Management and Insider Ownership- Junior Mining Investment
Management and Insider (“M&I”) Ownership
How many shares does management own? At what price was it acquired? Have they bought in the open market over the past 12 months? There are no hard and fast rules in evaluating management and insider ownership in a junior exploration company but here are some red flags that I look to identify:
1. Management & Insiders own less than 5% of shares outstanding (not fully diluted) in a sub-C$100 million market cap company.
I like to see M&I have a large stake for obvious reasons as it better aligns them with shareholders. I would personally not invest in any junior miner or explorer if this target is not met as it is a major red flag. The lack of share ownership could point to three main reasons: First, management has either sold their position or never acquired a big enough position. Two, could be a result of management significantly diluting shareholders. Finally, could possibly point to the fact that M&I hold shares under another name and would potentially be undisclosed or unreported sellers.
2. Management/Insiders acquired most of their shares prior to an RTO/IPO or in a major share consolidation.
Investors need to be very much aware of how M&I acquired the majority of their share position. It is relatively common for relatively new junior mining companies (less than 2-3 years) to have been recently put together to take advantage of a market cycle. I generally avoid these companies for the simple reason that M&I may have acquired their position for essentially free (i.e., less than C$0.01/share). The simple reason being that M&I will not be so concerned diluting shareholders in the future given that it doesn’t hurt them as much on a relative basis than an investor who purchased shares at C$0.20/share or higher.
3. The majority of M&I share position comes in the form of stock options or RSUs.
No hard and fast rule but I generally want to see AT LEAST as many shares being held by M&I than options and RSUs combined. I would also add that it is important to see M&I buying shares in the open market particularly when the share price drops.
I would also thoroughly review the history of option grants to see if there is a pattern of re-pricing and abusive option grants. If management has NEVER exercised any stock options in the past, then it is a pretty good bet that they have not created enough shareholder value (NOTE: share price increasing not market cap increasing) in order for those stock options to have been “in the money.”
4. M&I has sold over 25% of their holdings over a six-month period of time
Although M&I should be able, at times, to sell shares in order to compensate he/she for the hard work and value creation created, selling more than 25% of his/her position in a short period of time is not a great sign. If M&I is selling, I would simply pick up the phone and call he/she and specifically ask the question. M&I works for shareholders not anyone else.
One caveat. At times, M&I should be able to sell some shares to compensate he/she for having created shareholder value especially for higher quality companies whereby M&I is being compensated far below the market rates.