What to Look For in Junior Gold Stocks

The precious metals sector remains in correction mode, although Gold is pushing up against resistance. The worst of the correction is probably over, but it may continue (and specifically for the gold stocks) as a consolidation.

With that said, you do not need to read another article about support levels and accumulating weakness. You already know. 

Instead, let me provide value to you by discussing what I am looking for in junior gold stocks right now.

I am looking for junior companies with 3x to 5x potential over the next 18 to 24 months. These companies need to have some modicum of safety or defined value yet be small enough to achieve that kind of upside potential. 

I’m less focused on tiny, and riskier “drill plays” which have much lower odds of success. These pre-discovery plays are appropriate for only a small portion of your portfolio because of the low odds of success.

But, the absolute biggest winners will be the pre-discovery companies that make a discovery that grows into a much more valuable deposit that needs to be acquired by a major or mid-tier.

I venture to invest between pre-discovery and acquisition, and that is also known as post-discovery. Ideally, we want to position in a company that has made a discovery or has a deposit of some sort but still has significant immediate and future growth potential.

Think of it as much less risk but still plenty of upside potential. 

We want to err on the side of size, which is also the case when selecting development companies. Bigger is better because that is what interests major mining companies and the smart money of the sector. 

For example, a big project with good but not great economics is a lot more valuable than a materially smaller project with robust economics.

Also, projects with size and scale benefit from optionality. In other words, a larger project will get a more significant benefit from a move in Gold to $2000/oz than a smaller project. 

For junior producers (and royalty companies as well), it’s all about production growth. 

The market loves growth and organic growth driven by exploration success is the best combination. In recent years some of the best performing junior producers made new discoveries that fueled current and future production growth.

I prefer to focus on these criteria first and then work back to the criteria most people examine first: management. Look for management with a track record in building a mine or making or growing a discovery. 

Finally, avoid anything with a significant flaw or multiple flaws. 

Some examples include: the project will never be built as a mine, is in too risky a jurisdiction, the company has a blown-out share structure, the stock has too many warrants, the deposit is too low grade (most common answer), company is a lifestyle company (not uncommon).

This criterion is not the “be-all and end-all,” but it will help you eliminate companies with very low odds of success (which is the majority of juniors). 

Turds can fly in a bull market, and these criteria may have excluded a few potential gems. Still, it’s better to focus the majority of your hard-earned capital on a smaller list of companies with a solid chance to deliver superior returns.

We continue to focus on identifying and accumulating those stocks with significant upside potential over the next 12 to 24 months. To learn the stocks we own and intend to buy that have 3x to 5x potential, consider learning more about our premium service.