How to pick winning small-cap gold and silver mining stocks

If you’re considering dipping your toes into the junior mining market for the first time, follow these tips to maximize your chances of success.

The number of gold and silver mining companies that trade on major exchanges can be overwhelming for investors who are moving into the space for the first time, and the fact of the matter is, it’s easier to find a dud than a company that could become a takeover target or a viable producer in the future.

Mining companies typically operate in three distinct spheres: exploration, development and production. It’s a niche-driven market with very different risk-to-reward ratios. Exploration mining stocks, for example, promise the greatest rewards but also pose the greatest risk. They’re seeking out properties that could, one day, yield great amounts of precious metals. But it’s just as likely they’ll end up with a portfolio of desert land that will lie dormant for the next century.

If you’re considering dipping your toes into the junior mining market for the first time, follow these tips to maximize your chances of success:

1) Stick with producers. Junior mining companies that are already extracting metals from the ground are a much safer bet than companies that are yet to produce an ounce. Not only will they have company-sustaining cash flow, but those greenbacks could multiply quickly if the current bull market in metals continues. That will help the company expand it’s mine or break ground on additional deposits.

2) Seek out strong management teams. While beginning investors tend to think of mining stocks as a bit of a gamble, the fact is, it’s a highly technical field that relies on institutional knowledge and years or decades of managerial and geological experience. Because the community is small, it’s not hard to track outstanding industry experts who have a record of joining successful companies. Several executives from Silver Standard Resources Inc. (NASDAQ:SSRI) recently joined up with exploration miner Pretium Resources, Inc. (TSE:PVG). You probably wouldn’t leave Silver Standard without a good feeling (and a lot of hard data) that indicates Pretium will be successful.

3) Watch out for share dilution. Jordan Roy-Byrne, a Chartered Market Technician at TheDailyGold.com, recommends junior mining companies with operational mines and fewer than 100 million shares. A tight share structure indicates a management team that’s careful with its capital and committed to seeing the company succeed over the long haul.

4) Think small-cap; not micro-cap. “Micro-cap” generally refers to companies with market capitalizations of $250 million or less. Shares in these companies can be illiquid and extremely volatile, and – in most cases – you’ll have trouble finding actual gold and silver mining companies that are in production and still fall into the micro-cap category. Roy-Byrne recommends small-cap companies with a capitalization of $300 to $600 million. They’re still small enough to rise five or ten fold in a few years, but not so small they might end up in bankruptcy court.

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