It's fair to say that gold miners have been a terrible investment over the last 12 months. The falling price of gold resulted in not only big operating losses for many gold miners, but massive balance sheet writedowns for some as well.
However now that the price of gold has stabilised (currently sitting at US$1,338 per ounce) it could be the ideal time to add gold exposure to your portfolio. So here are five tips to pan through the dirt and find a winner:
1. Buy the lowest cost producer
If the last 12 months has taught us anything about the gold mining industry, it's that All-in Sustaining Costs (AISC) make or break a great gold mining investment.
Costs range notably between companies. For the most recent reported March quarter, Newcrest Mining Limited (ASX: NCM) had all-in sustaining costs of $988 per ounce, while Beadell Resources Ltd (ASX: BDR) was as low as $937 per ounce.
All else being even, buy the lowest cost producer.
2. Understand how "resources" differ to "reserves"
When comparing miners it is important remember that resources are 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 that the gold can be viably extracted.
At 31 December 2013, Newcrest Mining's Group Ore Reserves were estimated at 78 million ounces of gold, while Mineral Resources (which includes Ore Reserves) were estimated at 150 million ounces of gold.
Figures for both resources and reserves should be independently and professionally verified.
3. Check the management
As Warren Buffett would say, "it's only when the tide goes out you learn who's been swimming naked". When the gold price tide went out last year investors quickly learned which management teams were ill-prepared.
Trusting the team at the top is vital. Check management and key board members have established track records with successful companies and have a history of demonstrating investor-friendly decision making. Northern Star Resources Ltd (ASX: NST) is one company which has demonstrated this over the last six months.
4. Growth and expansion potential
A winning gold miner should not only be low cost, profitable and well run, but should also have avenues of growth open to it. If the price for gold shifts upwards, these will become the most sought after companies.
Silver Lake Resources Limited (ASX: SLR) is one company with options to expand production if the price of gold rises, including reopening its Murchison Gold operations.
5. Focus on quality AND quantity
When it comes to gold, quality and quantity are both key factors. Quality is measured by the 'grade' of reserves which is in grams of gold per tonne of ore. Generally, higher-grade deposits result in lower costs of production, however underground mining is often much more costly than open pit mining.
