Junior Mining Companies: Are They Worth the Risk?

A few years ago, a few family members of mine lost TENS of thousands of dollars in an exploratory natural gas investment that had gone horribly awry.

They are veteran investors who have had much success in the past with their other endeavors.

However, this was the first time they had ever invested in a junior company.

There’s money to be made and, more importantly, danger to be had here.

Oftentimes junior companies, especially junior mining companies, make perfect fronts for scams that prey on even the most experienced of investors.

There are ways to enter this sector without falling victim, but it requires momentous due diligence.

But it’s not impossible.

Junior Mining Companies

A junior mining company is an exploratory endeavor that looks for new deposits of gold, silver, uranium, or other precious metals.

These companies are designed to scavenge target properties that are believed to have significant mineral deposits.

They are, in essence, the future of the mining industry.

They find the properties, prove the resources, stake the raw material, and bring mines into production.

Junior mining companies are responsible for 5% of the world’s gold production, collectively.

Once getting past the startup phase, they require substantial capital to get off the ground or they’re bought out by larger mining companies.

Because they have such small market caps, they are subject to extreme volatility.

It doesn’t take much capital flowing in or out for these companies to move violently in either direction.

That’s another reason they make such dangerous and flighty investments.

Scams, Scams, and More Scams

One of the biggest scams ever seen resulted in over $6 billion in losses in investor money, the biggest ever in the history of Canadian stock markets.

The Bre-X Minerals scandal lasted for nearly 20 years and drained everything out of the “shell” company’s estate.

Litigants were expecting substantial cash compensation, but there was nothing left.

Investors involved in a similar and more recent pump-and-dump scandal perpetrated by Southwestern Resources have also received no relief.

Ontario Superior Court Justice Paul Perrell agreed with a motion set in place by attorney Paul Pape to discontinue two lawsuits that alleged Calgary-based Bre-X Minerals participated in “stock fraud.”

The class-action lawsuits called forth the now-bankrupt estate for former Bre-X President David Walsh, who died in 1998, and former Bre-X geologist John Felderhof and his ex-wife.

All denied any wrongdoing, and those who were truly behind the scam were never caught.

Southwestern’s former CFO, John Paterson, pleaded guilty to four counts of fraud in 2012 for distributing hundreds of fake assay results in order to hike share prices.

The important thing to learn from these cases that you must look for red flags if you want to invest in this caliber of company.

Fraudulent companies do unusual things in order to cover their tracks.

The evidence won’t be staring you in the face, so monitoring corporate behavior could mean the difference between win and lose.

Anything that seems too good to be true usually is, like Bre-X’s Busang gold project in Indonesia’s metallurgical gold recoveries coming in 93%, an incredibly high number for a primary gold deposit.

Investors need to take the time to comb through the minutia of the technical reports, financial statements, annual information forms, and any other important documentation to look for anything out of the ordinary.

Some specialists even go so far as to recommend sticking to coins or bullion if you wish to add precious metals to your portfolio.

How it Happens and What to Watch Out For

After a company has been created, capital is raised through the stock markets, and then the company is situated near a proven successful area such as California, Nevada, or South America.

Once mining claims or rights have been acquired, press releases are sent out announcing recent purchases and linking them to genuine operations close by.

Experimentation permits and drilling programs then ensue.

The final piece involves more press releases advertising the fantastic results achieved through drilling.

However, in the unsavory, dishonest situations, soil samples are doctored along with the scientific information they are sent out with to “prove” the fantastic results.

Other signs of scam mining companies include the following:

  • Any company that boasts of new “proprietary” methods, steer clear. They rarely yield anything substantial, if anything at all.

  • Companies that also broadcast a slow-going drilling process are likely to be fraudulent. In normal operations, when large deposits are found, legitimate organizations employ as much equipment as possible.

  • Even though the company claims it’s done little to no drilling, it suspects deposits in the millions or even tens of millions of ounces. In order to say with any degree of confidence that even speculated deposits are this large, hundreds of drill holes with thousands of assays must be completed first.

  • Companies that claim they have rare precious metals, such as any from the platinum group, showing up in assays are lying straight to your face. These metals are especially rare and can hardly be found in large commercial quantities.

These are all prime examples of red flags, the warnings signs of a scam junior mining company trying to take advantage of its generous investors.

Not all junior mining companies are bad guys. There are genuine operations in place requiring investor funds. But the ones that go bad usually mean disaster for investors.

Ask questions. Lots of them.

Contact government regulators, state geological surveys, and securities regulators, and ask if they’ve heard of the company or project you’re thinking of investing in.

Even approach the company with your concerns and ask if they’ve actually produced the commodity they have claimed to. When? Where? How much?

Check, then double check.

Even consider hiring an independent consultant if the potential investment is significant enough.

The independent consultant company can take its own samples at the deposit’s location to evaluate the company’s claims.

If the company objects, it could be another sign that its operation is not legitimate.

Other things to focus on before investing:

Junior mining companies located relatively near to larger operations already in place are typically safer than completely pure greenfield targets where no known deposits have been found.

Also look into the company’s management structure. Does its team include geological engineers with extensive experience in precious metals? Has the team worked together in the past, even if just in part, and does it have a solid track record of its findings? Can the CEO or president raise necessary capital and negotiate deals compliantly?

It is also important to look into the governmental interference that should be expected in a company’s area. Not all states and countries are accommodating to mining.

Junior companies that boast rich mineral reserves in mining-friendly locations with low governmental interference are good bets.

There are ways to check government regulations on mining. Organizations like Fraser Institute organize “mining attractiveness” of states and countries all around the world. It is a good, informative resource for investors.

Just keep all of this in mind before diving into a junior mining company.

Do your due diligence.

Until next time,

John Peterson
Pro Trader Today