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A Novice’s Guide to Junior Mining Pt 2
Part Two: Red Flags to Avoid Pitfalls

One of the reasons I was so excited about the Commonstock (CS) app was the transparency the site offered. CS allows people the chance to see if I believe in a company and back it up with ownership, and when I choose to sell - be it for locking in profit or because I had cause for concern. I love to “talk my book” on Twitter & CS because it opens it up for discussion, and I honestly want to share in the excitement of the investment potential. The downside to that is that many of my choices are high-risk companies and interested followers that buy could easily lose rather than profit. I manage my allocation accordingly by maximizing junior miners at 5% (note: many at 1-2%), and ensure I am widely diversified by commodity, jurisdiction, and sector. Diversity reduces your risk, and if done properly does not sacrifice returns. Anyone considering investing in a company that I mention should perform thorough due diligence and never invest more than they can afford to lose. Many of these share prices can plunge quickly and shares are illiquid, therefore they’re difficult to sell when you want out.

In part one of my Novice’s Guide to Junior Mining, I discussed the infamous Bre-X gold mining fraud. Despite a critical revamp of the securities regulatory system, the junior mining sector is still rife with pitfalls that savvy investors need to remain aware of. When I first began investing in mining stocks, I was naïve to much of the rampant promotional activity and frequent “pump and dump” schemes. I hope the tools I describe here will be of use to you, though none of my methods are foolproof. I am wrong at times and still have much to learn, but I believe implementing these strategies has been very helpful in avoiding losses. One of the best suggestions I can offer to a novice is to become part of a knowledgeable community. There are so many generous, experienced individuals on these platforms that are rooting for your success. Finding several that will answer your questions or provide you with tools to navigate the sector is one of the best things you will ever do.

I am providing two examples of my prior investments. The first one I lost a substantial amount, though I reduced my loss somewhat by taking back some of my initial investment (‘no one ever went broke taking profits’). The second one I managed to walk away with a small profit, but I consider myself lucky that I noticed items I now view as red flags when I did; the result would have been dramatically different a week or two later (monitor everything constantly)! Initially I included charts to show the precipitous drop in the share price, as well as a more detailed account of these stories. I decided against it, as these companies are best left unidentified. Their actions may be entirely legal; they may be sitting on tier one deposits that capable management one day brings into production and the share price moons. I just won’t be investing in them personally.

Case 1: Monitor SEDI (System for Electronic Disclosure by Insiders)

In the first example, the company had some assay results anticipated for which many had high hopes. I owned the stock and had taken a portion of my initial investment back as excitement was building and the share price rose. Less than a month prior to the results, I noticed that some of the insiders had sold shares. There are always reasons that management may have to sell, be it for mortgage payments, taxes, or perhaps an individual is leaving the company. However, when more than one of the team is selling prior to lab results, I don’t believe it’s a positive sign. I regret not selling when I became aware of the transactions, as the share price tanked, and I lost over 50% of my investment. It can be tempting to let your entire investment ride on high hopes, but I was grateful I had taken some back previously as it reduced my loss somewhat. Not everyone monitors SEDI and some don’t consider these transactions a red flag, but I agree with Twitter’s @horribledisgust comment. In hindsight, it tended to mark the top.

Case 2: Beware of Possible Stock Promotion

In the second example, I came across an interesting-looking company when I was relatively new to junior miners. Many on Twitter were abuzz with speculation about a potentially world class deposit which had only one hurdle to overcome – a finalized agreement with a local indigenous peoples’ government. My initial red flag was a prior legal dispute involving the two parties. FOMO can be a terrible trap, and often causes people to put on blinders. Several anonymous and unverified accounts began heavily touting the stock’s potential on social media. The share price began to climb rapidly as rumours of a completed agreement began to circulate. When assay results were released sometime later, many experienced in mining mocked them as being ‘no better and perhaps worse than what the public has in their backyard.’ The share price plummeted from its 52wH.

Personally, I was fortunate to have swing traded the stock. I sold for a small profit once I became aware that things were “off”. Unfortunately, not everyone was as lucky and many failed to see the signs of potential promotional activity leading up to the rise in share price. So why did I feel that things were off? As I combed through chat forums to investigate, some individuals began commenting on the rather large salaries management had provided for themselves. I also began questioning the company publicly on social media and was immediately blocked by the accounts that had touted it. Social media can be a double-edged sword for investors. Stock promoters proliferate these sites and can easily feed FOMO for the inexperienced. At the same time, it can be helpful to pay attention to skepticism or changes in sentiment. If others are questioning certain aspects, then you would be very wise to do so yourself.

Beware of stock promoters. Whether the company’s fundamentals are good, bad, or indifferent, they are hired by companies to spin a positive message that is intended to increase share price. Their message may not reflect the true story behind the company. Insiders frequently grant themselves options and buy shares at a low price, and promotion can enable them to sell for significant profit later. BC is currently proposing much harsher penalties to deal with the issue, but the matter is certainly complex and social media creates a very difficult environment for law enforcement to pursue action.

Social Media Forums: Best Friend or Worst Enemy?

One of the sites I visit daily is CEO.CA. For investors on Canadian exchanges, it can be an invaluable tool. It is incredibly simple to view SEDI (System for Electronic Disclosure by Insiders) transactions, and if you create a CEO profile you can manage a watchlist. Any press releases as well as SEDI filings will show an alert so you can stay on top of everything. I feel it’s a very informative tool and it allows me to constantly monitor my holdings. The anonymity of the site can prove challenging, but if you familiarize yourself with some reputable posters and follow them, your odds of success will increase. You can visit the chat forum on the right-hand tab, and on the left you will find a chart as well as a button marked “SEDI insider filings”. You can find me on CEO as @sanibelchick. I have occasionally lurked on other chat forums such as Yahoo Finance, SeekingAlpha’s comment section, and even a Swedish bank’s chatroom (I avoid Reddit). Skepticism is key, but often I have found valuable tidbits in the discussion that I was able to verify independently.

SUMMARY

  • Learn to identify & avoid possible stock promotion
  • Monitor SEDI filings and news alerts
  • Read and participate in forums but independently verify information
  • Become part of a reliable and knowledgeable community
  • Keep a database of names that have performed questionably, as well as ones that have proven success
  • Refuse to live in an echo chamber, always question and re-examine choices
  • Diversify to mitigate losses
  • Seriously consider allocations regarding risk – never invest more than you can afford to lose

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