Junior Company

Junior Company Definition

Junior Company is the company that undertakes the development of natural resources, including research, confirmation of the existence of resources at the exploration site, actual extraction, etc., and also bears the direct risk of failure of such exploration activity. The senior companies oversee their activities and provide them with the necessary funds.

Characteristics of Junior Company

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Source: Junior Company (wallstreetmojo.com)

Example of a Junior Company

Atalaya Mining PLC, previously known as EMED mining public ltd., has a market cap of CAD 432 million with 137.339 million listed ordinary sharesOrdinary SharesOrdinary Shares are the shares that are issued by the company for the purpose of raising the funds from the public and the private sources for its working. Such shares carry voting rights and are shown under owner’s equity in the liability side of the balance sheet of the company.read more on the TSX and the AIM as on Nov 12, 2019, 3:14 AM EST. It is a mining and development company in the copper concentrates and silver by-product domain.

Its operations are concentrated in south-western Spain at the Rio Tinto project site, among others, of which it acquired 100% ownership in October 2008 and is currently in an expansion phase.

One of the most appropriate ways of understanding a junior company is through its shareholding pattern, which shows the sources of capital for its operational activitiesOperational ActivitiesOperating activities generate the majority of the company's cash flows since they are directly linked to the company's core business activities such as sales, distribution, and production.read more. The below image shows the significant shareholding of Atalaya Mining PLC as of Sept 16, 2019:

We can see that none of its major investors actually take up the mining operations at the ground level. Most of their involvement is for providing the funds. However, the largest shareholders are in related businesses such as trading or processing, and refining of the produce of Atalya or mining is their core investment domain.

Other examples could be Great bear resources, Novo resources, Silvercorp Metals, Pacific Booker Minerals, Kirkland Lake Gold, among others.

Challenges Faced by a Junior Company

  • Environmental permits: These days, one of the most critical factors which can make or break the spine of junior companies is the environmental regulations of the governments of the countries where such exploration sites are located. Certain countries offer environmental permits, while some countries have less liberal policies
  • Geopolitical risks: The interest of junior companies is affected by the geopolitical risks of the countries of exploration sites. E.g., if the country faces a civil war, the junior company is affected the most.
  • Rights of Indigenous people: Most sites are located in the tribal areas or the unexplored and therefore require rehabilitation of these people. Further, due to being accustomed to their ways of living, it is challenging for them to adjust to a new environment, and they may or may not possess the skills required for survival. It creates a barrier to exploration activities. Proper compensation may not always be feasible. A very recent example of the same is the Niyamgiri hill-Vedanta Group case from India, in which the Supreme court finally ruled in favor of the indigenous people and against the Vedanta resources.
  • Failures: As mentioned above, the sites need to be acquired before the study for resource existence can be undertaken. It requires a lot of capital, and if the study results are negative, all the investments go down the drain and produce no return. Therefore at times, failures even lead to the bankruptcy of the junior company if its debt is very high.
  • Socio-economic: In most African countries, such companies have to operate in a joint ventureJoint VentureA joint venture is a commercial arrangement between two or more parties in which the parties pool their assets with the goal of performing a specific task, and each party has joint ownership of the entity and is accountable for the costs, losses, or profits that arise out of the venture.read more with a local corporation or the local communities as the resources present on the lands of these local communities belong to these people also. E.g., the Blue Rock Diamonds group, based out of the U.K., operates in South Africa in collaboration with Ghaap Mining (Pty)Ltd., Kimberly, which owns 26% of its capital structure. It is because of the requirements of the Black economic empowerment regulations.

Conclusion

To sum up, the companies which undertake the initial study for the existence of natural resources and then team up with larger companies either financially or structurally to undertake the extraction activities are known as the Junior Companies.

Once they come up with a positive study result, they may either take up exploration activity themselves or sell out their findings and the explored site to an interested party, which might then take up the extraction activity.

It is high risk and high reward work. Therefore, it is not an investment opportunity for all kinds of investors; only those who have high risk-taking capacity and willingness should take up such investments.

This article has been a guide to what is a junior company and its definition. Here we discuss the characteristics of junior companies along with the examples and various challenges faced by them. You can learn more about finance from the following articles –