This is the first of a three-part series on how to get the most out of our Gold Investor Pro report. The supporting data is presented in our analysts’ Proprietary Excel File, which is updated on a quarterly basis. After spending 100 man-hours researching and compiling this exclusive excel database, our goal is to empower you to conduct your own independent analysis. In this first installment, we will explore the qualitative factors that go into valuating gold companies including the location, type, and stage of their mines. During the next few weeks, we will release two more updates regarding valuation and financial performance guidelines to help you further refine which gold stocks are best for you.
Mine Location: Infrastructure, Proximity, & Political Risk
A primary consideration when investing in a mining company is to assess the location of its assets. Since many early stage companies have yet to conduct any exploration, it may be valuable to measure their proximity to other mines, which may already be producing or at least have assay results. News of good assay results or geophysical work has caused stocks to rise, as land near mines with proven gold deposits is valuable. Additionally, increasing remoteness to infrastructure and resources such as power, transportation, or human resources can lead to higher operating costs. Finally, political risk is also an important aspect in determining the economic viability of a project, especially in developing nations. A multi-million-ounce deposit may not be feasible if the local or federal government imposes punitive restriction or taxes.
As in all investments, understanding the risk-reward ratio that is right for you is an integral part of your process to determine which mining stocks to buy. In figure 1 below, we show you how to filter for a relatively safe mining jurisdiction such as Nevada, USA and then sorting the mines from largest to smallest (based on proven and probable resources) using Excel’s ‘filter’ tool. As you can see, Carling, Cortez, and the Goldstrike property appear at the top of the list.
Figure 1: Using Excel to Filter for the Largest mines in Nevada
Type of Mine: Open-pit vs Underground
Open-pit is the oldest method of mining, which involves extracting rock or minerals from open pits, like quarries and burrows (Figure 1). Since it requires no tunneling and is utilized when substances are fairly close to the surface, open-pit mining requires much less capital and is less risky. As a result, the open-pit technique is an economical feasible method to mine low-grade minerals.
Figure 2: Open-pit vs Underground Mining
SOURCE: Kentucky Geological Survey
On the other hand, underground mining is often used when an area’s open pit mines are exhausted or impossible to build due to inaccessibility. The process requires building of spiral tunnels that circle the deposit, sinking vertical shafts adjacent to the ore, and often horizontal excavations into the side of the hill or mountain. Unlike open pit, underground mining requires additional requirements such as ventilation systems, area and ground support, and finding a consistent, safe, and cost-effective way to get materials to the surface. Since underground mining entails a much larger capital requirement than open-pit, mining lower grade gold is often not economically feasible.
It is also worth noting that some mines use a combination of both underground and open-pit mining. Sometimes, grades of minerals are much higher, deeper below the surface which makes underground mining valuable to extend a mines life. Like the ‘filter’ method on Excel used for location, we employ the same method to isolate the largest ‘open-pit’ type mines below. As shown below, Cerro Casale, Donlin Gold, and Detour lake top the mines list (note: Donlin Gold is owned by both Barrick and Novagold in a joint partnership, that is why it is listed twice).
Figure 3: Using Excel to Filter for the Largest Open-pit Mines
Stage of Mine: Exploration vs Development vs Producing
Typically, the lifecycle of a mine consists of three stages: exploration, development, and production (Figure 2). The first stage, exploration, is typically the highest risk where a company is yet to discover a deposit in the area; this usually interests high risk-high reward speculators. At the end of the exploration phase, typically a drilling campaign is complete as well an estimation of mineral reserves and resources. Then an economic feasibility study (EFS) is conducted to assess the financial value of the project before development is underway. If a mine is deemed uneconomical, it is put in the ‘maintenance’ phase where the project is put on standby until divested or economic conditions improve. During the development phase, risk is lowered and the mineral resource may be expanded with more exploration campaigns. Finally, once ready for the first pour, the production phase commences and the mine achieves its full value.
Figure 4: The Mining Life Cycle
SOURCE: Centre for Exploration Targeting
Depending on your risk tolerance, you may prefer a ‘producing’ stage company to invest in or if you have a greater appetite for risk, an exploration-based company. Either way, we can employ the ‘filter’ tool with Excel to narrow down on the mines and related companies that operate in each phase of the mining life cycle. In figure 5 below, we have filtered for the largest production-stage mines, which include Carlin, Detour lake, and Boddington.
Figure 5: Using Excel to Filter for the Largest Producing Mines
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As with all investments, understanding the risk-reward ratio that is right for you is an integral part of your process to determine which gold stocks to buy.
Look out for the second part of our ‘Excel How-to’ series as we examine key valuation metrics that are used to compare companies against their peers, to isolate those gold stocks that have a competitive advantage and are best positioned to generate healthy returns for shareholders.
Stay tuned as one of our leading research analysts provides his own expert valuation as to which gold stocks are likely to outperform their industry peers!