Part 1: Analyzing a Gold Mining Company–Where to Start?

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Assignment: Analyze and value a gold mining company

Mario Gabelli once suggested to a group of Columbia MBA students to become an expert in an industry. The process will take at least six months of intensive reading and research to get to a level of what you need to know and what you can ignore. Then in a year or so move on to another industry. After five or six years you will have competency in five to six different industries.   Since investing is all about context, we first need to learn about the gold (precious-metals) mining industry.

Whether you will analyze a gold mining company, a shipping firm, a title insurance business or a media company, you will need to develop an understanding of the industry within which your firm operates.

Since we do not have six months to study, we will move at an accelerated pace.

OK, so what do you need to start with and how would you begin?  Pretend that you wanted to build a mining company from scratch, how would you do it? If you were airdropped into Northern Pakistan, what would you first need after hitting the ground?

Friday, I will post my suggestions and information sources. Meanwhile, you can think and search for yourself. Eventually, we will move on to the particular company.   Don’t hesitate to post questions if you are unclear or my instructions are incomprehensible.

Good luck!

10 responses to “Part 1: Analyzing a Gold Mining Company–Where to Start?

  1. I would first gather information about which mines the company has and it’s sizes. Then will try to estimate the amount of gold according tote type of rock/soil they are at according to previous researches. I’d consider gold prices of course and try to get an average price for a certain period. I think that’s a start.

    • Fine, but you haven’t been given a company to analyze yet. How do you know what TYPE of company to search for? On what basis do you value such a company? What drives returns? Hint: Read COMPETITION DEMYSTIFIED by Bruce Greenwald.

  2. Just a quick comment here. I’m not an expert in valuing mining stocks, but I thought this 232 page monograph might be helpful:
    Fisher Investments on Materials, Andrew Teufel (Author), Brad Pyles (Author)

    I like the idea of focusing on one sector at a time. Otherwise, there’s just too much to learn. Not sure if this is the best book out there to understand the mining industry better.

  3. I would start by reading IBISWorld reports on Gold mining sector to get an overview

    • OK, but go to original sources rather than regurgitated info.
      Would you have done well buying gold mining companies in the Great Depression? How did the stock market, in general fare?

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  5. I’d segment the gold industry into subsectors such as 1) exploration companies (companies that buy claims and flip them for development 2) developers, and 3) integrated 4) Refining? Someone has to convert the metal into shiny bars.

    I’d also get information on cost inputs into a gold mine. I cannot predict gold prices, but I could determine a range of per unit costs to extract the gold. I need to know how much infrastructure (roads, power supply, water) need to be installed on the site, and the cost. I need to know how much labor is involved, and the cost of that. Clean up costs, machinery. Storage and transportation costs.

    I’d also like to get a historical success record to give a rough % of the success rate for extracting the metal. This should vary by country, deposit, etc.

    So how do I start?

    • Very good. I will be back to you tomorrow (Friday)

    • Not sure if this is the correct terminology, but I’d add that in addition to the success record any proven or estimated gold reserves, and the estimated/proven gold per ton of rock mined. Those details plus a track record of actually getting gold out of the ground can give you an idea of how much revenues may be going forward.

  6. Pingback: Primers passos per fundar una empresa minera

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