The best gold miners
When I decided that I should invest in gold mining stocks I began exploring all ends of the gold mining world. You cannot buy shares of a single gold mine. You need to buy the stocks of gold miners that operate one or more gold mines.
Before you want to buy a certain gold mining stock you need to know everything about the gold mines they operate and the gold mining company itself.
I make my selection upon a myriad of criteria. There are so many gold miners and even more gold mines. Of course I only want to invest in the best of them. I am looking for gold mining stocks with a limited risk but with good chances on a high return.
It turned out to be an exhaustive study and many gold mining stocks did not make it to my shortlist. Here I will share some of the criteria I use in determining whether a gold mining stock is worth buying.
The management of a gold miner
Generally the management of a gold miner consists of 2 important departments: the gold mining experts and the financial experts. That you need gold mining engineers to operate a gold mine sounds obvious.
But do not underestimate the financial department which weighs much heavier on the company than you would see at other businesses operating in other markets.
Starting up a new gold mine requires enormous investments. Attracting enough capital is crucial for a gold miner. They need to buy land, exploration rights and so forth.
In most cases these lands and rights are in the hands of specialized gold exploration companies. In most cases these exploration companies will be swallowed up by the gold miner with all the rights and lands they possess.
Then there is the sale of gold. Gold miners may decide to sell all the gold in advance to streamers or royalty companies. One can also wait for a higher gold price. A gold mine is a rather complicated business. You will have the gold mine itself but you also need a factory that will extract the gold from the rock.
I always look at the level of experience of the management team of a gold miner, for which company did they work for prior to this management position. Only a well experienced management team will be successful in operating a gold mine. If the management of a gold mine is coming from another successful gold miner than that will be a big plus.
How many gold mines do they operate?
If a gold miner only operates 1 gold mine they would be too dependent upon this single gold mine. A myriad of problems may occur when operating a gold mine such as labor strikes, technical problems, acts of nature and problems with the local authorities. If you operate 1 gold mine and it is affected by such troubles the whole gold mining company is at risk.
There are a few very large gold miners that exploit many gold mines. Those companies are not interesting for me. They are limited in growth potential. If a gold miner already operates more than 10 gold mines it will be hard to double this amount. It is not that often that a new possible gold mine is being found.
One can then only grow by takeovers. If the gold price goes up these takeovers will be too expensive. A large gold mining company is therefore limited in opportunities for growth. Add to that the life cycle of a gold mine which is often less than 10 years.
Just to keep production on level it will take too much trouble to operate still more new gold mines. All these reasons make me want to buy only small to medium-sized gold miners. Just big enough to limit the risk, but small enough for their growth potential.
Where are the gold mines situated?
You can find gold mines throughout the world. Large gold mines with relatively low operating costs are mostly situated in South America and Africa. Smaller gold mines with relatively high operating costs are to be found across Europe.
In Australia, the US and Canada you will find many gold mines with relatively high operating costs. Asia in on the rise as a gold mining continent.
Seeking the balance between risk and return is the main challenge. A gold miner with lots of gold mines in Africa and South America may generate high profits. But here there are also risks of local authorities shutting down mines, wild labor strikes, sickness and epidemies and general unrest.
Gold mines in other parts of the world do not have similar risks. But the lower gold production and higher extracting costs hampers returns in these countries.
What I want is a good mixture of gold miners I buy. Generally I spread my risks between some gold miners operating African and South American gold mines and some active in the US and Canada.
Each gold mine has its AISC which stand for All-Inn Sustaining Cost. This figure gives the needed total cost to mine 1 ounce of gold. If the AISC is higher than the current gold price the gold mine is not profitable. At most gold mines the AISC lies between 500 and 1.000 Dollar per ounce.
This 1.000 Dollar amount is the upper limit for a gold price of 1.200 Dollar. From this fact we can conclude that one will operate a gold mine only if one can make a return of 20%.
This is a very important thing to understand! In the case of a rising price of gold a sleeping or not active gold mine may instantly become profitable.
A gold miner who owns such sleeping gold mines may set things in motion quickly which makes such a gold miner very interesting if we expect a rising gold price.
But the AISC offers more insights. Of course we can compare different gold mines based upon their AISC. But beware of a common made mistake. In which gold mine do you want to invest, one with a lower or higher AISC?
Most investors would answer that question with an AISC as low as possible. But that is not correct. If the gold price is going down, a gold mine that has a low AISC will still be profitable. But it will make less profit and the share price will go down albeit less than a gold mine with a high AISC.
If I am expecting a lower gold price I would never invest in gold mining stocks to begin with. I am only interested in investing in gold mines when the price of gold is likely to rise. When I made that decision I would go for the gold mine with the higher AISC.
It works as follows: Suppose the price of gold will go up from 1.200 Dollar up to 1.400 Dollar. A gold mine with an AISC of 500 Dollar will not make a profit of 700 Dollar but a profit of 900 Dollar per ounce.
Instead, a gold mining stock with an AISC of 1.000 Dollar will not make a profit of 200 Dollar but a profit of 400 Dollar per ounce. That is double the profit it had!
With a similar price-earnings ratio the gold mining stock may also double. I always take a good look at the AISC before I will invest in a gold mining stock.
Loss or no loss?
At a low price of gold some gold miners may be loosing money. It is always good to know why they are loosing money. There may be some structural problems that cannot be solved quickly. In going through the quarterly reports I will look for these problems. If things are structurally wrong I will not invest in these companies.
If the loss is directly related to the lower price of gold such a gold mining stock could be very interesting. The stock will be very low due to the loss. If the gold price goes up and the loss will transform itself in a handsome profit the value of such a gold miner goes through the roof.
Therefore it is worth the time and energy to go through the financial reports of gold miners. I did that already. Many companies did not stand my test. The small number that withstood my scrutiny may produce a very nice return whenever the gold price goes up.
What is the lifespan of a gold mine?
Gold mines used to have a lifespan of 50 years or more. Nowadays it only takes 10 years to mine all the gold from a smaller gold mine. Large gold mines have a lifespan of 20 years or more.
It is very important to learn how long a gold mine will still produce gold. You do not want to invest in a gold miner that only operates gold mines that are depleted within 2 years.
Are there any large shareholders?
With normal listed companies this question is not that important. It is however with gold mining stocks. In the gold mining business it is common practice that larger gold miners invest in smaller gold miners. Generally they own then a 5% up to 30% share of the available stock.
It goes like this. A gold mine is very capital intensive. There is always a constant quest for money and investors. This is especially relevant for the phase that they have found gold but the gold mine is not in production yet.
They will seek money for exploitation on the basis of measurements. We are talking big money here, in many cases they need hundreds of millions of Dollars to start up a gold mine.
The common way to get the cash in is by issuing shares. Very large gold miners are always looking out for new gold mines. By buying a share in a new gold mine in an early stage they can get in at the cheapest point.
By owning the stock they can get their hands on all the data of the mine, learning more about the exploitation of the mine and deciding whether they want to add shares to this mine.
For me it is a big plus if a large competing gold miner has a share of another gold mine. They have all the know-how and experience to see whether the gold mine has a chance of “going for the gold”.
If needed they can share some advice and offer a helping hand. If some problems occur when the gold mine is in need of additional capital they can supply that in exchange of a larger share.
It will happen often that eventually they will buy the complete gold mine leaving each and every initial shareholder with a nice return.
How long is their company history?
Many investors regard investing in gold mining stocks as investing in high risk companies that may go down any moment. That is absolutely wrong. Investing in gold mining stocks is speculative because of the high volatility. But gold miners are by no means companies that are balancing on the cliffs of going broke.
Many gold miners have a history that goes back many decades. The newer names that do appear are often made up of a merger between several smaller gold miners that also are in the market for decades. Mergers and acquisitions are more common than in other markets.
Bankruptcies do not occur often. A gold miner may turn a loss and get into troubles for different reasons. But as long as they own mines that contain gold a takeover is more likely than going bankrupt.
If a gold miner exists for decades I will see that as a plus. If it is originated due to a merger with other companies I do not see that as a problem. If the gold miner’s history goes back for but a few years I would be cautious.
How many gold mines are in start-up phase?
As gold mines have a diminishing lifespan it is important that gold miners have some gold mines in start-up phase. It takes approximately 7 years between the moment of finding gold and going into production. By the way, it is not necessary that a gold mine already owns a gold mine in start-up phase.
It is very common that gold miners own shares of gold miners with mines in start-up phase. Sometimes they will operate the mine together. Larger gold miners often acquire other gold miners to own mines in start-up phase.
Of course takeovers are more expensive than owing new start-up phase gold mines by themselves. If a gold miner owns some mines in start-up phase I regards this as an advantage.
How much land is in exploration?
Before a gold mine may be started up one needs data. That will cost money and time. It all starts with buying the rights to a land. If drilling shows that the land contains gold the land will become expensive of course. One can choose to begin a mine on their own.
It is also common that they will sell the land or the rights in order to free some capital. It is always a big advantage if a gold miner owns land in research.
Of course it matters whether this land is lying in a promising region. A bigger advantage would be if drillings already proved that gold is underneath. Then it has become a valuable asset.