Points that Executives of Small Mining Companies  (Juniors) should consider. Article by K.C. Grainger

1-Small cap gold and base metal stocks are different in many ways from large caps and are usually best approached on a ‘value’ basis-that is what a company expects to have “in the ground” or what it eventually expects to prove. Many investors will buy a stock if they are convinced that it’s undervalued based upon its potential ‘to find’ and ‘already found’ “in ground reserves and resources. The key-showing investors that your stock is undervalued.

2- Recognize that many large brokerage houses will not allow their brokers to buy many of the small caps stocks for their clients, particularly under $2. In 2000, they would rather recommend a Nortel at $110 or a Lucent at $60. I can go on forever with examples. What makes it so bizarre and inconsistent with any investment sense is the fact that the brokerage industry, with its pathetic track record, has the audacity to tell anyone what to invest in and not invest in. Their track records and facts speak for themselves-in no uncertain terms!

 

3-Most large US brokerage houses have no credibility whatsoever-I mean maybe 10% to 15% do-maybe! They are a painful and expensive joke. The good ones are few and far between-usually they are the small brokerages. Too often, brokerage houses focus on what is popular and “commission and underwriting fee friendly,” not what is undervalued. It has always been that way.

4-Most large US brokerage houses will only recommend a stock based on their own financial self interest. Our readers and clients have had numerous experiences. Too many brokers do not want their clients engaging in the most successful investing method-“buy and hold-and waiting.” There are so little commission profits in buying and holding which prevents small companies the required time for success. That it is not desired business by the large brokerages. The fact that a stock is undervalued and represents exceptional value means little to the brokerage houses but I’ll bet that you already knew that.

5-Junior low cap mining stocks are not covered by most brokerage houses on a research basis. Moreover, in Canada and the US, less than 15% of all the publicly traded companies (over 15 thousand of them) have any comprehensive research coverage. And the ones that do have coverage are usually overpriced by the time the brokerage house clown analysts recommend them. Let’s just look back ten years and see three of the most highly recommended  stocks by the Wall Street elite: Microsoft then $50, now $26…General Electric then $51, now $18…Nortel then $110, now bankrupt and gone. Those analysts are just great aren’t they!

6-Junior mining stocks often have enormous insider (officer) ownership percentages. It is a major positive selling point to successful investors. It is monitored closely today, yet it’s rarely emphasized by companies. If officers own a stock and are buying or own it, show it!

 

7-Au contraire! Since there is so little research available on the junior mining stocks, if officers and directors sell even a moderate amount of their own personal shares, when the sales are reported on the internet 2 days later, the stock can plummet in price. Recognize that often insider transactions are the only method of analysis that investors have available, so even a small sale by an officer or director can have disastrous effects!!!! So be careful!

7-Far less brokerage research coverage exists today than ever and it will get worse. Discount brokers have damaged brokerage house profitability and cutbacks in research coverage and brokerage analysts continue. It is not the analyst’s accuracy (or inaccuracy-which is more often the case) but the fact that there is no comprehensive information available for investors for the majority of all stocks, research coverage  is very expensive.

8-An extreme price rise in a stock is not always in a junior company’s best interest. If it leads to excessive overvaluation in price, it will later plunge. It often takes 4 years to return to the old highs-if it does. Price spikes can be very damaging in the long run unless the value is really there and it can support a higher price.

9-The best investors understand and look for value. Inventor, scientist, writer, ambassador and publisher Ben Franklin said 230 years ago that “he that has patience can have it all.” The vast majority of juniors and most mining stocks demand patience which too few investors have. They must be regularly informed why they should invest in and continue to hold a stock. This is often the exact opposite of what the brokerage industry wants.

10-A research report is extremely beneficial today; there is no avoiding it. Among several things and simply stated, a  good research report for a junior should indicate such things as what projects a company has, what it is currently doing such as exploration plans, management’s long term focus, its financials, insider ownership among many factors.

11-Companies want to attract intelligent investors. “Intelligent investors” will invest at or near price lows, are patient and will sit through the normal challenges faced by a company.

12-The worst buyer (as an investor) for your stock is a trader/hedge fund that has little time or is not permitted to sit with a position in your stock and is inclined to be a seller-sooner rather than later. If your company’s shares are bottoming, you really don’t want  traders/hedge fund types buying, you want private investors and officers/directors  buying your stock.

13-There are very few market makers that support a stock as they did in the past. And even less will hold a position. They are there to trade and will often knock stocks down when they are short and sell in front of others on rises. Fact: few market makers position (hold in inventory) stocks today so your stock (any stock) can plunge on virtually no volume.

Brokerage house employee market makers (specialists are another term for them) were once a source of price support for stocks but no longer are. Note: Over 80% of transactions by market makers today are short sales or sales as they try to make a market. It is impossible to keep adequate “inventory” in any stocks. And short sales create selling pressure and price weakness (which they want so that they can profit by their short selling and seeing the stock’s price plunge. When the selling is finished, they can repurchase a stock at bargain rates. Manipulation? (Of course not, they would never do anything like that! God forbid!)

14-The least desired investors/shareholders for a company’s stock are traders and hedge funds. Why? Because their shares are always for sale. After a price move up, they bring in selling pressure and price declines as they sell their positions. They can kill a stock’s price.

15-We find that if a company informs investors about what it is doing and explains it thoroughly, investors can exhibit extraordinary patience and if and when a stock is undervalued, purchase more shares. By the way, there is a second key-dollar cost averaging in juniors-adding to positions after price declines, but few investors do that. Successful ones do!

 

The best method of approach is to have a company’s stock shown to people who are patient long term patient investors. You want to find investors who are going to invest in your company and put your company’s stock away-not traders.” That is how to build a successful junior company. Thank you, K.C. Grainger

 

Original report published in 2005, updated June 2011 for Montrealanalyst.com and Canadianmineanalysis.com