Evaluating Junior Explorers

Fraser: In our last Discussion, you made it clear that junior mining companies are essential to the world economy. But there are so many juniors and they won’t all be successful. Let’s talk about how an investor can determine which junior explorers have the best prospects for success.

Lawrence: You are absolutely right that not all explorers will be successful. You will never know ahead of time which exploration projects will turn into discoveries. But there is a lot that investors can do to put the odds on their side. Its worth the effort. The rewards can be huge: not just percentage gains but gains of several times your investment. Share prices that go from pennies to multi-dollars.

Fraser: You’ve got my attention. What are the criteria that investors should be looking for?

Lawrence: First off, look for management and technical teams that are serious about exploration. There are a lot of companies that bill themselves as a play on whichever commodity happens to be the flavour of the month. First off, for some of those companies, the only connection to the commodity is in the name of the company. Even for those companies that actually have some metal in the ground, nobody can tell you whether a particular metal price is going up, down or sideways at any point in time. It’s pure speculation. What I can tell you with certainty is that when an explorer makes a significant discovery, shareholders will be rewarded. They get a bonus from a gain in the commodity price; but the real win comes from the company successfully executing a business plan.

Don’t speculate on commodities. You should look for companies with a sensible business plan and a team that has the appropriate breadth and depth of skills and experience to execute on that plan. Invest with people who stay focused and are committed to creating shareholder value.

Fraser: That makes a lot of sense. Next, talk to us about jurisdiction.

Lawrence: Jurisdiction is getting more important by the day. Kinross just shut down their mine and development project in Russia and then sold them for fire sale prices. Who knows if they will ever recover any value? Chile is considering a boost in its copper royalty rate from 3% to effectively 21%. Barrick finally settled a 2017 Tanzanian tax bill of $190 billion, a large multiple of their profits. Indonesia and Mongolia and several other are more direct, simply decreeing that the government should own a piece. Last year, Kyrgyzstan seized the whole of the Kumtor mine from Centerra. They finally settled for a compensation described as “a fraction of what it was once worth.” And on and on around the world. Its not easy to move a mine out of the country, and governments take advantage of that. In the 1970s and 1980s, the mining industry spread out around the world. Canada is now looking a lot more comfortable than most places in the world.

Fraser: What else should investors be looking for?

Lawrence: The most effective exit strategy for an explorer is to sell their discovery to a well-established mining company. That means a discovery must have the scale to attract the big players. And, it has to have a clear path to production. By that I mean: Can they develop infrastructure? Can it get permitted? With sufficient scale, all of the other factors can be brought into alignment. That means working in areas with the right geological environment to deliver large deposits.

Fraser: What should investors expect in terms of time frame?

Lawrence: You would have to be extraordinarily lucky to buy shares in a company moments before they announce a big discovery. Exploration is a process. It might take a couple of years or more. Along the way, the share price should notch up as the projects advance. Some people buy on dips and sell on spikes and in that way, they get some near-term action and build their position over time.

Fraser: Some investors focus on people who have been successful in the past.

Lawrence: That’s a good approach. A couple of things to consider: You will pay a premium price for the people who have built a reputation. And, they aren’t always successful. Even the most successful players have losers as well as winners. Another thing is that people working toward their first fortune may be hungrier than the guys who already have a big house and all the trappings of wealth.

Fraser: That’s an interesting perspective. You may be better off backing the next big success story than the last one. How do you determine who might be next?

Lawrence: Look for commitment, enthusiasm, the willingness to do whatever it takes to be successful; people who take risks and who apply the latest science and technology to advance their projects. Reach out to the companies. Make an effort to engage directly with management.

Fraser: That sounds like a good plan. You can meet these people at conferences, now that we’re getting back to in-person conferences. And, of course, on-line discussions and presentations.

Fraser: The next area that I would like to explore is how do you carry out exploration. That could be the topic of our next discussion.

Lawrence: I look forward to talking about my passion: the treasure hunt.