What Is a Junior Company?
A junior company is a small company that is developing or seeking to develop a natural resource deposit or field. A junior company is like a startup in that it is either looking for funding to help it grow or it is looking for a much larger company to buy it out.
- A junior company is a new company that is looking to develop a natural resource deposit or field.
- Junior companies seek to grow by obtaining funding or seek to be bought out by a larger company.
- Most junior companies are small-cap companies with a market capitalization of $500 million or below.
- Junior companies are typically involved with venture capital companies that aim to develop the junior company into a profitable one.
- The risks associated with junior companies are high because they are new in the market and have not necessarily proven their asset base.
Understanding a Junior Company
Junior companies are typically small-cap, with a low market capitalization (usually under $500 million) and have thin daily trading volumes of 700,000 and under. They are most likely found in commodity exploration, such as oil, minerals, and natural gas. Junior companies are believed to be interesting businesses for those who can afford to take the risks associated with them.
The costs involved in starting a junior company have grown significantly, but so has the reward for being successful.
The first thing many juniors will do is to acquire properties they believe have a big probability of resource deposits. The company will then conduct a resource study. Once that has been completed, it will either provide the results to shareholders or to the public to prove there are assets available.
If the study provides positive results, the junior company will raise capital to go ahead with exploration, or partner up with a bigger company to cut down on costs. In some cases, it may also attempt to be bought out by a larger company.
Characteristics of a Junior Company
A lot of junior companies are venture capital recipients that are looking for financing for their own operations. For example, a junior gold mining company may not own its mining operation. Instead, it may look to secure capital in order to undertake this part of the business.
Junior companies also come with a lot of risks. If the company undertakes exploration and cannot find any resources before its debt is due, it will suffer financially and may have to declare bankruptcy.
Juniors are also sensitive to commodity prices, meaning their share prices fall directly in line with the commodity with which they are associated. So the share prices for gold juniors will be affected by the price of gold, just like oil and gas juniors will be affected by energy prices.
Juniors will have management teams that provide some expertise in the field of exploration and can navigate any local governmental and environmental regulations. The companies will also have highly trained personnel on staff, including engineers and geophysicists, so when the properties show promise, they can help bring the resources into production.
Investing in a Junior Company
Investing in junior companies often comes with more risk than companies that are bigger and more established. This is because juniors may still be exploring and, at times, may not find any resources at all. Investors who are interested in smaller, up-and-coming companies like these should remember to diversify in order to minimize their risk and get the maximum return on their investments.
A greater degree of interest in juniors will typically come from individual investors because they usually invest based on emotions. Institutional investors, such as mutual funds or hedge funds, will normally invest in senior companies with a greater track record.
Real World Example
Nexus Gold, headquartered in Vancouver, Canada, is one example of a junior mining company. As of Sept. 2, 2020, the company had a market cap of $14.5 million, with a daily trading volume of about 253,000, putting it firmly within the small-cap parameter. The company is listed as an exploration and development company with operations in West Africa and Canada.
Currently, Nexus has six projects in Canada and five projects in West Africa, so it is further along the development line than completely new junior companies, though these projects have only shown historical samples or prospective new samples, meaning that the mines are not in full development as yet.