In investing, it’s useful to have a checklist to evaluate gold & silver mining companies. Here’s a great checklist for a place to start, or for a refresher…
by Simon Popple of Brookville Capital
7 Things to look out for when buying the miners!
You don’t need me to tell you there’s no right and wrong way to evaluate any company. But if you’re dipping your toe into a market you’re unfamiliar with, it’s useful to have a checklist. With that in mind, I thought it would be helpful to set out 7 criteria that you may want to think about when buying mining shares. There are plenty of others, but it’s a useful start.
Here they are:
1) Where is the deposit located?
This should be no surprise to you, but some areas are safer than others. Find out where the main deposits are.
It’s impossible to provide any definitive advice, but you may want to take a look at the work produced by the Fraser Institute. They produce an annual mining survey which ranks regions by “attractiveness”
Here is a link to their website: Fraser Institute
It’s really common sense. If you wouldn’t go there then why should anyone else? If you’re one of life’s adventure junkie’s, then I’d be very careful about investing in any region in the bottom half. That’s not to say you shouldn’t, but there should be compelling reasons why you’re prepared to take on the extra risk.
2) What is the size of the largest deposit?
This is an area that confuses many investors. They hear that a miner has a decent resource of say 1 million ounces and jump in. Only later to discover that this resource is over 10 different deposits which are not close to one another. None being economic to mine.
It’s very difficult to determine what is a large or small deposit, because so many other factors need to be accounted for. But as a rule of thumb. If the miner has proven that the deposit is “open in all directions” – which means that drilling has indicated there could be more gold both laterally and at depth then you may be prepared to run with a smaller deposit.
As a very rough guide, if a miner can prove there are at least 1 million ounces of economic gold in a deposit, there is a reasonable chance they’ll get financing for a project (especially if the deposit is open in at least one direction).
Clearly grade and other factors come into play, but I personally like the largest deposit to be over 500,000 ounces with potential for a lot more. I should add that I have quite a high appetite for risk. Those with a lower appetite may want to consider a higher threshold.
You also need to be aware of the different types of reserves and resources. This requires some detailed analysis, but if you’re new to the sector I’d suggest you look for at least 500,000 ounces in the Measured and Indicated category from a single deposit.
Here is a useful article that you should take a look at: Classification of Mineral Resources and Reserves
This is incredibly difficult to generalise about because there are so many factors at play, such as the depth and type of the ore. But as a very general rule, you probably need to be careful about investing in an open pit project where the grade is less than 1g/t or an underground project where the grade is less than 3 g/t.
Needless to say, rules are there to be broken and some of the World’s largest mines have a proven reserve of less than 1 g/t (Canadian Malartic have a proven reserve of 0.89 g/t). But if it’s less than 1 g/t you probably need to think about things a little more carefully. With the case of Canadian Malartic, it’s a huge mine – it’s also worth noting that their proven & probable reserves are 1.1g/t.
Roads, rail, power and water should be taken into consideration. Mines need to be accessible and they consume a lot of power and water. If a company finds a great deposit they still have to find the money to construct the mine, transport the ore and utilise a skilled workforce.
Sometimes there is a mill in the vicinity, but you need to be very careful about making any assumptions that they’ll have access to it.
This is one reason that exploration near existing mines is more attractive. Not only is the infrastructure invariably already there, but there’s greater chance you’ll find the local workforce are well trained and ready to work on your project.
Like all companies, good management is important. Not just to ensure the operation runs smoothly, but also to make sure the company operates in the best interest of shareholders. Again, it’s very difficult to generalise, but here are a few red flags:
a) They have not got a good track record of running a mining company (where were they before?)
b) They have never raised significant amounts of capital
c) They have not personally invested much capital in the business
There are clearly others, but please don’t overlook the importance of having a good management team.
I’ve made this term up, but it’s important! If there are other mines in the area, there’s clearly gold around. It may be that nobody has found it on your company’s patch – they could have an underexplored tenement or it may be something that has been comprehensively explored by others who have walked away.
Several points to note here.
Firstly, why did they walk away? Was there no gold or if there was, how much was found? It might not have been enough for a major to get involved, but very attractive for others. Major are generally looking for deposits of over 2m ounces, quite often more than 3m, so they may have decided the potential was too small.
Secondly, when did they walk away? Technology has obviously improved, so if it was in the past few years that may not be good, but if it was decades ago, there may be compelling reasons for having another look. You should also look in to how much exploration was actually done.
Thirdly, who are the nearby operators? If you can prove there’s gold on your land they may want to buy it. Are they capable of buying it? They may be too small. Similarly, if they are very large they may only be interested in a huge deposit.
Fourthly, if there are mines in the area, the infrastructure is probably pretty good. One less thing to worry about.
7) Balance sheet
This is quite simple. If you’re investing in an explorer then be very careful if there’s any debt on the balance sheet. Because they’re not generating the cash to repay it!
Similarly, take a look at how much cash they are spending and what it’s being spent on. If it’s going on solid exploration efforts that could yield exciting results, then it may make sense to invest before those results come out. However, if it’s going on other aspects of the business, you may need to think about where it’s going. Some mining companies seem to be run as lifestyle businesses, keeping the management happy but nothing really happens! I repeat, make sure the management have a good reputation.
Debt is less of an issue for producers, because they’re generating cash to service it. In this instance, it makes sense to have a good look at their costs to ensure they can still generate cash should costs go up or the gold price move down. Take a look at their All-in Sustaining Costs and compare these to the gold price. You should have a decent margin to feel comfortable.
As I said at the top of this article, there are many other factors to think about if you’re interested in the sector, but these 7 are a useful starting point.
Please take a look at my website for more information on gold