A few days ago I published the first installment of my junior mining red flags. Today's second installment in the series is a bit more nuanced because the red flags don't always pertain to the company itself - a company's shareholders also matter because they are invested alongside you if you choose to buy shares in the stock. I also believe it is important to evaluate how a company communicates with the market, both in terms of language and technical detail but also in terms of transparency.
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 - Part 2
7. Companies that are consistently, and egregiously late in their own stated timelines. If a company doesn't care about keeping its word with shareholders it doesn't speak well to its corporate integrity and what they are likely to deliver in the future. One of the secrets of success is to always underpromise and over-deliver, avoid companies that are good at doing the opposite.
8. Companies (either directly or through vocal shareholders) that blame poor share price performance on short sellers. The fact is that short selling accounts for a very small percentage of total trading volume in the junior mining sector. Blaming poor share price performance on short sellers is lame and most likely false. If a company delivers good news and executes well then short sellers will be forced to cover and help to lift the share price even higher. Avoid companies where the CEO spends a lot of time talking about the share price and trading in the stock.
9. Avoid stocks that have a large cult following. Why? Because this sector is challenging enough, we don't need to be involved with heated battleground stocks where many of the shareholders lack objectivity and through their actions may in fact alienate new potential shareholders. A large cult following is also a sign that a company's story has been widely disseminated and has likely already attracted the vast majority of potential shareholders that are out there. We want to get into stocks that are under the radar, not ones where a large herd of cultish followers are "all-in" and have tapped out all of their potential buying power.
10. Companies that are quick to jump aboard the latest hot metal/mineral. In 2016 it was lithium, in 2017 it was cobalt, now in 2018 it's vanadium. Avoid companies that jump from project to project with the hope of raising some more money and/or creating a short term spike in their share price because they now have a project that has something to do with the latest hot commodity.
11. Companies that make blatant mistakes in their NRs, or who purposely try to misrepresent material facts in an NR. This rule once again pertains to a company's integrity. I'd rather not own shares in a company that is consistently trying to pull the wool over my eyes, we should be on the same team and shareholders should expect a level of honesty and disclosure.
A few weeks ago I saw an NR from a company that was titled "Director Resigns", but it turned out that there was a lot more to the story since this director was also the President & CEO of the company. It's a small thing but it speaks to much bigger issues. If you find a company that is clearly making purposeful misrepresentations or blatant mistakes (the wrong grades or lengths of drill intersections for example) in their NRs, RUN, don't walk.
12. Companies where insiders have only minor share holdings. This is a lesson that I learned the hard way recently with a company that shall not be named. Obviously it depends upon the market cap of the company but I really want to see insiders own at least 10% of the shares of a company, and the more the better. This rule is just basic common sense. You want the people making the decisions aligned as closely as possible with you the shareholder. If people don't have much skin in the game they are less likely to care about important details or how the company spends its shareholders' money.
I also like to see companies where the CEO and other top executives are willing to step up and buy shares on the open market, and i'm not talking about just a few hundred dollars - purchases worth more than $10,000 by the company CEO hit my radar and tell me that they are committed to creating shareholder value. It's worth noting that my biggest winner of 2018 has been Westhaven Ventures (TSX-V:WHN), a company with ~40% insider ownership and a founder'/chairman who was been a regular buyer of Westhaven shares on the open market. Simply put Westhaven management have a lot of skin in the game and it has translated into how they have operated over the years and shrewdly managed shareholder money.
Stay tuned for the third and final part in this series early next week!
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.