Trust, But Verify: Jayant Bhandari, a fund adviser, recently published a guide called “High Risk, High Reward: Disciplined Junior Mining Investing” that suggests comparing company presentations to the annual reports usually available on the company website or at sedar.com. “It is not illegal for companies to fail to provide you full information in these presentations,” he cautions. For example, a company might show in the presentation that it has $5 million ($5M) in cash, but might not mention that it also has $50M in long-term debt. Or a presentation might feature a project without telling you that the company doesn’t currently own it. “As you dig deeper, the incongruities that you discover between what they show in the presentation and what they actually have tell you a lot about their integrity, who they think they work for, and what respect they hold for you, the owners of the company,” Bhandari says. He suggests looking out for the following red flags. “If they try to get you to value them based on how much each ounce of gold they have in the ground must be worth—a ridiculous way to value a project—they might be telling you that their project lacks economics, and hence must be promoted using flawed metrics. If they give you a net present value that is not explicitly shown as pre-tax, it might be worth asking if tax is really voluntary in their area.”
In Rick Rule’s A Guide to Natural Resource Investing, he outlines the 10 fundamentals of junior resource stock analysis. The corporate presentation is a great starting point for a lot of those exercises.
Value Investing: One important measure of a company’s true worth is the comparison of liquidation value to market capitalization, Rule says. “A company is …read more