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Are junior miners an attractive option for investment?

What makes a mining company, especially one operating in Africa and especially a ‘junior’ attractive to for investment? 

Ha.  Ask a dozen people – you’ll get a dozen answers. Ask a 100 people, a 100 investors, and you’ll get 200 answers. 

This article first appeared in Mining Review Africa Issue 1, 2020

Read the full digimag here or subscribe to receive a print copy here

Many of them will be different. But there will definitely be the important, ‘basic’, well known ‘fundamental’ factors all experienced investors look for.

By Peter Major, director: mining, Mergence Corporate Solutions

Those factors include:

  • Location/geography;
  • Asset/ore deposit;
  • Liquidity;
  • Ownership.

Perhaps the most important – ‘who is driving the bus’. Investors/promotors like Robert Friedland or Rob Still carry enough gravitas and success with them that many investors will almost blindly follow projects that ‘the two Robs’ are putting their money into.  

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But how about on a ‘do it yourself investment’? Where you are the leader – not a follower?  Is the effort and risk worth it?

This is worth considering. Large companies are:

  1. Safer and more liquid than smaller companies.  Say an Anglo American versus a Pan African or Durban Deep;
  2. Well diversified in geography – say an Anglo or Billiton versus an Exxaro or ARM or an AngloGold or Goldfields versus Harmony or Pan African Resources.
  3. Well diversified in product, is safer and often better than less diversified producers.  Again – Anglo American or even ARM versus a pure gold or coal or other single commodity producer.

One can even bore down further. For instance, look at the diverse income stream of a PGM producer in South Africa as opposed to a pure gold producer.  South Africa’s PGM producers’ revenue is now almost 30% each from platinum, palladium and rhodium. 

The other three of the six PGMs, plus base metals plus chrome, all combined, can be 10 – 12% of the total revenue stream.  Now that is diversification in its own right – especially compared to a Stillwater or North American Palladium who receive 80 – 85% of their revenue just from palladium alone.

But as we all know too much diversification can also ‘average out/cap’ returns as well. Everyone on earth wants to know ‘how do I get ‘ahead’ of the market’? 

How do I get ‘better’ than market returns? Thinking out of the box and putting in more time and effort ‘should’ counter out a lot of the higher risk and leave you with the higher return.

Junior miners connote many thoughts in our mind.  Most people’s vision of a junior miner is an undercapitalised little producer toiling away on a bare minimum budget and ore body – in hopes of hitting a real mother lode ore deposit and or seeing a massive increase in the price of the mineral they are mining.  THAT is what most people envision when they think of junior miners.

A new era junior

But from an astute investor’s perception there is another junior miner.  He is one who is from a traditional, large-scale, well experienced and capitalised mining company.

This new era junior owner/manager knows what the large companies can and cannot do well.  As important – he knows what the big companies want – new and attractive ore deposits and investment opportunities.

So these type junior mining companies are very focused, generally well managed and often well capitalised too. But more often than not, they are unlisted, which does add more risk as there is much less liquidity and transparency.

Investors really need to do their homework when marrying into ‘these’ firms as a later divorce is near impossible and almost always hugely expensive.

Let’s create an example.  Why would an investor want to consider when investing in an African junior?  Generally – the investor is keen on a certain metal/mineral and he believes Africa to hold great deposits of that commodity.

The investor knows unlisted companies are difficult to trade and so he would probably begin his search in the Canadian or Australian (or even UK) small cap space.

If he finds what he wants there – great – first problem addressed (to some extent – liquidity and transparency – and Stock Exchange rules and regulations too.) Now it’s time to check out the ownership and management of the company – as well as their financials and plans. 

And checking out means ‘review their track record’. (Why on earth would you give someone money in such a risky business – if you didn’t know and trust his track record?) 

And unlisted junior miners?   Oh boy.  THIS is where the action and demand really are.  There are tens of thousands of unlisted junior mining companies and they all want your money – all of it. 

They have limitless ideas and opportunities and only need ‘your’ money in order to become the next Voisey Bay or North American Palladium or Stillwater Platinum or even Barrick or Anglo American.

Now not all of these unlisted juniors are scams.  Many do have an actual dream or hope of becoming successful.  Some even have a prospect!  And some of those may even have a genuine prospect/ore body. But it’s up to ‘you’ to decide how viable/valuable this is.  

And not only the ore body – but the metal itself. Gold and the base metals are generally the easiest to mine, process, transport and sell. And to understand. Iron, coal, chrome and manganese need location, grade and logistics. The exotics?  Tantalum. Lithium, PGMs, Rare earths? Many ways to come short here.

Cash flow is king – always. And, how the company is getting its cash?  Even if not profitable a company with any kind of cash flow is a big plus as a junior, for the company and shareholders alike. Burn rate is a sibling of cash flow.

How long can the company last on current financial resources and what sources of cash are available to it and at what rate is and what is the company’s consumption of money? 

And where is that money going to? Salaries and related? Capital? Exploration or development or promotion?  How good is the company at all of these and other essential activities?  And don’t forget where your dilution and or contribution fits into all of this.

Choosing a junior miner as an investment is high risk and a lot of work. You can’t rely on finding another sucker. You have to know that your junior has a great ore body that a larger company will want, in a location it can stomach and that your junior has the management and owners to ‘get it there’ – while you are still young enough to see and enjoy the reward.  

Happy gambling!