Ten ways to find gems among the rocks when investing in Canadian penny mining stocks

Canadian penny mining stocks are some of the riskiest stocks you can buy. These companies are trying to find mineral deposits to mine at a profit and such finds are exceedingly rare. Because of this, it’s even more important to look for investment quality in penny mines.

To start, we automatically rule out investing in penny mines that promote themselves too aggressively or do so misleadingly. The mine-finding effort is more likely to succeed if the managers focus on finding a mine rather than hyping their stock.

We like to see a mine-finding effort that focuses on geological probabilities and doesn’t simply attempt to piggyback on the popularity of mineral areas that are in the limelight because of a recent rich find.

A brief overview of Canadian penny mining stocks

It is sometimes said that a single drill hole has a 1-in-1,000 chance of turning up an “anomaly,” or a drill result that could be a marker for a mineral deposit. However, the odds against finding a mine on any one anomaly are also about 1,000-to-1. So, the odds that a particular drill hole will lead to the discovery of a valuable mineral deposit are about a million-to-1.

That’s why we never recommend Canadian penny mining stocks that have much or all of their value riding on a single drill hole. Instead, we want to see a series of promising drilling results, along with other encouraging development work.

Mining promoters sometimes run out of money and have to abandon their efforts at exploring and developing a set of mineral claims. But abandoned claims can become profitable again; higher prices can make this possible by allowing companies to mine a smaller deposit or a lower grade of ore.

Buying Canadian penny mining stocks is pure speculation. It can pay off extremely well when it succeeds, of course. But (in addition to the geological odds lined up against success), it’s much easier to launch and promote a Canadian penny mining stock than it is to find an actual mine. That’s why penny mines are so common, even though profitable mines are rare.

It’s also why many penny mines fail, and why they should make up only a very small part of your portfolio.

But there are ways to cut your risk here, too.

Ten factors to help you find the gems among the rocks in Canadian penny mining stocks

1. We avoid mining companies that operate in insecure and politically unstable regions, like the Congo. We tend to stay away from those countries with little respect for property rights and the rule of law, like Russia or Mongolia. That’s because mining is vulnerable to political instability.

   You can’t move the mine to another country, and local citizens sometimes believe that a foreign mining company is robbing them of their birthright, even though they need the foreign company’s capital and expertise to get any value out of the ground.

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 Canadian penny mining stocks 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 Canadian penny mining stocks with strong balance sheets and low debt.
6. When we recommend Canadian penny mining stocks, we want to see positive cash flow—
   preferably when commodity prices are low.
7. Even better, we like to see mining companies that have cash flow from an existing mine that is sufficient for (or at least contributes to) the cost of developing a second mine.
8. We want to see mining firms with experienced management that has a proven ability to develop and finance similar projects by working with other junior-mining companies.
9. We avoid Canadian penny mining stocks that trade at unsustainably high prices because of broker hype or investor mania about the underlying commodity (such as gold). Instead, we focus on reasonably priced Canadian penny mining stocks with favourable geology.
10. We avoid stocks trading over-the-counter where regulatory reporting and oversight is lax.

Have you ever invested in Canadian penny mining stocks? Tell us in the comments!