Making it Rain!
This morning I was reading the digital news before I logged-in for the day and I learned that gold was formed by a neutron star collision, resulting in pressurized debris that rained down onto our Earth— fresh from the Universe. This is why people are so starstruck with gold!
As an industry, mining is extremely capital intensive and relies heavily on investments from the public to make their projects come to fruition. These projects cost millions upon millions to fund. But as an investor, it’s difficult to know how to differentiate a good project from one that can leave investors broke and jaded.
Skim the corporate presentation and they will generally break this out for you. Here’s what you need to know:
Usually ranges from 60 Million to 150 Million
The shares indicate the ownership of the Company.
Be on the lookout for the fully diluted shares, such as stock options and warrants which when added together, contains all of the shares. This is called: “fully diluted shares.” Once these are exercised, they can dilute your holdings because more shares are added to the float for the buyers and sellers of the stock. It’s in your best interest to include those in your calculation. It will take more momentum for the stock to move up.
Money in the bank is good and this money is what is needed to pay for the expenses. Use your judgement. If management doesn’t have enough money to complete the next phase of the project (see *Pipeline from part 2 of 3), they will likely do a capital raise. This will involve diluting equity, so your shares outstanding will go up and this may cause the stock price to drop.
Look to see how much is owed and pay attention to the terms, because the debt will have to be paid back at some point and the interest rates and payments may be steep. Debt holders also get paid before you as a shareholder if the company defaults. If the terms don’t seem reasonable or achievable, this can be a red flag. If there’s no mention of debt in the corporate presentation, you can check the company’s financial statements.
Market Capitalization =
X Share price
This will give you an idea of how much money is invested in the company already. It shows the value of the Company. This is useful because you can compare the market capitalizations of similar companies to see where your junior gold company compares with other juniors.
During my many conversations with mining professionals, they described having a “gut instinct” as to whether or not the people they chose to work with would be synergistic. One individual described his team as “only as good as its weakest member.” This is very true. because good people like to invest with good people. This is why the management team is the most important part of the project. If they can’t properly execute, it won’t get off the ground.
Now that you know the basics, before drilling down to the core of the quality of the resource and capital structure, assess management first and proceed down the checklist. Remember, to keep the gold standard. Good luck with your digging and don’t forget to rock on!