Some Considerations For Selecting Junior Miners

Now that the investment clarion has been sounded, investors may wish to do their own homework for evaluating candidates for investment.  Among the several dozen decent publicly traded companies how does one decide which ones to invest in?

While not an exhaustive list, here are some things every investor ought to keep in mind.  Follow these rules, and your chances of getting in trouble will be greatly diminished.  

Ask and answer the following questions:

1.  Where Are The Operations Located?

In my opinion, the biggest risk currently is geo-political.  Some countries are dependent on their mining industries and are not terribly interested in having foreign interests, i.e. us, coming in and pillage their resources for our own profit.  The risk is nationalization.

A recent case is that of Crystallex International Corporation (KRY), whose mining interests were nationalized by Venezuela.  KRY stock sold for more than $4 per share as recently as 2007, before losing a mind-numbing 98% of value to hit 10 cents per share.  It has recovered somewhat to trade at $0.45 today.

Personally, I prefer to stick to North American companies which operate in some combination of Canada, the United States and Mexico.  I tend to avoid companies with the bulk of their operations in Africa, whose countries tend to be perpetually unstable and subject to ethnic conflicts and new governments.  It's impossible to predict which country in what continent will be unsafe, so I stick to where I believe the business environment will not be subject to change without warning.

2.  What Aspect Of Mining Is The Company Involved With?

The junior mining sector is basically divided into explorers, developers and producers.  The explorers are like oil wildcatters.  They can have the greatest gains and the most severe losses.  Some junior explorers to consider are U.S. Gold Corporation (UXG), Explor Resources Inc. (EXSFF) and Vista Gold Corporation (VGZ). 

Most explorers wish to develop their projects, but some don't.  Vista Gold successfully developed its Nevada-based operations to form Allied Nevada Gold Corp. (ANV), which was later spun-off to shareholders at a tremendous profit.

The key risk to an explorer is that its projects turn out to be not viable economically.  NovaGold Resources, Inc. (NG), which has a 50% interest in the Galore Creek project, had to suspend development in late 2007 as cost estimates proved way too low.  The stock lost 99% of its value from more than $20 per share to about 25 cents in one year.

3.  Is The Company Profitable?

The only companies that can report profits are producers.  Some geo-politically safe producers include Aurizon Mines Ltd. (AZK), New Gold Inc. (NGD), ECU Silver Mining Company (ECUXF) and Hecla Mining Company (HL).  Each of these is profitable and getting more so, based on recent financial reporting.

Given the very favorable mining economics prevailing today, the list above is far from extensive.

4.  Is There An Asset Play?

Some companies are primarily an asset play.  They hold already drilled and largely delineated projects.  Probably the best asset play out there is Seabridge Gold (SA), which boasts more than 60 million ounces of economically viable Gold, in addition to a slew of other minerals such as Copper.

Producers can also be terrific asset plays.  ECU is not only currently producing and profitable, it also boasts what is now the 4th largest resource base of Silver, at a fraction of the market capitalization of high-quality giants such as Silver Wheaton Corp. (SLW) and Pan American Silver Corp. (PAAS).

5.  Does The Company Have Sufficient Financial Resources?

Miners who are not generating cash flow are dependent on the capital markets.  The financial meltdown of 2008-2009 placed these companies under extreme financial duress.  Developing, drilling and exploring is capital-intensive and requires regular infusions.

It's important to note both how much liquid resources a company has and its offsetting debt obligations.  If too much debt is coming due and the financial markets are frozen, the company may have to raise additional funds at extremely bad terms.  Companies with limited financial resources got particularly bludgeoned in the 2008-2009 meltdown.

6.  Is This Company Likely To Acquire Or Be Acquired?

Undoubtedly, as the mining industry starts to boom, there will be a slew of mergers and acquisitions.  Any company making an acquisition will typically do a "stock-for-stock" transaction, which will dilute the acquiror while paying a premium to the acquiree. 

This is why I tend to avoid the larger companies.  To remain competitive, it's more cost-effective to acquire in-ground assets than to go through a long and expensive exploration, drilling and development process.  Existing projects have far less risk.

The companies most likely to acquire are primarily the majors such as Newmont Mining Corporation (NEM), Barrick Gold Corp. (ABX), Yamana Gold Inc. (AUY) and Goldcorp. Inc. (GG).  Even higher-quality intermediate producers such as IAMGold Corporation (IAG) or Eldorado Gold Corp. (EGO) can be expected to join the acquisition race.

If you hold a company that gets acquired, you receive an instant windfall.  While you may be disappointed that the ride to much higher prices has been cut short, you can easily re-deploy the gains you just received in another junior.

Naturally, this is just a brief checklist of the items to look into prior to making a sizable investment.  There are many more items to consider such as quality of management and liquidity of the stock.  And, a technical review of the stock would also be a very important criteria. 

Great fortunes can be made in the next several months for investors who can make good decisions as to the horses they choose to get them to the finish line.  Most important is to avoid the big loss.  Another obvious factor to incorporate is good diversification.  For those investors who are not comfortable with making these choices, an excellent vehicle which includes 40 juniors and intermediates, is the Exchange-Traded Fund GDXJ.

Marko's Take

Samex Mining: A Grand "Slam" Ex?

We are getting ever so close to the final precious metals launch into the stratosphere.  In fact, we believe that yesterday's $20 rise in the price of Gold will prove to be the "foreshock" to the earthquake ready to rattle investors.   With that in mind, we're continuing our series on promising junior mining companies.

Today's featured company is a very speculative play called Samex Mining (SMXMF-OTCBB or SXG.V).  This company was first brought to my attention, as was ECU Silver Mining, (http://markostake.blogspot.com/2010/02/ecu-silver-mining-as-good-as-it-gets_7745.html) by Bill Murphy's must-read LeMetropole (http://www.lemetropolecafe.com/).

But if you're not a reader of LeMetropole, which you should be, you may not know about this incredibly promising company.

Samex is an explorer, which is different than a miner in that explorers chiefly find promising deposits.  How they dispose of those finds can vary.  Some like Vista Gold  Corp. (VGZ) have spun-off projects to shareholders.   Vista spun-off a company called Allied-Nevada Gold Corp. (ANV), which is a first-class producer in, where else, Nevada!

Samex explores the Andean Cordillera of Chile for rich deposits of gold, silver and copper.  This area is one of the most bountifully mineralized regions on Earth, where many of the globe's largest deposits have been discovered.

Normally, I tend to avoid companies that operate in areas that may be considered geo-politically risky.  Just ask the shareholders of Crystallex (KRY), who had their fabulous Venezuelan deposits expropriated by Hugo Chavez.  KRY sold for more than $5 per share in 2007, now languishing at about $.30 and is engaged in a war of words with the Venezuelan Government.  It would a shareholder want to "kry"!

Chile is no Venezuela and is known for mining friendliness.  Since the 1990’s, Chile has been the first port of call in terms of investing in South America and, as a result, numerous foreign companies have developed the country’s burgeoning mining sector.  Chile is recognized as the mining capital of Latin America and can be credited with initiating the investment surge to make Latin America the world’s primary mineral target.

As an explorer, earnings as a barometer of value are entirely irrelevant.  The value is highly qualitative - more a function of the quality of managment, properties owned and the company's ability to maintain funding as it completes its program. 

Samex has been steadily reporting rich finds.  The company's latest press release elaborates (http://www.samex.com/news/aa-news-2010/NR1-10-Jan21.pdf).

While Samex is not particularly well capitalized, it was able to realize proceeds of nearly $1.2 million in a warrant offering in November, 2009.  Thus, the company, despite its very low stock price of about $.30 is still able to access capital markets.

Anyone considering investing in Samex has got to look at it as a high risk/potential high return proposition.  This company is not for the feint of heart - as is ANY explorer. 

For disclosure purposes, I am an owner of Samex shares and believe that the high potential rewards MORE than justify the risk.  I would NOT recommend it to anyone... just those who are looking for an excellent roll of the dice and perhaps some diversification in a portfolio of juniors.  I would NOT place Samex as a core holding as I might view either Seabridge Gold (http://markostake.blogspot.com/2010/03/seabridge-gold-how-to-buy-gold-for.html) or Hecla Mining (http://markostake.blogspot.com/2010/03/hecla-mining-at-119-years-old-producing.html).

Finally, I want to thank our new partners at "Stock Maverick" (http://www.stockmavrick.com/), a fabulous website for penny stocks like Samex, although with a broader mandate to cover promising companies in sectors not just limited to commodities and natural resources, as we are at "Marko's Take".  Check it out for some excellent ideas!

Happy investing!

Marko's Take

For new readers, we also have a YouTube channel, which is more oriented toward World Events and Politics, as opposed to pure investment issues.  It can be accessed here: http://www.youtube.com/markostaketv.  We will be filming 5 new segments this coming Saturday and start releasing them on a weekly basis, along with our partner, Phoenix Film Group, http://www.youtube.com/phoenixfilmgroup.




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