Criteria for Speculating in Gold and Silver Mining Companies - Refined

In an earlier post I set out my criteria for speculating in precious metals mining companies: 

I have started to speculate. When placing my bets, I look at companies with the following characteristics:

• seasoned management with proven track records
• good balance sheets (reasonable amounts of cash on hand and minimal debt loads) and a demonstrated ability to secure financing
• production underway or to begin shortly
• low costs of production and profitable operations in the face of low metals prices
• mines in geopolitically stable jurisdictions and good relationships with local residents
• mines within established mining camps (benefits of infrastructure, established labour pool etc.)
• a “good story” which is understandable

I do not involve myself with major companies at this stage in the mining cycle as the upside is generally not as great as more junior members of the community when gold prices increase notably. I ignore exploration companies and other ventures which have yet to reach production status as the risks are too high. Many of them are finding it very difficult to obtain financing. Later on in the mining cycle, I may look at such beasts, but not now.

I regularly visit Mine Web.  It's a promotional vehicle for mining companies.  Nevertheless, it is very useful in taking the pulse of the industry.  Occasionally, there are some great nuggets.  In this case, 

Rob McEwen has some advice for mining executives From a man that practices what he preaches.

McEwan's investment criteria make sense.  Here are a few:

First, I listen to management’s pitch and if it sounds interesting; second, I ask about their share ownership and if I find they are talking a big story without having a large investment in their firm, then my interest starts to fade. But, third, I look at how the market is pricing the company. If its shares appear to be selling at a large discount my interest can return. I tend to take large positions in explorers and small producers that I feel have big upside potential.

The location of a resource is very important. There are definitely countries that are unattractive to me, especially where there is no rule of law, high crime rates and greedy governments. Experience has narrowed my focus to the Americas and perhaps Europe. I have no interest in putting my staff’s lives at risk. In addition, I wish to avoid exposure to regions where corrupt practices are commonplace and the potential for us to get ensnared inadvertently in the new foreign corrupt practice laws that have been enacted here at home.

The market has spoken loud and clear; investors don’t want to buy a producer that has sold a good part of its future revenue. The impact of streams and royalties has been particularly painful during this period of low metal prices, as these instruments have hammered operating margins. A number of mining CEOs say it’s the only reasonable source of financing they can secure now, but to my mind their actions appear to be a Faustian bargain. They are selling their shareowners’ future profit to the devil and he has come to collect it.

I had not paid sufficient attention to the preceding consideration.  I will now.  As always, it literally pays to read. 

I like to be a long-term investor rather than a trader. During the 19 years that I ran Goldcorp, I was comfortable to hold my shares for the long term despite the ups and downs in the market. Perhaps because I was a large shareholder and the CEO that I believed that management and I could and would build greater share value over time. Another reason for my long-term view is market driven—shareowners don’t like to see management selling.

As to the general state of the market:

When you observe an inordinate number of new issues or secondary issues coming out in a short period of time and the media is full of stories of ever higher prices, that is usually a good indication that you’re nearing a top.

The bottom is usually close when there is tiny trading volume, no one is doing any financings and the media is full of stories about ever lower prices. Today feels like we are very near the bottom.

.... and that's why I am so interesting in speculating at this time ... but with the proviso that I take measures to try and select the best horses for the race.  

And in reading the article, one might be led to explore the benefits of investing in streaming companies.  Silver Wheaton has been a stalwart in my portfolios - added a few months after the company was established. The field is getting more competitive these days as there are now more participants.  The goode olde days are over, but profits are still there to be made, especially as mining companies are hungry for cash and willing to take extraordinary measures to stay solvent.