Higher commodity prices and an improving global economy have pushed up the prices of many junior mining stocks recently. And we think the best juniors have the potential to go even higher.

(In a recent Stock Pickers Digest hotline, we updated our buy/sell/hold advice on a junior mine that’s risen more than 50% in the past six months, Baffinland Iron Mines. It’s got an iron-ore project with strong potential on remote Baffin Island. Read on for further details.)

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 five things we look for when we analyze junior mining stocks for our investment services, including Stock Pickers Digest, our newsletter for aggressive investing:

1. We like to see well-financed junior mines with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests. Even better, we like to see a major partner who can finance a mine to production.

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

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3. We avoid junior mines that trade at unsustainably high prices as a result of broker hype or investor mania.

4. We compare the market cap of the junior mines with the estimated value of their assets or future earnings stream. Some need to quickly find or develop a mine to justify the current share price and avoid collapse.

5. We automatically rule out investing in juniors that promote themselves too aggressively, or do so misleadingly. Success is more likely if the managers focus on finding a mine, rather than touting their stock.

Baffinland seems to match up well with these standards. However, its commercial success is still unproven. That’s why we continue to keep a close eye on its progress in Stock Pickers Digest.

Baffinland may soon have the funds to tap into a rich vein of iron ore

Baffinland is focused on developing its Mary River iron ore project on Baffin Island. The company aims to spend four years building an open-pit mine at Mary River. It then plans to produce 18 million tonnes of ore a year for 21 years.

The company still needs to find a partner to help pay for the project’s $4-billion price tag. However, Baffinland seems to be making progress on this front. It recently said that as many as 20 companies have expressed interest in the project, including major Chinese firms. As well, the German government has declared the project eligible for $1.2 billion in loan guarantees. And German steelmakers have signed contracts to buy most of the mine’s iron ore.

If Baffinland could find a partner to put up $1 billion of the necessary funding, it could then take out loans to cover the rest. However, aside from a suitable partner, the project needs a continued economic rebound and a rise in steel demand to keep to schedule.

For our latest buy/sell/hold advice on Baffinland and dozens of other companies that could be suitable for the part of your portfolio you devote to aggressive investing, you should subscribe to Stock Pickers Digest. Best of all, you can get one month free when you subscribe now. Click here to learn how.