The junior mining space is very risky, given very limited options in terms of mines and their involvement in early stages. So it’s very important to identify the right junior stock.
One approach could be to rely on the due diligence and expertise of the larger mining companies and to see where they’re investing their money. One very recent example is Agnico Eagle (AEM) and Yamana Gold’s (AUY) acquisition of Osisko Mining (OSKFF).
Things to watch out for with gold juniors
There are additional things you need to consider especially for junior mining companies.
- Management track record: Juniors often have only one mine, so it’s very important that management has a proven execution track record and, more importantly, management must be ruthless when it comes to bailing out a project that’s not proving out.
- Location: Location is doubly important for junior miners. Their focus is usually one or two mines at a time. The projects that are near the currently operating mines are usually a safer bet. Also, properties in the proximity of known mineralization usually have access to infrastructure like roads, water, and electricity.
- Political environment: Political pressures can cause governments to change policies overnight. Hugo Chavez in Venezuela nationalized the gold mining sector while the fate of many juniors hung in the balance. So it’s very important to identify juniors that are operating in politically stable environments.
Major sources of future supply
Reserves for majors are declining fast. They’re high-grading their mines, mining only the high-grade part of the reserves and leaving the low-grade parts alone. So now is the time to identify the junior gold companies that will be a source of future supply to majors. Usually, majors don’t make an offer before a company publishes a preliminary economic assessment (or PEA). So investors should look for PEAs with high net present value and low capital costs.
You can also stick with the Gold Miners Index (GDX) and Junior Gold Miners Index (GDXJ) if you don’t want to do so much due diligence. These ETFs invest in gold majors and gold juniors, respectively. The SPDR Gold Shares fund (GLD) is also a good way to play spot gold.