When gold goes up again, I believe we’ll find that the junior miners that have been crushed into the dust will be tomorrow’s value plays. Your goal, then, is to identify these “diamonds in the dustbin” today. Below are 8 ways I’m finding tomorrow’s gold value plays today.
So writes Sean Brodrick (www.uncommonwisdomdaily.com) in edited excerpts from his original article* entitled 8 Ways I’m Finding Tomorrow’s Gold Value Plays.
The following article is presented by Lorimer Wilson, editor of www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.
Brodrick goes on to say in further edited excerpts:
Right now, we are at an extraordinary period of time when we can buy actual producing miners for dirt-cheap prices. That doesn’t happen very often so which companies are diamonds in the dustbin and which will be left in the dust?
Below are 8 Ways I’m Finding Tomorrow’s Gold Value Plays:
1) Good management
Good managers have plenty of experience, are successful at bringing projects online, keep costs down, manage resources effectively, seek out new resources (and not overpay for them), know the difference between good debt and bad debt, and seek out strategic alliances.
To find good managers, find out what they’ve done before. A good track record, especially at another publicly traded company, could set a precedent for what you can expect them to do in their new roles.
People who helped bring mid- to large-scale projects to production should make it to your list.
2) Size of deposits
Small miners can see their share prices go nowhere for years because few institutions will finance them and fewer companies will ever look to acquire them so the larger the gold deposit or potential deposit, the better. Having a small deposit doesn’t necessarily rule out a company as an investment possibility, however,…if it has a lot of potential to grow that deposit.
In other words, the company may own more than one mine, but perhaps not all of them are operational at a given time. Accordingly, everything can change if it has [mines about to come on line].
3) Mines (about to come) on line
Projects that successfully come on line can boost a miner from the junior leagues to the mid-tier producer level…
It can take at least 7 to 10 years to get a new mine up and running. Bigger companies have such a desperate need for new resources that they don’t have time to waste so a junior company that is about to bring a new project online can become a takeover target…Owning a stock that is acquired by a company willing to pay a premium for it can be rewarding … sometimes very handsomely.
Why would a company pay above-market-value for a smaller outfit? A big factor is the [grade of the gold ore].
4) Grade of the gold ore
Everybody wants high grades across wide zones of mineralization – the richer, the better – [but] getting to these highly sought-after metals is an expense… You don’t want to invest in a company that is spending all of its money on pulling the metal out of the ground and bringing it to market.
In other words, you want to see them making a nice profit on the price per ounce. This brings me to the importance of getting an accurate read on a company’s [mining costs].
5) Mining costs
Generally, the higher the grade, the lower the mining cost per ounce and the lower the grade, the higher the mining cost per ounce…
The “production-weighted cash cost” of gold…[was at $718.37 per troy ounce as of the third quarter of 2012 according to] CPM Group in its Gold Yearbook 2013…explaining that the data to determine these figures accounts for roughly 60% of total global mine production.)
Some miners talk about “direct cash cost” or some other weird measure that ignores the cost of smelting. In my view, these miners are to be avoided. If they have to fudge the facts, they’re not companies you want to own.
Companies that have cash, and know how to manage it, will outshine the rest – and so will their stocks.
6) Price-to-cash flow
If the miner is already a producer, you want a low price-to-cash-flow ratio.
A mid-tier and smaller…[developer] can sell for high price-to-cash flow because they expect new projects to come online and boost cash flow so it’s also good to check their pipeline and see how soon they expect to have projects completed.
It’s also good to know whether they have the means to complete these projects, whether on their own or through [access to financing].
7) Access to Financing
Companies with a low debt-to-equity ratio and a decent amount of cash on hand allows them to rapidly expand their own projects, buy up competitors or junior miners for their reserves, and ride out any tough times with comparative ease.
If a company will have to raise cash in the future, you have to look at their track record of raising cash in the past.
8) Political Risk
…Some gold miners have a history of shooting themselves in the foot when it comes to dealing with locals so, if you are going to invest in a company that has gold mines in the third world, then at least pick one with good community relations.
These are just some of the things I look at when I start researching gold companies. There are many other factors, but narrowing down your list to companies that fit these eight criteria will give you a top-notch pool of stocks from which to choose.
(Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)
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