Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Evaluating and Choosing Gold Mining Stocks

Commodities / Gold & Silver Stocks Aug 28, 2009 - 04:40 AM GMT

By: Neil_Charnock

Commodities

Best Financial Markets Analysis ArticleOne of the most important questions investors have about gold stocks is “which is the best stock to buy”?  You want to invest in the next ten bagger, all investors do.  Huge profits that leverage the coming gold price rise are most certainly possible in gold stocks however you are unlikely to achieve this by luck.  Choosing without in-depth evaluation is a recipe for disaster.


I will repeat again – I have never been more excited about the prospects of the gold mining sector here in Australia.  Soon we will see an awesome buying opportunity for the precious metals (physical or ETF’s) and the quality gold mining stocks so I am gearing up in readiness.  This is the time to get the homework and preparation done.

Quick market comment – the XGD still going against the general market most days this week and bounced off a new short-term low.  RSI made a new low for this correction indicating it was oversold but also that we may still be on the way down albeit gently.  This is not a savage correction in the XGD but we did warn it was going to happen and it is still ongoing.  I am watching for the turn around in the charts and see it could potentially come soon due to seasonal factors.

I spoke to one investor last week who was watching a “falling knife” looking at the value – his assumption was that this stock with a plummeting share price is cheap now.  My assumption is that this stock is in trouble and that investment is a high risk.  If he is right he gets a bargain but this is not a wise method to choose a stock.  Different valuation models have to be used, not just price which can be highly dangerous.

Tough Business

Gold mining is tough for the miners and for investors to evaluate.  Education on this subject is so important to making profits as an investor.  I have just done a study with an in depth evaluation of a gold company so I could provide some answers on this complex subject.  It was time consuming and I already had an excellent understanding of the company I chose as the main example.

I spoke to a founding Director, the Information Communications and Technology Manager, the Exploration Manager and the CEO in order to verify facts and research the report.  I went through the web site, tangible assets, EV, ground position, Management skill sets, company reports, broker reports and my own investor education files from the GoldOz Gold Members area to calculate, evaluate the company - and also to compare the stock to its piers. 

Forward earnings were evaluated in depth as part of the exercise – an essential element in profitable investing.  Also touched on were the modern technologies being employed to unearth the balance of the available gold Resource on their ground position.

It is also highly useful to look at comparative advanced operations in terms of resources, cash flow, share price / market capitalization and geology to establish potential should the company you are considering reach that stage of company evolution.  Will it succeed; does it have cash flow or other problems / limitations that could stop progress?   These are vital questions.

The exercise was highly rewarding as I eventually gained the informed knowledge about the geology, mine progress, corporate strategy and finances required to come to any sort of reliable conclusion.  Some non company specific excerpts from the research are offered in this article.

“General comment:  
Astute investors value gold stocks via several benchmarks including resources, assets, production and profitability, life of mine, quality of management and ground position.  These factors point to sustained future growth in share price = investor profits.

The balance sheet indicates financial health and potential yield – how much return am I going to get if I park my capital into this investment over time?  As such we also find debt, hedge book obligations, convertible notes and royalties influence share price too.”

And…
“Distortions in share prices based on general market sentiment also create opportunity, eventually under-valuation leads to over-valuation.  This will be the time we seek to sell and take profits.

Make no mistake though – the single most important factor that drives any share price is money – purchasing pressure.  I am talking about two buyers for every seller (or better), liquidity pouring into a stock in a sustained flow forcing the share price higher. 

This can only result from broad investor / broker interest and media attention.  In other words share price is driven by positive promotion in its various forms.  To achieve this, a stock needs a good story initially followed by a positive information flow and over time it needs a high level of profitability over a sustained period.”

Also…
“General comment: The JORC contained assets are not yet mined and production costs in future years are not yet known – however these assets do point to projected profits and LOM (life of mine) which indicates mine sustainability.  Commodities fluctuate in value which increases risk in future years if sale prices drop along side an increase in costs.  Therefore high margin ore-bodies that can be mined over extended mine life after capital expenditure is returned are more attractive.”

When establishing a potential gold endowment of their assets looking forward…

“When you add historic gold production to the current un-mined resource this field has already established an endowment of 4.52M oz in total.  I am saying that a total of 7.5 M oz is quite possible with sufficient drilling and use of the right technologies.  Archean Greenstone Belts of this scale typically average about 7-10M oz.  This is a global average across Russia, Canada, Australia (Kalgoorlie, Leonora, Noresman, St Ives, Paddington etc), Brazil & China.”

When looking at various balance sheet questions and financial aspects…

“Assets of approx $230M and short term liabilities of $20M gives a balance of $210M by this valuation model.  Forward earnings however suggest a $30M gross profit which gives us a current market capitalization of 2.5 x gross profit.  These earnings are current however they are not guaranteed to be on-going short-term due to the mill refurbishment / start up risk.”

The whole 13 page report is linked at the end of this article for interested investors and at the top centre home page on my site.  It is written in plain English for education purposes because I want to communicate some skills and knowledge – there is no point in being illegible because you don’t get the message across. 

On this point I feel many mainstream investors run away from investment in the mining sector because they don’t understand the jargon.  I must admit is can be daunting but understanding the nature of the deposit is essential.  Over the years I have found a most useful trick – simply gaining the most important piece of data about the deposit.  Of course I have to understand the deposit to a far greater degree but this is an indicator that is important.

This equates directly back to cash cost but learn to look at the reports carefully and workout how much actual cost is being capitalized.  Otherwise high development costs can be hidden distorting the real profitability picture.  Are the development costs ongoing or just an initial pain in the balance sheet?  Some deposit types are just troublesome and so are some sovereign states.

But generally you may see high or low grade ore yielding similar profits and this will give away the end game.  It’s about profits.  We are offering a limited discount subscription for Gold Membership at present – offer runs out on 4th September so consider your timing if you have interest.  Here is the link promised above to the offer and free educational report.

Good trading / investing.
Regards,
Neil Charnock

www.goldoz.com.au

GoldOz is currently developing a Member area and has added further resources for free access. We have stepped up our research and stand by to assist investors from all walks of life. We sell an updating PDF service on ASX gold stocks from only $AUD35 for 3 months – the feedback is grateful and enthusiastic because we are highlighting companies that have growth potential and offering professional coverage of the sector. GoldOz web site is a growing dynamic resource for investors interested in PGE, silver and gold companies listed in Australia , brokers, bullion dealers and other services.

Neil Charnock is not a registered investment advisor. He is a private investor who, in addition to his essay publication offerings, has now assembled a highly experienced panel to assist in the presentation of various research information services.  The opinions and statements made in the above publication are the result of extensive research and are believed to be accurate and from reliable sources. The contents are his current opinion only, further more conditions may cause these opinions to change without notice. The insights herein published are made solely for international and educational purposes. The contents in this publication are not to be construed as solicitation or recommendation to be used for formulation of investment decisions in any type of market whatsoever. WARNING share market investment or speculation is a high risk activity. Investors enter such activity at their own risk and must conduct their own due diligence to research and verify all aspects of any investment decision, if necessary seeking competent professional assistance.

Neil Charnock Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in