Developing a Scorecard for Assessing MicroCap or Junior Explorers/Miners
I have inserted a very brief pause in the microcaps series; because over the course of completing the first two company-specific discussions, it occured to me just how important a more uniform means of comparison could be to the overall effectiveness of the series. This is an idea I've tossed around for years, and now both the time and the reason to develop the idea have arrived.
We need a scorecard that we can utilize to yield a score for prospective microcap resource companies that we perform due diligence on, so that all the work we do looking into each company produces a better and comprehensive understanding of how it may stack up as an investment opportunity relative to other similar plays. Rather than a means to an end, the scorecard is also conceived as a guide to hone due diligence endeavors to ensure that the full suite of salient characteristics of an emerging resource company are inspected and surveyed in a more systematic way.
So I spent all day and night yesterday honing an approach that I believe may have some merit as a scoring system. I am very interested to get your feedback if you can think of anything I've overlooked here, but on the whole I think you'll find this scorecard system will lead to just about every important rock being overturned during your/our research process. The other great advantage of this system is that now you don't have to wait for me to get through the 36+ companies in the cue for this series, but can rather proceed confidently in your research in the meantime and make moire timely decisions regarding your own selections of the most compelling investments available in the space.
The approach outlined below is based upon a maximum total score of 100. Within some individual sections, I have offered some suggestions as to how to apportion scores according to individual items in that section. Of course, one could easily alter that guidance to suit their own varying emphasis upon particular qualities or characteristics, provided they keep that approach consistent throughout their comparative research process.
I will illustrate the proposed scoring procedure in greater detail over the course of the next couple of company-specific posts, but in a nutshell, here are the major moving parts:
Resources: (maximum 30 points for this section)
estimated scale of resources identified to date. 10 points
deposit type: near surface vs. deep deposit, bulk-mineable vs. vein deposit. 4 points
grade: rating average or observed ore grades relative to deposit type and peers. 8 points
thickness and strike length: looking for positive indications of continuity and scope. 8 points
bonus for deposits open along strike, at depth, or signs of infill potential.
Real Estate: (maximum 20 points for this section)
location relative to producing or historical trends: the story that led them to look there. 5 points
favorability of local and regional geology.
scale of the land package along geological trend - portion explored vs. unexplored. 5 points
bonus for signs of district-scale potential beyond identified deposits.
adjacent or nearby mines, deposits, or targets; bonus if any include well financed operators. 5 points
bonus for an adjacent mining operation, especially if it appears to be along strike/along trend.
strategic allure - identifiable motive for acquisition by a nearby producer/developer.
jurisdiction: political stability, tax regime, permitting process and regulatory regime. 5 points
negative scores for this sub-section can conceivably be assessed for worst jurisdictions.
Life Stage: (maximum 15 points for this section) This section is all about the de-risking effect.
very straightforward: one point for each milestone achieved in a typical development lifespan:
staking --> sampling/trenching/target development --> exploration drilling --> initial resource estimate
--> further expansion or infill drilling --> PEA/pre-feasibility study --> building/reporting reserves -->
feasibility study --> permitting --> construction decision --> mine financing --> mine construction -->
mine completion/inauguration --> mine ramp-up --> achievement of design throughput.
Management: (maximum 15 points for this section)
geological expertise, especially in region, and track record of prior discovery a huge bonus. 3 points
commitment to shareholders: insider ownership; record of resisting shareholder dilution. 7 points
strategic focus: coherent vision for company's future, including future financing needs. 5 points
Valuation: (maximum 10 points for this section)
if resource estimate achieved: compare ratio of enterprise value to market value of resource to peers.
if extensive, highly successful drilling is not included in estimate, adjust score accordingly.
if no resource estimate: consider existence of a "persistent market disconnect" (see Alexandria post)
Upside Drivers: (maximum 10 points for this section)
A more subjective section, where any additional items not contained above may be considered.
looming advancement to new development stage with favorable indicators overlooked by market.
if "persistent market disconnect" is very extreme, with high confidence, consider bonus points here.
scale of exploration/development effort underway: # of drills, # meters to be drilled during year, etc.
additional properties/opportunities apart from the primary project under consideration.
I want to know what you think. Does the relative allocation of points among the sections feel appropriate to you? I know that not all investors share the same precise value set when assessing opportunities (i.e. some may place greater emphasis upon valuation or management than I have here, but I have attempted to base my weighting on my observations of what has set outperformers apart in the past, rather than my own specific value set as an investor). I am aware this is nonetheless a subjective and non-scientific process, and so I would very much enjoy your feedback here. Again, I have attempted herein a weighting of company characteristics according to my experience of how significantly those characteristics appear to predict outperformance over time. I have not had a chance to test this scoring system out yet, so I reserve the right to tweak or alter this approach after putting into practice.
Thank you for your feedback! Now go out and try the scoring systenm for yourself and see what you come up with for your own favorite junior resource company. I will do the same in preparation for the next post in the series, and then we'll compare notes on the process in a subsequent post.
Thanks to all of you for your continues interest and participation in this highly enjoyable process.