The Mining Stock Report

Part two of a series on evaluating junior mining stocks. Part one covered the all important factor of management, but it may surprise investors to suggest that the second most important priority when evaluation a junior miner is how well the company is financed.

In our last installment, we discussed the importance of sound management. But what other factors should be considered when evaluating a junior mining company?

Exploration and development requires a great deal of capital, and junior miners often need to be able to sustain their exploration program for many years through various different stages. As a result, one of the primary factors that investors should be aware of when doing their due diligence on a prospective junior miner is how well the company is financed. Actually, there are a number of things that investors need to keep in mind with regard to finance, and many of which we will go through now.

From the outset, Investors need to ask themselves a number of key questions when they begin looking at junior mining stocks, and one of the most vital areas of concern is the financial situation of the company, (both in the short-term and in the long-term). Firstly, an investor needs to look at which projects the company plans to engage in their exploration / production programs. From there, they need to roughly figure out how much that is going to cost and how the company plans to pay for this expense. Does the company currently have sufficient capital reserves in the treasury? Perhaps they have already raised enough capital to carry on the initial stages of their exploration program and are not immediately concerned with the need for cash, then great. But if the company does plan to engage in a drill program, and it lacks the capital resources to carry out that plan, it is clear that a future financing is in the offering.

As well, what is the current and projected ‘burn rates’ for the junior miner? Sometimes it may appear that a company has significant resources, but due to poor planning and overly aggressive targets, those resources can be drained quickly. There is nothing wrong in spending money in an aggressive exploration program, but make sure that the allocated resources make sense to you as an investor. The ‘burn-rate’ can be one of the best questions that an investor can ask when calling a company during their due diligence phase. Don’t be backward when looking for answers, there are literally thousands of mining stocks competing for your investment dollars, if the CEO or investor relations representative can not answer your questions with confidence and clarity, then move on.

The next question I like to ask myself is debt. Does the company have significant debt, and if so why? Look to see if the company is accumulating debt from overly onerous management fees, or the poor use of resources and planning. Debt can be found in many forms, and this is another excellent question to pose he company once you call (by the way, the telephone is perhaps your most valuable tool when doing research, use it well and use it often).

It really depends on what stage a junior mining company is at when evaluating the stock, but one factor to not overlook is cash-flow. This can heavily depend on the business model of the mining stock you are research. If the company is focused on exploration or advanced exploration, then cash flow is most likely a distant prospect. But perhaps the company is selling concentrate? Perhaps the company is building a production facility, or is involved in a joint venture with a major, these are all possibilities. Does the company currently have cash flow, and if not, when are they likely to see it.

There are a number of different questions to ask yourself as an investor when evaluating junior mining stocks, but there should be significant weight placed on capital. Do your due diligence, and never be afraid to pick up the telephone to ask the tough questions. And one thing I like to remind people is that even after they have done their research, go to your investment professional and get their input.

Next in the Evaluating Junior Mining Stocks series is Part III: Properties.