|The great news about any boom is that 'a rise tide rises almost all boats' - except those that sink by default, eg. Bad grade control, high capital costs, hedging debacle (eg. LAF, SGW in Australia). Keeping it simple. I started researching when I was 15yo. I had no degree then, but if you read enough company reports, you can see the factors that matter. Having degrees has not helped me a great deal with investing. Reading technicals "Market Wizards' by Jack Schwager is important, or the like. Anyway,|
1. Gold content in the ground (more than 1mil oz to be safe, or better still confidence it will be found, eg. orebody not closed, drilling only to 50-70m depth, so likely extensions.
2. Prospective areas, look for companies with >1000km2 of tenure, as more likely to be under-explored area. Better still in Africa or Asia, where virgin areas.
3. Sovereign risk - An over stated problem...rare! In the last 20 years, only Bolivian (strategic) oil assets have been nationalised and gold projects halted by environment concerns in Ghanian forest parks. Companies are negotiating upfront agreements with natives before exploring these days.
4. Entry - Avoid explorers still along way from production, since they need to spend more money, unless they are at pre-feasibility stage, committed to plant construction. Need to watch equity raisings, ie. dilution. Better still if the company has a 2nd hand treatment plant, or access to toll treatment facilities in established gold provinces. 5. Geometry - It takes time & money to access deep orebodies, so look for Open Cut projects. The wider the average gold intersections the better (8-100m) is grade, with corresponding grades of 4 to 1g/t. Larger deposits can tolerate lower grades because more mechnised, less selective. Best if orebody <150m>
6. Exploration - look for geochemical or geophysical anomalies along structural trends with at least anomalous gold, but preferably already some signs of commercial drilling intersections, eg. >6metres at >2g/t. Think about how easy to get out. eg. Are the richest grades near the surface, or deep. Is the ore distribution patchy requiring selective (more expensive) mining?
7. Capital - Watch their cash reserves - avoid dilution to finance project construction.
8. Hedging - Hedging removes the upside and also poses a risk. eg. Lafayette Mining had a mine spillage in the Philippines. The govt closed the plant down, so LAF was loosing $3mil a month on hedging.
9. Risk - The lowest risk entries are often the projects with the highest risks, meaning that the risks are priced in, so they can only go up.
Be strategic. Look for exposures that provide the best upside. The perfect company has a 2nd hand treatment plant (or is close to a plant), $3-5mil in cash, 0.5-1mil oz of gold indicated resources, grades 2-4g/t, 10+ untested anomalies to test, no hedging, few shares on issue, company listed options (to maximise leverage), and is located in Australia or Canada. Get good at this, you will get strategic, being able to anticipate deals.You said or the big companies are already expensive. Bear in mind, that assumes a certain gold price, which can change. I can see gold going at least to $US1250/oz, maybe $2000. There has been alot of inflation since 1980, so adjust that $850/oz high for that. A blue chip gold stock is a yield proposition with most of the risks stripped out. You want risk if you want return. RISK is good! You dont avoid the risk, you understand it, you learn to read it & manage it. Whats risky to you is less risky for me because I know something about gold mining & gold prices that you dont. So learn. The benefit of knowing investment is that you can live freely without being tied to a job or mortgage. Money makes money. Know how to manage it. The best areas to pick are IT (project & capital leverage) and commodities (volatile prices, project & price leverage).
PS: This is an old posting of mine - from Jun'05 - see http://www.gaijinpot.com/bb/showthread.php?t=11552.
- Andrew Sheldon www.sheldonthinks.com