Junior Miner Investing, Stages And Risks

Small and junior mining companies are a glorious place to go investing - but it's necessary to understand what's going on in the sector. Here is your introductory guide to what everyone's doing and talking about with junior miner companies.

Takeaways

• Junior miners are always risky and sometimes profitable

• Knowing how to reduce your risk

• Valuation points worth selling out at

Junior miners in a nutshell

A reasonable definition of a junior miner is someone who wants to mine something but isn't doing so yet. Junior miners are an important part of the London (and Canadian) stock market and as a class of shares they are full of risk.

There are also the occasional 10 and 20 baggers - shares that soar by ten and 20 times their starting values. This is a short and simple guide to the stages of life of a junior mining company. The examples are companies that were at each stage in Feb 2022.

What should we mine? Where?

The first stage is to decide what to go and look for. Castillo Copper is just past this stage. They wanted to go and do something, thought about copper. They were offered an opportunity with cobalt. The cobalt prospect was much more attractive than that copper one so, they switched the focus of the entire company. OK, drop the copper, this looks much better. This is not unusual at this stage of a junior mining company's life.

The aim is to be able to build a mine and that means taking the best prospects available at the time. This first stage is usually just this highly opportunistic. The aim is to find a deposit, of something - anything really - that people might want. Also, that might be worth digging up.

The exploration stage of a junior miner

Once the target area and mineral have been decided upon a miner needs to actually explore the area. This is where Helium One is. They know they are looking for helium, they have got indications that their area of Tanzania has some. But how much? Is it worth mining for? No one knows as yet so someone needs to look.

Proving it's worth mining

A resource is something that is probably there. A reserve is something that is proven to be there. A considerable amount of work has to be done to "prove", to turn that resource into a reserve. It's to a specific legal and stock market standard too.

The meaning, stripped of the legalese, is that we've proven that the mineral is there, in this quantity, we can extract it, process it, using current technology, at current prices, and make a profit. It costs, normally enough, tens of millions at least to go through this proving process. This is where European Metals are - it's known the tin is there and plans are being finalised.

How to build a mine for a junior miner

Once the reserves are proven then it's time to raise the money to build the mine. That document that proves the reserves is the main fundraising document.

This can cost tens of millions to billions, to actually build the mine and associated processing plants. This is where Rio Tinto is with the Oyu Tolgoi copper mine in Mongolia. Rio is not a junior miner, having many other operations, but in this instance we can regard that project as being in this sequence.

Operating a mine is more than just digging

Then there's the actual business of running a mine and selling the product. Tirupati Graphite is in this situation. Their graphite mine in Madagascar is open, they're producing and they're expanding production. The worries now become only whether the market price for the production will hold up.

What's a valuation event at a junior miner?

At each stage a junior miner - usually at least - requires more money. Any one specific fundraising is likely to cover only the next stage of the process. This is because there are always failures at each stage. So, why fund a company beyond the stage of the next possible failure?

Given our definition of a junior miner as being someone not producing yet, the money to explore, prove and build, must come from the capital markets. More shares being issued at each stage is the normal process of raising that capital to proceed through the next stage of the process.

Remember, our definition of a junior miner is someone not producing yet. So there is no revenue. Thus the money to advance through each stage must come from the capital markets. Due to the regular failure leading up to each stage, when we reach one the stages explained above, a valuation event is created.

Having decided what to look for might not add much value to a company but showing that there's a resource does. Proving that resource into a reserve will boost the value. At any of these stages it is possible to sell the project on to another company - the value is crystallised given the stage that has been reached.

It's quite a common process for junior miners to do, say, the exploration stage and then, when the financial demands become heavier later in the process, to sell the project on to a larger company.

The worked out gold mine is more than just a movie plot

There is a wrinkle to this process which is to go and look at old mines and see if they're worth reopening. Exploration techniques do advance, extraction and processing technologies. Even prices change, so that what used to be not worth it now is again.

Eurasia Mining is doing this with old nickel mines once operated by Norilsk. Maybe new techniques will make it possible to reopen those mines? Similar work is being done on Cornish tin mines. Or Panthera Resources is looking at gold in Mali.

For near a millennium Mali has been a source of gold and the old techniques are, therefore, pretty old. Maybe modern machinery can follow the minerals further underground and so on? Or, of course, there is the entirely opposite idea of going for entirely new metals in entirely new areas - like Pensana is doing with rare earths.

Operating mines are not a junior miner

When a mine is up and operating then it's not really, by our measure here, a junior miner. The questions of value become how well is the mine being run and also, what's the price for the output?

That all becomes a very different set of questions. The iron ore price has run from $80 a tonne to $250 back down to $100 in just the past couple of years. So that's changed the value of iron ore mines, certainly. But that's price risk, that's not exploration risk, or as we might say, junior miner risk.

As it happens there are junior miners looking for iron ore and their prices have changed very little along with the iron ore price. The risk of their being able to prove the deposit is much higher - and thus a bigger influence on prices - than the price of the finished product if it ever happens. Zanaga Iron Ore might be an example here.

The skinny on minerals

There will be claims about this metal or that, this mineral or that other. Ideas about how large the market is, or will be. Or how there're just no more reserves, or resources left, so get in now.

This can even be true but it's worth checking. The United States Geological Survey runs an excellent site to check these things. USGS Mineral Commodity Summaries. I know someone who built an entire, global even if small, business just by reading those - me. Unbiased information is your friend in this field of junior miners.

Conclusion

This field is tremendously risky. People are, usually, going to try to find out whether something is true - is there something here worth mining? Often the answer is no and so there's a total loss. Sometimes the answer is yes - that's the payoff. Never, ever, place everything on the one card turning up. This is a place to spread risk and positions. It's the portfolio of companies over time which can make returns.

The investing area also garners more than its fair share of fantasists and even outright crooks. Junior miners are risky enough, even on major exchanges, for any of us to go chasing unlisted stocks.