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Why Is It So Difficult To Make Money In Gold & Silver Mining Stocks?
From the Archives
Originally published December 21st, 2004
6818 words - Reading time : 17 - 27 minutes
( 5 votes, 4/5 ) Print article
 
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Before I receive tons of e-mail flames, daggers, and brickbats, hear this: I like gold/silver mining stocks. I manage many THOUSANDS of shares of several VERY CAREFULLY SELECTED companies. Some you know well, some you have likely NEVER heard of. Some I trade/sell when the profit target I sought is reached, others I hold until kingdom come. If I make a bad choice, I quickly cut the losers from the stable. PAY ATTENTION: I will take a locked-in, KNOWN LOSS over any "wait and see, she might recover" nonsense ANY DAY. Some stocks are clearly suited to trading in and out of, with caveats, while others are only good if you hold them forever. NEVER treat all gold stocks the same by holding them all or trading them all. If you are very conservative and want to sleep at night, then, in the current phase of our very young bull-market in metals, it is OK to HOLD them all, for now. I recommend selected offerings to many, but not all, of my clients. I am NOT your advisor, so please don't e-mail and ask for specifics. You couldn't pay me what I am worth…you know; you can't get around the minimum wage laws and all that. The clients that I tell to avoid stocks are commanded to hold bullion coins in the amount that is right for them and their objectives. I don't know yours.

 

Many financial advisors and monthly newsletter gurus have plenty of industry knowledge, street smarts and are excellent writers. I love their sense(s) of humor and acerbic, mercurial, esoteric, acrimonious and even platitudinous witticisms. (I throw these in so maybe you will grab a dictionary instead of writing me a nasty e-mail…Wow, all this great advice and a FREE vocabulary lesson, this guy is too much!). But I often pay more for their literary talent than their market savvy. I often feel that something is missing. Of course, Dan Denning at Strategic Investment is excluded (note: this is an uncompensated, shameless plug). I find myself either ripping apart the envelope of the newsletter, or getting out my trusty 10 power magnifier hoping and believing there has GOT to be something else still hiding in the envelope. There just has to be something valuable hidden in the fine print…AAAACK!…no dice…I paid TWENTY FIVE BUCKS FOR THAT?!? Financial WISDOM is a very scarce commodity indeed. Even rarer than a "I hope I get a home run ten-bagger with this one" junior/exploratory miner. I offer what I believe is a bit of wisdom. For free. What other advisor/broker/guru ever gave you for free that which even compares with what we provide? Your only investment is the time it takes to read the rest of this. If you're a speed reader, you will assuredly get your money's worth. If you're still "hooked on phonics", I apologize in advance. The cheerful optimists say "the best things in life are free", while their anti-matter counterparts, hiding in the gloomy clouds of cynicism say: "well, that stuff was worth exactly what you paid for it". You decide.

 

With all the hand-wringing about why the "blankity-blank gold and silver stocks are way behind bullion" currently festering, we seek to calm some of your fears. Go to Hollywood with Frankie and Relax. Take a breather from stocks and pile into physical for a short while. At least with future investment funds. Hold your existing stocks. Actual, fully paid-for, low-premium bullion coins in your tight little hands are always a safer investment, especially so for the smaller capitalized/beginner investor. Gold and silver coins may not be quite sexy enough for many investors, but I'll take their girl-next-door beauty everyday over any sultry siren promising more than she can deliver. As long as we know the stock risks and their potential rewards, they are FUN to play with. So, let's all pile into the sandbox. Watch out for the evidence of kitty cats.

 

Let's take a look at the long, long list of things that have to go exactly right in order for you to even have a cool, shiny gold coin in your sweaty little palms. Join me as we plunge hand-in-hand down the mineshaft:

 

  • You have to find gold, first. It isn't everywhere, at least not in "profitable" amounts. I can take you on a hike to many of the U.S. western states and let you stand right on top of $10 million dollars worth of gold. Before you make your reservations and buy a shovel, let me point out that it would take $20 million to get it out of the ground, so it stays there. At least at today's prices, and likely for several years worth of price increases to come. While we all would like to simply reach down and pick up placer or nugget gold right off the ground, it isn't anywhere near that simple. Big chunks of gold are rare. Tiny, tiny pieces (flakes and sand-size particles) and grains invisible to the naked eye are common. It takes experts and years of experience to recognize potential ore bodies and see all of the competing, complex and inter-related factors clearly enough to even bother to drill the first hole. It is an art, and there are far too many paint by number geologists and not enough da Vinci's. This is the reason why the geologists and consultants who have successfully navigated the minefields needed to bring a dirty pile of rock all the way to profitability can be counted on about two hands. And they are well known and in great demand. For every 10 phone calls they get from a startup, they return one. Most geologists spend their entire career without ever finding a "profitable at the current gold price" ore body. Pay attention. That's a hint. Your chances of ever making money on an explorer are greatly increased if these field marshals are on board. Especially if they have put their money where their math is by supplying their own shekels along with their skills.

 

  • Gold is sometimes found in veins of quartz (you know, silicon dioxide, or another form of beach sand) where the gold is "massive" and can be seen with the naked eye. These lovely little strips, ribbons or flakes of yellow payola are found with native silver (bonus!) and various sulfides of copper (another bonus), lead, and antimony also in the host rock. Also common in places where gold can be profitably mined are ores containing microscopic sulfides and tellurides of gold, sometimes with other quite nasty interlopers we don't want, like arsenic. All of the other things may be useful and valuable, but we mention them for this reason: It cost more, sometimes a great deal more, to separate the things we don't want, at least not primarily, from the gold. Some of these other minerals can be separated and sold at a profit; profit which clearly subsidizes the cost of the gold extraction. There are even some mines where the copper is so rich and the gold is an "accident" that the gold is sold to subsidize the cost of getting the copper. A great portion of mining engineering has been devoted to optimal techniques to separate the "good" from the "bad". At low cost and safely for the miners, the environment, and the marketplace. Some "Rube Goldberg on crack" contraption may be clever, but it probably won't pass mining inspection.

 

  • All those other things we don't want often force the design of the ore processing facility and often the method of mining. In some cases, the engineers have no flexibility. They have to do it one way and one way only. This lack of flexibility is expensive and adds overhead burden to the net cash cost per ounce finally recovered. In many instances the ore from the same mine has different grades or a mix of different mineralizations. This requires expensive pre-sorting or pre-separation in order to feed it to the correct "next step" in the process. The mine has to be designed around everything they expect to process and this increases the cost enormously. Gold is often found near the surface but may follow veins below even several miles or more. Durban Deep in South Africa is currently chasing ore 2 miles below the surface. This is outrageously expensive, if the gold ore wasn't rich enough to justify this subterranean maelstrom it would never happen. The host rock may be more or less brittle and fracture or collapse as the ore is removed. This restricts how you can take the ore safely. You can't dig big, deep trenches without lots of expensive wood/steel lattice work added to reinforce the whole structure. In some mines, the vein or mineralization still runs onward, but they have to leave it in place because going further would ingloriously bring down the whole shebang. In some locations, they also are required to intentionally cave in the whole thing when closing the mine to reduce danger to curious explorers. Some of this gold may have been initially included in estimated reserves which would have boosted the aggregate share value if removed, but ultimately was simply left in the ground to the stockholder's dismay. We will discuss "proven/probable/inferred" reserves and resources later. Of course in many parts of the world there are much more, shall we say, "liberal" mining codes than the costly US rules. Even if you can simply run to the next village and replace all the "brave workers" who were victims of an adverse demonstration of the laws of physics, it is still expensive. And terribly politically incorrect to attempt to squeeze out every ounce at the lowest imaginable price. You have to spend a lot of extra money to do it "right" in both a technical and moral sense.

 

  • Once an area with good potential is discovered by examining the surface rock, etc., it must be drilled to get a good idea of just how much gold is in the area. How deep is it? How large (surface acreage) is the area that contains gold beneath the surface? What is the surrounding rock type? Can it be blasted, drilled, or forced out with a high pressure water-hose? (You gotta see this in action; it's a fireman's fantasy!). A detailed geological map is made, nowadays using GPS receivers, to plot in detail every feature on the surface. Geologists, mining experts and various expensive personnel like chemists, metallurgists, ore processors, and plant engineers may study these initial results and mappings for MONTHS (getting paid everyday by YOU) before they even drill the first down hole. Wow, the cash injection from that first 10 million shares at a dime a share IPO is gone, and all of the experts with "consulting service invoices" in hand ain't even off the bus yet! "Mother Nature" has had her big strong fists around her precious bounty for a long time; she's not going to yield it to your tiny weak fists without a worthy battle.

 

  • The best way to intelligently and honestly determine just how likely it is that any "ore body" will be mined profitably is to sink some drill holes. You can of course use a backhoe and dig shallow trenches, etc. as a starting point, but you HAVE to drill to do it right. This isn't cheap; these holes are not bored willy-nilly. Careful study and instinct lead to the selection of the drill sites. It can take weeks to drill a single hole after setting up the heavy, expensive rigging, especially if the area is remote or the terrain is anything other than flat or very gently sloping. You can imagine the drilling complexity along the side of a steep mountain deep in a jungle. Drilling holes right in the midst of an ore body with measurable surface gold will tell you the most important thing you need to know: Does this gold extend below the surface? If it does, just how deep does it go? And just how "rich" is the deposit? There might be "some", but not "enough" to be profitable. If we drill straight through a shallow surface deposit and find nothing, we know this gold has likely been deposited here after being carried away from somewhere else through weathering and erosion, earthquake hiccups, volcanic eruption or via ancient water courses long since dried up. Then you go looking for the "somewhere else". It may lead you to someone else's claim just up the mountain slope. Too bad. It was fun while it lasted.

 

  • Rotary type drilling is relatively expensive compared to "diamond core" drilling, which is really king. The rotary drill technique loosens and scatters the earth. It also breaks up the rock allowing inspection and assay of the sample. Assay refers to the process of determining very accurately just how much actual gold is in the sample and is discussed in more detail later. Diamond tipped core drilling is the most versatile and expensive, but gives an excellent indication of just how the gold ore lays in the earth. Knowing this can save a great deal of time and money during the extraction process; only the minimum amount of overburden will have to be removed and processed. Just like taking x-rays and MRI imaging before "cutting", the surgeon minimizes damage to surrounding tissue and speeds the healing process. The diamond drill uses a circular, hollow bit from about 1 inch up to about 4 inches in diameter. Water is pumped into the hole to lubricate and cool the bit as she grinds deeper. The ore sample is trapped in the center of the bit as she goes lower. External sludge remains outside the drill bit and is pumped up and out, then discarded. The good stuff you want is tucked safely inside the drill bit. The actual process is much more complicated, but you get the idea. The core sample is carefully tagged and labeled to match it up with its exact location on the geological survey maps. The core is placed in special storage tubes or compartments and VERY carefully guarded for two reasons; to protect the integrity of the sample and keep competitors and "spies" from knowing just what you may have found. Oh yes, exploratory drilling often takes many years, maybe a decade or more for a large ore body before everything can be fully analyzed to determine if it's going to ever be profitable to rip the metal from the earth. Cash ponied up from stockholders via IPO's and private placements, venture capitalists, banking concerns, etc. is being burned throughout this very long process. Roughly 97% of all discoveries never graduate from an exploratory dream to a producing mine; they succumb to infant mortality even though tens of millions of your dollars were spent in a heroic but futile attempt to save her life.

 

  • After honeycombing the earth around the property through drilling we have a good idea about the distribution of the ore. The more holes you drill, the more it costs and the longer it takes, but the better the picture of just what you have found. We will likely know roughly where veins and mineralization pockets start and stop, which way they run and how deep they go. Some drill holes may show good yields while others show little or no gold in that "plug". It is VERY important that the drill intersects the ore pocket at right angles to its "run" or "lay" in the earth so the thickness of the seam can be accurately determined. Drilling at any other angle may lead to HUGE errors in the calculations about just how much golden pay dirt is actually present. These HUGE errors can lead to the completely erroneous assumption that there is much more gold present than in reality. If these dubious results are published too early and lead to massive buying of the stock, you will have a NASTY surprise later in the drill regimen as these pockets are more clearly defined with subsequent drilling. The area is then divided into "zones of occurrence" typically to classify them as low grade or high grade regions. This is kind of arbitrary and relative. An ore body with many "low" grade zones can be profitably mined if the gold is close to the surface, easy to get to and the mineralization is amenable to simple mechanical and chemical separation of the gold from everything else we don't want. By the same token, a mine with easy to get high grades can die early. All the cream is scooped up when the gold price per ounce is low; it's the only portion of the ore reserves than can be extracted profitably when gold prices are low. This will kill the mine. They will have to replace their reserves through new discovery (outrageously expensive and hard to do), junior acquisitions (very expensive) or mergers with rivals to survive. Otherwise, they die. Cash flow or dividends from that stock are GONE long before you wanted them to end. The stock price may plummet; you won't even realize a much sought after capital-gain profit through stock price appreciation.

 

  • What is all this mumbo-jumbo about proven, probable and inferred reserves or measured, indicated and inferred resources? This is one of the most significant bits of information when considering if any resource mining company WILL EVER BE PROFITABLE. Important caveat: All jurisdictions do not define these terms equally. In the United States the SEC prefers one set of definitions that must be adhered to when quoting ore discoveries in press releases, prospectuses, quarterly reports, etc. Canada has another set of standard definitions, which are different from those of Australia/New Zealand, which are very much different than the rest of the world. The definitions have VERY specific legal import and interpretation relative to risk disclosure and fraud. The reported accuracy of the "ore richness" terms often becomes the central point of any nasty post-bankruptcy litigation. All slices of "truth" in reporting are not created equal. It is very difficult for even an experienced geologist to make relative comparisons between mines in different parts of the world using the data that is reported. For example, in Canada these are the standard terms and their meanings:

 

 

    1. The term "Resource" is used for exploratory and prospecting ventures that are not yet producing or even close to producing. This is for the "dirty pile of rock" that looks promising. That's it; nothing else is really known, so we call it a "resource". Resources are classified as measured, indicated, or inferred. If it is unknown, it has to be identified as unknown. Combinations of all these categories are permitted. Definitions:
      • Measured: The thickness, grade (in grams of gold per ton of host rock), distribution and extent of the deposit is "fully" known, or at least with great statistical confidence. Where the ore starts and stops in every direction should be "known". Many, many drill holes and assays are completed and analyzed. Relative concentrations of gold ore to host rock and overburden are "known".

 

      • Indicated: Only a "few" drill core samples and assays of those cores may be completed and sufficient to calculate tonnage and grade. Inferred projection of the "goodies in the ground" at a measurable distance away from the drill holes is permissible with limitations. It is very expensive to drill every few feet, so you have to make reasonable assumptions about what is hidden between the drill holes; it may be a bonanza, it may be nothing.

 

 

      • Inferred: Usually only crude, high level ground survey or statistical "sampling" of the area has been performed. Not enough actual testing has been performed. "Gee, it kind of looks like that outcropping way over there has some gold in it too; it looks like it starts here and continues all the way".

 

    1. The term "Reserve" is used only for mines that are actually producing or very near that point. Much more is known about the richness, depth and expanse of the ore body. Drilling is complete and assays have been verified. Reserves are classified as proven, probable or possible.

 

      • Proven: The actual entire ore reserves are stated explicitly in terms of the mineable tons. The chemical and metallurgical properties of the mineralization are very well known and documented. The mining method is clearly identified and optimized. The estimate of the "mine life" before resources are exhausted is extrapolated. All of the supporting infrastructure, ancillary requirements and capital costs are identified and indexed to expected price and "net profit" per ounce. This is the most important category and should always be carefully analyzed when picking a potential stock for inclusion in your portfolio. Almost everything else is a "sales pitch". You've been warned

 

      • Probable: Only the mineable ore grades and tonnage are stated. The vein thickness is known and the way the gold ore lies in the ground is also known fairly well. Where mineralization starts and stops is reasonably estimated. This is often estimated from following industry accepted and permissible "ethical" procedures after drill results

 

 

      • Possible: This is a big estimate of how much gold might be here; it is sometimes referred to as "potential" How many of us know people that never lived up to their "potential" for one reason or another? Same thing here. It may be no more than some geo-pseudo-scientific guess based on little more than review of earth mapping satellite imagery or surface surveys.

 

    1. The ore can migrate from one category to another over time as the deposit is better measured and understood after more drilling and extraction is completed. Any given "zone of occurrence" can have only one classification at any given time. Lodes can turn out to be either richer or leaner than initially "guesstimated". It is NEVER an exact science, errors are inevitable. A simple decimal point higher or lower in any mathematical measurement can be the difference between profit and failure.

 

  • Dirt and rock are heavy. Well, duh! Moving tons and tons of earth or overburden to eventually get a few grams of gold is common. One ounce of gold is about 31.1 grams. 10-20 tons or more, often much more, of earth will have to be completely processed to yield this final ounce. If it requires about 250 bucks of "all in cost effort" to perform this metallurgical magic and the metal was sold into the open market for 450 bucks, this only yields 200 bucks "profit". Be careful when you forget this by thinking "gee, a million ounces of proven reserves; this bad boy is worth 450 million". She's not. She may be "worth" far less than 200 million.

 

  • Machinery to dig, drill and transport ore is expensive and often leased during the early years of a start up. They have to finance the payments of expensive machinery forever or burn start-up capital (provided by YOU via the "initial offering") at a rate that would even scare Bill Gates. The first hundred thousand ounces produced often have to be sold before the cash flow every common-stock investor is seeking even begins to materialize. The bankers, creditors and major financers always get paid first. Big machines require big energy. Big hauling trucks use up lots of diesel, diesel which is going up with the price of oil due to an ever more worthless dollar and explosive Asian demand. Ore crushing machines require lots of energy; often electricity. Getting electricity from the nearest generator all the way to the mine processing facility requires ground clearing, transmission wire and tower installation, and substation power step-down facilities which are all extremely expensive. Electricity generated from non-hydroelectric sources is also rising rapidly in cost. Even coal-fired boiler/steam turbine power plants are paying more for coal because China is sucking up every last briquette. Labor-wage inflation cost push has not hit the US, yet, but it is a problem where the local currency is strengthening relative to the nasty little US dollar, which is everywhere. (Isn't it amazing that penalties show up everywhere, everyday and in every form because of the worthlessness of the dollar?). Mines get fewer units of local currency in exchange for the gold they sell in declining value US dollars, even though the gold price is rising in those same dollars. They have to pay locals for supplies and labor in this harder to come by (relative to the dollar, that is) national currency. These are only some of the reasons for a drop in profitability in many mining operations even though the market price of gold is increasing.

 

  • With all of the countless rules, laws, increasing environmental regulations (with stiff penalties and production delays for infractions) and ever growing national tax/royalty levies, I believe exploratory mining operations will decline in many parts of the industrialized west in the future. I expect many of the Yukos-type problems that occurred with Russian oil oligarchs to spill over into every other natural resource in the "rising from the ashes" golden Phoenix we call the reborn Soviet Union. I personally avoid operations completely or largely dependent on the "continuation of democratic rule of law and protection of free-market business interests" in locales where this is becoming an ever more naïve assumption. Ignore these geopolitical shifts to your own peril. In the third world, on the spot, impromptu inspections by the local mining chief, who is of course, the village mayor's brother-in-law, always seem to find something that is a no-no. Shakedowns and protection money payments are common in many smaller operations. So is claim jumping by squatters who are merely a nuisance. I wouldn't want to pay the same guy every month several thousand dollars to go away. Third world mine security officials are often more "creative". They might pay him the first time. The second time he will accidentally fall into an abandoned mineshaft.

 

  • In US territory, the EPA is merciless. If you have submitted a mining plan that is approved for say, three cyanide leaching pads and well, you have four, that can be a $100,000 math error, not counting the down time for the facility if something more egregious is found. And oh, that cyanide stuff is very nasty. Cyanide is very inexpensive to buy, but very expensive to use because of all the process control and clean up costs after its use. Newmont currently has a lot of problems in Indonesia; prison sentences for high ranking in-country corporate officials are being considered. Even if it's just a sophisticated shakedown it will directly impact their bottom line. Newmont can handle it and recover; many explorers or juniors couldn't. Cyanide is both a dream come true in gold extraction as well as your worst nightmare. It's heinously toxic to people, plants and possums. Like most things in nature, we have to take the bitter with the sweet. Remember we used the term "sulphide" mineralization in our first bullet? One of the reasons that "sulphide" ores are economically (profitably) mined even with relatively small concentrations of gold is that the gold that is present is easily removed in a simple chemical reaction between gold and cyanide. In a typical leaching pit, crushed rock is piled high on clay pads with plastic liners. The rock is sprayed with a liquid sodium cyanide solution until it is thoroughly wet. As the liquid snakes it way to the bottom of the pile, it combines with the fine particles of gold very easily (in many cases up to about 97% of the gold is collected), rapidly forming a "mechanical mixture" of auriferous sodium cyanide. This mixture is heavier than the surrounding rock; under the force of gravity (gravimetric separation), the gold rich compound migrates to the bottom of the pile much like the way that water sinks below oil in such a mixture. Or that nasty stuff in the bottom of the salad dressing bottle. The bottom of the pile is now rich in gold; a layer of the pile can be removed and processed for the gold or the pile may be resprayed to repeat the process. The gold is separated from the cyanide in the next step. A tablespoon of the toxic spray liquor can kill the biggest of humans. This stuff has destroyed many waterways, wildlife, animal grazing ranges, lakes/streams full of fish, underground aquifers and bird feeding/migration routes as it spilled into the surrounding environment. The U.S. and most highly developed countries require the companies to build expensive specialized containment vessels with concrete and other materials inside earthen berms to keep this stuff from leaking out of the leach pits. All of the extra precautions required when using cyanide in the recovery technique are very expensive. Fines and shutdowns if this stuff gets out can literally bankrupt the mine. In their defense, mining companies always claim that under direct sunlight, the cyanide in the area is decomposed into its "basic" elements through this "photo-kinetic" process. But the resulting elemental sodium is still toxic to many living things, especially fish and water creatures. One of the worst cases on record occurred in February 2000 at the Aurul Gold Mine near Baia Mare in Romania. Hundreds of tons of poison cyanide leaching liquid eventually found its way indirectly into the not-so-blue Danube and Tisza rivers. It destroyed 150+ tones of fish, decimated the local fishing industry and contaminated drinking water for many miles of waterway. Even though there is still plenty of gold in Dracula's backyard, the toxic leftovers will be present for years to come. European officials declared this the worst industrial disaster since Chernobyl in 1986. Note: mines don't all necessarily use cyanide in the gold recovery process. But most still do, and will for the foreseeable future. It isn't necessary in all cases. New extraction technology avoiding cyanide does exist and is being refined; but it is not yet as cost effective for big, low grade deposits. I am "big" on achieving a sensible balance of safety and respect of natural beauty during resource extraction. These things are tragic for everyone, including the investor.

 

  • Since no mine lasts forever, the costs and procedures required to close the mine, clean up the mess and walk away must be considered before the first shovel full is processed. Many regions require expensive remediation plans to restore the area to something resembling the natural beauty before the lust for gold turned it upside down. It is very expensive in the US and most of the developed west, especially if the mine is large and the mining technique was especially destructive to the environment. In fact the EPA, Bureau of Mines, Department Of The Interior, etc. will not even sign off on any plan that doesn't do an adequate job of apologizing and making amends to Mother Nature when all of her wealth has been pilfered. This "put everything back where you found it" legal and moral requirement is extremely expensive and will divert a significant portion of the net shareholder return. Of course, this is of less importance in some regions of the third world that are desperate for jobs and revenue associated with producing mines.

 

  • A mining venture has most of all of the same costs and problems with making a decent profit as any other modern non-mining business. Attracting and keeping intelligent, hard- working personnel is a problem. With the long doldrums in most metal (especially tin, gold, silver, copper, and aluminum) prices through the 80's and 90's, fewer young people were even interested in obtaining a mining engineering or useful related degree. Everybody wanted to go to a top-tier business school and become an investment banker or stock jockey that might finance or sell mining stocks (in between big blocks of internet gee-wizardry trash). Nobody wanted to do the dirty, dangerous work to make it happen in the first place. Now the good part about this is that gold and silver mining output has declined and will decline (net-net) for years to come. Once the real, gluttonous feeding frenzy in precious metals gets underway (we are still in the appetizer stage), the few companies that are producing profitably will be more than glad they did whatever was necessary to survive. So will the savvy investors who bought carefully researched and cautiously acquired juniors, explorers and producers and held them tightly during the dips in the mother of all roller coaster rides that is coming. Some derivative flavored hedging to deliver "new" metal into the marketplace at "old" prices was necessary and prudent to survive during the lean years. Clearly many producers overdid it; this excess and profligate behavior will be catastrophic for many and we won't know until it is too late. I believe we will attend the funerals "tomorrow" of several of the well known names that look perfectly healthy today.

 

So, how do we distill all of the foregoing blather into a few generic "tips"?

 

  1. Look for the names of well known, respected successful geologists and consultants in the press releases, offering prospectuses, 10K filings, quarterly reports, etc.

 

  1. Avoid the regions of the world where political and social unrest, as well as dubious law-enforcement, confiscatory royalty mindsets, minority empowerment attempts to right 100 years of past exploitation in one week, nationalization "rumors" and self-defeating taxation schemes are becoming the modus operandi. Remember, a rumor is a rumor until it's officially denied by authorities. THEN YOU KNOW IT IS THE TRUTH. Do not be deceived by thinking: "Gee, these folks want all of that foreign investment capital to flow into their country. They won't do inane things that will scare away the cash they desperately need to expand their industry and grow their economic base". I say, in Mogambo-Speak: HAHAHAHAHAH! For the short list of places that are in my OPINION, slightly less risky (and not in any particular risk order), try:

 

    1. Canada
    2. Australia
    3. New Zealand
    4. Papua New Guinea
    5. United States
    6. Tanzania
    7. Thailand
    8. Vietnam
    9. Myanmar
    10. Romania
    11. Mongolia
    12. Brazil

 

  1. Wait until a comprehensive drill program is COMPLETED before loading up on the stock. Of course the stock will cost more at this point than if you bought it totally "blind", 20 minutes before two scruffy prospectors sped back to town in their rusty pick-em-up-truck screaming EUREKA from one end of the village to the other. Make sure the explorer drilled enough holes carefully to truly gauge the scope of the ore body. Make sure diamond drill core samples have been independently audited/assayed by at least two respected assay houses and compared to a controlled, locked up reference if there are any disputes about the "richness" in grams per ton, etc. I am sure there is a "Son Of Bre-X" out there somewhere, lurking in the pink sheets. We won't know until after it is too late to recover our capital. Every mania (and IT WILL BE A DOOZY) brings the charlatans and thieves to a heady froth. This chapter in our eternal gold story will be no different.

 

  1. If you want to play with mining stocks, as a very crude rule of thumb and not financial advice, you, in my opinion, should keep a portfolio of about 10 stocks. With any less, your risks would be too large. Never buy just one, even Newmont. Don't try to handle more than 10; you can't keep up with all the details if you have a life outside the fine print of the WSJ. TALK TO YOUR OWN FINANCIAL ADVISOR; I AM NOT YOURS. A strategy that has served ME well (don't know about you, so again, this is not advice) is to pick the 10 this way: Throw Newmont (NEM) in at the top of your list. At the bottom, pick one of the sub $1.00 per share puppies that has found great ore bodies, has survived infant mortality, and is going to be actually producing good quantities of metal within a year or two at most. I like New Guinea Gold (NGG on Vancouver) here. DISCLOSURE NOTE: I LIKE HER AND OWN MANY THOUSANDS OF HER SHARES. She is one of my long shots with blue sky potential, but anything can happen to her. I won't warn you before I buy more of her or dump her. But since she didn't cost me very much, I will not toss her out easily. If she vaporizes, my life won't change. If she goes to the moon, you will never see another article written by me….What's that I hear…some of you are praying for her to go up now….? I also like Tan Range Exploration (TNX on Toronto) here too as another long shot because of their integrity, board of director savvy and massive potential. I don't own her yet. I may next year. I may not. Next, into your stocking stuff Kinross Gold Corp (KGC) in the middle of the pack. She is hard to beat as a mid-level player. I own her. If you like silver also (or better than gold, as some of you clearly do) toss in Hecla (HL) or Coeur d'Alene (CDE). Now it's your turn to have some fun. Do your own due-diligence type homework and pick the remaining five or six. Choose carefully only after reading EVERYTHING PUBLISHED YOU CAN FIND ABOUT YOUR PROSPECT. Diversify geographically throughout some of the suggested areas listed in number 2 above. Call the investor relations office and chat with them about anything you don't understand in the published literature. Visit the place if you can on your next vacation. It's a blast. Yes, it will be expensive, but the most fun you can have with your prospecting boots on if you really enjoy the mining stock casino.

 

  1. The hardest part is NOT the BUYING of the stock, it is ALWAYS the SELLING. Greed and fear kill everyone. No exceptions. You must decide what you want from any given stock before you reach those bony fingers for the phone or the mouse button. If you have made a good profit either from dividends, if any, or through simple price appreciation, SELL ALL OR PART OF YOUR HOLDINGS when her price is strong and her volumes are decent and take money off the table. If the trend for gold overall or that specific stock is still strong, you can buy her again and repeat the process. With the upcoming volatility it may be difficult and you could leave some money on the table, but so what? Many fools watch real profit vaporize because they don't get while the gettin' is good. Cut losers quickly from the stable before growing losses make you emotionally determined to hold her until she comes back. Don't confuse tech fund liquidation of huge blocks of your little darlings, cartel cabal malfeasance, price manipulations or negative newsletter "top-picker" sentiments with a real dog that isn't doing well compared to other shares, who are in marked contrast, prospering in the same negative environment. Now, ignore this rule with the sub buck a share long shots. If you bought them in intelligent quantities, you don't care if they go to nothing. You only bought them instead of a lottery ticket, which will usually be a better bet. Even the best stock pickers get massacred now and then. I have had my head ripped from my shoulders on many occasions. All metal stocks are volatile and as you well know do CRAZY things like lead bullion when they should lag and vice versa. I HAVE NO CRYSTAL BALL. BUT IF I MAKE MONEY ON HER BY SELLING TODAY, I DON'T NEED ONE. I am taking it off the table. What is a decent return for me may not be enough juice for you. I have no way of knowing. It's a free country, do whatever you want; it's your money.

 

Conclusion

If all of this is just too much for you, simply buy low premium, well known/popular gold and silver bullion coins from a reputable dealer, tuck them away safely and be patient. With gross exaggeration, of course, about a billion things need to go exactly right to ever make a predictable, consistent profit from a mining stock. With finished coins, everything that needed to happen HAS happened. Think about it. With real bullion coins in your hands, the only thing needed now to make a respectable profit is that somebody, somewhere wants the gold more than the paper dollars they exchanged. And currently, about 3 billion people on the planet do. Wake up now or sleep forever. Get on board with stocks or coins; the Auric-Polar Express is leaving the station.

Trust Governments For Nothing. Trust God For Everything. Trust Gold Somewhere In Between.

 

 

J. Kent Willis

 

 

 

J. Kent Willis is a Financial Advisor, Licensed General Securities Representative and the President of AGAPI Financial, LLC. He specializes in tangible assets, biblical faith-based investing seminars and balanced life strategies. He has traded gold and silver since the mid 1970's and resides in Kentucky. He can be reached at jkentw2@aol.com..

 

 

 

 

 

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