Investors interested in investing in a gold and silver stocks are often overwhelmed by having
to choose from among the more than 1,000 choices that trade publicly on
Reserves and Resources. Gold and silver companies often distinguish between their reserves and resources, and investors in these stocks are sensitive to the difference. Reserves (both proven and probable) are resources that can be developed profitably with available technology; the calculations are generally in accordance with an industry-standard methodology.
Resources are areas of mineralization that have been surveyed, with their quantity and quality determined; they are sometimes categorized as measured, indicated, or inferred. Resources do not have demonstrated economic viability, and gold and silver stock valuation models generally deeply discount the value of measured, indicated, and inferred mineralization.
Countries in which the Reserves and Resources are Located. Some countries have operating and regulatory conditions that are quite favorable to gold exploration and production companies, while other countries have relatively hostile conditions. Gold and silver stock investors have historically had some bad experiences with negative changes in countries’ views toward miners, and investors remain wary of high-risk locales.
Operating variables include infrastructure (power, roads, and water), availability and quality of local labor, and weather conditions. Some areas in the far north are frozen over for many months of the year, greatly shortening the exploration, development, and mining seasons.
Major regulatory hurdles include permitting, environmental constraints, taxation, and political graft. Many of the gold and silver mining companies are making strong efforts at community involvement to help alleviate any local opposition to their projects. These efforts often include job training and other development of a skilled labor pool.
In some countries, there may also be ill defined or adverse rule of law and/or constraints relating to property ownership.
According to the Fraser Institute’s
2010/2011 survey on political risk to mining companies, jurisdictions
believed to have the lowest political risk are Quebec, New Brunswick,
Finland, Alberta, Nevada, Saskatchewan, and Chile. Much higher political risks are associated
Gold and Silver Mining. Some gold and silver bearing ore is extracted from open pits, while extraction of other ore is situated beyond the practical depth limitation of open pits and requires underground mining. The cost of underground mining can be substantially higher than that of open pit operations.
Once gold and silver are extracted from a mine, the ore is crushed and the metals extracted. Cyanidation is the most common means of extracting gold from crushed ore, although other techniques such as froth flotation or centrifugal concentration are sometimes used. Since cyanide is highly poisonous, some jurisdictions have banned or restricted its use in extracting gold from ore.
Gold and silver mining have become increasingly expensive. Many of the top-grade deposits have been exploited, resulting in higher production costs for the lower-grade ores. There are also increasing costs for labor, permitting, and environmental issues. These costs do not include the cost of failed exploration efforts.
Exploration and Development. Gold and silver exploration programs are generally measured in years, and they can be very expensive. The programs usually begin with a search for favorable geology and surface anomalies. Aerial surveys can help pinpoint areas of interest. The companies develop drill programs to define the mineralized areas and to sample the grades of mineralization. They then use industry-standard methodologies to determine the proved and probable reserves. These standards are designed to lead to feasibility studies conducted by third parties, with the results often used to attract funding commitments for actual construction of the mining project.
Once a project has been designed and the funding secured, the development process proceeds through permitting, construction, startup, and expansion.
Financial Strength. Exploration and development are very expensive and time-consuming. Valuation of a gold or silver stock can hinge importantly upon a company’s ability to finance a project without incurring undue shareholder dilution.
Companies usually obtain their early exploration and development capital from high-risk-oriented individual and institutional investors. Early-stage financings are often in the form of private placements and/or secondary offerings. Upon completion of a feasibility study, banks will often step up to finance actual construction of the project. Construction budgets usually run into the hundreds of millions of dollars, and some of them are in the multi billions.
Some of the large, well-funded companies expand their reserve and resource positions by helping to fund other companies’ promising projects. They sometimes structure joint ventures to fund a specific project in return for a percentage ownership in the project.
Valuation of Gold and Silver Stocks. Gold and silver stocks can be very difficult to value. Most have no direct comparables. There are generally great variations from company to company in their gold reserves and resources, operating and regulatory environments, rates of production, exploration and development programs, financial positions, and ability to raise capital. In addition, the prices of gold and silver are subject to wide swings.
Notwithstanding the foregoing, analysts often make gold and silver stock valuation comparisons by using the ratio of enterprise value (market capitalization, plus excess working capital, less debt) to mineral-equivalent reserves and resources. One could improve upon such a valuation model by also taking into account whether the companies have existing production facilities, since building such facilities can be tremendously expensive and is often subject to environmental and political constraints.
NYSE Arca Gold BUGS Index. There are 15 large gold stocks in the NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index (NYSE stock symbol: HUI). The Index is a modified equal-dollar-weighted index of selected gold mining companies, and it is designed to provide significant exposure to short-term movements in gold prices by including companies that do not hedge their gold production beyond 1.5 years.
Other widely followed indices that provide tracking of gold shares’ performance include FTSE Gold Mines Index, S&P/TSX Capped Gold Index, and the Philadelphia Gold and Silver Index.
There are more than 1,000 gold and
silver stocks not contained in the NYSE Arca Gold
BUGS Index, and many of them are highlighted on this web site. The total number of gold and silver stocks
that publicly trade in the
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