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Junior Gold Miners: 4 Steps to Find Credible Stocks | The Mesh Report

Junior Gold Miners: 4 Steps to Find Credible Stocks

Mike Hammer October 16, 2017 Comments Off on Junior Gold Miners: 4 Steps to Find Credible Stocks

A Gold Mine

Every so often, your friendly Gold Enthusiast gets an email asking a question such as, “How do I evaluate junior gold miners?”

In case you’ve been living under a rock the last 50 years, junior gold miners are smaller-than-huge companies that typically have one to four mining and/or exploration projects going at any one time.  They’re called “junior” because they are small compared to the big companies in the sector, like Barrick Gold (NYSE:ABX) or Royal Gold (NYSE: RGLD).  They might someday grow up into a big mining company, but for now they’re relatively small sized.

Over the years there are many great stories about the widow who invested all her life savings in one of these companies, and ended up wealthy thanks to a buyout or a sudden spike in gold prices.  What’s talked about in less-lilty tones is that junior gold miners can also drop like a rock, if a vein runs out or the firm hits a streak of bad luck.

So how do you tell good junior miners from ones that aren’t so good?  Here are the first-round criteria that this Gold Enthusiast uses to tell if a junior miner is worth a deeper look.

Number One: Experienced management.  Many miners fail because they didn’t have experienced people at the helm.  Mining is a tricky, dangerous and costly business.  As much as we like the image of one dirty guy with a pickax, it’s not just “dig it up”.  It really, really helps if there are some cool-headed, experienced people at the helm.  Your Gold Enthusiast likes to see 20+ years experience at the C-suite (CEO/COO/CFO) level.  And the CEO needs to have a history of success in his previous positions.

Number Two: A well-proven main project.  Figuring out what’s hiding underground is a game of probabilities.  Miners use “drill programs” to ascertain what’s down there, and how likely it is to be big enough to be worth digging up.  Buying a company that doesn’t yet have a working, producing mine is a risky business, because you can’t tell yet whether the people interpreting the drilling results really know what they’re doing or if they can be trusted.  

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What you can trust is whether a current project is producing as much as expected.  Also, drilling programs result in projections of ranges of production, so if a mining project is producing on the higher end of the projected range, it’s a sign that the people who interpreted the drilling results know what they’re doing.

Number Three: Now that you might have a company that’s well-managed and producing, you’d think you’d want a few big projects in the pipeline.  That’s actually Number Four.  What you really want to see next is a pattern of decreasing cost per ounce of extracted gold.  It’s easy to spend far too much digging up gold.  One of the real tests of management is whether they can dig up gold for a reasonable cost, and drive that cost down over time.  There are also industry averages for production costs, and it’s important the company isn’t out of line compared to their peers.  Your Gold Enthusiast likes to see a two-year record of decreasing cost once a project starts producing.

Number Four: We’ve let the cat out of the bag on this one already.  If you get this far – and it’s surprising how many companies don’t – you want to see at least one project as big as the company’s main (producing) project in the pipeline.  This tells you the company will be around a while.  Otherwise, when the current project is done, the company can’t make any more money, which means – yep, the stock price will tend toward zero.

Those are your Gold Enthusiast’s top four criteria.  There are others of course, but first we’d like to hear from you.  What do you look for in junior gold miners?  Or, what other criteria would you look for after these?  Or – Are we completely out of line?  Tell us in the Comments below!

Signed, The Gold Enthusiast

DISCLAIMER: The author holds no positions in any security mentioned in this article.  The author is long NUGT and JNUG and may add to or sell these positions in the next 48 hours.

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