Higher commodity prices and an improving global economy have pushed up the prices of many junior mining stocks recently. That has prompted more members of our Inner Circle service to ask us for our recommendations on junior mines they are considering investing in.

(See below for further details on a junior firm that explores for rare earth elements, which have attracted a lot of investor attention lately. We recently analyzed this company for a member of our Inner Circle service.)

Junior mining stocks have strong potential — but use caution

Despite the strong potential of top junior mining stocks, it’s important to remember that these stocks are among the riskiest you can buy. That’s why we think it’s a mistake to load your portfolio up with these highly volatile companies.

Instead, make sure your investments are diversified by spreading your holdings out across the five main economic sectors (Manufacturing & Industry, Resources & Commodities, the Consumer sector, Finance and Utilities).

However, junior mining stocks can play a role in a portion of your portfolio, specifically the part you devote to aggressive resource investments.

Here are 5 things we look for when we analyze junior mines for our investment newsletters, and when we’re researching companies for Inner Circle members:

1. We want to see experienced management with a proven ability to develop and finance a mine.

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2. We look at environmental constraints where the junior mines are looking for minerals. In Europe and certain parts of the U.S., junior mines need a particularly rich find to justify the costs of overcoming environmentalists’ objections.
3. When we recommend junior mines that only explore for minerals, we prefer those that operate in an area with geology that is similar to that of nearby producing mines.
4. We look for well-financed junior mines with no immediate need to sell shares at low prices. That’s because doing so would dilute existing investors’ interests. The best junior mining firms have a major partner who has agreed to pay for drilling, or other exploration or development, in exchange for an interest in the property.
5. We like mining stocks with strong balance sheets and low debt.

This Canadian junior mine’s properties could contain a wealth of rare earth elements

As I mentioned, we recently analyzed a junior firm that explores for rare earth elements for an Inner Circle member. I’d like to share our member’s question, along with our answer. I hope you enjoy and profit from it.

Q: Pat: What are your views on Medallion Resources?

A: Medallion Resources, $0.52, symbol MDL on Toronto (Shares outstanding: 32.8 million; Market cap: $17.0 million), explores for rare-earth elements. These metals are a key component of many new energy-saving technologies, including wind turbines, electric and hybrid vehicles, and super magnets.

Right now, Medallion is concluding an agreement with Rare Element Resources Ltd., symbol RES on Toronto, to earn a 65% interest in Rare Element’s Eden Lake property in Manitoba. Medallion can earn the 65% stake by paying Rare Element $250,000 when the deal is signed, and then spending $2.25 million over five years for exploration at Eden Lake.

Medallion is also exploring over 42 square kilometres of the Red Wine rare-earth prospect in southern Labrador.

The stock has moved up from $0.10 a share in July, due to rising investor interest in companies that mine or process rare earths. The company has taken advantage of the price jump to raise $1.2 million in a share issue.

Medallion’s properties are still at very early stages, and a long way from production. Moreover, the stock could have trouble moving higher, or even holding its big gains, if investors begin to lose interest in rare earths.

Our buy/sell/hold advice on Medallion, based on the company’s prospects and the outlook for rare earths, is only available to members of our Inner Circle. You can’t get it anywhere else! (Note: If you are a current Inner Circle member please click here to view my recommendation. Be sure to log in first.)

If you’re looking for authoritative advice on investment issues, or fundamental analysis of stocks you’re considering buying (or selling), you should join my Inner Circle service. When you do, you always get clear, concise investment advice that’s 100% independent, and untainted by commissions or other undisclosed influences. I swear to it. Click here to learn more.