How to get the gold mine, not the shaft

Junior mining stocks offer huge potential as metal prices skyrocket. Ten check points to steer you towards the winners

By Charles Corvallis

Mining stocks are hot — and so are the brokers intent on unloading as much product as they can on one of their favourite marks (er, professions). Irritating as the breathless emails and phone calls might be, there truly is some "gold (not to mention platinum, silver, copper and zinc) in them thar hills." With soaring metal prices there's good money to be made, sure enough. But the question is, what hills, how much gold, how easy is it to get at and, more to the point, who's doing the mining?

RISKY BUSINESS
Mining stocks are notoriously volatile. There's something enormously appealing about the idea of finding valuable minerals buried in the earth. What investor hasn't wrestled with the urge to 'strike it rich' with a penny mining stock, even while every caution light was flashing and all the warning bells were ringing. Part of the appeal of most junior mining stocks is the low price.

The Royal Bank shares you buy today for $47 are going to take a long time to get to $94 but how about Acme Mining Ltd that has some 'promising property' on Vancouver Island and has just gone public at 60 cents a share. Why, it would hardly take anything at all to shoot the price up to $1.20 and you'd double your money. Indeed. All it might take was a rumour or two that, for example, another mining company had made a significant find on an adjacent property and the rush to buy Acme could easily push the price up a dollar. Once it hit a buck or two, you'd cash out, savvy investor that you are. Rumours like this one, and a thousand other variations on the theme, do have a significant influence on the price but often only the people who started them get to cash in.

Mark Twain defined a mine as "a hole in the ground with a liar on top." This writer once did a story on a Montreal brokerage house that was seduced to the dark side by some US operators who used the firm as a base to promote penny-mining stock. After a few smelly deals went bad, the firm lost its licence and seat on the exchange. As the ex-owner locked the door for the last time a departing former employee offered this advice: "Next time you promote a mine at least make sure there's a hole in the ground!"

TIPS TO STRIKE IT RICH
Every investor has a story about a mining stock that went bad but there are at least as many good stories about mines; Canadian mines in particular. And, unquestionably, we're in the middle of a period where the outlook for every higher metal price has seldom been shinier. You want a piece of the action, you deserve a piece of the action. What's a doctor to do?

Michael Jones, president of Platinum Group Mines, has some advice. His firm has even gone so far as to draw up a ten item checklist to help would-be investors separate the gold or, in this case, the platinum from the gravel.

Here's a rundown on the Platinum Group Mining Scorecard (right):

Management track record. This is decidedly the place to start. Companies are run by people and the more you know about the principals, the better. It's remarkable how many investors know next to nothing about the people running the ventures in which they invest. And in the end, it's the people that make an investment successful.

The internet has made what was once an onerous task remarkably easy. The first place to look is the company's own website. Though the site is certainly going to present the company in the best possible light, you can also glean some valuable information from it. In the case of Platinum Mines, for example, you'd discover that the Canadian company's primary investment is in South Africa, a country that produces 80% of the world's platinum. The site also introduces you to Mr Jones though a video of a recent guest appearance on the morning show on the Report on Business channel. Nice, but you can't trust a company's own site to give you all you need to know.

Time to point your browser to www.sedar.com, which lists all publicly traded companies. Sedar is the official site of the Canadian Securities Administration and with a few clicks of the mouse you can pick up a lot of valuable information.

Let's take Platinum Group Mines (TSX symbol PTM), as an example. We find that the company was founded on January 10, 2000 and R Michael Jones is the president. The company's Vancouver address is given along with the name of the auditors — Deloitte & Touche. The authorized capitalization is given as $25,000,001 to $100 million. Another click takes you to all the releases the company has filed since it began. They contain a wealth of further information on the company, including results from exploration and the specifics on what was found. One thing that's missing is a profile of Mr Jones and other executives. You can find this information by visiting the Toronto Stock Exchange (www.TSX.com) and downloading the latest PTM annual report. What you're looking for is a reputable track record, unsullied by associations with questionable firms and, ideally, a record of success. While at the TSX also check the stock performance.

Acquisition Timing. If the company has acquired properties you want to know when they got in. Typically in new finds, those in earliest reap the biggest benefits, with less promising adjacent areas going to the Johnny-come-latelies.

Scale of the project. You want to know that the potential size of the project is sufficient to ensure good returns.

Proven District. Mines that are in areas where the mineral has been discovered previously are potentially more likely to contain reserves.

Tonnes. You want to know how much of the metal(s) are available in a given amount of rock that has to be processed.

Grade. The quality of the metals found is another key.

Depth. The easier it is to get the metal out of the ground, the better. Shallow, good. Deep, bad.

Partnerships. It's a good sign if junior companies are partnered with larger ones — someone who knows the business has faith in them.

Shares outstanding. You want to know how many shares are outstanding. Since the stock is only selling for a couple of bucks or less, you want to know that it's not so widely held as to significantly dilute the price.

This kind of research takes a little while but it's well worth taking a couple of hours to find out all you can about a company in which you're considering an investment — especially if it's a mining venture.

Once you've done your homework and still feel the investment looks solid, lay your money down and continue to follow the fortunes of your investment online. Set a target price at which you'll sell and stick to it no matter what. If the stock doubles and you're determined to hang on, sell half your holdings and hang on to the rest. That way you'll have covered your original investment and even if the company goes bust, you won't lose anything.