Rules of Thumb for Investing in the Mining Sector, Part 2

There are hundreds of public companies in the mining sector. Picking the ones that will potentially benefit your portfolio isn’t an easy task.

It takes time and experience. For some investors, it’s a tall order. But Canadian Mining Report is here to help.

Our team of top-notch analysts has been helping readers navigate the mining sector for years. After all, some mining stocks keep delivering superior gains despite macroeconomic challenges.

Whether a company makes a discovery or advances a project towards production, it could see its share price rise. The challenge is knowing which ones have the best chance of reaching these value-adding milestones.

In the previous article, we covered the key technical rules of thumb for investors in the mining sector.

(You can find it Here.)

Today, we continue to educate investors with another set of important rules. These will help to assess the corporate side of publicly traded mining companies.

1. People

The management team is the core of any mining company. No matter how great the project is, an incompetent team will not be able to realize its value.

It isn't easy to "score" the people running the business, but there are certain things investors need to consider.

First and foremost is the track record. Were the people involved in any past successes? Have they kept their promises and delivered value to investors?

If the answers are unclear or negative, that’s a red flag.

Skilled executives need to have some achievements and rewards to show.

Check what companies the team was involved with in the past and how these companies performed. If they created shareholder value during their tenure, it is a great sign. They clearly have done something right and were rewarded by the markets.

Maybe they sold a company at a high premium or discovered a world-class deposit. All of these will support your investment thesis.

But-in general-try to steer clear of people that come from other sectors. If the team just ran a crypto or cannabis company, they are likely chasing the flavor of the day in the mining area. Unless they have been serially successful in their past endeavors, these "outsiders" increase the risk of your investment.

2. Share structure

Make sure to check the company’s share structure. The fewer shares the company has, the better. If the company already sits on over 500 million shares, it will likely do a rollback to keep the share price higher.

A rollback is a technical move that lowers the number of shares for everyone. This, in turn, lifts the share price. The action on its own doesn’t change the value of the company. Yet, it sets the existing investors up for higher dilution.

When it’s time to raise funds in the future, new investors will get a higher share of ownership in the company by buying the same number of shares as old investors.

This is how some companies destroy value.

Also, it’s worth checking how many warrants and options are issued. These can be sources of additional funding but also dilution. A lot of these (typically over 20% of the share count) can be a red flag if the exercise price is below the current share price. These are called “in the money” and will likely be exercised, increasing the overall number of shares and making existing shares represent a lower percentage of the total.

3. Funds

Producers and royalty/streaming companies often have sales and profits. They can fund their investments and even M&A by themselves. Yet, in most cases, exploration and development stage companies have no sales. Instead, they use the funds they raise from investors and then spend them to reach their next milestone.

If a company burns a million dollars per month and has only three million left in the bank, it will raise funds soon.

These capital raises often harm the share price as the number of shares increases.

But if the company has funds for another year or more, that’s a good sign. It will be enough to deliver on near-term goals and hopefully add value to the story.

4. Political risk

The location of the flagship project is crucial. Some countries, regions, or even states are going all-in against mining. There is little the company can do to fix that.

For instance, Mexico recently became one of the places that face opposition against open-pit mining. A coup in Niger led to a drop in most companies' share prices (not just mining juniors). The Russia-Ukraine war pretty much closed both countries to outside investors.

Before investing in a mining company, make sure it operates in a safe place. Ideally, with a pro-mining regime and active mines nearby. This will reduce the risk of getting rejected by the regulator and secure support from local interests.

Most parts of Canada are safe to invest in. Some states in the US, like Nevada, Utah, and Idaho, are also mining-friendly. Australia is mostly supportive of mining. However, each project is unique in its nature and can face red tape.

Takeaway

These corporate rules of thumb will help investors do their due diligence. After all, avoiding obvious losers is a large part of the investing process.

Don’t be afraid to reach out to the management and ask questions. These are often happy to get in touch with investors and get their stories out. A good way to reach the company will be at a mining conference or via the contact info posted on their website.

We hope these rules of thumb help you make your next investment decision.

Sign up to receive our future articles and updates.

   

Signup