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.
Understanding 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.
Costs Involved in Starting a Junior Company
The cost involved in starting a junior company has 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 Junior Companies
A lot of junior companies are venture capital companies 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 risk. 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 who 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 Juniors
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.
Examples of Junior Companies
As mentioned above, there are hundreds of mining companies listed on the TSX and the TSXV.
Nexus Gold, headquartered in Vancouver, Canada, is one example of a junior mining company. As of June 11, 2018, the company had a market cap of $5.2 million, with a daily trading volume of about 49,000. The company is listed as an exploration and development company with operations in Burkina Faso, West Africa, and has three projects, including the Bouboulou project.
Calgary-based Delphi Energy is a junior energy company. As of June 11, 2018, it has a market cap of $160 million and a daily trading volume of about 55,000. Delphi has been developing its Montney property in the Deep Basin of Bigstone, which is found in Northwest Alberta, Canada.