One of the questions I get more than any other in my travels is "Greg, how do you pick winning stocks on a consistent basis?" While the filter system I use for evaluation is subjective in awarding points for various categories, the real skill comes in knowing what to ask, when to ask it, and how to read the people giving the answers.
This is the basic system I use that can be applied to any of the resource stocks that you are considering for your portfolio. Simply by getting the answers to the questions below, you will have a much better understanding of whether a stock is worthy of consideration.
With so many mining companies vying for our attention, asking the hard questions can quickly help you weed out the bad ones and identify the good.
The filter system I use for evaluating junior exploration stocks is based on points, with a 1,000 point maximum. Here is the breakdown:
Management (up to 400 points)
- What is the management team's experience in making discoveries in the metal they are now hoping to find?
- Are they specifically experienced in the task(s) at hand?
- What are the credentials of each member of the management team?
- How do the company's activities increase the stock price, and when?
- What are the exact goals and objectives of the company and what is the specific timetable for completion? Are these goals reasonable?
- Are the goals outlined suited to the management team's strategy and skill sets?
- Is the management team a cohesive group that works well together?
Capital (up to 200 points)
- How are they going to raise the monies they need to accomplish the tasks at hand?
- How much money do they currently have on hand?
- How much do they need to reach their goals?
- What is their burn rate? Are they being responsible in spending available cash?
- Does the company have any debt? What are the payments each month?
- Do they have any current cash flow?
- If not, how soon do they expect to have one?
Properties (up to 100 points)
- What mineral(s) are they hoping to find? Precious metals, base metals, polymetallic?
- Does the property offer the potential for a large-tonnage, geologically credible deposit?
Price (up to 50 points)
- Can I buy the stock at a reasonable price?
- Has the stock already run up?
- Can I participate in any early-stage private placements?
Resource Filter
- Do they already have a defined resource? (100 points)
- Do they already have a discovery? (75 points)
- Are they a grassroots play? (-30 points)
Shares Outstanding (up to 50 points)
- If the company is successful, will the number of shares outstanding allow for a significant rise in our share price?
- How will future financings affect our share structure?
- What is the likelihood that the company can achieve success with a small or reasonable number of shares outstanding?
Market Cap (up to 50 points)
- What is the current liquidation value of the company versus the market capitalization?
Political Risk (up to 50 points)
- Where are the company's properties located? In which countries are they trying to do business?
- Is the political risk/reward ratio worth it?
Promotional Savvy (up to 50 points)
- Does the management team have any experience or talent with marketing and promotion?
- What is the promotional budget?
- What is the plan for telling the company story and who is going to tell it?
- Who are they directing the promotional efforts to? Institutional investors, retail investors, brokers, etc.?
- How are they accessing these groups?
Blue Sky Potential (up to 50 points)
- If things were to work out, what kind of upside potential does this stock really offer compared to other opportunities in the junior mining sector?
- What could go wrong? How would this affect us?
- Has the company hedged any of its future production?
If you seriously ask these questions of the companies you are interested in, I am sure you will discover things that will have you scratching most names off your buy list. This is a tough business and one where failure is the norm. Remember that very few will make it.
That is because finding an economical mineral deposit takes a lot of talent, time and money. Going forward from there and actually building a mine takes even more capital, time and managerial expertise. Costs can start at 50 million and go upwards to a billion dollars.
With all that being said, wise speculators can still make tremendous returns in the junior exploration game. That comes down to timing and knowing when to buy and sell.
The bottom line in this business is that discoveries need to be made and juniors statistically make 70% of all discoveries. So the leverage is there if you know how to play!
Learning how to effectively evaluate junior mining exploration stocks is critical to your success. As you get better at this, your profits will increase.
Until next time,
Greg McCoach