This is the second in a series of musings in which my intent is to inform and educate the layman and help him become a better and more successful investor in the junior resource sector.

The first in the series was called Reserves versus Resources: A Primer for the Lay Investor. It defined the various categories for classification of reserves and resources in simple terms, detailed the important distinctions in the various categories defined by the Canadian Institute of Mining and Metallurgy, and emphasized that a reserve is a mineralized body that can be mined at a profit while a resource has not undergone an evaluation of its economic viability.

This musing will detail my systematic methodology and process in evaluating the merits of a junior resource company for investment.

I am asked frequently how to evaluate companies. For those familiar with my audio interviews this will sound (pardon me while I employ a favorite quote from The Firesign Theatre circa 1971) as if it’s coming from the Department of Redundancy Department.

But this statement always bears repeating:

There are three key ingredients to any junior resource company: Share structure, people, and projects.

Many of my stock finds occur at the numerous investment conferences in North America; I attend about a dozen every year. There are sometimes hundreds of companies exhibiting and thousands of people on the floor of the convention hall. Working efficiently in this environment can be a daunting task.

In a typical two day conference, I visit with 20 to 25 companies, attend a couple of talks on macroeconomics and/or commodities forecasts, give one or two audio or video interviews, take a half dozen private meetings with CEO’s, and do the usual schmoozing and networking. These conferences are fun but absolutely the hardest work I do as an analyst. I must have a well thought-out plan and be efficient; there is never enough time to get everything done on my list because there are so many spur-of-the-moment add-ons to that pre-conference list.

As a result, I have developed a quick and dirty methodology that allows me to reject most companies in a maximum of 15 to 20 minutes. It is a standard list of rapid fire questions. The goal: Separate the contenders from the pretenders, ASAP.

In my analysis, I value each of the key three criteria equally. But I do not consider them in the order presented above.

I start with projects. At any given time, I have priority targets of specific commodities in specific deposit types in specific areas of specific countries. That eliminates most companies immediately.

As an experienced geologist who has seen almost every rock type that exists on the Earth, the flagship project is my first focus. Generally I am not interested in a company without a flagship property.

I want an advanced play in a particular commodity in a prospective geological environment in a geopolitically stable jurisdiction with permissive size and grade to develop as a possible mine or attract acquisition by a larger company.

That’s a mouthful but the necessary characteristics of a flagship property are all summed up in that one run-on sentence.

So my first set of questions goes something like this:

·        What is your flagship property?
·        What is the commodity?
·        Where is it located?
·        How large is the land position?
·        What is the geological setting?
·        Are there producing or past-producing mines in the district or region?
·        How many drill holes have penetrated the prospect?
·        What are the results of these drill holes?
·        Is there a historic or 43-101 qualified resource or reserve?
·        Is there metallurgical testing?
·        Are there environmental or geopolitical concerns?

I want to see good graphic presentations at the company booth, including location map, geology map, and plan map, long-section, and cross-sections showing the deposit and the drill holes. It also improves the company’s chances if there is someone with a geology or engineering background on hand, and it is especially good if he is the CEO, COO, chief geologist, or VP of exploration. I generally want to engage the IR-types only to request a meet with the technical guy in charge. It is not intended as disparaging but those who took Mining Geology 101 from the BC Institute of Technology in North Van do not have the in-depth knowledge I am seeking.

If the project has a pre-feasibility or feasibility study with reserves in the ground, I want to know projected operating and capital costs, what metals prices and recoveries were used, the projected Net Present Value (NPV) and Internal Rate of Return (IRR), how debt and/or equity financing will be procured, and projected time to positive cash flow.

As an aside, I will ultimately examine those documents in detail and reach a preliminary decision on the project merits and demerits. If it passes my vet (which many don’t), then I get my consulting mining and metallurgical engineering colleagues to review the technical data and double check the operating and capital costs. We must ascertain if the NPV and IRR valuations are done per our conservative industry standards.

Remember what happened with the Galore Creek capital expenditure fiasco a year ago? In my opinion that one enormous technical screw-up was the beginning of the current bear market in commodity stocks.

If it is a producing mine, I want to know the strip ratio if open pit, or tonnes of underground development and waste rock versus ore, mining method, and dilution if underground, metallurgical process and recovery, yearly production and reserves, operating cost, projected capital expenditures, royalties, short and long term debt, last quarter and year to date cash flow, exploration potential, and what the company has done and intends to do with their profits.

P.S. I really like producing mines issuing dividends to shareholders even though that might impact growth and expansion.

To the board of directors: Please reward your shareholders. They are your lifeblood, especially in difficult times. Foster their loyalty by returning capital and they will support you time and time again.

These questions can be asked and answered in ten minutes or less and they eliminate half or more of all junior resource companies. Note also that my acceptance or rejection of a company is highly dependent on the projected supply/demand curve and current and projected price of the commodity in question.

My next set of questions is designed to evaluate the share structure:

·        How many shares are outstanding?
·        How many shares fully diluted?
·        What is the current share price?
·        What is the 52 week high/low?
·        What is the range in the past thirty days?
·        How many shares trade in an average week?
·        What percentages are insider held, “family and friends”, and institutions?
·        Who are those institutions?
·        How large is the public float?
·        How many warrants are outstanding?
·        At what prices are they fixed and what are the expiry dates?
·        What is the current working capital?
·        How much is cash and how much is equities?
·        How much are the long term and short term debts?
·        Are there recent proposed, amended, closed, or cancelled private placements?

I want to see a company that is tightly held by insiders and family and friends (a minimum of 15 to 20%), and a low number of shares outstanding commensurate with the advanced status of the project. There should be a healthy working capital position that can carry the company for a year or more without dilutive financing, warrants that are in-the-money and will raise substantial working capital for future funding, or warrants out-of-the-money that will not cap a rising share price. Institutional funds that are financially viable and committed to their investments and a large enough public float to produce consistent moderate to high liquidity are also necessary ingredients.

This simple exercise can eliminate another quarter of all juniors.

Tune in tomorrow for part II of this article. 

The Mercenary Geologist Michael S. “Mickey” Fulp is a Certified Professional Geologist with a B.Sc. Earth Sciences with honor from the University of Tulsa, and M.Sc. Geology from the University of New Mexico. Mickey has over 29 years experience as an exploration geologist searching for economic deposits of base and precious metals, industrial minerals, coal, uranium, and water in North and South America and China.

Mickey has worked for junior explorers, major mining companies, private companies, and investors as a consulting economic geologist for the past 21 years, specializing in geological mapping, property evaluation, and business development. In addition to Mickey’s professional credentials and experience, he is high-altitude proficient, and is bilingual in English and Spanish. From 2003 to 2006, he made four outcrop ore discoveries in Peru, Nevada, Chile, and British Columbia. 

Mickey is respected throughout the mining and exploration community due to his ongoing work as an analyst for public and private companies, investment funds, newsletter and website writers, private investors, and investment brokers.

Contact: Mickey@MercenaryGeologist.com

Disclaimer: I am not a certified financial analyst, broker, or professional qualified to offer investment advice. Nothing in a technical report, commentary, this website, and other content constitutes or can be construed as investment advice or an offer or solicitation to buy or sell stock. Information is obtained from research of public documents and content available on the company’s website, regulatory filings, various stock exchange websites, and stock information services, through discussions with company representatives, agents, other professionals and investors, and field visits. While the information is believed to be accurate and reliable, it is not guaranteed or implied to be so. The information may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. I accept no responsibility, or assume any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information. The information contained in a technical report, commentary, this website, and other content is subject to change without notice, may become outdated, and will not be updated. A technical report, commentary, this website, and other content reflect my personal opinions and views and nothing more. All content of this website is subject to international copyright protection and no part or portion of this website, technical report, commentary, and other content may be altered, reproduced, copied, emailed, faxed, or distributed in any form without the express written consent of Michael S. (Mickey) Fulp, Mercenary Geologist.

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