in

How to Avoid Common Mistakes With Mining Stocks (Part 1: Team)

For investors and speculators focused on growth, there is nothing more exciting than watching a stock go “on a run” for a big return.

Junior mining stocks, which are small publicly-traded companies that are aiming to make big discoveries, are well-known for being extremely high in both risk and reward.

But with a universe of thousands of available companies out there, how does an investor even begin to evaluate opportunities in this sector?

An Investor Checklist

We’ve partnered with Eclipse Gold Mining on an infographic series to show you how to avoid common mistakes when evaluating and investing in mining exploration stocks.

Part 1 of the series focuses on what to look for in a management team, including the types of characters you’ll want to avoid!

Part 1: Manage Team

Mining exploration stock can go on exciting runs but they certainly aren’t for the faint of heart.

As with any early stage, pre-revenue company, invertors can minimize their potential risk by screening companies based on a tried and true set of criteria.

The 5 Pillars to evaluate a potential junior mining company, there are five key pillars that need to be examined:

1. Team

2. Jurisdiction

3. Project quality

4. Past success and Funding Strength

5. Business Plan

This series will dive deep into each pillar to show you what to look for ( and what not to look for)  to help de-risk your decision-making process.

The Team: Every company you research will be talking about how ” Great” their team is. Here is how you can make sure the team is actually great, and not filled by a bunch of pretenders.

Step 1:  

Reseach the CEO and key figures on a company’s management team to make sure they are the real deal.

Here are several archetypes you want to avoid:

The Close-ologist: the best place to find a mine is next to an existing mine.

  • Typical strategy: The Close-ologist funds new enterprises by staking land around a project that the market currently finds exciting.
  • Why it doesn’t work: There is some truth to close-ology, but management teams that do this over and over are spraying and praying for traction anywhere. Once they run the project in the ground, they’ll set up shop with a new close-ology play.

The Trend-Chaser: forget the blockchain vanadium is where the real money is

  • Typical strategy: The Trend-Chaser jumps from industry to industry, or mineral to mineral, to chase the market’s flavor of the week.
  • Why it doesn’t work: The Trend-Chaser has no real conviction, and changes direction too often to maintain a clear focus. One something doesn’t work, he or she will go to the next industry.

The Pump’n Dumper: If you buy now, you’ll be in on the ground level. This stock is going sky-high!

  • Typical strategy: Accumulates stock at insanely low prices, raises money, and then uses grey-area promotional strategies to inch up the stock price on low volume. Sells stock as soon as price is high enough to make a profit.
  • Why it doesn’t work: This may make the promoter a few bucks, but for the end investor this almost always spells trouble. After pump and dump occurs, the stock’s news flow will disappear and it will slowly fade to zero.

The Commodity Collector: We’re a junior exploration company focused on precious metals, bas metals, and diamonds in North America, South America, South America and Africa.

  • Typical strategy: Buids up an extensive list of ongoing assets and projects, thinking that this redices risk- like diversifying a stock portfolio
  • Why it doesn’t work: Finding a new mineral discovery is extremely hard. But this is even harder when a team’s focus is split between many different projects, each with very different circumstances and geological attributes.

The Lifestyle Executive: This year is the year we hit the big one!

  • Typical strategy: Uses shareholder money almost exclusively to fund the salaries of management and other G&A expenses. Almost no actual work gets done.
  • Why it doesn’t work: The Lifestyle Company Executive is focused on raising money and funding their bank account, and exploration progress comes second. Expect dilution until fundingbecomes impossible, and then a rollback and re-brand.

The Optimistic Geologist: For the last four summers, we’ve collected thousands of soil and chip samples. This is going to be a monster deposit.

  • Typical strategy: This is usually the pet project of a geologist, and the project may have some merit.
  • Why it doesn’t work: With no business plan and little capital markets eperience, time is the enemy of the Optimistic Geologist.
It’s also not impossible for CEOs to exhibit two or more of these personas at once, so beware.
 

Step 2: 

Examine the management team and the board of directors and dig deep into their history. Here is what you want to actually see:
 
  • Clear vision: Management has articulated a clear vision for the company, and how it will create value for shareholders
  • Transparency: Management has a history of integrity, being honest with shareholders in every circumstance.
  • Skin in the Game: Simply put, management owns sufficient shares of the company ( not just options) and is incentivized to succeed.
  • Winning Track Record: Management has made previous discoveries, and has successfully excited companies in the past, taking shareholders along for the ride.
  • Business Mindset: Management has a plan tp generate ROI for sahreholders, and knows how to execute on that plan.
  • Relevant Expertise: Management has hired a team that has relevant experience. knowledge, and connections that can help advance the vision.

Step 3: 

Finally look to see how the mangement team in question has handled situations in the past.
Have they been able to consistently fund projects in the past, even in bad market, without overdiluting shareholders?
Management teams that are unable to fund companies through touch times have two risks:
  • They are unable to advance project ( no cash)
  • They run risk of having to raise money at bad market price, further overdiluting stock.
Is the team well-rounded? Do they have expertise covering multiple fields? Make sure they have backgrounds in geology, finance, capital markets, communications, and other important business functions.
 
Does the team have connections to major mining companies, major banks, other important institutions? Trusted management teams will have connections that they can rely on to help provide key catalysts ( funding, M&A, gaining institutional buy-in, optioning projects, etc.)
 
Did they do what they said ther’d do, while sticking to timelines? Look at past companies that management has been a part of. See if they delivered on their objectives on time to meet shareholder expectations.
 
Has the team successfully exited from their previous ventures? Teams that have had success are more likely to generate successes in the future- while teams that hop around from venture to venture without having any degree of success will be riskier bets.
 
You can’t control everything that happens in the market, but by achieving alignment in the five pillars, including the quality of the management team, you can better your odds at success.
 

If you’ve ever researched mining exploration stocks before, it doesn’t take long to realize that every company will talk about how “great” their team is.

Here’s a few steps to ensure that the team is actually great — and not filled with pretenders.

Management Team Checklist

Step 1: Avoid the Bad Characters

The mining stock universe can be filled with interesting and amusing characters, but many of them are not there to generate you a return. Here are the personas you should aim to avoid:

  1. The Close-ologist: Funds new enterprises by staking land around a project that the market currently finds exciting.
  2. The Trend Chaser: Jumps from industry to industry, or mineral to mineral, to chase the market’s flavor of the week.
  3. The Pump n’ Dumper: Accumulates stock at insanely low prices, raises money, and then uses gray-area promotional strategies. Sells stock as soon as price is high enough to make a profit.
  4. The Commodity Collector: Builds up an extensive list of ongoing assets and projects, thinking that this reduces risk. But really, it just reduces focus.
  5. The Lifestyle Executive: Uses shareholder money almost exclusively to fund the salaries of management and other G&A expenses. Almost no actual work gets done.
  6. The Optimistic Geologist: This is usually the pet project of a geologist, and the project may have some merit. However, time is the enemy of the Optimistic Geologist.

It’s also not impossible for CEOs to exhibit two or more of these personas at once, so beware.

Step 2: Traits You Want to See

Examine the management team and the board of directors, and dig deep into their history. Here’s what you want to actually see:

  • A clear vision: Management has articulated a clear vision for the company and how it will create value for shareholders.
  • Winning track record: Management has made previous discoveries and has successfully exited companies in the past, taking shareholders along for the ride.
  • Skin in the game”: Simply put, management owns sufficient shares of the company (not just options) and has the incentive to succeed.
  • Transparency: Management has a history of integrity, being honest with shareholders in every circumstance.
  • Relevant expertise: Management has hired a team that has relevant experience, knowledge, and connections that can help advance the vision.
  • Business mindset: Management has a plan to generate ROI for shareholders and knows how to execute on that plan.

Step 3: Past Performance

Finally, look to see how the management team in question has handled situations in the past. The following questions will help you evaluate:

  • Have they been able to consistently fund projects in the past, even in bad markets, without overdiluting shareholders?
  • Is the team well-rounded? Do they have expertise covering multiple fields?
  • Did they do what they said they’d do, while sticking to timelines?
  • Does the team have connections to major mining companies, major banks, or other important institutions?
  • Has the team successfully exited from their previous ventures?

The De-risking Imperative

You can’t control everything that happens in the market but by successfully de-risking each management team with these criteria, you can better your odds at success in a high-risk, high-reward market.

This is part 1 of a five-part series on common mistakes made by investors when evaluating mining exploration stocks. Stay tuned for the upcoming parts in the series, covering other topics like jurisdiction, project quality, and more.

Barstool Sports founder believes he’s a better investor than Warren Buffett and has determined day trading is ‘the easiest game’ there is

How to Avoid Common Mistakes With Mining Stocks (Part 2: Business Plan)