Portfolio Criteria
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Mark Twain is credited with saying “a gold mine is a hole in the ground with a liar standing over it.”

Translation: You can’t always trust a company to tell the truth, the whole truth, and nothing but the truth.

Even without the promoter hazards, mining stocks are a higher-risk proposition than the average S&P 500 stock…

  • Only one in several thousand exploration projects ever becomes a mine.
  • Analyzing a mining company requires an entirely different method than used to evaluate a tech stock or corporate bond.
  • Even professional mining stock analysts don’t always pick winners.

Those realities can make mining stock investing tricky.

Don’t let that discourage you. There is a mining stock evaluation method that can:

  1. Weed out the higher-risk plays, and
  2. Zero in on those with the greatest potential.

While it’s impossible to share everything I’ve learned over the years, there is a basic method that is always my starting point. It’s a method I encourage you to adopt as your own…

The 3 Legs of the Stool

A stool can’t stand upright without 3 legs. Remove one and it topples over.

The same analogy applies to investing in a mining company.

There are three fundamental pillars that support successful mining companies. If one of these core criteria is missing, or if conditions change for the worse—your investment can fail.

The three legs for a mining company are:

  1. People
  2. Politics
  3. Property

And I do mean in that order.

When I first hear about a mining stock that someone’s excited about, it’s invariably talk of “killer” drill holes or a prospective project.

That’s all fine, but it’s not where I start my due diligence.

If I’m not familiar with the company, I immediately ask, “Who’s behind it, and where is it located?”

You may be familiar with this three-pillar method, but don’t know how to use it.

Here’s a detailed look at how to examine each leg of the stool.

Just as important, I give you some very specific questions to ask. The answers will tell you if you have a promising mining investment (or not)…

How I Examine the People

I can’t overstate the importance of the people behind a project.

“I’d rather invest in a mediocre project with top management, than a top project with mediocre management.” —Doug Casey

The best people with the best experience and the best track record will know how to navigate through the tough decisions. A weak management team can screw up even the best of projects.

When you start examining the people, looking at the resume of an executive or geologist is not good enough for me. Anyone can make a resume look good.

Instead, I want to know two specific things about the people running a mining company:

  1. How did the stock do during their tenure at previous mining companies? Did they create shareholder value? Once you know the name of the companies, you can search historical stock prices for the answer.
  2. How much of their own capital have they invested in their stock? More skin in the game will tell you the level of management’s confidence in the company.

If you find strong answers here, you’ve got a motivated team that has a history of creating shareholder value. If I uncover weak answers, I almost always pass.

  • This is exactly where I start when I consider who to invite as a sponsor of TheGoldAdvisor.

I want companies with staying power.

I need to see management teams with proven success at creating shareholder value.

And I want to see confirmation of skillful navigation through the obstacles mining will relentlessly throw at you.

If you get the right answers to these two questions, you’ll put the odds of owning a successful mining stock greatly in your favor.

How I Examine the Political Jurisdiction

The mining jurisdiction—the country where a company has mining operations—is always a basic screening question. It must be.

Location, location, location. A gold deposit can’t be moved. So you must determine if a project is located in a country that is friendly or hostile towards mining.

Think long-term:

  • Does the jurisdiction have a history of changing mining regulations, raising taxes on miners, or making permitting difficult? Is there a large anti-mining movement among the locals?

Think twice before investing in a company with operations in a country where politicians frequently rail against mining. Even if their threats never become reality, it can scare off investors and depress the stock price.

And the present mining climate in any country is only as secure as the next election. Understanding the overall political attitude toward mining is critical.

Your starting point here is the Fraser Institute’s Annual Survey of Mining Companies.

What I like about this report is that the rankings are drawn from executives working in specific countries. It thus provides first-hand feedback on how friendly—or not so friendly—the mining climate is for a country.

Obviously, you’ll look for the higher rated companies.

Keep in mind the survey is based on results from the prior year. You’ll need to monitor the countries where you’re invested for changes that can impact your investment.

More than once I’ve seen the politicians in a country make sudden policy changes that hurt investors.

How I Examine the Property

Lastly, the property must be highly prospective.

How do we know if it is? Here are two things to look for:

  1. As many in the industry say, “go big or go home.” It costs just as much to build a small mine as a big mine. Focus on projects that are, or can be, big. Roughly speaking, I define that as a deposit that holds at least several million ounces of gold, and an operation that can produce 100,000 ounces/year or more (or show strong promise of getting there).
  2. Projects with higher grade ore. The “grade” of a gold mine refers to how much gold is contained within a measure of ore. It is usually stated in grams per tonne, or g/t. Generally, the higher the grade, the lower the cost of production per ounce of gold. However, what’s considered low grade could, in some cases, make for a good mine. Higher grade can make that easier.

The Starting Criteria for How I Pick Mining Stocks

I encourage you to make these criteria your starting point. This simple method will reduce your risk and give you the best odds of long-term success.

To show you how this works in practice…

  • All companies in our portfolio have completed our Questionnaire that address these specific criteria—and passed with high marks.

You’ll begin to see why I consider each of them strong speculations as you read through their responses to our pointed questions.

There are more criteria, of course, especially when looking at the different types of mining companies.

Nonetheless, if you start your analysis by putting every stock through the “3 legs” criteria you’ll greatly reduce your risk and begin to zero in on some of the stronger speculations in the industry.

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