The Basics of Investing in Gold Mining Companies

Posted: June 11, 2012 | Author: | Filed under: Gold | Tags: , , , , , , , , , | Leave a comment

Investing in gold is now a fairly common topic, but investing in gold mining stocks is still one that is misunderstood by many. Here, I’ll tackle a few topics that investors must consider before owning a gold mining stock.

Know your location

Mining in Australia is entirely different than mining in Argentina or Mexico or China. Geopolitics is probably the biggest concern when it comes to investing in a gold miner. After all, 0ne can have a fantastic deposit to mine, but if the government taxes the company to death, what’s the point? Osisko (OSK) mining in Canada won’t have the same issues like Randgold (GOLD) which is going through a coup in Mali.  Companies involved in the Philippines like Gold Fields (GFI) and CGA Mining (CGA) are going through taxation issues (but so is the rest of the world for the most part except Canada). Companies in Mexico have to deal with the drug cartels, but even then, some like Timmins Gold (TMM) are so isolated, it isn’t a problem.

Other key questions to ask: What is the government like? Is it socialist? Does it have a history of taking more out of the pockets of the corporations. Is it friendly? Are there labor issues (Usually yes)?

Know the deposit

This is a pretty tough category that involves learning a new science, but for the most part you can get away with a lot of basics.

In my experiences, sulfur presents a whole new set of challenges for every natural resource company. It’s just a stubborn chemical, so in gold deposits, that is why the “sulfides” are called refractory deposits. Sulfides = bad or at least “not as good.” Oxides = good. Obviously this is a big generalization, but my point is to know what kind of material these companies are mining.

It gets very tricky and a lot of these occur together. One example is Allied Nevada (ANV) that operates the Hycroft mine in Nevada, where underneath the oxides (the easy stuff to mine), there are a few billion tonnes of sulfides that could be challenging to mine later on.

The next thing we must examine are grades. The more research you put into gold stocks, the more you’ll find out that grade is sexy! With sulphides, grades are typically very low (anywhere from 0.1 to 1 gram per tonne). Now just think about that for a second.  We are digging a few hundred meters (in some cases a few miles) into the ground pulling out rock by the tonnes to get an amount of gold that wouldn’t even cover the area of your index finger. That’s why when people fuss over these things screwing up in production, you tell them they aren’t lemonade stands! These truly are very complicated businesses, and diversification will help filter out some of these problems, but we’ll save that topic for another day.

Continuing on with grades, let’s compare two companies, a sexy bombshell that is known as Pretium Resources (PVG) versus the red-headed step child known as Seabridge Gold (SA).

The deposits of both companies are located in British Columbia, Canada. Seabridge is pretty low grade. Yes it’s 38 million ounces, one of the world’s largest deposits, but it’s at 0.55 g/t meaning it’s very expensive to get out. Pretium is unlike any other deposit in the world. They are regularly pulling out gold in the ground in the 1-2 kg range. Their biggest ever was an +18,000 gram sample. Keep in mind, companies are typically pretty happy to find samples containing 2-3 grams per tonne and Pretium is finding samples containing 1000 to 2000 ounces. Deposits like Pretium’s Brucejack simply aren’t found anymore as much of the low hanging fruit has already been picked.

Know the mining type

Two basic categories of mining types: 1) open pit and 2) underground. Open pit is just digging a gigantic hole in the ground. Underground is just like how it sounds but then there are a number of different mining types when one goes underground (block caving, long hole stoping, etc).  It’s a much more complicated process and this is where the problems really start to happen. Great Basin Gold (GBG) is notorious for its problems and they are an underground, long-hole stoper in South Africa. Open pits are not without their problems though. Nevsun (NSU) is one I won’t forget for a while. It’s an open-pit operating in war-torn Eritrea and basically a lot of the gold they thought was there, simply isn’t. The stock basically lost over half its value after the news came out.

We’ll pause right here for the moment and continue on with this topic later. But in the meantime, we look forward to your questions.

Email us at the following address: theinvestingoracle@gmail.com

-Terry Woo

The Spanish Bailout

Posted: June 11, 2012 | Author: | Filed under: Eurozone | Tags: , , , | Leave a comment

“España no es Uganda.”

Translated in English, the statement says, “Spain is not Uganda.” According to El Mundo Spanish Prime Minister Mariano Rajoy sent that text message to European leaders just hours before the now Spanish bailout went down.

Spain is certainly not Uganda but it is Greece and it will no be the last European country that requires a bailout.

On Sunday evening there is still speculative information about the details of the 100 billion Euro bailout. What we do know is:  there will be no condition on fiscal policy or structural reforms and the loan will sit on Spain’s balance sheet. This brings up an interesting push/pull; the loan needs to be big enough to convince the market the Spain’s banking issue is addressed while not being so large to jeopardize Spain’s public debt.

This bailout looks like a much bigger version of TARP. As TARP was 5% of US GDP while this bailout is 10% of Spanish GDP.

Below are the main questions:

1) Where will the money come from?

The cash will from the ESM and/or EFSF. Which leads to the main worry: does the EFSF have enough cash to cover the bailout costs? The world’s largest hedge fund, Bridgewater, believes that once it’s time to bailout Italy its game over.

2) Where does the money go?

The bailout cash will go to the FROB, also known as Fund for Orderly Bank Restructuring. Which is a fund-to-fund insolvent banks.  It would seem that the FROB looks like a weaker version of the FDIC.

3) What happens to Spanish sovereign debt?

Spanish bondholders are basically getting their first taste of subordination. After watching what happened to holders of Greek Government Bonds, holders of Spanish debt should run for cover. For more on subordination check out this excellent piece by Zero Hedge.

4) What does this mean for Europe?

This is a giant step for Europe as it is now clear that the bad risks will make there way to the public sector. Moreover, it looks like European officials may have bought a little time. How much time? I’m not sure, maybe a few hours, maybe a month or two.

During the next few weeks keep a close eye on Spanish sovereign bonds because once the short-term painkillers wear off, the market will understand another bailout is most likely needed.

Lastly, the next euro-nation to watch is Italy, as it will require a bailout next. As for the next big European event, the Greek election next week should rile the markets.

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