Guide To Finding Junior Gold (And Oil) Companies

"The Patient Investor" has spent some time investing in junior resource stocks. He's been involved with VSE-listed stocks as far back as the 1980s, when the Venture was still the Vancouver Stock Exchange. And, he's written a guide explaining what he looks for in a junior. Included is his procedure for finding American quotes for Canadain-listed stocks. Of note is the fact that he uses management presentations not for selection, but for elimination.

As for golds, he uses these criteria:

What do I look for in companies? I want multiple projects with large land areas, a high amount of resource, experienced management, low number of shares, and in a good location.

For gold mining companies with open pit heap leaching projects, I want at least a million ounces of gold reserves and production of 75,000 ounces of gold a year. In third world countries I want at least 50 million tons of ore at .8 grams of gold a ton. In the US or Canada, I want 50 million tons of ore at 1.2 grams of gold a ton. For underground mines with a milling operation, I want at least 1.5 million ounces of gold reserves and production of 100,000 ounces of gold a year. I want at least 20 million tons of ore at 6 grams per ton in third world countries. In the US or Canada, I want 20 million tons of ore at 8 grams a ton. If a US or Canadian company produces much more gold a year and has much larger reserves, I will look at a little lower grams per ton.

The reason for wanting higher grade ore in the US and Canada is higher labor and operating costs. Also, if the company is producing other metals as part of its operations, then a lower grade of gold ore can still be very profitable. The reason I want more production in an underground mine and milling operation is it usually costs much more to produce an once of gold than in an open pit heap leach mine. I usually try to invest in these companies once they have raised money to bring a mine into production or after the scoping/feasibility report is finished.

That point is where a patient investor would step in. Often, exploration stocks on the verge of production drift listlessly for what seems to be a very long time. From what I've seen, the rewards for this strategy are greatest at about the time a good or very good feasibility study is released. Of course, the risks are greatest at that point - and that's because the big barrier is still acquiring capital for the project. Companies that don't secure capital have a tendency to drop to near-zero if they're indebted. If not, they still sink and go dormant indefinitely.

Should they get financing or taken over, on the other hand, then they climb and sometimes shoot up.

One exception to this rule are hot companies whose flagship projects contain huge deposits. They tend to be shoot up long before the feasibility study, in part of hopes of a takeover by a major. One more wrinkle: a company with a hot strike tends to leap up beyond the price that later economics justify.

The best entry point for risk-takers is before the feasibility study if the stock has been listless for a long time. A good sign for those less adventurous is a jump in the stock price once the feasibility study is released.

Still, there's the capital barrier to remember.


An example of an advanced-stage exploration company with a good preliminary economic assessment, which is two steps away from a feasibility study, is Majestic Gold Corp. I've profiled it here. Unfortunately, Majestic does not qualify on the low-shares criterion but the projected economics of its project are fairly good.