Among the most critical factors deliberated upon by potential investors in junior mining projects during the due diligence process is the credibility, quality and experience of the emerging company’s management team – a criterion that may often make or break the decision to invest at all, the Junior Mining and Exploration Conference heard on Tuesday.

Mining consultancy Core Consultants CEO Lara Smith held that junior miners were far more likely to attract sustained, substantial investment from credible investors if those within the executive management structure had an established record of past successes.

Risk-averse investors would be reassured if the management team had brought other successful mining ventures to market, which had remained successful entities.

According to Smith, the core team could further demonstrate their “commitment” by agreeing to performance-based salaries and by holding a significant stake in the firm’s equity.

The former EY analyst cautioned, however, that investors were wary of management-held convertible share options that stood to significantly dilute shareholder value.

“A company fully funded by debt without management taking a stake is often a red flag to investors. But, above all else, management must know what they are looking for and be able to state a clear vision and concept,” she commented.

She added that the “problem” with junior miners, particularly those that offered a multiresource deposit, was that they lacked a clear vision about the type of deposit they wished to market and its true potential profitability.

“I can’t tell you how often I am asked whether a company should regard themselves as a rare-earth prospector with some phosphate, or a phosphate prospector that can potentially produce rare earths.

“This is a question that, more often than not, comes down to the company wanting to know which is a more attractive investment proposition,” she said.

Management should also demonstrate “ruthlessness” when it came to abandoning a project that is not proving itself viable, as investors were looking for consistent, increasingly positive development feedback in the form of consistently improving resource statements and cost estimates.

“The management of several junior mining companies are simply holding on in the hope of a buyout offer. In this case, they know that there isn’t much chance that the next drill hole will produce much, but they are unwilling to cut their losses and are, therefore, waiting for some greater fool to buy them out,” she said.

Additional, and perhaps more obvious, key criteria considered by potential investors during their investment decision-making process were the political, social and financial risks inherent to the country in which the junior miner was active.

Smith noted that, as commodity prices rose, producers and prospectors became more willing to seek out “riskier projects in riskier regions”, while the governments of these countries increasingly altered legislation to allow them to partially or fully nationalise these assets in a bid to retain as much value as possible.

“We expect this trend to continue,” said Smith, adding that the consistency and predictability of the political jurisdiction in which the company operated was critical, as juniors were finding it increasingly to their advantage to operate in regions with reliable regulatory frameworks.

As a result, country-related risks have increased considerably over the last five years, driven higher by the global financial crisis, as governments looked to tighten control over commodity resources.

This came amid an increasing global trend that has seen junior mining projects fail after the company had incurred substantial costs related to discovering, developing and initiating production on a rich ore zone in a less-than-stable political jurisdiction.

“In this case, just as a project is generating significant cash flow, it is either confiscated or made uneconomical because of arbitrary increases by the State in royalties, rent seeking or other mineral-related payments.

Further significant factors considered by investors were the junior project’s location, its proximity to other producing mines, the availability of infrastructure, such as roads, electricity, water and labour, as well as the regional and intraclaim geology and geochemistry.