When investing in Junior Gold, share structure is a very important consideration. Exploration companies don’t have any revenue. They issue shares from the treasury once in a while to pay for exploration. If they don’t find anything, well, their share price goes to zero. Sound appealing? Rest assured where there’s risk, there’s reward, and I think the rewards in this sector are pretty good compared to the risk.
Share Count
Normally junior exploration companies start out with around 30 – 40 million shares outstanding. They will take a couple of decades to work their way up to about 300 million. If they don’t have any significant discovery or other asset of value by this time, they should reorganize. A share consolidation is one option (opposite of a split), where investors are left with a smaller share ownership but the company is down to a smaller share count.
Once the share count gets really high, it is less appealing to investors because a discovery has to be split many more ways. For example, a billion dollar discovery with 300 million shares outstanding will produce only $3 per share of value, but if they have only 100 million shares outstanding, it will translate into $10 per share of value.
The more important number to look at is called the Market Capitalization, or market cap. This is defined as the market value of the company, or the number of shares times the share price. One could argue that the number of ways a discovery has to be split is less important than the increase in value of the company following the discovery. For example, if a billion dollar discovery is made, the important number might not be how many shares outstanding, but rather how much the company was worth before and after. If the company was worth $100 million and went to $1 billion, that’s a 10 fold return for investors regardless of how many shares are outstanding.
Before investing in a junior gold company though, you should always know the share count, because it can vary by a factor of 10 or more, and it makes a big difference to the investment merits of the company. Many junior resource stocks are overpriced due to hype, good promotion, one single mention by a newsletter writer, etc. The share count should be easy to find on their web site.
Financing
When a junior raises money, there are generally three ways this can be done:
- Bought Deal
- Private Placement
- Non-brokered Private Placement
Bought Deal
In a bought deal financing, someone, or a group of people, have bought the entire share block. There is usually very little the average investor can do to get in, but often the shares are distributed among the investment firms funds. If you do business with the bank that did the financing, you have a chance, but I wouldn’t give it a very big chance. Usually only high net worth clients have a shot at this type of stuff. At my broker they often appear in the “new issues” section where you fill out a registration form and there’s some sort of minimum investment.
Private Placement
In a regular private placement, a broker is hired who’s job is to sell the shares. They peddle the shares around Wall Street, Bay Street (Toronto), and through their established channels. These are more likely to appear in the “new issues” section of your online broker, and it might even be worth calling the broker listed in the news release to see if they’ll sell to you. They will probably require a decent minimum investment, like $25,000 or more, because they would rather deal with institutions.
Non-brokered Private Placement
When there is no broker, everything is wide open. The company is selling shares directly to the public. This generally only happens when the market is strong and the company thinks it will have no trouble selling the shares (thus it skips the broker’s fee). In my experience, if you want to take part in this you need to call them the same day of the news release because the shares are spoken for very quickly. Also, the minimum investment is usually the lowest. A junior exploration company will generally take your money even if you’ve got $1,000 to give.
the Junior Gold blog