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When considering investing in junior mining companies many factors must be taken into consideration. The majority of junior mining companies have no revenues or cash flows which makes evaluating them with traditional methods used for established companies less than ideal.
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+ Evaluating Mining Stocks: Discovery Investing
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+ Interview with Chris Berry
• Chris Berry is the founder of House Mountain Partners, LLC.
• House Mountain has created a system for evaluating junior miners
• Their system works for evaluating companies who don’t have reputation of
larger firms that have been established in the industry.
• For more about House Mountain Partners:
• http://house-mountain.com
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+What is Discovery Investing?
“We have pioneered an investment philosophy called ‘Discovery Investing.’ It’s a
different approach to risk and is a road map that lends itself nicely to micro and
small cap companies.
We believe that all wealth creation begins with a discovery, whether it’s a gold
deposit or a cure for cancer. With that in mind we look at 10 factors that are
designed to evaluate junior companies.”
- Chris Berry
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+Major Factors in Discovery Investing
When he spoke with Gold Investing News, Chris Barry outlined that most of
factors affecting the value of a junior mining company relate to the deposits the
company has access to. Specific factors include:
• The Size of the Deposit
• The Location of the Deposit
• The Ownership of the Deposit
• Experience and Quality of Management
• Potential and Immediacy of Production
• Financial Footing
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+The Size of the Deposit
To determine whether a deposit is a “company maker”, House Mountain
suggests first looking at the total size of the company’s mineral deposits.
This is usually based on:
• Grade of the mineral deposit
• Tonnage in the deposit
• Intangibles such as location
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+The Location of the Deposit
As an investor analyzing a junior mining company, it’s important to ask
yourself, is the deposit in a mining and business friendly environment?
Location factors to consider:
• Transport costs
• Business jurisdiction
• The threat of expropriation
• Political instability
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+The Ownership of the Deposit
The control that the company in question holds over a deposit weighs heavily
on future profits, and takeovers. Questions investors should ask include:
• Does the company own 100 percent of the asset?
• Does the company have underlying royalties to pay?
• What do joint venture partners bring to the table?
• How ultimately will joint ventures affect profit margins?
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+The Experience and Quality of Management
Management can make or break a company’s long term potential. In relation
to junior mining companies that are looking to start production on an asset, it
is beneficial to know:
• Has the management team gone through the procedures before?
• Is management information accessible on the company website?
Generally, the more experience the management team has, the better.
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+Potential and Immediacy of Production
The potential and the immediacy of production on the deposit is essential to
realizing profits. The longer the process to get a mine into production, the
greater the courage and patience of the investor. Questions to ask include:
• Is the project a “new discovery”, > 10 years from production?
• Are there permitting and environmental issues?
• Has the company acquired a past producing mine?
Past producing mines can return to production quickly.
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+The Company’s Financial Footing
You can then do the math to determine what the company is
worth relative to its peers in the market.
• Many junior mining companies are yet to create cash flow
• Enterprise value is considered the “take-over” value of
the company
• Enterprise value = Market cap + Debt – Cash
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