By Paul Ferguson
A junior mining company I’ve followed for years recently announced that they were raising money. The initial response from some investors was to cry “Dilution!”. Virtually all mineral exploration and development companies are reliant on the public markets to fund operations. Without revenue or other income, staying in business means they must periodically raise money by selling stock.
Given that selling equity is a fact of life for almost every junior mining company, it is incumbent upon shareholders and investors in those companies to pay attention to how this is done by each of them. While the mere mention of the term “share structure” risks sending readers to sleep, it is a critical factor for how the shares of that company will perform.
In this particular case, a closer look at the financing history of the company and at this specific financing showed me that there are indeed CEOs who act like business owners and understand this vital concept. This company had the luck, skill and foresight to raise a considerable amount of money early on, back in 2002. It is difficult for most juniors to raise a large sum of money in the early days as the dilution would be punishing. This management team was able to leverage exploration success at previous companies to attract financing.
Raising the money in one thing but making it last and employing it judiciously is another. This company was able to operate for over eight years without needing to return to the market. The frugality of the management team is legendary. And the net result is that shareholders have a lot more leverage than they would have had, if their equity had been bled away through repeated financings over that period…as is all too often the case.
Share structure is something I always examine when evaluating an investment. It is another term for ownership. The value that management places on shareholders can often be seen clearly in how share structure is managed. Take the time when doing your own evaluations, to examine share structure. Make it a checkbox on your due diligence list. Do your best to identify the management teams who have shown by their actions that they understand the importance of doing it right.
