Precious metals continue to heat up as the dollar slides and gold trades above its 200-day moving average. That’s been great for gold miners and especially junior gold mining stocks, which were up more than 1.8% and 4.2%, respectively, for the week as of this morning.
On Tuesday, I wrote about how mining stocks are on the move and the risks I consider before buying any junior miner. Specifically, we looked at the development phases common to all junior miners.
As someone who’s explored dozens of mines — and met with even more promoters insisting that their mine will be wildly successful — I can tell you that it’s important to understand these stages.
A good rule of thumb? The further a project is from production, the more that can go wrong. But as I said in my previous column, higher risk often means greater reward.
No matter what phase you invest in, you’ll want to make sure your junior miner has the following traits …
Trait No. 1: Smart Management
Management isn’t everything, but it’s the most important thing.
In gold mining, the management team is more important than the resource the company is sitting on. Guys who have succeeded in mining in the past are more likely to do it again.
Fact is, in this business, money follows money. Banks and funds that gave someone money the first time they hit it big are 10 times as likely to give it to them the second time they ask.
Unfortunately, management is not something you can screen for on a computer. But you can read up on the board, directors and managers of any company you are looking to buy. See if they have the experience necessary — not just to do the job once, but to do it over and over again.
Trait No. 2: Good Real Estate
You’ve heard that when it comes to real estate, it’s all about “location, location, location.” That’s doubly true for gold projects. The best place to look? Right next to an existing mine… or right where an old mine used to be.
At the same time, you must know the politics of where the project is located. Are there bandits? Grabby politicians? Non-governmental agencies that just seem to be put on God’s green Earth to make life difficult for miners?
Obviously, you want to avoid these places. There are plenty of areas in the U.S., Canada, parts of Mexico, Colombia, Chile and other countries where good companies can thrive and not be used as piggy banks by the locals.
Trait No. 3: Sound Financials
Is the company cashed up, or is it in danger of running out of dough before it produces a single ounce?
If it’s going to have to raise more money, you need to find out how it plans to raise that money.
If it’s producing, all-in sustaining costs need to be less than the price of the metal. I prefer companies that have low enough costs to make it through the hard times. (There will always be hard times.)
And it’s much, much better if operating margins are widening. That means the company is making more money on every ounce.
Trait No. 4: Blue Sky
Blue sky means untapped opportunities. It usually refers to the size of the resource. You could also put it like this: “What opportunities does a company have that are not expressed in its share price?”
Answering this question often requires boots on the ground. As often as I can, I like to do this myself. Or I’ll take the word of an analyst I trust. My primary goal is to see what kind of exploration upside potential the company has — and what kind of production cost they have.
Trait No. 5: The Company Has an Executable Plan
If a company’s plan is “we’ll keep drilling holes until Newmont Mining (NYSE: NEM) buys us,” you need to run the other way.
Instead, look for a company that knows how it is going to expand operations. It has to have a plan to not just survive — but thrive.
There is a lot more to it, but these are basics. And they should certainly give you a leg up when conducting your own due diligence.
10 Names of Interest
Unfortunately, I’m not at liberty to discuss a lot of my favorite junior mining plays. It’s not personal. It’s just that, due to their small size, we run the risk of inflating share prices.
The good news is I recently posted a list of small exploration and development companies I have interviewed, including …
“2 Small Companies with Big Ambitions“: That story included interviews with Blue Sky Uranium (TSX-V: BSK; OTCQB: BKUCF) and Fireweed Zinc (TSX-V: FWZ).
“Two Gold Explorers with Potential“: Amarillo Gold (TSX-V: AGC; OTCQB: AGCBF) and Integra Resources (TSX-V: ITR; OTCQX: IRRZF).
“Hidden Treasures of the Golden Triangle“: Skeena Resources (TSX-V: SKE; OTCQX: SKREF) and Aben Resources (TSX-V: ABN; OTCQB: ABNAF).
“Uranium Developers for a White-Hot Market“: Uranium Energy Corp. (NYSE: UEC) and GoviEx Uranium (TSX-V: GXU; OTCQB: GVXXF).
“More Good Stories in a Hard-Knock Gold Market”: Golden Arrow Resources (TSX-V: GRG; OTCQB: GARWF) and Americas Silver Corp. (NYSE: USAS; TSX: USA)
If you want to jump into junior miners now, one way to do so — while mitigating your risk — is to buy the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ).
The fund has an expense ratio of 0.55%. And when gold miners rally, GDXJ should go along for the ride.
All the best,
P.S. This is my last regular column for this year. I’ll return on Tuesday, Jan. 1 with a trend that should prove powerful in 2019. In the meantime, if you’re a Wealth Supercycle subscriber, keep a close eye on your inbox at noon tomorrow for three investments that will help you ride this potentially very profitable trend. And if you’re not yet a member, consider gifting yourself a subscription today.