The Motley Fool

Five tips for picking a winning gold company

Gold companies have been hammered over the last two weeks in response to the miserable gold price and the prospect of things getting worse.

But investors with cast iron stomachs and plenty of time on their side may be weighing up if there is value to be had from the current distressed prices of Australia’s gold miners. If that’s you, here are five tips for panning through the dirt to find a winner.

1. Buy the lowest cost producer

Cash is king in the mining business and above all else right now, gold producers with the lowest all-in sustaining costs stand the best chance of survival. Mine location plays a big part in the cost of production, with more remote locations costing more to operate. Similarly, the deeper the gold is in the ground the more expensive it is to get out, making open pits much cheaper to operate than those underground.

Costs range notably between companies. For the most recent September quarter, Newcrest Mining (ASX: NCM) had all-in sustaining costs of $1,093 per ounce, while Northern Star Resources (ASX: NST) was as low as $996 per ounce.

Perseus Mining (ASX: PRU) fared particularly poorly with “all-in site unit cash costs” of US$1,342 per ounce – higher than the current gold price if US$1,232 per ounce.

2. “Resources” vs “reserves”

It is important to understand the difference between “resources” and “reserves” when comparing different companies. Resources are natural concentrations of gold (or other minerals) that have the potential to become mineable.

Resources can only be counted as reserves after careful drilling, testing and mapping has been conducted to determine the gold can be viably extracted.

For example Newcrest Mining’s 2012 group Ore Reserves are estimated at 87.3 million ounces of gold, while Mineral Resources (which includes Ore Reserves) are estimated at 161.2 million ounces.

Figures for either should be independently and professionally verified.

3. Trust thy management

In times of crisis it’s best to have a sturdy and experienced management team at the helm. As Warren Buffett would say, “it’s only when the tide goes out you learn who’s been swimming naked”. The tide is well out, and several companies have had management team shake-ups in response.

Trusting the team at the top is vital. Good track records and investor-friendly decision-making are positive signs.

4. Growth and expansion potential

The company you target should not only be cheap, profitable and well run, but should also have avenues of growth open to it. If or when the price for gold corrects, this will make these companies especially attractive to investors. Silver Lake Resources (ASX: SLR) is one company with options to expand production if the price of gold rises.

5. Be prepared for the worst

Remember that at the end of the day every gold miner is at the mercy of gold prices, the drivers of which are unique and fickle. According to some analysts, it could be a year or more before there is any material change in gold price. Some companies may not survive.

Foolish takeaway

Finally, if you do find your dream gold producer, remember to protect yourself by limiting your investment, diversifying over other industries and monitoring for any negative changes in your new asset. Good luck.

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