Lifecycle of a Mine

Utilizing the Lifecycle of a Mine to Pick Superior Gold Stocks: In order to find the diamonds in the rough of gold mining stocks, it’s important to identify where a mine is in its lifecycle. Explore this slideshow and learn about the stages gold mines flow through from discovery to production.
The Lifecycle of a Mine: The lifecycle of a mine can take anywhere from five to eight years from discovery to production. It’s imperative to know which stage of its lifecycle the mine is in to make a better-informed decision on whether to invest, withdraw or wait.
Stages of Mine Development: Mines go through three main stages – from exploration to research to production. Within each of those stages are smaller periods where specific tasks are undergone such as trenching, cost estimates and permitting.
From Speculating to Investing: During the discovery period it’s all speculation and not until a mine actually begins producing metals does it turn into proper investing. The ideal entry point for investors is typically when development begins and after research is complete.
Mining Stocks Are Susceptible to Risk. Certain events, such as property ownership disputes, can cause a mining stock to fall up to 50 percent. Investors should be aware of significant fluctuations in these stocks, both up and down.
Discovery and Speculation Phase Contains Highest Risk. First, there’s euphoria over exploration results that are better than expected. The stock price rises as investors race to buy shares, however there are still many hurdles to overcome before gold comes out of the ground.
Exploration Involves Geology and Preliminary Drilling. During this time of speculation, investors should be aware that no deposits or minerals could be discovered.
Reality Sets in During Development and Investment Analysis Phase. Investors soon realize that a mine is still years away from actually producing. This is when a huge correction in the stock price typically takes place.
Development Involves Further Drilling and Cost Estimating. Share prices fall during this time as investors await news that production will begin.
The Ideal Entry Point for Investors in Gold Mining Stocks. After development and research is complete, mines begin production. This is the ideal time for investors to enter once many risks are lessened.
Excitement Arises in Production Phase When Metals Are Mined. This phase is characterized by construction, permitting and the start of full mining operations.
The 5 M’s for Picking Gold Stocks: In order to find the diamonds in the rough, we use “The Five M’s” for picking gold mining stocks.
The 5 M’s: Market Cap: Market cap is simply the number of shares outstanding multiplied by the stock price. The gold sector is broken down into three sectors by market cap: seniors (market caps >$10 billion), intermediates (between $2 and $10 billion) and juniors ($2 billion).
The 5 M’s: Management: Some of the most successful leaders in the gold-mining industry are what we call the “financial engineers”—those who have key relationships, understand the capital markets, and who hire the best geological and engineering teams.
The 5 M’s: Money: Mining is an expensive business and investors must look at the “burn rate”—how long will a company’s current cash levels last before it needs additional financing. We recommend not paying more than two times cash per share if there are no proven assets in the ground.
The 5 M’s Minerals: Compared to the rest of the mining sector, gold companies have the highest industry valuations based on price to earnings, price to cash flow, price to enterprise value and price to reserves per share. Companies operating mines that produce gold as well as industrial metals tend to have lower valuation multiples.
The 5 M’s Mine Lifecycle: As discussed previously, the lifecycle of a mine is of utmost importance when identifying an investment entry point. We recommend entering the game just before production begins.
Building a Brand of Gold Mining Stocks: Branding is all about what you know and who you know, and is essential for gold mining stocks to gain buyers. Much of this starts with company leadership and their explicit and tacit knowledge. How deep is their expertise and how wide is their network? Are they surrounding themselves with a community of high-achieving professionals?
To Understand a Mine, Visit it In-Person. Clearly, the task of picking which gold miners to invest in isn’t easy. We recommend traveling to mining projects to “kick the tires” and ask tough questions of management. Pictured above is U.S. Global Investors CEO Frank Holmes visiting a mining project.
How to Invest in Gold Mining Names With U.S. Global Investors.