Market timing is important, but over the long run, company selection is more important. We want to own the companies that can add value and more than survive in a flat-price environment within this sector. At the same time, we want to find the companies that will lead and leverage gains on the upside.
Here are the three most important factors to consider when selecting (and ) companies.
1. Fundamental Quality
You’ve read this before, but I have never elaborated. There are many aspects to a company’s fundamentals, but the most important is the economic value and potential of its projects and/or mines. For producers and developers, we want production growth. For explorers, we want discoveries or value addition to an existing discovery or deposit.
Size is essential. Junior producers need to have production potential of 100K oz Au/yr. Junior explorers should have projects with 3M to 5M oz Au potential or +2M oz Au potential if high margin potential.
2. Odds Of Success
Most projects fail because mining is very difficult, and it only takes a single fatal flaw to doom a project. Ask yourself the odds the company can execute on its value proposition. Here we evaluate management and ancillary things that impact success like jurisdiction. Ask yourself if management has built a mine? Sold a company? Grown a deposit? Sold an undeveloped project? Is this a jurisdiction in which majors operate?
Nothing is a certainty, but companies are all over the place on this metric.
3. Upside Potential
If you are looking for a high margin of safety, put your money elsewhere or buy one of the larger royalty companies. Given the volatility in this sector and vicious corrections, we need to swing for home runs. Assessing upside potential is essential because it is another way to define value. Some companies may be similar in fundamental quality and odds of success, and therefore upside potential becomes a tiebreaker.
At present, these three factors are of equal importance. Should the price break weekly, monthly, and quarterly resistance of $1900/oz, then upside potential becomes increasingly important and fundamental quality less so.
For now, I’m focused on finding quality juniors with 7 to 10 bagger potential over the next two to three years. The recent decline in the sector has priced out much of the risk in these stocks and enhanced the potential upside for new buyers.