Investing in natural resources can be rewarding but it does have its challenges. There are lots of technical terms to understand, resources are sometimes located in risky & distant jurisdictions and from 100 exploration projects, less than 1 will become a mine. Yes, tough odds, but if you happen to buy into a company when it is just starting, the upside potential is phenomenal. Note that this post is for beginner investors only!
Exploration is a tricky game: not all companies will find a deposit that is economically exploitable, so if you can educate yourself about this sector to analyse technical reports and news releases, you are in fact de-risking your investment and improving your chances.
Last year I wrote a similar post about lithium companies, this time I will focus on gold. Without further ado, let’s just get into it:
- Grade is king: you will hear (or read) all executives going on and on about the grade. Normally, anything above 2g/t is good. But if you find values above 20g/t or more, the project is very promising. The results that Goldgroup -a Canadian explorer- got in the San José de Gracia project, located in Mexico, are a good example.
- Three (or two) times’ a charm: If you want dividends, you need to choose companies that have already built a mine. Moving an exploration project to production is not easy and companies transitioning from an explorer to a producer can have lots of delays if not handled correctly. You can reduce your risk by choosing companies that have already done it. Companies like Goldcorp have a good track record in this sense, having several mines in operation such as Pueblo Viejo (Goldcorp owns 40%), among a few others.
- Three’s company: Most times the type of mineralization will include other minerals alongside gold; typically it will be silver and/or copper, but there are others. These byproducts can help the economics of the project as these can also be extracted and sold once the company reaches production. The Soledad project from Chakana Copper prove this point.
- Bigger is better: gold projects are classified in relation to their size of resources (infered, indicated, measured) or reserves (probable or proven) in ounces. So a small mine can have reserves or 400 to 800,000oz, and a medium to large, several million ounces, such as Pretium’s Bruce Jack Mine.
- Must be safe: since gold is a precious metal, and its value is currently 1,300+ per oz, the logistics of a gold producer are quite different to say, copper concentrate. Security is paramount, hence it is a significant part of the operation costs. Air transport and also armoured trucks are normally used to transport bullion from the minesite to refineries or secure storage facilities.
So that’s a great start if you are just getting into this commodity. Gold should always be in a portfolio, whether in companies operating exploration projects with potential, mines, ETFs, bullion or in derivatives. Aside from its intrinsic value (and the income potential through dividends), it is considered a safe haven and an insurance of sorts for times of uncertainty. I may get into these other options in another post.