Gold in the ground we stack up well31 Jan 2020 13:07
There is a plethora of companies to choose from in all segments of the resource sector. For any speculator, the challenge is to separate the many pretenders from the very few contenders. This is an especially daunting task for the retail lay investor. In this musing, we provide insights based on decades of experience evaluating companies and their projects.
We examine a 24-year takeover history of advanced gold explorers and developers to determine the real value of gold in the ground and develop a set of criteria for assessing any company and its flagship project for investment. Analogous to the major miners, we find that the quality of ounces of gold is far more important than the quantity of ounces.
All junior resource companies can be evaluated and ranked utilizing four key criteria:
Share structure: should be tightly held with significant holdings by insiders and management.
People: should have technical expertise and experience with past successes and not a series of failures.
Project: should have favorable geology and geopolitical jurisdiction with an experienced and successful geological and engineering team.
Working capital: should have significant cash on hand and/or the ability to raise funds without severe dilution.
Many analysts, money managers, newsletter writers, and pundits promulgate the idea that management is the most important criteria for speculation in a junior resource company.
Cipher and I vociferously disagree. We cannot recall any advanced explorer or developer taken over for the attributes of its management.
We submit that Project is King in evaluating any gold company for speculation or acquisition.
An early-stage explorer has no tangible value. The company’s market capitalization is simply a speculative valuation based on investors’ perception of its management, projects, and potential for share price increase.
The successful junior exploration company makes a gold discovery and drills it in sufficient detail to table a mineral resource estimate. Once there is an in-the-ground resource, an informed valuation can be assigned to what has become an advanced explorer with a gold deposit.
To become a potential developer, the company performs engineering studies on the resource to determine the amount of gold that can be converted into economic reserves (ore). Once reserves are quantified and assigned an economic value, the company can either raise money to build a mine or sell the asset or a portion of it to another miner.
At any juncture in this process, the real value of said mining project is derived solely from the level of confidence that it will produce a quantity of ounces of gold at a profit in the future.
So how do we evaluate a gold project for possible investment?
Both Cipher Research and I employ a peer valuation model based on the value of gold in the ground. My methodology is simpler than Cipher’s, which employs a detailed technical and financial analysis.
Here’s the b
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