Placer_foot

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Selecting a junior precious metals company to invest in can be challenging to both the experienced investor with mining shares and a novice with limited knowledge of the mining industry.

But there are pointers that those keen to profit from the boom in the mining industry and the potential upside in junior mining and exploration companies can apply to make a good choice.

One fundamental to keep in mind when investing in a junior precious metals company, such as a platinum explorer, is that the company possesses exploration potential and consequently does not show a strong correlation to commodity price movements.

In the case of mid and large capital producers the performance of the company share price is often flat if the underlying commodity price proves stagnant.

Companies trading at significant discount to their net asset value (NAV) should be spotted early in their lives as early recognition of these opportunities leads to unlocking considerable value later in their development.

To this end, it helps to know that investment hype normally occurs after the discovery of minerals in the ground but diminishes during the exploration phase, only to pick up again after a feasibility study is completed and brokers start covering the company.

Growth in NAV is typically modest during the exploration phase, but picks up during the period of mine construction to peak after first production. However, it falls again to negative growth in the course of production if resources are not expanded.

A thorough analysis of the company from the bottom up should be made to successfully find value in explorers or small companies, taking into account their market capital, EBITDA margin, liquidity, management and geographical risk, project financing, near term NAV growth, total expected return, operational analysis and reserves or resources.

There are different terms to describe the level of certainty around company resources, starting with resources in the inferred category and working its way up to the indicated, measured and then probable and proven resources categories.

Importantly though, inferred resources and beyond, are generally not included in' companies reported resources but considering this category is indeed crucial in the valuation of juniors.

Although a NPV/IRR analysis is typically performed on juniors, these analyses do not consider uncertainties in geological or operational parameters especially important in the valuation of juniors and exploration companies.

It is wiser to work with a range of likely production, capex and costs when undertaking a risk analysis of these, in order to derive a spread of NPV and IRR values as opposed to single values.

And by next plotting NPV/Market Capital the top investments can be picked.

A final factor to consider is a takeover premium that depends on both the company's potential to expand, and possible merger and acquisition potential and activity.


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