This is the second in a series of musings and accompanying videos with Vancouver-based Interactive brokers commissions forex converter Research Ltd, which evaluates exploration and mining companies for investment. Once again, we assess a segment of the gold resource sector. Our first musing was posted in early February and titled The Real Cost of Mining Gold. It evaluated seven major gold miners over the 11-year bull market from 2003-2013, showed how and why they failed to profit and reward shareholders, and provided a solution for the future, i.
Today, our subject is the value of an ounce of gold in the ground. Venture always flows where potential reward is perceived to have the lowest risk. There is a plethora of companies to choose from in all segments of the resource sector. For any speculator, the challenge is to separate the many pretenders from the very few contenders. This is an especially daunting task for the retail lay investor. In this musing, we provide insights based on decades of experience evaluating companies and their projects.
We examine a 24-year takeover history of advanced gold explorers and developers to determine the real value of gold in the ground and develop a set of criteria for assessing any company and its flagship project for investment. Analogous to the major miners, we find that the quality of ounces of gold is far more important than the quantity of ounces. Share structure: should be tightly held with significant holdings by insiders and management. People: should have technical expertise and experience with past successes and not a series of failures. Project: should have favorable geology and geopolitical jurisdiction with an experienced and successful geological and engineering team. Many analysts, money managers, newsletter writers, and pundits promulgate the idea that management is the most important criteria for speculation in a junior resource company. We cannot recall any advanced explorer or developer taken over for the attributes of its management.
We submit that Project is King in evaluating any gold company for speculation or acquisition. An early-stage explorer has no tangible value. The company’s market capitalization is simply a speculative valuation based on investors’ perception of its management, projects, and potential for share price increase. The successful junior exploration company makes a gold discovery and drills it in sufficient detail to table a mineral resource estimate. Once there is an in-the-ground resource, an informed valuation can be assigned to what has become an advanced explorer with a gold deposit. Once reserves are quantified and assigned an economic value, the company can either raise money to build a mine or sell the asset or a portion of it to another miner.
At any juncture in this process, the real value of said mining project is derived solely from the level of confidence that it will produce a quantity of ounces of gold at a profit in the future. So how do we evaluate a gold project for possible investment? Both Cipher Research and I employ a peer valuation model based on the value of gold in the ground. My methodology is simpler than Cipher’s, which employs a detailed technical and financial analysis.