Market Wrap: Gold Hits 3-Month Low Amid Dollar Surge; Platinum At 5-Year Low; NatGas Outperforms

Written by Julian Murdoch | April 02, 2009

Everything You Ever Wanted (Needed) To Know About Junior Gold Miners

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With everyone focused on gold as an inflation/recovery play, cocktail conversation turns to the juniors.

• What is a junior, anyway?
• Is it gold? Or is it dirt?
• Separating the dreams from the reality

Every once in a while, you’ll read that junior gold miners are where it’s at. The theory is simple: So-called junior minors – mostly younger companies still in the exploration and discovery phase of developing gold mines – will either strike it rich on their own or become an attractive acquisition target for the majors.

But what exactly are these junior gold miners? And how do you tell the real deal from the fly-by-night operations?

It’s a critically important question in this space. Because if you’re not careful, you can end up acting like a newbie at a horse race – placing your bets based on the name of the horse or the flash of the jockey’s colors.

Who You Callin’ Junior?

What exactly qualifies a company as a junior gold miner? Some analysts say that any company that’s not part of the Philadelphia Gold and Silver Sector Index (XAU ) or the Amex Gold BUGS Index (HUI ) should be considered a junior. A more descriptive definition takes into account the resources a company holds, how far it is from actual metal production, or how much it has produced in the last few years.

That is to say, it’s all a matter of opinion.

Where can you find these junior miners? Well, there are many analysts and gold sites out there ready and willing to take your $35 a month to send you a newsletter and tell you which relatively unknown gold companies you should be watching. Alternatively, you could just take a look at the Toronto Stock Exchange.

TSX & TSX Venture Exchange: The Place For Mining Stocks?

As of the end of 2008, the Toronto Stock Exchange and TSX Venture Exchange had 1,427 mining issuers listed between them – 356 on TSX and 1,071 on TSXV. The 1,071 companies listed on TSXV are broken into categories such as mining, mining (non-oil and gas), mineral exploration/development, gold mining, etc. For our purposes, junior gold miners can (and do) fall into any and all of these descriptions – so this list is merely a starting place if you’re looking for new and unusual opportunities.

The TSXV tends to have early-stage, small-cap companies; we’re talking small small. Forty-five percent of the mining companies on TSXV had market caps between $1 million and $5 million as of December 31, 2008. Only 1% had market caps of $100 million or more.

For our purposes, the exchange is aptly named. As an investor in a junior gold miner, you are mainly acting as a venture capitalist – supplying money to keep the company searching for the next big find, enabling them to continue test drilling, or perhaps even funding the beginnings of mining operations. Getting in this early can have some advantages over big-ticket investing:

• Many times juniors are cheap, especially now after the market has taken such large hits. Ask a penny stock investor – when it works, the pops can be huge.
• Pick the right horse and your shares could end up being worth a lot when one of the majors comes looking for gold resources. Mergers and acquisitions may be a more attractive way for big gold to add reserves than investing the time and resources to develop new projects themselves. Junior mining buyouts can and do happen.

There are just as many reasons not to invest in juniors, however:

• Ask a penny stock investor: Just because a stock is cheap, that doesn’t mean it can’t go to zero. Gold companies can fold in no time, for many reasons – lack of funding, test drills coming up empty, etc. These are small, risky bets.
• With no proven track record, it can be difficult to evaluate new companies in the market.
• If the company has no proven reserves, chances are high that its explorations may not pan out.

So how do you separate the wheat from the chaff?

The first rule is caveat emptor: In this day and age, a fancy Web site does not mean a successful junior miner; it just means that a miner hired a good PR firm and Web designer. As an investor, your job is to go beyond the Web site to find out what is really going on at the company.

The prevailing wisdom is that the location of properties (e.g. the political stability of the region) and reserve levels are key indicators to look at if you are investing in a company for the long haul. But this is not fire-and-forget investing; this is making-phone-calls investing, and you have to stay involved if you want your investment to pan out.