Originally Posted by
SilverBack
I disagree McGinty that the leaders are the way to go. If by leaders, you mean those with the highest production, then these often become overvalued and anyway, their returns on investment are likely to be lower, although, generally speaking, they do have lower risk. Newcrest, the largest Australian gold company, languished for many years because it overpaid to buy Lihir Gold (a large mine offshore of Papua New Guinea) that needed a lot of money spent in order to keep its production going, even though it is a rich mine.
If by leaders you mean those whose whose share prices are going up most, then be careful. The gold market on the ASX is a wild west arena and fluctuates strongly, along with executives and directors who are intent on retaining their positions. Market manipulation is rife, as is leaky news with insiders (or "friends" of insiders) getting advantage.
Recently the ASX has seen a number of gold producers get into serious trouble, including administration, looking for takeover, or committing to adverse funding at the expense of existing shareholders.
Often the mid-tier producers give better returns while developers (those with reserves who are establishing mines and processing plants) have higher risk but can give higher returns. Then there are explorers who have not yet established sufficient reserves and resources to consider a mine. These are the riskiest but can give very high returns and so should have smaller amounts invested.
A gold company's prospects are linked to:
a) its reserves - the amount of gold in the ground that is considered by a professional geologist to be economic for mining according to international standards (JORC)
b) its resources - the amount of gold in the ground including reserves but also that which is not yet assessed as reserve but for which drilling results indicate that there is reasonable probability that it could be
c) the level of production per annum
d) the life of the mine(s)
e) the cost of extracting and producing the gold over the life of the mine(s) - otherwise known as ASIC = All In Sustaining Costs
f)) the price of gold, taking into account the level of hedging in place
There are various measures used to assess the value of a gold company. Some of the most significant ones are:
i) the Enterprise Value (EV) to Annual Production ratio ($/oz)
ii) the EV to Reserve ratio ($/oz)
iii) the EV to Resource ratio ($/oz)
iv) Life of Mine in years, which generally speaking is the reserves divided by annual production
v) the Price of Gold less the AISC which gives an indication of the operating profit
Companies with high production generally have higher EV ratios than those with lower production. This reflects their lower risk. However, it is important to understand what the reserves and production output and costs will be going forward.
I do not advise buying any gold company and putting the shares on the shelf. I think they need constant monitoring and readiness to sell. There is too much constant change to let them sleep, including the price of gold, mine situations and market sentiment (which is often manipulated).
As gold is mined and produced, reserves lessen along with mine life. Exploration consumes millions of dollars but is necessary to establish new resources and reserves for continuing production. Establishing a process plant for new mines costs hundreds of millions.
Having said all this, I do not recommend NTL and if anyone wants to buy gold companies then the ASX is much better. So far as NZ gold activity goes, then Oceana Gold (OCG.ASX) with producing mines at Macraes in Otago and at Waihi (as well as The Philippines and the USA) is a much better prospect than NTL (which is a pip-squeak developer). OGC is producing about 525Koz of gold over the next year. However, check out the various valuation metrics for OGC and look at them all, because when a company produces comparisons across a range of companies, it always chooses those that are in its favour and ignores those which are not. If you want a bit of safety then look at producers with 200 Koz p.a. or more but recognise that "safety" is a very relative and tenuous term for any gold company. I only mention OGC because it has NZ mines. Whether it is a better investment at present than other goldies is a matter of opinion (not necessarily my own) and you will have to make your own decision. I own OGC as part of a wide ranging gold portfolio.
I have realised an average of 38% from gold companies over the past 4 years but my current holdings are close to break-even at present (positively) which probably gives some idea as to the volatility and risks involved. I invest rather than trade and so need to look at a long term picture, which is not easy with gold companies that delve underground to extract the gold and cannot "see" the gold but have to use various geotechnical methods to estimate where it is economic to mine.
Disclosure: I have shares in OGC and previously NTL but also have holdings in 20 other gold companies.