How To: Invest in Junior Mining Exploration Private Placements

Joel Faltinsky
April 26, 2021
minute read

Junior mining private placement investments can offer +10x returns.

Ill-discipline on the sell-side in the junior mining sector however, can lead to the loss of your investments just as quickly. The ability to remain emotionally-neutral with your investments, and be disciplined on both sides of the equation is a skill that many investors will learn the hard way.

Junior mining companies, or simply Juniors, are in the very first stage of the mining company lifecycle - exploration. Before a company develops a mine site to extract their known resource deposits, they must first discover such deposits. And it is the plethora of global Junior mining companies which are responsible for these discoveries through their exploration campaigns. However, exploration is very expensive and with little-to-no revenue, Juniors are generally negative cash-flow operating businesses. In order to fund exploration and potential discovery, Juniors raise capital through the issuance of equity to investors through various methods including private placements.

What are Private Placements?

Private placements are very common for Juniors as they're more cost-effective and time-efficient and are exempt from the extensive disclosure requirements in comparison to public equity offerings.

When a Junior requires funding, they will first determine the type of capital raising they wish to run - public financing, private placement, equity for debt, etc. Private placements are very common among Junior mining companies, and many start-ups in general, due to the fact that they are more cost-effective and time-efficient in comparison to public offerings. Since the placement is private, in that is isn't offered to the "public", the companies are also exempt from the extensive disclosure requirements of public offerings. Private placements can be offered by both private and public companies and for early stage juniors generally they are either "brokered" or "non-brokered" placements.

A brokered private placement is where a registered broker is selected to run the campaign on behalf of the Junior. When companies are requiring a large private placement, or when Juniors are very early stage and don't have the investors to raise the required amount, a brokered placement is beneficial as the broker is responsible for securing investors on their behalf. In return for the brokers' services, they will receive a "finder's fee" usually in the range of 6-10% of what they bring in.

A non-brokered private placement is simply a placement that is run by the company themselves. In order for this to be successful, the company would have a robust network of private investors who they can raise money from. The biggest advantage of this type of private placement is the money saved by not paying finder's fees to brokers.

Private Placement Pricing

Once the type of placement is determined by the company, they must nominate the share price of the program to the Securities Commission for approval. The funding share price is generally lower than the company's open-market share price at the time because participation in the placement comes with a mandatory hold-period (usually 4-months). This means that at the close of the placement, your shares won't be free-trading (eligible to sell in the open market) until 4-months later. The hold period allows the company time, albeit a relatively short amount, to commence/continue development and gain liquidity in their market before the "cheaper" stock from the placement begins to sell.

Investing in private placements can be risky given that the share price of the company may drop within the 4-month hold period. However, as with any investment, it is important that you do your own due diligence and are comfortable with the level of risk versus reward. Junior mining companies are always looking for funding and the share price at which they raise capital can vary drastically. Very early stage juniors can raise around $0.05 per share while juniors with a more developed portfolio of projects and exploration results will raise money at a share price reflective of their market price at the time. Your investments into private placements should reflect your risk strategy.

Who Can Invest?

Private placements, being exempt from having to complete a prospectus for "public" investors, are only available to "accredited investors" however there are a few exemptions. To be an accredited investor, you must satisfy the criteria as stipulated by your geographical regulations. In general, an accredited investor is someone with the financial means and knowledge such that the risks of that investor losing their investment is reduced. Examples of accredited investors in Canada are those with financial assets in excess of $1 million; or an individual whose net income before taxes exceeds $200,000 in each of the previous two most recent calendar years, etc. If you are wishing to invest in a private placement, it is your responsibility to ensure that you satisfy the relevant criteria. You will make this declaration when completing the subscription documents for the placement.

If you aren't an accredited investor, there are a few exemptions which may enable you to participate in a private placement. These exemptions vary depending on the issuing company, most notable whether the company is private or public. In general however, non-accredited investors eligible to participate in private placements include friends or family members, or business associates of the company. Institutional investors such as hedge funds, banks and brokerage firms are also eligible.

How To Invest

If you would buy the company's stock in the open market, than that is a good indication that you'd be interested in participating in their private placement.

There isn't any one formalized way to identify open private placements nor is there a standardized template for identifying the best private placement suited to an individual. In fact, the process of identifying a private placement to invest in is very individualized and is very similar to identifying a company that you would invest in on the open market. If you would buy the company's stock in the open market, than that is a good indication that you'd be interested in participating in their private placement.

Whether buying in the open market, or through a private placement, your decision to do so will be affected by your personal situation - finances, risk tolerance, your access to cash to invest and when you foresee the need to cash-out (remembering that there's a 4-month hold with private placement investments). Assuming that you are invested in the junior mining sector through the open market, a good place to start is by continuing to follow these companies to get notified of when they open a private placement financing.

There are investors who take a slightly different approach and that coming from a financial basis. These investors, generally accredited individuals, will follow many Juniors with a particular interest in early stage companies that raise at lower share prices. Sharing their investments over a handful of companies raising at low prices, while more risky than a more developed company investment, their strategy is to invest in many companies whose upside outweighs the risks. Simply put, should only 1 of their 5 (or however many) investments actually be successful, the gains on this 1 company will be more than their 5 initial investments combined.

As with all investments, your strategy is personalized to your own circumstances. That should not change when it comes to investing in private placements. As a starting point, you should continue to follow the juniors that you're currently invested in. Developing a network within the junior resource sector is also a great way to stay in the know of company updates and investment opportunities. Majority of juniors are set up to receive inbound queries either via email or phone and it is possible to speak with some executives depending on their size and set up. A percentage of juniors are also now beginning to create an online presence either through their own social media or outsourced digital marketing companies. As we enter the new era of investing, digital presence is becoming ever-important and we would expect the dissemination of company investment opportunities to take advantage of this huge influx of audience.