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Gold stock investing made easierTroy Schwensen For many investors new to the world of precious metals, investing in gold and silver mining companies can seem daunting. When I started investing in this sector for a living eight years ago, I set out on a long journey to discover as much information as I could find. Having an accounting and finance background helped me to establish which factors were important but, like anything worthwhile, it took a great deal of time and patience. For newcomers and experienced campaigners alike, there are many traps one can fall into. The good news is that the market over time is sophisticated and efficient enough to sort the wheat from the chaff. If a company is doing the “right things” for long enough, this will invariably be reflected in the share price. Perhaps more than in most markets, there are short term price fluctuations and market inefficiencies which present proactive investors with unique opportunities. Over the longer term, however, the winners will be there for all to see. So how does this concept of past market performance help you, the investor, today? Fortunately we have been in a bull market in gold now for near on a decade. There is a wealth of historical information available. When you combine this with some of the key factors I am going to discuss today, you can gain a distinct advantage. Allow me to elaborate and demonstrate. Where to focus your attention To invest successfully in any sector you need to quickly establish where to target your attention. In the precious metals sector there are a number of different development stages you can invest in. The basic categories which many of you will already be familiar with include:
The stage we tend to focus our attention on is the production stage. Once a company is producing there are literally few places to hide. Any mistruths and mistakes that may have been spun or made at the development stage of a project come out for all to see! Investing is a game of imperfect and incomplete information. In the metals sector, information is more plentiful at the production stage, but is scarce and specialized for companies still in the exploration stage. The risk/return profile tends to reflect this information flow. The number of new precious metals investors we see focusing their sole attention on the highly specialized grass roots exploration stage has always puzzled us. They are no doubt attracted to the lure of big life changing profits, but seem less aware of the significant risk factors involved. For new comers, we think the logical area to focus on is the area with the most available information – the production stage. Your chances of becoming an overnight millionaire may not be as high but, as we are about to demonstrate, the longer term returns are surer and can still be extremely attractive! What are the Key Driving Factors Earlier I made reference to companies doing the “right things” in order to grow shareholder wealth. To keep things simple, I am going to make reference to three key driving factors for gold producing companies:
The profitability I refer to here is the ability to generate lots of free cash flow from projects. This can go towards paying off debt associated with project development, or get reinvested into exploration and acquisitions to help grow and secure the company’s future. Profitable companies are less likely to dilute shareholder wealth with frequent capital raisings (required to sustain or purchase suspect and marginal projects). This invariably gets reflected positively in the company’s share price.
This refers to the company’s ability to grow production over the long term while adhering to our profitability requirements. There are many companies out there that seem to grow production for the sake of it, without properly considering important factors such as return on investment.
Adhering to the first two factors can very quickly come to nothing for a company if they run out of reserves of metal to mine, and can not sustain production. The market has a tendency to punish companies which end up with huge cash balances and very little in the way of projects to reinvest in. It is vital for a mining company to grow its business within the confines of what it can realistically sustain. Much easier said than done! The most successful mining companies invariably outperform in these three important areas. Now this is all well and good and fairly obvious but how can you effectively assess and track this information as part of your due diligence process? We have recently developed some simple indicators which can effectively identify which companies do these things well. Chances are these companies have capable management teams with the knowledge and experience to continue applying this winning formula for the future benefit of shareholders. The longer their successful track record, the more credence you should potentially give them. Indicators to help capture this information
Our PGS indicator looks at:
The higher the PGS is relative to overall averages, the better. Note in our results table to follow, green denotes above average and red below average. If a company has not experienced positive share price growth it will not register a PGS score. 2. GS Indicator The GS indicator ignores price and simply looks at Growth and Sustainability. Think of this as the same as the PGS indicator minus the price performance component. The higher this number is relative to the overall averages, the better. Again, in our table to follow, green denotes above average and red below average. Results: Producers 10 years plus (Extract from full report)
(Click on table to enlarge) * For companies that have been producing for more than 10 years we have started their share price performance analysis from 1st January 2000 when the bull market in gold effectively began. In addition, the annual returns do not take into account dividends. Prices used are as at 3 Sep 2010. PGS is calculated by multiplying the Annual Return (Total) by the Sustainability (in years) and then by the Growth factor. GS is calculated by multiplying Sustainability by Growth. What does this information mean The two companies in the above table represent two of the best longer term performing gold producers on the North American exchanges. The average represents that of 17 North American producers which have been producing for more than ten years. When you look at the PGS and GS indicators, we see these companies on a comparative basis are tracking considerably higher than their counterparts. Their share price growth over the longer term is also more than two times that of the average at 25-32% per annum versus just 12%. This is indicative of the positive profitability these companies have enjoyed. They also have longer life mines (sustainability), as well as excellent growth potential confirmed by their GS indicator readings. We have generated the above information (in a new PDF report) for over 55 North American listed gold producers. We have importantly split the data up into four different time periods determined by how long each company has been producing for:
The longer a company has been producing, the more confidence you can generally have in the numbers. We have in turn ranked these companies from highest PGS to lowest. Now that you have a better understanding of what to look for in prospective gold producers, how can investors use this information to short list appropriate candidates? There are two ways.
You could simply concentrate on the companies which have a strong track record in these key areas of importance (highest PGS values) and bet on them replicating these traits going forward. Past performance is of course no guarantee of the future but, in our opinion, the odds will be considerably more in your favor.
Alternatively, if you feel like getting your hands dirty, you can use the GS indicator to look for companies which outperform in the growth and sustainability stakes but, for whatever reason, have failed from a price performance perspective (below average PGS). In this case, you may want to try and determine what has caused the under performance and assess whether the company can overcome these issues. Examples of temporary issues might include the mining of lower grade portions of a deposit, technical issues which the company is working through, a poor hedge book adversely affecting profitability or a public relations failure resulting in a lack of market awareness. Chances are, if these issues can be overcome, there will be a re-rating in the company’s share price. We discuss a number of examples in the full version of this report. The bottom line is you don’t have to be an analyst or an accountant in order to take more of a proactive approach to your investments in this sector. Most of this comes down to basic common sense when you are equipped with
I trust this article has been of some help to you. Having been in a precious metals bull market for close to a decade now, it seems crazy not to use past share price data coupled with the other important factors we have discussed to help isolate highly prospective candidates. As mentioned earlier, we at the Global Speculator have combined our extensive knowledge and experience in investing in this sector with the GoldNerds database of comprehensive information to generate a PDF report containing this invaluable information. The full version of the report has been made exclusively available to all our North American GoldNerds subscribers (both standard and professional). We also have an Australian version of the report with 31 producers listed on the ASX. I personally invite you to join the GoldNerds revolution today and be a part of an increasing number of investors who are benefiting from our experience! ### Troy Schwensen Editor Editor GN North America In our ongoing effort to develop a comprehensive information package for gold investors, the recently released North American version of the GoldNerds product includes a rolling 4 quarter summary of actual ongoing capital expenditure. It also provides a forward looking forecast of ongoing capital incorporating up and coming projects (this feature will soon be added to the Australian version of the product). These numbers are then integrated into a formula which adds an estimate of the future average cash cost (assuming all projects are developed), the enterprise value per mineable oz (customized indicator) and future construction capital (associated with undeveloped projects) to provide users with a useful Total Cost per oz estimate. This enables investors to effectively compare gold mining companies from a very unique and useful perspective. If you are serious about researching gold mining companies I encourage you to pay us a visit. The North American version covers most of the established producers and many of the up and coming development companies listed on the North American exchanges. Disclaimer 321gold Ltd |
