Junior Company

A small entity or firm whose sole business activities include the development, exploration, and research of natural resources

What is a Junior Company?

A junior company can be defined as a small entity or firm whose sole business activities include the development, exploration, and research of natural resources. Junior companies are comparable to start-ups in the sense that both entities are searching for growth funding or seeking to exit through being purchased by a larger entity. A junior company is generally controlled and funded by a senior company – sometimes referred to as a mother company.

 

Junior Company

 

Normally, a junior company tends to have a low market capitalization with low trading volumes. It is normally considered a small-cap enterprise, and they (junior companies) are normally found in mineral, oil, and gas exploration.

Junior companies normally acquire fixed assets (primarily properties) with possible natural resource and mineral deposits. They perform a study on the area to determine the existence of the potential resources/minerals.

The research findings are presented to the shareholders or the general public as a form of evidence for the existence of the natural resource. If the research produces positive outcomes (i.e., there is indeed a natural resource or mineral present), the junior company will seek funding to continue with exploration or seek to be taken over by a larger entity.

 

Summary

  • A junior company can be defined as a small entity or firm whose sole business activities include the development, exploration, and research of natural resources.
  • Junior companies are normally found in mineral, oil, and gas exploration.
  • Junior companies normally have a low or small market capitalization, experience low trading volumes, have high levels of capital expenditure, have high acquisition costs, are considered to be “high-risk,” and require a team of highly-skilled management personnel and technical specialists to oversee the company.

 

Characteristics of a Junior Company

 

1. Low market capitalization and low trading volume

Junior companies normally have a low or small market capitalization. They tend to have a market capitalization that is below $1 billion and are, therefore, considered to be a “small-cap company.” Also, such companies generally experience low trading volumes. Their stocks are not traded in high volumes (i.e., they are rarely traded), thus their daily trading volumes are almost negligible or significantly low.

 

2. High capital expenditures and high acquisition costs

Junior companies tend to have high levels of capital expenditure (CapEx) because their project requires a considerable amount of excavation activities, and research and development technology and equipment can be very costly. The companies, hence, make significant investments in fixed assets.

In addition to high CapEx levels, junior companies also tend to have high acquisition costs because they have to acquire the properties that may have potential resource deposits before performing resource studies and exploration on the property.

 

3. High risk

Moreover, junior companies are considered to be “high-risk” because their success relies heavily on the study performed to determine the existence of a natural resource or mineral. A study with a negative outcome would eradicate the possibility of obtaining further funding for exploration, and the funds spent on studies and site acquisition will become a sunk cost.

 

4. Requires a highly-skilled workforce

Furthermore, junior companies require a team of highly-skilled management personnel and technical specialists to oversee the company and its projects and ensure that the company is in good standing and compliant with local government laws and regulations.

 

Common Challenges Encountered by a Junior Company

 

1. Difficulty in obtaining environmental permits

Junior companies may struggle to obtain environmental permits in certain states or countries where an identified exploration site exists due to limited laws or policies. Certain countries may not be willing to offer environmental permits due to political interest or a lack of or minimal liberal policies. Also, the companies can be exposed to risks associated with the potential country, e.g., an ongoing civil war.

 

2. Uncertainty of outcome from research and exploration activities

Junior companies also face a risk of failure because, as previously discussed, they need to make site acquisitions before they can begin studies or exploration activities. Their success is heavily reliant on the studies’ outcomes to determine the presence of a natural resource. The funds spent on acquisition and research will be lost if the study derives negative results.

 

3. Government regulations

Another challenge that junior companies can face is that the sites they’ve identified and seek to acquire may be located on tribal lands, which would require that the inhabitants of the tribal areas need to be relocated or rehabilitated.

 

Additional Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Oil & Gas Company Balance Sheets
  • Research and Development (R&D)
  • Small Cap Stock
  • Volume of Trade

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