Keith M. Barron (How to pick junior gold.....1. A posting on this website recently said that the three most important criteria to picking a junior were "strong management", "good properties" and "money in the bank".....BUT we're buying shares of a gold exploration company - not a real estate firm. The author left out "an experienced technical team". If the junior has three investor relations people and no geologists or geo-engineers they are to be avoided. Period. Also, I'd be less likely to invest in a company that lets all technical work be handled by a consulting company. Consultants are hired hands with no vested interest in making a company a winner, nor do they usually provide project continuity as would someone on staff. Chances are, if a company doesn't have a geological staff they are just speculators. Canadian companies now need to have a "qualified person" (a geologist or geo-engineer) sign off on press releases. Don't be afraid to phone up the company and ask management what the qualified person's relationship is with the company. Are they getting their hands dirty in the field? Or are they sitting in the offices and are fed information by others? Any formal technical document that is to be used to raise money needs to have a "certificate of qualifications". Ask to see it. Ask them to fax you a resume of the qualified person - hell, it's your money at stake!
2. Any company with a legitimate new discovery will have an independent, third party project assessment done as early as possible - perhaps several. We can expect that companies will go to extreme means to prove their finds are real.
3. Is the property in a geographical area where gold has been found before? Are there government reports relating to the area? Usually this kind of information can be found on the internet. A company with a new discovery in the Carlin Trend, next to Kalgoorlie, or in the Timmins camp wouldn't be hard to believe, but if the company claims to have found the world's largest gold deposit in Nebraska or Paraguay then be a sceptic! Many juniors play it safe and tie-on their land positions to known deposits. These are what's called "proximity plays." Though this strategy sometimes pays off, the juniors most of the time simply try to bask in the reflected glory of the company next door with the goods, and don't do any of their own exploration. Make sure the company is out there doing work, not simply speculating in real estate.
4. Beware of companies that say their deposits are "heap leachable" or their ore "free milling" if they can't back this up with an independent metallurgical study.
5. What assay laboratory does the company use? Are they licensed? In the past bubble we saw unlicensed assayers and analytical laboratories that had no history of working with mining companies suddenly churning out numbers. If the company can't or won't tell you the name of their lab avoid them. Don't be afraid to phone up an unfamiliar lab and ask them if they have other clients.
6. Sins of omission: Does the company have the title to the property and all permits to carry out exploration? In the past bubble, many companies had only filed applications or signed letters of intent, yet left it to the investor to "fill in the blanks" and believe that the property was a solid asset (remember Bre-X didn't have all it's CoW's [contracts of work] in order?). Is the property next to a Wilderness Area, National Park, Archaeological site, Panda habitat?? Is the project likely to run into environmental opposition?
7. Sins of commission: These are cases of outright fraud and harder for the layperson to detect. As a rule remember that no gold deposit in the world will produce consistently good (or incrementally increasingly better) drill results. There will ALWAYS be some misses. We are dealing with a natural phenomenon after all. If a company exponentially increases their reserves without increasing their number of drill rigs, something is very wrong. Beware of companies that don't carry out occasional check assays with a separate lab. Some things are just common sense. For instance, during the last bubble I came across a company that said their deposit was "open pit-able" though the ore zone didn't start until 300 metres down! No one removes 300 metres of waste to get to the pay zone. Never. As one of my old professors used to say, it's only "ore" if you can mine it at a profit. Also, high grade gold, platinum and palladium NEVER occur together in nature except EXTREMELY RARELY so be forewarned!
8. Obfuscation part 1: Beware of companies that mix up different units of measurement, especially metric and imperial units; ppb, ppm, ppt, oz/t, g/t in the same press release. ppt is parts per trillion, ppb is parts per billion, and ppm is parts per million (ppm is the same as grams per metric tonne). I've seen companies post low gold results in ppt to make them look better. Bigger numbers = better results right? Wrong. Check the units! Most rocks around the world contain 1 to 3 ppb of gold (so does concrete). 20-100 ppb would be "low anomalous" (unusual but not really too interesting). Greater than 100 ppb starts to get interesting, and 1000 ppb (i.e.1 ppm or 1 gram per tonne) can be very interesting depending on the context. Assays of tens of ounces per ton (or 1000's of grams per metric tonne) are bonanza grades. However, whether any of it is mineable at profit depends on where it is and how much of it there is. Any encyclopaedia will give you metric and imperial equivalents.
9. Obfuscation part 2: Never invest in a company that measures value of their rock in "gold equivalents" unless they are willing to give you a breakdown. This is an old trick to inflate the numbers. For instance, a company whose rock contained gold, copper, silver, bismuth, cobalt and nickel worked out the value of the contained metals and reported it in "gold equivalents" though some of the metals only occurred as traces, and the likelihood that all these metals would be recovered together in a commercial operation was just about nil.
10. Desert dirt scams: Every time there is a boom in gold mining stocks these things resurface. The line is always the same, "We have a new proprietary method to liberate gold from rock and soil." The following is always the kicker, "the contained gold is not amenable to conventional fire assay." If you see either phrase take your money and run. If it can't be conventionally fire assayed it can't be conventionally milled either (see how the two nicely fit together?) A company a few years ago claimed to have found hundreds of millions of ounces of gold in desert dirt near Death Valley. Everyone who invested and believed the hype lost everything.
11. Check out the principals of the company: Have they ever been banned from trading on a stock exchange? Have they been convicted of insider trading? Do they have any felony convictions? Your broker should be able to help you find this out. Do a search on their names using one of the many internet search engines. You may dredge up some newspaper articles they would rather forget. Felderhof & Co. of Bre-X fame had been banned from trading on the ASE.
This list is not intended to be exhaustive, but it contains the important stuff. Remember, just because a penny stock is cheap doesn't mean it is a "buying opportunity". Do your own "due diligence". Don't always simply rely on the word of your broker - he is probably only passing along something he heard anyway. Don't be afraid to ask tough questions. Many of the promoters in the gold bubble of '96-'97 switched into dot.coms. If they aren't selling used cars now they'll be back to gold soon. Enjoy the coming ride to riches. Good luck and happy hunting!
Keith M. Barron Ph.D. (Director of ARU)