Picking Junior Stocks: Deal Structures

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When looking at junior stocks, one must develop filters. We recommend looking at junior stocks based on four important measures: sector, management team, stage of development, and deal structure. Order of importance is up to the individual investor. This is the final post in a series of four that addresses the above four topics.

A good property with a bad deal structure is a horrible investment. Ideally, ownership is in a clear, straightforward setup. If there are derivatives, expect valuation discounts.

A company structures the ownership of a property in two stages. First, it must acquire the property and thus structure a deal to buy the undeveloped resource. Secondly, it must take in risk-sharing partners for further development of the property.

We prefer to see companies with clean ownership and a decent royalty structure on property acquisition. However, the better the property, the less likely it is. The best ownership scenario is where a company does its own grassroots exploration and maintains 100% ownership with no royalties. The second best structure is a clean joint venture. With clean JVs, risk and reward is shared rationally between the two owners.

We do not like structures where strategic partners come in early and pay the bills but also completely remove any takeover premium and much of the long-term value. On good properties, these deals destroy value.

When looking at ownership structure, make sure there is a takeover premium plus a path to ownership by a major company, and not just one major. Make sure no one company can hold the property hostage, and make sure you understand how everyone at the table, including the governments, is planning on making money.

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