In the last few weeks the subject of red flags to look out for in the junior mining sector has caught my attention. I have started to put together a list of red flags that I look out for and which would have me either sell my shares in a junior mining company or definitely not become a buyer of a company's shares.
As always with rules it's tricky to come up with hard and fast rules that apply to all situations - there are often nuances in each situation that one must pay attention to, and while rules may apply to the majority of cases they certainly can't be applied to every single case. With that being said I think the list of junior mining red flags that i've come up with will keep a junior mining investor away from many of the worst mistakes to be made in the sector. These rules are based on my experience as an investor in this sector for more than 15 years and they are my opinions and my opinions only.
I plan to release the entire list in three parts over the next couple of weeks and i'd love to hear what readers think. I'm definitely open to readers' suggestions for the next set of red flags.
Junior Mining Red Flags
1. Blatant grade smearing - Example: A company drills one meter of bonanza grade gold (let's say 200 g/t Au) and they smear that over an additional 20 meters that does not contain economic grade gold mineralization (sub 1/2 g/t Au) to make it look like they intercepted 20+ meters of 10+ g/t Au which would be a very impressive intersection, especially if the grade of mineralization is fairly consistent throughout. Blatant grade smearing is an attempt at deception and speaks poorly of company management's integrity. It's also silly because in this day in age it's usually caught very quickly and pointed out by more experienced investors. Major red flag.
2. Excessive executive compensation plans and excessive granting of options to insiders. A sub-$10 million market cap junior should not have a CEO making over $200,000 per year. Period. And the way a company manages its share count matters a lot to shareholders especially when a company is in its early stages and trying to attract a solid shareholder base.
3. Companies that hire promotional groups whose only objective is to jam the share price higher in the short term. In other words they aren't really interested in creating more market awareness and longer term shareholders. There is a clear distinction between sensationalist promotion full of hype, and promotion that is intended to increase market awareness and investor interest in the FACTS of a company's story.
4. CEOs and other executives who drop hints of a takeover happening i.e. "we might not be around next year (wink)" etc. First of all you don't want to be a shareholder of a company that spreads material non-public info because it's breaking the law and completely out of integrity. Second, you also don't want to own shares of a company where the management is blowing smoke up everyone's ass and creating false rumors. You lose either way in this situation.
5. Companies who release NRs about nothing or have their stock trading halted for immaterial reasons i.e. NRs about putting out an NR next week or halting their stock to announce they closed a financing. Halting the trading in a stock for immaterial news announcements is another cheesy trick intended to draw eyeballs over to a company NR. I want to own shares in companies that don't need to use tricks and games to grow investor attention to their story. As one junior mining CEO told me a few weeks ago "I'd prefer to let our grades do the talking."
6. Companies that have out of date websites and/or poor corporate presentations. If a company can't even update their current share counts on their website for an entire year do I really want to be a shareholder? The corporate presentation is the most commonly viewed item by shareholders and prospective shareholders, if a company can't put together a clean, crisp, and attractive corporate presentation where else are they cutting corners and doing mediocre work?
Stay tuned for Part Two this weekend!
DISCLAIMER: The work included in this article is based on current events, technical charts, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. The views expressed in this publication and on the EnergyandGold website do not necessarily reflect the views of Energy and Gold Publishing LTD, publisher of EnergyandGold.com. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.