Gold prices are making headlines again, which means all kinds of gold-derivative investments will be receiving fresh interest from investors, especially gold miners.
After investors have bid up better-known names such as Barrick Gold (ABX), they’ll also be tempted to look at smaller mining plays from off the radar, many of which appear to be deeply under-valued for different reasons.
While true gems can be found in smaller mining companies given their lack of investor exposure, be very careful, warns MiningMx. We selected three of their ‘Golden Rules’ to follow when analysing a tiny speculative gold play.
1) Anything which hasn’t even started production yet is worth massively less than any mining asset already in production:
WHAT REALLY LIES BENEATH THE SURFACE?
I attended an investment briefing at the JSE recently, where two junior mining companies presented very compelling valuations for their proven reserves some six, seven times more than the share price. Personal experience tells me what also lurks beneath the surface is costs – even bigger costs. It’s only when production gets underway that the real hassles with bringing ore to the surface emerge.
2) Just because some hot shot investor bought the stock doesn’t mean it will succeed. It could just be a tiny punt for the large investor:
DON’T FOLLOW LEADERS (or walking parking metres)
When well-known business leaders back or take a strategic stake in a junior mining venture, there’s obviously cause for “following the smart money”. Money is the operative word. These chaps have more money than you or I, and can quite easily afford to drop a few bars on a speculative play. I followed retail tycoon Christo Wiese into hapless fluorspar miner Sallies – where, seemingly, solid fundamentals were smothered by a variety of operational difficulties. As fate would have it, when Sallies finally did “come right” the global crisis was in full swing. My portfolio still shows some nasty scars from Sallies, and my only hope of recovering some capital (and pride) is via the Sallies Debentures. Wiese sold out his sizeable holding in Sallies ordinary shares at a massive loss, but I got the sense he was not beating himself up over the matter.
3) Few small miners actually succeed.
IT’S NOT EASY TO EMULATE SUCCESSES
There have been quite a few notable junior mining successes. I can recall Ocean Diamond Mining or ODM (run by the brilliant and uncompromising André Louw), Ted Grobicki’s Kalahari Gold, Metorex (notwithstanding its debt hassles of late) and East Daggafontein (which, I seem to recall, became the base for Mvelaphanda Resources). But success is not easy to emulate. Back in the Nineties there were a slew of West Coast marine diamond miners hoping to cash in on ODM’s popularity with the punters. Companies like Benguella Concessions (later acquired by Trans Hex for next to nothing), Zenith Concessions and regional resources never managed to produce meaningful returns. Fizzled junior ventures are a dime a dozen.
Gold’s price rise will bring all manner of snake oil salesman out of the woodwork, as we’ve already seen with various coin and cash/gold schemes on late night T.V. and splayed across the internet. Small mining stocks will be no different. You can find more about mining stock failures at MiningMX.