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

Tara Minerals: On A Tear-A

In keeping with this week's theme of pointing out some interesting ideas in the junior precious metals space, we introduce a very unknown company called Tara Minerals Corp. (TARM).

Lately Tara has been quietly vaulting higher.  The stock closed yesterday at $2.50 despite having sold for about $.50 as recently as September 2009.  Tara is, as far as I can tell, completely unknown to most precious metals afficionados, but seems destined to hit the radar screens of the invesment community in short order.

The Company was organized May 12, 2006 and is engaged in the acquisition, exploration and development of mineral resource properties in Mexico.  The Company owns 100% (minus one share) of common stock of American Metal Mining, S.A. de C.V., which was established in December 2006 and operates in México.   All of Tara Minerals’ operations in Mexico are conducted through American Metals Mining, since Mexican law provides that only Mexican corporations are allowed to own mining properties.

Tara Minerals has an interest in several gold/zinc/lead/silver mining properties.  The properties are located in the northern part of the La Reforma Mining District of northeastern Sinaloa State, Mexico, which has been mined for more than 300 years.  The Company believes that this area may potentially host base metals that were never discovered, or exploited, as the result of market conditions, lack of technology, and lack of funding.

Tara Minerals is fully funded and focused on generating revenue from its 100% owned high-grade Gold, Zinc, Lead and Silver Don Roman project.  Production began in the third quarter of 2009 and is expected to generate significant revenue - allowing the financing of all near-term exploration and production goals.

In 2010, the Company is expecting to produce approximately 900,000 ounces of Silver and 24 million pounds of Lead and Zinc concentrate.  The value per tonne of mined rock is currently approximately $350 versus a cost of $80.  Tara has also discovered a rich vein of Gold in its San Felipe property.

Tara's CEO and President is Robert Wheatley, former Director of North and Central American Exploration for Yamana Gold (AUY).

The Company has approximately 50 million shares outstanding, however, 80% is owned by parent company Tara Gold, leaving a fairly small float of approximately 8 million shares.  Tara Mineral expects to seek listing on the American Stock Exchange, which requires a period of greater than 10 consecutive days with a $2 or better share price.  If this listing is realized, the Company will obtain greater access to capital markets and investor accessibility.

For full disclosures purposes, I am currently a shareholder of TARM.

While most investors in precious metals companies will be rewarded, the upcoming environment will prove especially conducive to those who find and select the "sleepers".  Tara Minerals appears to be one of them.

Happy investing!

Marko's Take

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