How to spot a “lifestyle company” in your due diligence process | The Weekly by Synergy: Feb 15, 2021

Welcome to The Weekly by Synergy! 5-minute musings on the markets, current trends, and events. From our opinions, observations, analysis, and news commentary, just a few lines to get you started every week.

This week’s commentary will be centered on junior mining investing. If you are a small-cap retail investor or an institution with an eye on the juniors, this is a real risk that doesn’t get enough discussion. Here’s our friendly warning: “lifestyle companies” will drain your resources and evaporate wealth so it’s wise to spot them quickly. Intrigued? Read on…

What do we mean by “lifestyle company”? Well, in a nutshell, a lifestyle co is a small/micro-cap publicly listed entity that creates very little wealth to the bulk of their investors, aside from insiders, and most particularly those employed in the operation of it. And it has no plan or desire to change this. Most of them are under $10m in market cap, but some will go as high as $25–35m.

In the main mining exchanges, as shown in the chart, the number of companies in these buckets are rather large compared to the total (highest is TSX-V, unsurprisingly), so it can be helpful to notice trends for analysis.

How do they operate? After seeing many of these come and go over the years, we can see a very distinguishable set of traits. They will:

  1. Buy projects often, normally in 3–5 year farm-ins/ option agreements with large payouts at the end, and always in the commodity of the moment
  2. Constantly raise capital to drill -they usually have good access to capital-, seemingly rushing exploration efforts
  3. Find nothing economically viable and leave the project and sometimes even the country. They will drop projects before large payments or significant milestones achieved
  4. At times, leave plenty of bills unpaid, causing significant harm to local contractors, claiming to run out of money, and having no way of covering these bills. They may offer shares in lieu of payment, which will likely be highly diluted by the time the (often) applicable lock-up period ends
  5. Once a cycle is over, doing it all over again, most typically with the same name and always with the same team
  6. Many legitimate companies will do some of these, for sure. But the piece de resistance, to be sure? Beware of no changes in management and no discoveries, progress, or real growth (measured by its enterprise value) in 5–10 years… This shows that they never have and never will have the intention to do anything differently.

Investing in junior explorers and tech startups is risky but can bring outsized returns to a portfolio and that’s why we love it!. Keep these tips in mind to delve into these promising waters a bit more safely!

We’d love to hear your thoughts. Reach out on our social media channels and find additional resources here.

And that is it for today. See you next week!

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