Simmering Hope

Hope is the expectation that something outside of ourselves, something or someone external, is going to come to our rescue and we will live happily ever after. – Dr. Robert Anthony

Nov 17, 2009

How to choose good gold miners?

Now that the stock market is approaching the end of the year, meaning that time when the fund managers and private investors are trying to solve the tax issues, getting position in good securities, especially for a newbie like myself, is even more complicated than before.

Let’s start by saying that I do not believe in any market/economy recovery. Not yet. More and more jobs are lost and I really don’t see the light at the end of the tunnel. We are told that it’s all right and that soon it will be better. In the mean time governments spend money they don’t have, so smart people started thinking that all the paper issued recently is totally worthless and it’s probably better to invest money in gold. But how to choose good gold miners?

Following are abstracts from the article Investment checklist for precious metals

Naturally, the starting-point in looking at the quality of any mining company is the quality and quantity of ore in their property(s). The quality or “grade” of the ore will go a long way in telling us about the profitability of a miner (or the potential profitability of an exploration company).
For gold miners, the starting point would be to look at ore with 1 gram of gold per ton of ore. That’s right, ore with as little as 1 gram/ton is potentially rich enough to support commercial mining. Of course, with this low level of concentration of gold, it will generally require both vast tonnages and favorable geology for ore of such a low grade to support commercial mining operations. Generally speaking, what exploration companies are looking for is ore with several grams of gold per ton.


Much of this information is revealed to us in the drilling samples which mining companies extract and analyze. A drilling core sample is a vertical cross-section of the ore which ideally is perpendicular to the vein in question – so that the sample represents a “true width” of the particular vein. Since veins of ore can exist at various angles relative to the surface, and can also bend and twist through the Earth’s crust, it can be very challenging for the miners doing this drilling to produce such ideal core samples.


Assuming this is the case, when you examine the drilling results of a mining company, the data is generally presented as a series of “intervals” in each core sample, with each “intercept” representing a separate vein of gold. Thus, the drill samples will tell miners (and investors) the grade of the ore, the thickness of veins, and the number of veins – over the total depth of the drilling sample. This means that an ideal core sample would demonstrate high grades (i.e. averaging several grams per ton), thick veins, and (hopefully) many such veins. Since these intervals can be very thick, in some cases exceeding 100 feet, the grades within veins can vary considerably. Where the concentrations are unequal, the person evaluating the core sample will generally also list sub-intervals within the intercept – and indicate the especially rich segments of such intervals.


While veins of gold are relatively narrow, the length of these veins can run for miles beneath the Earth’s surface. Some of the world’s largest/oldest mines end up as vast labyrinths of tunnels occupying areas of many square miles. As a result, even more important than the data which is obtained vertically through each individual drill-sample are the number of such drill-holes produced in a drilling program.
It is the accumulation of dozens (and often hundreds) of drilling samples which map out the dimensions of any given ore-body. Obviously, if such holes are placed closer together, the data obtained is more precise. However, with drilling being a very expensive process, there is a large economic incentive for companies to space-out the holes quite widely (at first) to gauge the overall dimensions of an ore-body. Then subsequently once those dimensions are identified, companies will “fill in the gaps” with more drilling within this perimeter – in order to provide geologists with enough data for a “resource estimate.”


For potential investors viewing the results of such drilling, there are two indicators which they typically look for. First (and most obviously), they want to see most if not all of the drill-holes showing significant levels of mineralization (i.e. several grams of gold per ton in each intercept). Of nearly equal importance, investors want to see evidence of even greater mineralization. Specifically, they will look to see if the drilling reports that mineralization is “open” (i.e. it continues beyond the scope of the original drilling).


Since exploration companies generally have no sources of revenue, being efficient (and a little lucky) with their drilling can and does determine which of these companies will survive and thrive, and which will struggle to stay afloat or simply fold.
Once a drilling program has identified a body of ore with the potential to support a commercial mining operation, this is only the starting point of analysis. A “feasibility” study must be done to evaluate a number of other factors (a more preliminary form of this analysis is called a “scoping study.”)
Sulphides and oxides
Ore containing gold falls into two categories of chemical/geological composition: sulphide-based ores and oxide-based ores. Gold “oxides” are preferable for mining since the chemical “bond” which locks the gold to other chemical elements is not as strong. As a result, processing such ore is cheaper, easier, and generally yields a higher “recovery” rate than with gold sulphides.
The “recovery rate” is self-explanatory. It is the percentage of gold contained in a given quantity of ore which is successfully extracted, and ready for further processing (and ultimately refining into bullion). In simple gold oxides, a recovery-rate above 90% is not unusual. However, because gold oxides contain gold that is cheaper and easier to extract, most of the world’s easily accessible gold oxide deposits have already been mined – meaning that modern miners are forced to obtain much more of their gold in sulphide-based bodies of ore.
With gold sulphides, the much tighter chemical bond between the gold and other elements is much more technically challenging. Attempting to extract the gold using the same methods of extraction as with gold oxides would result in vastly inferior recovery-rates – closer to 50% recovery. Primitive methods of secondary processing of such ore were developed, which improved recovery rates, but resulted in vast quantities of highly-toxic waste.
Unless such “tailings” were collected and contained very carefully, the result was generally environmental devastation. Such primitive gold-sulphide mining operations have been among the worst “offenders” when it comes to mining-based pollution. Fortunately, modern technology has devised new methods for extracting gold from sulphide deposits – which are not only much more environmentally “friendly” but also yield higher recovery-rates.


Up to now, I have been discussing hypothetical bodies of ore with the unstated assumption that they only contain one commercially valuable mineral. In fact, most bodies or ore which contain gold or silver will generally contain one or more other mineral elements with commercial value.

These “byproducts” will add additional complications to the processing of ore, although modern metallurgy has progressed to the point where these problems are nothing more than minor considerations. Typically what occurs is that the metallurgist will seek to maximize the recovery-rate of the primary metal (gold or silver) with secondary processing yielding lower recovery-levels for the other metals contained.
Naturally, these byproducts will offset the production costs of the primary metal, through the “credits”obtained by selling these other metals. This lowers the production costs for each ounce of gold/silver (the “cash costs;”) however, it also dilutes the “purity” of the miner.
For example, a gold miner which obtains 25% of its revenues from copper also contained in the ore, or a silver miner which also produces large amounts of lead and zinc (both very common scenarios) are no longer the “pure plays” which are favored by investors. Such companies generally receive inferior valuations relative to revenues/profitability, and also are affected by price-changes for these other metals.

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