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Investing in minerals-focused junior companies is not for everyone, and is often left to highly sophisticated investors and speculators; however, some investors include juniors in their portfolios for the sake of diversification.
While some investors favour precious metals, as they tend to have more utility, there is a wide range of juniors involved in searching, staking, proving up and even developing projects in every mineral category, but the road from discovery to mine is fraught with dangers for companies and investors alike.
Being on the small side, these companies could offer greater growth potential but this also comes at greater risk. With gold’s plunge this year, some wary investors have steered clear, while others see huge opportunity.
Few junior gold miners have delivered strong performances over the past year, but their depressed prices could represent more attractive entry points for interested investors, albeit at extreme risk, owing to many of these being in dangerous penny-stock territory – below $5 apiece.
Gold stocks – particularly those of juniors – have been undervalued for longer than many investors thought possible. But, as in all things, most believe that the undervaluation cycle will eventually have to be broken.
Mickey Fulp, author of the Mercenary Geologist website, tells Mining Weekly that, for successful junior investment, considering four criteria is essential. These are to look at the company’s share structure, the people, the project (which is most important) and the company’s capital-raising ability.
He points to the fact that a multitude of junior companies are teetering on the brink of failure, having burned through their capital and now not meeting the minimum listing requirements of stock exchanges.
From the start of the year to August, about 85, or 5%, of the 1 673 mining companies listed on Canada’s TSX and TSX-V failed, compared with about 6% in the oil and gas industry.
These do not include companies taken off the exchanges owing to merger and acquisition (M&A) activity, going-private transactions or those companies that have graduated to bigger exchanges.
Fulp says it takes a lot of time to “wash out the bad” companies and many are, by now, merely hanging on, creating more danger for the unsuspecting investor.
He warns that dilution is the bane of juniors, and while there is a range of alternative financing options available to smaller companies, not all of them are accessible at this time, necessitating some juniors having to undertake highly dilutive share placements to survive.
With anecdotal evidence pointing to a sharp increase in the number of insolvencies in the mining sphere in the last two years, market signals are pointing to things getting a lot worse before getting better, John Sandrelli, a partner at law firm Dentons Vancouver, says.
He tells Mining Weekly that, given the “very challenging” current market conditions – characterised by slumping commodity prices, rising costs and a lack of access to capital, especially for the small and medium-sized miners – he has not seen much change for the better in recent months.
“We believe this will be a drawn-out market cycle, different to what we have seen before, and we believe the lull will last at least until the first quarter of 2014.”
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