Three months ago (April) we covered the reasons we primarily invest in junior exploration companies. We promised to follow up with some criteria we follow in attempting to pick winners. Here are five things we look for when evaluating and selecting junior exploration companies.

Management has a track record and experience.

There is a decent number of executives in the junior industry that were part of or led a company to an acquisition. If they have done it before then they know what needs to be done in order to do it again. If management has not been involved in a transaction, check to see if they have discovered a deposit or expanded a resource through drilling. Also, seek out the executives that had ample experience at a major company.

Do not stop with the CEO. Also consider the track record and experience of the chief geologist. They are just as important.

Strong capital structure and a small retail float

The capital structure refers to the cash, shares outstanding and warrants and options. We are looking for companies with cash, tight share structures and tight floats. That means enough cash to move forward (without needing to raise multiple times) a low number of warrants and options and a small retail float.

The float is the number of shares available for trading after subtracting closely held shares. The smaller the retail float, the more amount of stock is tightly held (by insiders, institutions and large investors). Stocks with tighter retail floats can rise more quickly than stocks with larger retail floats. It’s basic supply and demand and the size of the retail float is just as important as the overall structure itself.

Industry sponsorship

Juniors can have industry sponsorship through joint ventures or investment. Has a major gold mining company invested in the junior or partnered with the junior on its project? That would certainly lend quite a bit of credibility to the junior and its project.

Note that this is only one criteria and not a declaration to follow every major company into every investment they make. They can get better terms than you and I and they make mistakes too.