Junior Resource Plays: red flags to avoid

Good Tuesday MINING AIM, and welcome to my thought of the day.

One of the things you may not realise, and which I tend not to publicise too much, is that for every company that we back on this site, we've researched three or four others that simply didn't cut the mustard. 

I don't tend to name the companies that I think are junk (unless they're truly hopeless and it helps people avoid a disaster), but I would like to take a moment to cover the red flags that turn me off on a venture. 

For context, roughly once every three weeks I have to field a phone call with a CEO or PR rep and explain why I have no interest in their terrible business. These are not always easy conversations to have, though sometimes can be a lot of fun.

Anyway, here's the things that make me run for the hills:

The first is when management engage in overly aggressive marketing; their assets are the best thing since sliced bread, they bought them for a few potatoes and a goat - and will now proceed to generate millions and millions of dollars in revenue for the next seventy-three-trillion years. 

Everything in the world is promised, but there are always delays, and then more delays, and then the inevitable crash as it becomes apparent that the assets that were bought for a few potatoes and a goat were probably just worth a few potatoes.

If you got an asset cheaply, then the only thing that improves its value is exploration, and in particular, independently generated assays. Just saying it's better than anyone else thought is not good enough.

Conversely, my second red flag is when management refuse to engage in consistent communication. This does not mean they have to be releasing an RNS every other day and emailing back investors within five minutes like some kind of functional McDonalds with the icecream machine working - but it does mean that they are treating their long term holders with respect - giving non-sensational updates at appropriate times. 

There is a balance to be had here; my basic perspective is that management need to find the sweet spot - though obviously this will mean more comms when there are more assets. 

I'd prefer a vocal CEO over a silent one though - but the claims have to be backed up with progress. A decent litmus test is whether a CEO can congratulate other companies for their success, or readily admit that licences close to their own are just as prospective as theirs.

On management specifically - I like to see at least one finance guy in addition to the usual cabal of geologists, mineralogists, metallurgists and other technical people. If you give these people time and money, they will spend forever and a day developing an asset while the share price slides inexorably lower. 

The finance guy tells them: 'This is your capital, this is how long you have.' It sharpens minds.

The finance guy is invariably a gent in their 50s, with steely grey hair and horn-rimmed glasses, who has had their sense of humour surgically stripped from them by lawyers at birth. He's the sort of character that also prevents management from awarding themselves options at a historic share price low - because that's never a good look.

But when it comes to management as a whole, a history of failed projects is never a good look - and perhaps especially when they jumped before the project failed. It screams lack of accountability. Of course, teams should be allowed to fail; exploration risk is a real thing. But if all you have is failure after failure after 30 years of work - perhaps it's time to hang up the hard hat. Ditto for previous legal issues, or (and let's call a spade a spade here), involvement in scam projects.

In particular, what irritates me is the classic: 

Forget the last asset (we overhyped it but it's worthless really), here's our shiny new asset, then placing. Repeat ad infinitum.

Or else - the drilling is promising but has not turfed up anything economically viable, so we're going to raise more at a huge discount to keep poking holes in a Swiss Cheese that will never become Fondue.

High board turnover can be but is not always a problem. But I also (and perhaps should not admit this) won't work with someone from whom I get a bad 'vibe.' I am fortunate in that I can talk with management teams of most companies with little effort - and sometimes you just don't gel. 

Sometimes, we simply have jarring personalities, and that's fine! The joy of freelancing is that you can pick your own clients.

But often a bad vibe that leaves you qualitatively questioning ends up being a survival instinct.

Then onto cash. Unless you're an Amaroq, Sovereign or similar - a key reason to be publicly listed is to gain access to finance in London. That's alright. You may be forced to place at a ridiculous discount, which also can't be helped at present. However, given the steep cost of capital, you must use it to advance your business case - even if the share price doesn't respond immediately.

For some perspective, it costs circa £1 million per annum to stay listed on AIM nowadays. If you raise just enough to cover working capital every year, then it doesn't matter how good your assets are. You're going nowhere.

Of course, if you have low cash reserves and you're going to the brokers, then I'll probably wait for the placing to be over before jumping in. The market is broken in this respect, it's not fair, but we all have to look after our own portfolios. 

The only person who lives with the profits and losses is you.

On that note, very very few companies sign a CLN and walk away better for it unless it's with a partner which also has some kind of stake in your success. Death spirals are real and can easily become the stuff of nightmares.

Next up is asset specific: if you've got a bunch of old data - great! But if you've been around a while and not explored further, then this generally indicates a problem. Likewise, if your guesstimate of possible resource size is a bit wild....

If you set a milestone and miss it, that's fine. If you see delay after delay, followed by ever more dilution, then it can become a problem.

In this vein, if capex costs keep rising - or RNS language becomes progressively a little less positive - run. 

Then there are the contractors to consider. If you hired a plant builder beginning with S, bad news I'm afraid. But jokes aside, a junior exploration company is only as good as its contractor. A JV is only useful if the partner had deep enough pockets to fulfil its side of the bargain. Be aware that as with all things in life, two identical drilling programs carried out by different contractors could yield wildly different results.

Anyone who disagrees with this has never had builders in.

I would also touch on ESG considerations. This is one of those things (like taxes) that you can delay bothering with - but if you don't engage properly in 2024, you will get burnt eventually. Lip service is not enough anymore.

My final red flag (there's probably more but I have work to do), is a leaky ship. If the share price jumps or falls immediately before an RNS, then management is surrounded by people who do not act in the company's interest, but in their own. This is sometimes unavoidable, but there is a difference between management who crack down on it, and others who turn a blind eye.

And if any of this describes you, your company, or your asset - don't get in touch. 

- Charles Archer, 13/8/2024