.
If - as many financial institutions predict - the price of gold rises again this year, the lagging share prices of juniors and gold miners will have even more catching up to do.
At least that's the hope of many of the 7,000 investors who attended the annual resource show run by Cam-bridge House International. The Jan. 22-23 conference featured speakers, newsletter writers, a broadcast centre and more than 600 junior resource companies exploring for gold, silver, copper, uranium and a host of other metals.
I attend each year to check out investing ideas and companies that are worthy of further investigation. It's a good first stop for stock pickers who enjoy researching companies, are looking for out-size returns and have a high risk tolerance.
Sure, there was plenty of "bull" among the booths at Vancouver Convention Centre West.
It seemed almost every company had the most promising gold-silver-copper-uranium project on the planet, with colour-coded maps and glossy brochures to match.
For many of them, buying the pitch - and the stock - is a recipe for heartache.
But among the over-hyped, under-funded Howe Street specials are gems in the rough - quality companies whose share prices will double, triple and more in coming years as they become takeover targets for larger mining companies that need to replace declining reserves.
Boosting reserves is what keeps the CEOs of mining companies awake at night, as demand for both base metals and precious metals rises along with ascendant economies such as China, India and Brazil. When miners buy reserves by purchasing exploration companies, shareholders of the take-over target win.
Keep in mind: I am not a financial adviser and this is not investment advice. I am decades away from retirement and have a high risk tolerance.
But there are ways to protect your-self from getting burned when investing in this speculative space. Here are a few of the characteristics I look for in quality juniors:
1. HIGH-QUALITY PROJECTS IN MINING-FRIENDLY JURISDICTIONS
Ounces in the ground is what separates moose pasture from mineral deposits. Companies with Canadian projects or that are listed on Canadian exchanges classify their mineral resources through National Instrument 43-101, which regulates how public companies disclose information about a mineral project. Resource nationalism is also on the rise, as foreign governments tap into mining as a source of income, so geopolitical concerns are also crucial.
Vancouver is home to several mining entrepreneurs who are experts at turning a junior with a promising project into an economic deposit that a mining company is willing to buy for a healthy premium. For stocks and mutual funds, "past performance is no guarantee of future results." But when it comes to management, track records can be a valuable indicator.
3. WHAT'S THE 'SMART MONEY' DOING?
CEOs, directors and senior managers are classified as company "insiders" and must report to regulators when they buy or sell stock. When insiders own large stakes in the company, they have skin in the game. And when they're buying in the public market, paying the same price as other investors, it can be a bullish indicator. As Canadian markets plunged in 2008 and 2009, insider buying accelerated. In many cases, the prices paid proved to be fire-sale bargains. Insider sentiment on the TSX Venture Exchange hit a three-year high recently, with six stocks that had key buying for every one that had selling, according to Ted Dixon of INK Research, which tracks insider buying and selling. (The Vancouver company also runs canadian insider.com, a free site that tracks insider activity by company.)
4. CASH IS KING
Well-financed juniors are operationally buffered from market ups and downs and can focus on running drill rigs and expanding their resource. Lack of cash killed off many junior mining companies during the financial crisis and left others vulnerable to opportunistic predators with deep pockets. Even blue-chip Teck Resources had a near-death experience because of debt issues. Money in the bank also means the company doesn't have to constantly raise cash by issuing stock, which dilutes share-holder value in a blizzard of paper. A company trading at $2.20 with 40 mil-lion shares outstanding has the same market capitalization as a company trading at 22 cents with 400 million shares outstanding. But it's the latter that is truly a "penny stock."
It's not for everyone, and much depends on factors such as age, financial situation and investing profile. Some investors write off the entire junior mining sector as too risky, even for a small portion of their portfolio.
But risk - especially in these markets - comes in all shapes and sizes. Just ask shareholders of Nortel, and more recently, Research in Motion.
firstname.lastname@example.org Twitter: @jameskwantes James Kwantes is a Vancouver Sun copy editor with an interest in investing and the junior mining sector. The views expressed are his own and do not constitute financial advice. All investors should consult a licensed investment adviser before buying or selling any security.