Nevertheless, many want to know: What should I look for when buying a mining stock?
As always, selecting stocks is as much an art as it is science — and the same applies to gold and silver miners. To maximize your potential gains and minimize your risk, you must be selective.
Whether you’re doing the research on your own or with the assistance of a broker/adviser, here are the key questions you should seek answers for:
- Does the mining company have too much debt? You don’t want a firm that’s loaded down with too much debt. This is especially true as interest rates begin to rise again. Rising interest rates are deadly for any company with too much debt. As a general rule of thumb, I look for mining companies that have less than 50 cents in long-term debt per dollar of stockholders’ equity (as my more conservative measure) and certainly less than 50 cents in long-term debt when compared to the value of their total potential gold or silver resources.
- Does the company engage in heavy forward selling? If the mining company is selling their future gold or silver production in the futures market at today’s prices, that alone wipes away — or at least limits — your profit potential. After all, what’s the point of buying a company’s bullion production to ride the next bull market in gold or silver when that same company has already locked in today’s low price. Bottom line: Gold and silver have been in a bear market. Once their bull markets resume, you don’t want to be buying miners that still hedge, or sell forward, their production.
- What is the company’s average production cost per ounce of gold? In today’s market, I feel it should be no more than $750 an ounce. If it’s a bit higher, it’s not a deal killer. But it’s a good benchmark to consider.
- Is it expanding its resource base? Since new exploration can be expensive, I favor companies that are actively engaged in buying proven gold and silver properties and smaller mines.
- Does the company have experienced management? I want to see individuals that demonstrate not only solid, prudent management, but also a talent for thinking outside-the-box. Especially when it comes to the acquisition of hot properties and creating financing that does not dilute down existing shareholders much.
- Most important question of all: Is it a good value? In the gold and silver mining world, P/E ratios are not the key metric. They are almost meaningless.
The more important metrics I look at relate to proven and possible gold and silver resources in the ground. For example, I want to find companies where the marketplace has undervalued those reserves by a substantial amount.
These are just my very basic criteria. And importantly, there can be exceptions to each one of them, depending upon other criteria.
For instance, I have no problem looking at a miner that has more debt than I would like to see, provided it also has more potential gold and silver resources; or, it is sitting on properties that other blue-chip miners might be interested in acquiring, or joint venturing with the company.
But in general, the above represents my basic rules of thumb when looking at miners. I think they should be applied by you as well in your own research.
Until next time,
Larry Edelson is the instructor of the “Ultimate Gold and Silver Trading Course” and editor of the Weiss “Real Wealth Report,” “Super Cycle Trader,” and “Gold & Silver Trader.” In addition to overseeing these three premium services he also contributes to the Weiss’ daily “Money and Markets.”