Graphite One Inc V.GPH

Investing rules to live by

[settoretire]

This guide was posted on another board I follow. I feel it is very relevant to GPH, and thank the poster for putting it out there for everyone to read. It is exactly the principle reason I got out ( except for a small position ) in GPH.
I hope this helps give more information to those trying to decide their future with this investment.
As the say, dyodd........



Due Diligence Checklist for Junior Explorers

An investing checklist: Five steps to narrow the field

-- Valuation of juniors can be a demanding process. Before you sink too much time and energy into researching a junior, try the 5-step due-diligence process used by Fundamental Research Corp. -- including a quick comparables valuation.

At Fundamental Research Corp., we cover over 100 companies, about 80% of them in the junior mining space. Our mission is to identify underexposed and ignored securities that are likely to be undervalued and offer attractive investment opportunities, and bring those investment opportunities to the market’s attention.

Due to the high inherent risk associated with junior mining projects, the due-diligence process required to analyze mining stocks can be very different from the typical process used to analyze companies in most other industries. Although there is no formula to identify a good investment, we believe investors can significantly increase their probability of success by following the five-step due-diligence process discussed below.

Step 1: Management team

As junior mining companies typically hold very early stage projects, investing in a junior is essentially investing in its people. So, it is crucial to examine the management team’s biographies and research key members’ backgrounds. Googling their names to verify whether they have been associated with any questionable deals in the past is a good start. At FRC, we have developed a management rating system to quantify the strength of a management team based on a number of factors, including technical experience, the ability to raise financing, experience in putting mines to production or generating prospects, and management’s time commitment to the company. Management’s ownership in the company is also an important factor – obviously, a high percentage typically indicates that management is likely to act in the best interest of investors.

Step 2: Primary target commodity

A company’s fair value depends heavily on commodity prices. If a company is four or five years away from production or more, it is essential that your long-term outlook on the commodity is positive, as cash flows from the project will depend on commodity prices at the time of production. Also, note that a company targeting or producing a commodity whose prices are highly volatile, will also have high volatility in its fair value, and high volatility implies high risk.

Step 3: Quality of asset base and infrastructure

Although it is advantageous in this step to have a strong geological background, high-level technical knowledge is not necessary in the preliminary due-diligence stage. However, a basic understanding on the different types of deposits is necessary. For example, you should know that porphyry deposits are typically lower-grade deposits, and so need to be relatively larger than other deposit types in order to be economic. The U.S. Geological Survey (USGS) is a good source of information on the type of deposits and their characteristics (www.usgs.gov).

In addition to the type of deposits, check the location, accessibility and infrastructure of a particular project. A project might be very exciting geologically, but if it’s remote, mining could be very challenging or even uneconomic. Two companies that we monitor with projects in attractive locations and access to good infrastructure are Jiminex (JIM-V), which is focused on the Northern Eagle and the Misehkow River gold properties in the Hemlo and Pickle Lake gold regions of northwestern Ontario, and Silvore Fox Minerals (SFX-V), which holds the Coxheath copper-molybdenum-gold deposit in Nova Scotia. Coxheath is located just 14 km west of deep water shipping facilities, and has onsite power, nearby rail and paved highways – these factors can play a key role in improving the economics of a project.

Step 4: Financial position

Most junior mining companies carry high risk and are yet to report revenues. Therefore, maintaining a sound balance sheet is vital. Always check the balance sheets, especially for juniors with no revenues/cash flows. Our rule of thumb is that companies with less than three to six months of cash on hand, and facing trouble raising capital, carry high liquidity risk. Although not very common to have debt, a high debt position relative to working capital would also imply high liquidity risk.

Step 5: Valuation

The ultimate purpose of securities analysis and valuation is to answer one question:  is the intrinsic value of a company’s shares higher than its market value? At FRC, we apply three different valuation methods to estimate intrinsic value: the discounted cash flow (DCF), real options, and comparables valuation models. Building DCF and real options valuation models requires extensive due diligence, is time consuming, and is beyond the scope of this article. However, a quick back-of-the-envelope comparables valuation is often a very effective way to get a rough idea of a company’s valuation. We believe that Enterprise Value (EV)/Resource is the best valuation metric as it captures the value of a company’s projects after discounting for the impact of cash and debt on its market capitalization.