What makes a good and bad gold mining stock

A recent reader of my Global Mining Investing book asked me whether an investment in A1 Consolidated Gold Ltd (AYC:ASX) made sense as an investment. He was 'on the fence'. In this instance, I was a negative for a number of reasons:

Given the name, I knew this project was going to be in the Victorian goldfields, and to be fair, there are some risk avoidance considerations built into this points, but fundamentally, this is not the first place to invest, even if you were to make money. We don't just want to make a profit. If there is a gold boom, we need optimised exposure, or the most upside, so if our gold price forecast is wrong, we still make money.

The problem I see with this company is that they offer:
1. Marginal grades of 5-6g/t for underground mining
2. Risk of under-capitalisation - an upset could cripple them, with a lot of share capital dilution. This project might have a roof collapse which sends them bankrupt, or just results in a great deal of delay and dilution. The boom could pass you by whilst you wait for them to raise capital and commission a mine.
3. Messy small scale 'selective' mining - so they will unlikely get many ounces of gold without a lot of development. Basically you have to mess with a lot of waste to get ore, even if its higher grade.
4. Small companies like this tend to attract less capable geologists who can't get work elsewhere. In fairness, Victoria is a better 'lifestyle' place to work than WA, so this criteria is offered for guidance only. These companies tend to use outside consultants who can be hard to procure in 'booms', which is not currently a problem, and not likely to be so.
5. Seems to be low resource - There is not the type of upside offered as say a mineral explorer in WA.
6. Risk of discontinuous, unrealiable, pinch & swell ore zones
7. Risk of nuggetty gold - This distribution of gold is notoriously hard to predict grade, which means the project will not be trusted by banks, and investors until bulk mining performed, by which time, the investor can only waste for the 'tragic news'. Too risky.
8. UG - better to be surface - I don't know how deep the mining is, but why bother with UG when there are plenty of cheaper gold resources in Africa under-loved. Now, GRY has just struck 4m @ 35-45g/t, and has $62mil in cash and 4Moz of gold besides. So this type of company sitting on a small resource does not make sense.
9. Better to be in Africa with large tracts of land where you find a resource then, like GRY, you find ore 45g/t, then you prioritise that. GRY has probably 100km of prospective strike length to explore...plenty of scope for gold discovery. In Victoria, they might have large tracts, but is it all prospective? Even so, there has already been a great deal of exploration, so less prospective.
10. They are too early stage. They only have a few hundred thousand ounces. Gold is under-loved, so there are even miners like Millenium (MOY.ASX) which are better buying, since its producing. GRY is even better, even though it is not yet mining.

I suggest lookin for companies pursuing projects hosting more favourable geology like Archean type greenstones which are under-explored (Africa, outback Aust & Canada), or porphyry copper-gold projects (Central Asia, Latin-Sth America, PNG, Ring of Fire cordilleras), or skarns, as they are the best propositions.
Vein type deposits won't give you leverage for your money. I like North West Resources (NWR.ASX) - antimony/gold, but still its too small scale, and again its under-capitalised. You might invest them when everything else has moved. These types of companies are left behind....last ones to go in the boom.
Anywhere in African greenstone beltsAlso PNG, Latin-Sth America, Central Asia cordilleras is good too

Investing is strategic. Too many geologists get caught up in 'interesting geology'..much to the annoyance of executives. Mining is about making money...not looking at fascinating rocks. Academic universities like Macquarie University tend to instil these non-commercial values. Fortunately I learned how to make money before I went there.


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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Investment advice in a stagnant market with currency debasement - go where the currency is 'hard and fast'

An old colleague asked me for some financial advice...

Sheldo, I notice that you post a lot of news about the ASX, shares and investing? I am currently unemployed (6 months) yet sitting on some funds from a recent inheritance. I wondered if we could start some dialogue on how to invest money without losing my house and then my balls!!!

Do you intend to learn during your hiatus, or do you just want to outsource funds management? The reason I ask is because I write books about 'active investing', not passive funds management. So I can recommend a stock, but I'd prefer you to get the logic. This is philosophy to me, not just making money. I say 'Risk is managed, not avoided'. So rather than say 'I'm unemployed', I'd prefer you to say, "I'm going to study how to invest' or manage risk..which I say is growing knowledge. To which I would respond, buy my book at www.miningstocks.sheldonthinks.com and I'll offer support as you develop your knowledge. If you don't need some of this money in the next year, today is a good day to buy GRY.ASX at 20.5c. Say $10K worth. If gold price goes as low as $1000/oz, then just build the position. Gold has upside to $2400/oz last time I looked, but given the Dow it might be more like $2800/oz. I think you will know very soon if gold is going to break that $1380-1400/oz level. The US govt says it will end QE. Either way, you have upside. Understand I want to write books, and I write books to sell. Its counter-productive to 're-write history' so to speak...but if you read the book (450pp), and come back with issues/questions, then that is a basis for me to revise the book, and you need only ask me for free updates, or I'll send them. Fair deal. The book challenges 'Modern Portfolio Theory' so its interesting. More importantly, it gives you 30yrs of investing experience in one place which you can share with your children...or are you really gay, and are just coming on to me? :)

Now, the other aspect of what I do is advice people on another type of investment, and that's emerging market property. I am going there in a week if you care to join me. That's the Philippines. To advise that, I need more info. Again this is active, and its probable I would suggest a condo in Manila or outside of it....depending on how much money you have....he...you might have inherited a shoe box of love letters. You'll need to pay cash, so you might prefer to wait until you have a job, depending on your savings. I'd need to look at forex rate as well. But your property portfolio there is a source of leverage. I have a $20 book for that.  A little dated for politics and finance context, but still good buying.

Basically incomes & rents have been rising in the Philippines along with property prices, so yields still good. This is because of lower interest rates, high rates of urbanisation, high 2% birth rate, high remittances to the Philippines. You can make it partially a lifestyle property as well. Sit next to me on the plane and we can yatter on for the 10 hour flight. 

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Profit from mining with Global Mining Investing eBook   Global Mining Investing Community.

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Why you don't need a super fund - Gryphon Minerals (GRY.ASX) prove the point

Now, some of you are probably deciding whether you should go to university and study business or accounting. I can't criticise that since I studied geology and mining engineering, but I also studied accounting , finance and economics. At the end of the day, economics and accounting are not very useful sciences without much 'life experience'. Accounting at least gives you some capacity to 'quantitatively' appraise a stock. But the type of stocks that are suitable for quantitative appraisal are simply not very interesting to me. The reason is that financial ratios are not conceptual or for that matter contextually. They are well-suited for a diversified portfolio of assets. Why would I want to tie myself to others portfolio of assets when as a small investor I have the flexibility to invest in 'best offerings'. This is the 'liquidity trap' of super funds. They cannot so readily invest in small companies like you or I, so in a sense, they present a conflict of interest for small investors like you or I. So why would you diminish your investment returns by committing yourself to low-yielding big companies which offer the liquidity they demand? Good question.

Consider the following stock - Gryphon Minerals (GRY.ASX) - its up another 5% today, though they did fall 10% on opening because gold softened $20/oz overnight. Clearly the market is expecting some consolidation in gold, and not a collapse. Gryphon Minerals will be a substantial producer when it commissions its mine in about 12-14 months. No further capital will be required I suspect given they have their 30% equity in cash. i.e. $62 mil of the $200mil capex. Maybe they will want some extra cash for working capital, but I wouldn't expect a heavy capital raising, and it will be well-supported by institutions, who are making their way onto the register as we speak. i.e. Genesis, a London based fund, with a similar investment strategy to me, is already in there...great minds think alike. 

Historically many funds, which unthinking mortals tend to passively outsource their money to, tend to take position in stocks as I'm selling out. Interestingly, the reason is the lack of liquidity of these small stocks...as I mentioned earlier. Yes they wait until the share price goes up and adequate liquidity arises. Kinda silly right? I've already made 200-300% before these funds invest. I personally think investing is 'supremely too much fun to pay others to do....but you have to learn to love it...otherwise you are motivated by fear, and end up hating a bank. That's not sensible...not that they do not deserve your derision. I prefer to love their idiocy. 

Of course Gryphon Minerals have far more liquidity than some other stocks that I support; like UCL Resources, which is another stock I recently invested in, which made a 200% return after jumping as much in a single day, thanks to an anticipated takeover.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Gryphon Minerals (GRY.ASX) breaks from downtrend

Gryphon Minerals (GRY.ASX) were up 20% this morning as investors returned to gold stocks. We have liked this stock for the last few months because of the upside, its gold exposure, its project interests and its cash position. At the very least that resistance will become support, but it remains to be seen whether it will be tested.

Gryphon promises to be an appealing gold producer in just over a year thanks to its proven and inferred resource base in Africa of over 4Mil oz. The company is cashed up with $62mil, which means that any capital raising is destined to be to finance its other exploration efforts, i.e. Non-substantial. The implication is the prospect of very little dilution from your current equity exposure to $5.6 billion of gold, equal to around $2.4 billion in cashflow over the life of the mine. Converting that into a NPV and discounting for a number of risks, you might expect this company to be worth around $1 billion....before consideration of the commodity (gold) price risk. But this company, which will justify a market capitalisation of $1 billion in a year (after successfully commissioning its project) is worth just $90 million today. So investors seem to be pricing in a gold price of just $800/oz. Given that gold prices rose to the equivalent of $2400/oz in current dollar terms in 1980, you might wonder why markets are so conservative. The reason is of course the spectre of 'global growth'. The argument is that gold is appealing as 'hedge against inflation'.
The deflationary global labour price disparity means that inflation is well under control; at least the type reflected in food, oil, and general product prices. Of course those types of 'speculative investment' assets are not included in this calculation, despite being 'products'. i.e. Gold is a product too...but given that it offers no 'yield' and 'has little industrial use', it is actually the last store of value to rise in value. Gold has been strong for two reasons:
1. All other asset classes are priced higher
2. Gold prices are appealing given forecasts of where gold prices are expected to go
3. The outlook for yields on other asset classes is deteriorating

Now, with interest rates at very low levels, clearly bonds are abysmal investments. This is one of the biggest markets, so you might ask whether the very small gold market has appeal, and of course the answer is yes, simply because any rise interest rates will undermine equities. i.e. Rising bond yields will not help their value, so gold is still appealing. This is ultimately why people are sceptical that the global outlook is positive. Growth until now has been restored through monetary 'QE' stimulus.

So, reflecting on this, we are inclined to see the recent sell-off in gold as either 'technical' over-selling, or manipulation of the market, so that market pundits can acquire positions. We actually expect gold prices to perform even better, and we also expect several other positive events for Gryphon Minerals:
1. Takeover by another African producer wanting to diversify with pan-African risk
2. Expansion of resources given its large acreage along structural corridors
3. Doubling of gold production - this will bring forward cashflows, reducing the applicable discount factor

4. Development of other project interests - no appraisal has been made of these interests given the already substantive upside.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook   Global Mining Investing Community.

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com