Striking a balance between growth and safety in the sharemarket is hard at the best of times. However gold miners are in a league of their own.
In addition to the normal considerations an analyst uses to value a stock, gold investors must add unpredictable commodity prices, industry jargon and frequently changing production costs into their calculations.
The grey area between risk and reward becomes a whole lot wider when assumptions, such as these, are made.
Getting the balance 'just right' is difficult but there are a few basic rules of thumb an investor can use to eliminate which miners are, and are not, valuable.
For example, low all-in-sustaining-costs are important. Anything below $1,000 per ounce is good because it offers a healthy operating margin to low cost producers. Currently gold is fetching approximately $1,400 per ounce.
However one of the biggest factors affecting production costs is the quality of the ore.
For example, despite being a very small miner, Doray Minerals Limited (ASX: DRM) has produced 76,785 ounces of gold at 10.8 grams per tonne of ore, in this past 12 months. 10.8g/t au is an exceptional grade of ore. Unfortunately, over time, smaller miners such as Doray struggle to maintain low costs because grades drop-off and reserves run low.
Underground mining generally yields higher grades but costs more.
Fortunately for Doray shareholders the company's Andy Well project had a short forecast mine life at inception and its strong margins have enabled the company to pay down debt rapidly and increase exploration spend in the nearby Murchison region. In addition to the possibility of increasing Andy Well's mine life.
Having a robust balance sheet is essential for any stock and especially important for gold miners. It affords management the ability to increase capex spend and improve operational efficiency.
Northern Star Resources Ltd (ASX: NST) is now Australia's second largest mining company because it was able to capitalise on the worst gold price fall in over 30 years, which we experienced in 2013/2014, by acquiring gold projects at a discounted rate. This was only possible because it maintained a strong balance sheet.
Since our top analyst tipped the stock to readers (see below), NST's share price has jumped over 100%!
Lastly, it's important to consider diversification and available reserves when picking gold miners. For example, although Newcrest Mining Limited's (ASX: NCM) share price was hit hard by the recent gold price falls, it has some of the best gold mines in the world under its control. With global diversification it mitigates the risks associated with doing business in just one country.
As investors with exposure to Indonesia's unprocessed ore export ban can attest, maintaining a diversified project base is an important consideration.
Our top 3 high-risk/high-reward resources stock picks – Yours Free!
Picking gold miners isn't easy and many investors would say they're better off left to day traders and institutions. However using the simple criteria I set out above, I believe Northern Star Resources Ltd is one gold stock worth considering.