Points that Investors & Executives of Small Mining Companies (Juniors) should consider.

1-Small cap gold and base metal stocks differ in several ways from large cap metals and are best approached on a potential value basis. That would be what a company expects to have “in the ground” and/or what the company eventually expects to prove. Successful  investors will buy a stock if they are convinced that it’s undervalued based upon its exploration potential and what it already has in resources. The point is that if a stock is perceived as undervalued with exceptional potential for capital gains, investors will be interested.

2-Note well that large banks and large brokerage houses generally do not permit their in house brokers to recommend small caps stocks to clients, particularly under $5 a share. In 1999-2000, they would rather recommend a Nortel at $110 or a Lucent at $60. We can go on forever with examples. What makes it so bizarre is the fact that the analysts in the U.S. brokerage industry, with its long history of disastrous stock recommendations, have the audacity to still advise the public which stocks to invest in but worse yet which companies not to invest in based upon their analysis. Their track records and the facts speak for themselves.

3-Generally, brokerage houses focus on what is popular and not what is undervalued. Their key is what will generate trading commissions and underwriting relationships. That has always been the “rule” but now it’s become worse. Most large US brokerage houses have little credibility. The good ones are far too few; usually they are the small brokerages.

4-Large US brokerage houses generally recommend a stock(s) based on their own self-interest. We have had numerous experiences with that.  The large brokerages want to control investors’ assets. The fact that a stock is undervalued and represents exceptional value means little to the brokerages but you already knew that.

5-Junior low cap mining stocks are rarely covered by brokerage houses on a research basis unless there is a “corporate finance” relationship which brings the broker/bank large underwriting fees. Moreover, in Canada and the US, less than 15% of the thousands of publicly traded companies have true comprehensive research coverage. Unfortunately, the companies that have coverage are often overpriced by the time the brokerage analysts recommend them.

Just look back twenty years and see three of the most highly recommended US stocks by the Wall Street elite: General Electric then $51, now $11…Nortel then $110, now bankrupt and gone, Citigroup, reflecting a reverse split is off over 80% in the last decade. Those analysts are just great aren’t they! The average person doing his or her own analysis can run rings around them.  

6-Junior mining stocks often have huge percentages of insider (officers) ownership. It is a major positive and is monitored carefully today by many investors, yet it’s rarely emphasized by brokerages as it can often indicate that a stock(s) may be overvalued. However if managements and officers own a large percentage of their companies’ stock and are buying, it merits attention.

7-Since there is limited 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 drop in price. Recognize that often insider transactions are the sole method of analysis that investors have available so just a small sale by an officer or director can have negative effects!!!! So be careful!

8-Far less brokerage research exists today than in the past and the decline will continue. Discount brokers have damaged full service brokerage profitability and the cutbacks in research and brokerage analysts continue. There is little comprehensive information available for investors for the majority of all stocks. Research coverage can be very expensive for juniors and many small caps as they have to pay for coverage. You have to learn to do it yourself.

9-An extreme price rise in a stock too quickly is not always in a company’s best interest. If it leads to excessive overvaluation in price, it will later plunge. It often takes four years to return to the old price highs-if it does. Price spikes can be damaging unless the value is truly there and the value can justify higher prices.

10- The vast majority of juniors and most mining stocks demand extraordinary patience which few investors have. They must be regularly informed why they should invest in and continue to hold a stock.

10-A research report is extremely important today; there is no avoiding it. Simply stated, a  good research report for a junior should indicate such factors 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……many!

11-Quality 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. But above all else, they will read any research available and be sure that it makes sense to them.

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

13-There are very few market makers that support a stock as they did in the past. And even less will patiently hold a position. They are there to trade. Today few market makers position (hold in inventory) stocks so a company’s 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: Historically over 80% of transactions by market makers today are short sales or sales to investors as they try to make a market. It is impossible to keep adequate “inventory” for so many stocks thus they are forced to do short sales to fill orders.  Keeping inventory is very expensive and risky and very few investors understand that.

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

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

***Whether a stock is selling at $90 a share, $40 a share, .05 cents to .02 cents a share, good value can be found anywhere!

Thank you, K.C. Grainger and Bob Pellerin