The field of gold miners can be a minefield for investors.
But like any challenge worth tackling, well-selected gold miners offer the promise of gains well in excess of price advances in the underlying metal. To aid that all-important process of distinguishing likely outperformers from the rest of the pack, let's continue our discussion of seven vitally important topics for Foolish consideration.
After clicking here to review Part 1 of this series, join us below as we learn how to decode economic studies of proposed gold mines and assess the likelihood of successful mine permitting.
With hundreds of companies to choose from, Fools have ample opportunities to select gold companies with assets at any stage within the development life cycle of a mine. Between the moment a property is first secured for exploration, and the declaration of commercial production, projects pass through life stages much the way an infant progresses to adulthood (sometimes it can take just as long!). Where in the development cycle one opts to jump in is often a matter of personal investment style -- with some targeting the sudden leaps that stocks can take as a quality discovery first comes into view, and others awaiting production for the onset of cash flow. By the time production begins, however, gold stocks typically will have already enjoyed a very profitable ride as that successful outcome increased in certainty, and so the ability to properly interpret the feasibility of a proposed mine project can mean the difference between good gains from gold ... and great ones! Of course, risk ramps up as you travel back along the development cycle, but then so does the potential reward.
Assessments of mine economics come in three forms: a preliminary economic assessment (or PEA) that typically considers a range of potential mine design configurations, a pre-feasibility study that moves a bit closer to a final proposal, and a full-blown feasibility study that typically serves as the blueprint for mine construction and planning. All three types are contracted by independent third-party consultants.
Feasibility studies assess the full range of factors affecting a company's final decision of whether to proceed with a given project, encompassing: optimal mining and processing methods, optimal project scale (expressed as daily "throughput" in tons of ore), initial capital costs for construction, operating costs, the estimated mine life (in years), recovery rates for each targeted metal (the percentage of contained metal that milling processes would extract), etc.
Importantly, the reports also typically convert mineral resources into the more reliable categories of proven and probable reserves. And of particular significance to investors, these studies estimate mine economics on the basis of several metrics that are price-sensitive (meaning they vary according to future long-term metal price scenarios). For investors who are comfortable projecting their own forecasts for future pricing, feasibility studies can generate powerful opportunities to invest in the valuation gap between the various metal price scenarios.
Let's dive into some examples to see what we're looking for as investors. Exeter Resource
In some cases, projects that may have been marginal a few years ago at $800 gold can begin to look solid with gold above $1,500. International Tower Hill Mines'
As a parting thought regarding feasibility studies, I offer this reminder: Size doesn't matter. Investors can easily become enticed by truly massive gold projects like Seabridge Gold's
Like a determination of positive economic feasibility, the often arduous process of securing all relevant government permits for mine construction is another hurdle over which all gold projects must pass. As an investor, getting tripped up at this stage in the development process can prove excruciating. Just ask Fools like me who were long shares of Taseko Mines
Nonetheless, the idea is for Fools to avoid the mistake I made with Taseko and stay on the correct side of anticipated permit application results. I encourage Fools to carefully research any vocal opposition to a given project and to ask themselves honestly whether any aspects of the proposal give them pause. I received an email from Robert Redford recently, asking me to oppose Northern Dynasty Minerals'
In Part 1 of this series, we scanned the globe for some of the most prospective golden real estate that coincides with friendly geopolitical and regulatory settings, and outlined some key aspects of mineral geology. Here in Part 2, we touched upon some important characteristics to watch for within project feasibility studies and permit application dynamics. Click here for Part 3 of this discussion, where we learn how to gauge a miner's all-important potential to expand resources through ongoing exploration, assess the strategic health of a miner's development pipeline, and pinpoint management teams that possess the golden touch.
- Add Taseko Mines to My Watchlist.
- Add AuRico Gold to My Watchlist.
- Add International Tower Hill Mines to My Watchlist.
- Add Kimber Resources to My Watchlist.
Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of AuRico Gold, Exeter Resources, Kimber Resources, Northern Dynasty Minerals, Seabridge Gold, and Taseko Mines. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.