The real value of gold in the ground

This is the second in a series of musings and accompanying videos with Vancouver-based Cipher Research Ltd, which evaluates exploration and mining companies for investment. Once again, we assess a segment of the gold resource sector.

Our first musing was posted in early February and titled The Real Cost of Mining Gold. It evaluated seven major gold miners over the 11-year bull market from 2003-2013, showed how and why they failed to profit and reward shareholders, and provided a solution for the future, i.e., a value versus growth philosophy.

Three short videos on the subject can be accessed here: Mercenary Geologist Videos.

Today, our subject is the value of an ounce of gold in the ground.

Venture always flows where potential reward is perceived to have the lowest risk. In my opinion, advanced explorers and developers often offer the best risk/reward profile in the junior resource market.

There is a plethora of companies to choose from in all segments of the resource sector. For any speculator, the challenge is to separate the many pretenders from the very few contenders. This is an especially daunting task for the retail lay investor. In this musing, we provide insights based on decades of experience evaluating companies and their projects.

We examine a 24-year takeover history of advanced gold explorers and developers to determine the real value of gold in the ground and develop a set of criteria for assessing any company and its flagship project for investment. Analogous to the major miners, we find that the quality of ounces of gold is far more important than the quantity of ounces.

All junior resource companies can be evaluated and ranked utilizing four key criteria:

  • Share structure: should be tightly held with significant holdings by insiders and management.
  • People: should have technical expertise and experience with past successes and not a series of failures.
  • Project: should have favorable geology and geopolitical jurisdiction with an experienced and successful geological and engineering team.
  • Working capital: should have significant cash on hand and/or the ability to raise funds without severe dilution.

[Read the full study from Mickey inserted below.]

Download (PDF, 842KB)