WGC: Gold Demand Strong Despite Sell-off in ETFs

Investing in precious metals mining firms requires a good understanding of the mining process as well as mining operations. A mining company can be looked at various ways depending on the evaluation perspective, whether it is for a buy-out or it is for a short-term investment. Here we have a compiled the four most critical aspects of a mining operation or a mining company relevant to a precious metals mining investor.

1. Resources & Reserves: 

Unless and until the company has performed an independent professional resource calculation for its precious metals reserves, know that someone is either speculating or guessing at one of the most critical data points in the mining industry. Resources is an important piece of information as it determines what the mining company is after and where the revenues lie. As well, “Resources” should never be confused with “reserves.” One should be careful when “inferred” is used since “inferred resources” are very speculative mineral inventories. “Reserves” are deemed to be proven economic and mine-able ounces calculated by very strict engineering and government rules. Resources, however, still have a long way to go to become an economic deposit.  One such rule regarding resources and reserves is Canada’s National Instrument 43-101.

2. Investing:

For investment purposes, it is suggested that your portfolio be 60% invested in companies already producing gold or silver successfully. The remaining 40% should be divided into companies close to production with impressive projects or companies that are very far along in defining large and significant precious metals reserves. Producers should include majors and mid-tiers with good growth profiles (your monetary insurance, since they undoubtedly have the goods in the ground).

Junior level producers with new projects are also acceptable. A good thing to look for is companies with lots of money in the bank or access to sponsorship from top investment banks in Toronto, London and Vancouver. This is a vital concept in this capital intensive business. Diversify your portfolio by having at least 15 good companies.

One could allocate a small portion to grass roots exploration stocks depending on the risk tolerance, but know this is the very high-risk end of the business. Development and exploration budgets decreased dramatically from 1998 to 2002. Any substantial project therefore going forward that is near feasibility (an extensive outside report based for the most part on tens of millions of dollars of engineering, geological and metallurgical work) could be a buy-out candidate for mid-tier and major companies that want to catch up on reserve replacement and growth.

3. Management:

The word “good management” is overused. A 20-year mining professional who have had past successful executive positions with large or successful mining projects or companies is the definition of good management. You are most likely dealing with some quality professional if you see names like Barrick, Newmont, Placer, Anglo, Goldfields, and so forth on the resume. Also, people who qualify are those that help to run medium to large projects to production or those who ran mid-tier companies successfully. You better know who you are dealing with. Check to see if management has other interests associated with being part of the company or the project.

4. Size:

The larger the potential resource or deposit the better. Size is very important. There are few institutions that will finance small mines and fewer companies that will ever acquire them; therefore, they are not worth your trouble. Gold mines with possibilities of 2-3 million ounces and above are a good size. Goldfields, the mining giant, only targets projects with two million reserve ounces.  One hundred million ounces should be the minimum with silver projects, but the above still have to be qualified. It may not be economic to mine if the resource has one of many other negative reasons, is too deep under the surface or of very low grade (richness). Some low metal values can be economic to mine if big tonnage operations create economies of scale. Tonnage is important. For an open pit gold mine, 300 million tonnes is big. A tonne is 2204.62 pounds, not to be confused with a ton which is 2000 pounds.  A small pit is one with 10 million tonnes. Tonnage can vary dramatically and grade and mining widths become more important for an underground operation, but one million tonnes would be small. For a base metal open pit deposit, 20 million tonnes would be small and one billion tonnes would be huge. Big is beautiful so remember this is business.

Investors have a few critical aspects to consider when it comes to investing in precious metals mining companies. For a wise investment in a precious metals mining company, its best to look for a company that has proven reserves instead of speculative resources while ensuring that the firm’s management is experienced enough to execute the projects.