【讨论】如何看懂金属矿产公司的DRILL RESULTS？

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TWELVE GUIDELINES FOR BUYING GOLD MINING STOCKS
By Kenneth J. Gerbino
June 08, 2004

The twelve guidelines should help you to better understand some investment
basics regarding the mining industry, especially if you do not have a
background in geology or mining engineering. I have kept this as
non-technical as possible so no one falls asleep. Keep in mind, these are
basic guidelines and far from complete.

·. If the company does not have an independent professional resource
calculation for gold or silver or other minerals, know that someone is
either speculating or guessing at the most critical data point regarding
mining industry valuations. Be careful not to confuse "resources" with
"reserves". Measured and Indicated resources are reliable as a resource.
"Inferred resources" are very speculative mineral inventories, so be careful
when "inferred" is used. A resource still has a long way to go to become an
economic deposit, as opposed to "reserves" which are deemed to be proven
economic and mineable ounces calculated by very strict engineering and
government rules. Canada's National Instrument 43-101 is one such guideline
regarding resources and reserves.

·. I would suggest your portfolio be 60% invested in companies already
producing gold or silver profitably. The other 40% divide into companies
close to production with impressive projects or very far along in defining
large and significant mineral resources. Producers should include majors and
mid-tiers (your monetary insurance, since they undoubtedly have the goods in
the ground). Look for mid-tiers with good growth profiles. Junior producers
with new projects are also ok.

Companies with lots of money in the bank or access to sponsorship from top
investment banks in Toronto, London and Vancouver is vital in this capital
intensive business and always a good thing to look for. Diversify: have at
least 15 good companies. Depending on your risk tolerance you could allocate
a small portion to grass roots exploration stocks but know this is the very
high-risk end of the business.

The industry has changed in the last five years. Exploration and development
budgets from 1998 to 2002 declined dramatically. Therefore going forward, in
my opinion, any substantial project that is near feasibility (an extensive
outside engineering report based usually on tens of millions of dollars of
geological, metallurgical, and engineering work) could be a buy-out
candidate for major and mid-tier companies that need to catch up on reserve
replacement and growth.

·. "Good management" is an overused word. My definition of good management
is 20 year mining professionals who have had successful executive positions
with large or successful mining companies or projects in the past. If you
see names like Barrick, Newmont, Placer, Anglo, Goldfields, etc. on the
resume you are most likely dealing with some quality professionals. People
who ran mid-tier companies or successfully helped bring medium to large
projects to production also qualify. There are always exceptions, but you
better know who you are dealing with. Direct mail pieces touting some gold
stock and claiming top management should be carefully checked out.

·. Size is very important. The larger the deposit or potential resource the
better. Small mines are not worth your trouble as there are few institutions
that will finance them and fewer companies that will ever acquire them. With
gold mines try and look for 2-3 million ounce and above possibilities.
Mining giant Goldfields, only targets projects with 2 million reserve
ounces. With silver, 100 million ounces should be your minimum. But the
above still has to be qualified. If the resource is too deep under the
surface, of very low grade (richness), or has one of many other negative
reasons it may not ever be economic to mine.

Tonnage is important. Big tonnage operations create economies of scale that
can make some low metal values economic to mine. Three hundred million
tonnes (a tonne is 2204.62 pounds, not to be confused with a ton which is
2000 pounds) for an open pit gold mine is big. Ten million tonnes open pit
is small. For an underground operation, tonnage can vary dramatically and
grade and mining widths become more important (we will discuss this below),
but one million tonnes would be small. For a base metal open pit deposit,
one billion tonnes would be huge, while 20 million tonnes would be small. So
remember in this business - Big is Beautiful.

·. Grade (richness) is crucial. How much bang for the buck are you getting
per tonne of rock. If the grades are high enough the above tonnage
discussion becomes less relevant. With a near surface potential open pit
gold deposit, 2 grams per tonne (a gram is .03215 of an ounce) would be
excellent. 1 gram would be fair as long as you don't have to remove too much
waste rock to get at the ore.

With underground mines, everything changes: depth, the continuity and mining
widths of the ore and the vertical or horizontal plane of the ore all comes
into play as well as many other factors. Generally, to be on the safe side,
if you can find gold grades of 10 grams (about a third of an oz.) or more
per tonne across mineralized sections averaging 3-4 meters or more in width,
then you are looking at good potential. Lower grades across wider widths
also work (i.e. 6-7 grams across 10 meters) Keep in mind these are rough
guidelines and subject to many other factors, like depth, vein continuity,
overall tonnage and much more. But the sweet spot in this industry is high
grades across wide zones of mineralization.

·. Expansion possibilities for a company's production and resources/reserves
are important. For non-producers, resource expansion is crucial, because as
these companies drill and confirm more resources they will increase their
intrinsic value. This helps them handle the big hurdles of either financing
the mine or mines, selling-out, or bringing in a joint venture partner at
reasonable terms. Mining companies with plenty of production and new mines
coming on stream in the years ahead are usually a good group to own. Growth
is Good.

·. Cost per ounce of production is very important. Companies with high costs
are more risky since a low metal price market will make them unprofitable,
but they will have considerable positive leverage if metal prices go up. A
gold mine with $325 costs per ounce, doesn't make much at $375 gold, but if
gold goes to $425, the mining profit doubles. High cost producers are a
double edge sword.

I like low cost producers. They are safer, have lots of cash flow to buy new
properties and mines, will have more funds for exploration and development
and could eventually pay strong dividends if gold stays in a new high price
range over the years (i.e. $450-500). Also large mining companies are not
going to buy-out high cost producers. They are risky and migraine headaches
for management.

Mining costs are mostly a function of grades, mining widths and tonnage. If
you can talk to a mining engineer and get a handle on the cost per oz. or
tonne of the operation, you are acquiring crucial data for your analysis.
Companies operating at high costs (within $100 of the gold price) or that
have projects that look like they will be high cost producers should be
avoided. High costs equal high anxiety.

·. Value per ounce: How much you are paying for the gold in the ground is an
important stat. The lower the better. The following guidelines relate to a
$350-400 gold price. If gold were to go higher these numbers would increase.
For advanced exploration companies, try and stay in a valuation range around
$15 per ounce of resource in the ground. As an example, a company with 15
million shares outstanding selling for $5 per share has a $75 million market
cap. With a 5 million ounce resource, the market cap. per ounce is $15. As
companies move up the food chain and expand and define the resource and test
metallurgy and do engineering studies, the market cap. per ounce should go
up to $30-50 per ounce. Depending on the quality of the deposit these
valuations can change.

Producing companies if bought out, can go for $100 to $150 per ounce of
"reserves" in the ground. That is an important guideline. You do not want to
buy a stock where you are already paying $100 per ounce for just a
"resource" (which means the "reserve" will actually be lower). With the
company just in the advanced exploration stage, there won't be enough upside
unless the deposit gets a lot larger. Advanced developmental (meaning
feasibility to actual construction) companies can be bought out for $40-75
per ounce of resource or much more depending on many factors that are beyond
the scope of this writing.

Usually the value of the ounces and the stock price go up as more and more
confidence is gained in the project. Initial resource definition usually
allows for a value of $5-10 per ounce. At the bankable feasibility stage
those same ounces could be valued at $40-75 per ounce.

If you see a mining company with a well defined resource and the gold ounces
are valued at only $5 per ounce or so, just know there is probably a reason
and it is probably bad. Most likely those ounces will never see daylight due
to any number of reasons: environmental, logistics and infrastructure
problems, political risk, low grades, high capital costs, narrow mining
widths, high strip ratios (how much waste rock has to be removed to get to
the ore in an open pit operation) and a host of other reasons. There is a
right price for the ounces, don't overpay.

·. In a favorable gold mining environment, which I believe we will have for
the next 10 years, it doesn't pay to take undue risks. Try and find good
merchandise and be careful of the small grass roots exploration companies.
Surface sampling is the key to the difficult exploration business. Positive
soil and loose rock samples on a prospective property may have come from
many miles away twenty million years ago. This means an ore body that is
hopefully under the ground is not there. Only one inch of geological
movement in a subsurface rock structure every 100 years equals in 20 million
years, 3.2 miles. In geology you are dealing with billions of years.
Mountains you see were once ocean floors, etc. Large and extensive outcrops
(surface rock formations) that have mineral showings can be a good indicator
as well as widespread crude and small local native mining activity. But it
is no easy task finding these minerals in large enough deposits to be
economic to mine. Surface showings are actually very important indicators
for economic mineral discoveries but unfortunately they are still high-risk
speculations.

·. A key stat is cash flow per share if the company is already a producer.
Large gold mining companies can sell for 15-20 times cash flow in a good
gold market. Mid-tier and smaller producers can sell for 25-35 times current
cash flow because of expected cash flow increases, from new mines coming on
stream. In this case the market is anticipating the future. Beware high cost
producers selling at high multiples of cash flow, as they will get hit very
hard if gold has a set back.

Companies expecting cash flow from future projects are usually valued using
a net present value criteria. In this method the entire future cash flow of
a mine is laid out and a value is placed on this cash stream, taking into
consideration the time value of money. How much is the $500 million dollars
that the mine will make in the years 2008 thru 2018 worth today in the
present. The future cash flows have to be discounted in order to arrive at
some sort of present value for the projects. Many times a 5-10% discount
rate is used. I believe a lower discount rate is also ok, since gold is an
anti-discounting currency (i.e. gold's price should go up with inflation and
interest rates therefore negating the discount rate - because it will keep
it's future purchasing value).
Earnings per share is a tricky stat for the miners because of so many
non-cash charges and accounting complexities. In the long run it all comes
out in the wash, but during the years of the life of a producing mine, cash
flow is the king. Look hard at cash flow per share or expected cash flow
from projects.

·. Comparables are very important. Why would you buy a stock where for every
$1 you invest you get $5 of gold in the ground when another company with
very similar fundamentals and resources gives you $40 of gold in the ground
for every $1 you invest. There actually may be a good reason, but the point
is you should know what that reason is. Comparisons are an important
ingredient to avoid overpriced companies and missing some real bargains. We
constantly do comparables at Kenneth J. Gerbino & Co. and I suggest you do
also. One should compare the basics: grades, tonnage, costs per ounce, costs
per tonne, smelter charges (for base metal deposits), reserve or resource
value per dollar invested, market cap per reserve/resource ounce, discounted
cash flows and the net present values of the mining assets. Comparables
allow you to better shop the market.

·. Be careful of the term Gross Metal Value. This is all the precious metal
ounces or base metal pounds in the ground multiplied by the current price of
the metals. It is misleading unless you have a lot more information and
knowledge. Just know that with any mineral deposit a company will never
recoup anything near the gross metal value of what is in the ground. The ore
will have a mine waste factor (5-15%), recovery losses in the mill or from
the leach pads (5-20%), and smelter, refinery, transportation and penalty
costs for base metals (20-35%). Throw in royalties, state and local taxes
and other expenses and you will see that gross metal value is less important
to your analysis than all the other ingredients that would determine a
quality mining investment. It doesn't mean the term is useless but it can be
dangerous to use on it's own.

Well, there you have some basic guidelines that I hope will help you through
all the press releases and some of the direct mail hoopla about all the
billion dollar mountains out there. Remember the more homework you do the
better off you will be. For other articles on gold and the economy please
visit our website at: http://www.kengerbino.com/

Good luck in what looks like a long-term, mostly bullish precious and base
metal market.


Kenneth J. Gerbino