Why Junior Gold Miners?
Junior Mining Companies
When investors seek more aggressive exposure to the price of gold, some will purchase shares in junior mining (or mid-tier) companies. These are companies that are either exploring for gold or in some stage of the production process.
Potential Leverage to the Price of Gold
Junior gold miners provide the potential of significant upside leverage to the price of gold. For example, if gold is selling at $1000/oz and the cost of underground production is $700/oz, there is upside leverage of $300/oz. Surface gold or open pit gold have the potential to lower production costs even further, thereby increasing the possibility of upside leverage. What makes these scenarios attractive is that even if the price of gold were to decline, the potential for upside leverage still remains.
Management, Financing and Properties
Sifting through and analyzing thousands of junior mining companies in various stages of development can be a daunting task. Circumstances can change quickly. Risks can run high. But so can the rewards. If a junior mining company has strong management, solid financing and quality properties, its potential for success is likely to increase.
Because junior gold miners start out with substantially lower market caps than major gold miners, and because significant risk is often factored into their share price, the first major discovery or the achievement of gold production has the potential to multiply their share price.
Less Than 5% Are Expected to Achieve Production
A junior miner whose share price doubles is said to be a “two bagger”. If the share price increases five-fold it is called a “five bagger”. If the share price increases ten-fold it is called a “ten bagger”. Very few junior miners ever achieve this mutiplier effect because of the risks associated with the mining sector in general, and junior miners in particular. Less than 5% of all junior miners are expected to ever achieve production.
Production Can Create Substantial Rewards
For those junior gold miners who achieve production, the rewards can be substantial. If a junior miner reaches 50,000 oz/yr of commercial gold production, they are considered to be a mid-tier producer. There are an estimated 50 mid-tier producers. When a company reaches 1 million oz. of commercial gold production each year, they are considered to be a major producer. There are approximately 20 major producers.
Due Diligence is the Key to Success
With junior mining companies, circumstances can change quickly. Risks can run high. Due-diligence is the key to success.