Dive into the often-misunderstood world of mining stock investments with our latest video.
I’m taking you on a bit of an exploratory journey, debunking common myths and unveiling the real factors that savvy investors consider when valuing mining stocks.
Inside This Video:
Beyond Market Cap: Learn why comparing market cap to ounces in the ground is a superficial metric and what you should be looking at instead.
Real-World Scenarios: Through practical examples, you’ll start to understand why some companies trade higher or lower per ounce in the ground.
Critical Factors Uncovered: Discover the impact of mining grades, strip ratios, the continuity of mineralization, and other things on stock values.
Geopolitical and Economic Considerations: Find out how jurisdiction and infrastructure influence the potential of a mining stock.
Insider Tips: Learn how to read between the lines of what mining promoters are really telling you.
🔍 Why Watch?
Myth-Busting: Shatter misconceptions about mining stock investment.
In-Depth Analysis: Get a more holistic view of what makes a mining stock worth your investment.
Investor Education: Empower yourself with knowledge to make smarter investment decisions in the mining sector.
💡 Key Takeaways:
Understanding Valuation: Grasp why some stocks may seem undervalued and the risks involved.
Market Dynamics: Appreciate how market conditions affect mining stock performance.
Strategic Investment: Learn to identify stocks with potential for high returns in various market scenarios.
Strategic Focus: Our guide is not just informative but also strategic, aimed at helping you make better investment decisions.
Never make any investment decisions based on my videos. This sector is very risky and this should not be considered investment advice. Always do a lot of your own research before investing your hard earned money.
#miningstocks #goldstocks #silverstocks
I think one big mistake a lot of mining stock investors make is relying way too heavily on the metric of the market cap versus ounces in the ground. So for example, one company might be trading at $15 per proven ounce of gold in the ground, whereas another company might be trading
At $80 per proven ounce in the ground. Now that’s a big difference, but I think that is a very unreliable metric to use when evaluating mining stocks. And in this video, we’re going to get into a number of the reasons why. In the world of mining stock investing,
You’ll often hear mining stock promoters talking about how cheap their stock is. And let me tell you, their stock is always undervalued, no matter how cheap or expensive it actually is. But one of the reasons they’ll give to justify or why they’ll tell you it’s such a great buy right
Now and why it’s so undervalued is they’ll say, look, our market cap relative to how many proven ounces we have in the ground is super low. For example, they might say, hey, we’re trading at $7 per proven ounce of gold in the ground, whereas our average competitor is trading
At $30 per ounce in the ground. So by this metric, we should be four times more valuable. So you should buy our stock because it’s such a great price. However, there are almost always good reasons for trading at a lower dollar value per ounce in the ground.
And in this video, I’m going to go over some of the reasons why some companies traded a higher valuation per ounce in the ground and while other companies traded a much lower valuation per ounce in the ground. So you can get an idea of what kind
Of deposit the company you’re interested in is looking at and how good or bad that deposit is. Now that’s not to say this is a useless metric because it can give you a pretty good idea of what sentiment is in the overall sector. For example, if one deposit today is trading at $15
Per ounce in the ground, and in the past in a bull market, a similar deposit has sold for $75 per ounce in the ground, well, that might give you an idea that you might be able to expect a five times or so upside in a nice bull market.
And also, this metric is pretty good for comparing one company to another company. Because if one company is trading at $10 per ounce in the ground and another company is trading at $100 per ounce in the ground, with this information you have a pretty good idea that one company, the one that’s
Trading at $100 per ounce in the ground is sitting on a very valuable deposit. Whereas the other company, trading at $10 per ounce in the ground, is sitting on a deposit that isn’t very valuable. Even though the one that’s trading at $10 per ounce in the ground might have a
Lot more ounces than the other company. It’s also worth noting that just because a company is trading at a low dollar amount per ounce on the ground does not mean that it’s a bad investment. As a matter of fact, a lot of investors in this space seek out those companies.
Because in a rip roaring bull market, those ones that are trading at a lower dollar value per ounce on the ground tend to have more upside because it’s a more mediocre project, generally speaking. Okay, let me give you a quick example here. So you have one company that can
Produce gold at one $800 an ounce. So that’s a pretty mediocre deposit. And then you have another company that can produce gold at $1,000 an ounce. And that’s a pretty darn good deposit. So today, gold is trading at approximately $2,000 an ounce. That means when in production, this company
Could potentially be making $200 an ounce. So $200 of profit per ounce produced, whereas this one has much better margins. And they’re going to be making $1,000 per ounce produced. So this is going to be, overall, the much better deposit. So that’s why this one might be trading at
A much higher valuation per ounce in the ground. But there are many other reasons that I’m going to get to. But I just want to show you why. Less good deposit has more leverage to the price of gold. So now, let’s say gold goes from $2,000 an ounce to $3,000 an ounce.
Well, assuming their costs stay the same, instead of $200 an ounce, this company is now going to be making one $200 an ounce. So a 50% increase in the gold price means a 600% increase in this company’s profits. Whereas over here, instead of making $1,000 an ounce, they’re
Making $2,000 an ounce at a $3,000 gold price. So a 50% increase in the gold price resulted in a 100% increase in their profits. So this is the main reason why a marginal deposit can have much better upside in a bull market. However, they’re much more risky because in a bear
Market now, it goes from having very little value to having no value at all, very, very quickly. So now let’s go over some of the reasons why companies valuation per ounce in the ground can vary drastically. Number one is grade. So let’s say one gold deposit has 5 grams per ton
Gold and another deposit has half a gram per ton. Well, the first one has ten times the grade. So that one’s typically all else equal is going to be a much more valuable deposit. The next thing to consider is the strip ratio. So the strip ratio is how much ground do you
Have to move that doesn’t have gold in it to get to the ground that does have gold in it. So, for example, if you have a high strip ratio where you have to remove ten tons of ground to get to one ton of ore, well, that’s going to be very expensive.
Whereas another deposit might have a strip ratio of one to one, meaning you only have to move one ton of worthless ground to get to one ton of ore. And that’s typically going to be much cheaper. So something you might want to look at is the strip adjusted grade.
So, for example, if you have a gold mine that’s 5 grams per ton, however, they have a strip ratio of five, well, you adjust that down to 1 gram per ton because they have to move five tons of worthless material to get to one ton of good material.
Another reason for the differences in valuation is the continuity of mineralization. For example, if you’re drilling a Porphyry copper discovery and you drill a hole a kilometer deep, and you have mineralization all the way through, and then you drill another one and it’s pretty much the same.
And another one and it’s pretty much the same, well, that’s very easy to predict what that’s going to look like. And you can be pretty confident that between each of those drill holes, the mineralization is pretty similar. However, if you drill here and you hit something good,
But then you drill here, here and hit nothing, and then you drill over here and you hit something good, well, that’s going to be something that’s going to reduce your valuation because it’s a lot harder to predict and it’s a lot harder to understand. And also there can be complicated vein system.
Things like that can make it more expensive to figure out what you have to figure out how you’re going to build a mine, and it can make the mine more complicated. Which brings me to my next point. The complication level of the mine that could potentially be built is going to
Make a difference in the valuation. For example, an open pit mine where the grade is really consistent throughout, well, that might garner a bigger premium than some other mine where the grade is very inconsistent. Another thing that’s going to affect the valuation is the stage of resource development. For example, there’s the preliminary
Economic assessment, the pea. And to get a pea, you don’t have to have drills very close together. Your drill spacing can be pretty far apart, but when your drill spacing is further apart, that means there’s less assurance of what’s in between. So a company at a pea stage may have a much
Lower valuation than a company at a feasibility study stage. So there’s three main stages, the pea, the pre feasibility, the pfs, and then the feasibility study. As you progress through those stages, you’re typically going to get a higher valuation per ounce in the ground because the results are more certain and a
Lot more money has been put into those studies to determine exactly what is under the ground. Another thing that’s going to affect the valuation is the jurisdiction. So, for example, if a mine is in South Africa, well, that’s a really unstable political jurisdiction. So it’s probably going to get docked
A lot by investors on the valuation. Or if it’s in Canada, that’s a more stable jurisdiction, that’s probably going to garner a higher valuation. And something else that’s important about jurisdiction is not just stability, it’s how long is it going to take to permit this thing. So, for example, if you have a
Mine in West Africa, well, those countries tend to permit projects pretty quickly. Whereas if you have a mine in Canada that might take seven years to get permitted, if it’s in many places in the US, that may never get permitted. So is it permitted or not? Can it get permitted?
And if it can, what is the probability that it does get permitted? If it is permitted, well, then those are going to get a much higher valuation. If it’s not, and people think it will get permitted, that will get a pretty high valuation as well.
And if investors think it can’t get permitted, well, that’s going to get a very low valuation because what is a million ounces of gold in the ground worth if you can never extract it? And something else that’s important about the jurisdiction is the geopolitical stability and the tax regime stability.
How much of the profits is the government going to let you keep? And are they going to change the rules after you already put all that investment into the ground? Because when you spend a bunch of money building a mine, it’s not like you can take those assets and move them somewhere else.
That’s money that’s invested permanently. So you really want a stable geopolitical jurisdiction and one with a stable tax regime. So you can calculate how much money and profits you’re going to take home into the future, whereas many of these developing countries have a pretty unstable tax regime.
And they may say that you’re going to be taxed at a 20% cut and that they’re going to take a 5% royalty or something like that, but then they change the rules after you invest all your money. And then they’re like, no, we’re going to double the royalty.
We want a 10% royalty, and you’re paying 30% in taxes or something like that. So that’s a really important factor as to determining what kind of valuation a company and their resource is going to get. And something else that is important for development companies, those going through the PEA PFS feasibility study stages,
And also in the process of building the mine and trying to get permitted and things like that, is, do you have the support of the locals? Because if you don’t have the support of the locals, if you don’t have the support of those stakeholders, that mine is not going to get built.
And what is a mine worth that’s not going to get built? Well, probably zero. So let’s say a company has a permitted project. It’s fully permitted. But something else investors need to know is, is that project financed? And if it’s not, what are the ods that it’s going to get financed?
A project that’s already permitted and financed is going to receive a much higher valuation per ounce in the ground than a company that is not. And in addition to that, like if they don’t have financing, does the market, do investors think they can get financing?
For example, if a company only has a market cap of $100 million, but they’re trying to build a mine that’s going to cost $500,000,000.05 times their market cap. Well, then what are the ods that that company is going to get financed to build that mine? Well, maybe it’s pretty low.
And in order for that mine to get financed and built, maybe it needs to be built by a bigger company. And if investors think that that company isn’t going to be able to get financing, well, then they’re going to be discounting that project a lot for that financing risk.
Another thing that’s going to affect the valuation is infrastructure. So you may have a great deposit, but if that deposit is 300 miles from any type of civilization, and to get in and out, you have to go in by a snowmobile or helicopter or something. Well, that is very very expensive.
Whereas if you have a project that’s, let’s say, 2 km away from a mine that’s already been built and they already have a mill that is going to need feed, well, that one is going to be valued at a whole heck of a lot more per ounce in
The ground than the one in the middle of nowhere. All else equal. Because if you have to build 300 miles worth of roads and you have to build a power plant, and you have to build power lines over hundreds of miles, and all this infrastructure that doesn’t exist, and you have
To build everything, well that can get very expensive really quickly and thus reduces the valuation of your project. And something else to consider is the size of the deposit. Is it a big deposit, and does it have lots of exploration upside? So for example, you might have a million
Ounce gold deposit over here and a 2 million ounce gold deposit over here. But over here we’ve already found the limits. What the hell is. Why are there balloons? So you might have a million ounce gold deposit over here and a 2 million ounce gold deposit over here, but if
You’ve already found the limits of this one, and you have not found the limits of this one, and the 1 million ounce gold deposit has a ton of exploration upside. So let’s say it’s a VMS style deposit, where those tend to come in clumps and there will usually be a bunch
Of vms style deposits together and you’ve drilled out one of them and you have a million ounces there, well, then the market might think, hey, this could be a 5 million ounce, a 10 million ounce deposit because it might be a series of 1 million ounce deposits.
So the more exploration upside you have, the better valuation you’re going to get and also the size of the deposit. Investors tend to prefer really big deposits because big deposits tend to deliver good surprises and smaller deposits tend to deliver bad surprises. And those companies with huge deposits tend to have a lot
Of great news coming out of them over the years. Something else to consider is the local labor force. So are you trying to build a mine in a place that already has a lot of mining around? Because if so, there’s going to be a lot of experienced
Labor around there who knows how to operate a mine. However, if you’re building a mine in a country that is brand new to mining, well, then you’re not going to have any experienced labor and you may have to fly in and out people who do have that experience.
And it’s probably going to be pretty expensive to train new people there so the labor force can actually be a big factor as to what kind of value that deposit is going to have. And another thing is, does management have experience, and do they have relevant experience?
So, for example, if the company wants to build a mine, and the management team has built lots of mines successfully in the past, well, then the market is probably going to believe that, yes, that management team can build this mine successfully, too. Whereas if it has a management team that has never
Built a mine, well, then the market is going to greatly discount that because that increases the risk a lot. And another important factor is metallurgy. Metallurgy. And another important factor is metallurgy. So is it easy and cheap to recover the gold that’s hosted
In that rock, or is it going to be very expensive? And you may only get low recovery. So can you recover 95% of the gold, or can you only recover 50%? And what kind of processing facility do you need to process that, and how expensive is that going to be
To build, and how expensive are the inputs going to be to extract those metals from that ore? Now, this can get really complicated, and I don’t even come close to having the knowledge to understand all this. So that is one reason why you need to invest in competent management.
Management who has done this successfully before? Because there is a lot of stuff in this that is really difficult to understand. Even if you’ve been investing in this sector for many years, there is no way that you have the knowledge and the expertise in all of these different sectors when
It comes to mine building the engineering, developing the model of what is underneath the ground based on the drill holes and what kind of mine is going to have to be built and how is that going to be processed to recover the gold and things like that.
So it can get very complicated very quickly. But if you invest in management teams who have history of doing all of this successfully, who have hired the right people to determine how to build the right mine and how to mine it in the most effective way
Possible, well, then you’re going to have a much better chance of being successful investing in this industry. And overall, the single biggest thing that’s going to affect the valuation per ounce in the ground relative to the company’s market cap is how much is it going to
Cost to extract that metal from the ground. Now, if you’re building gold mine and you can extract it for $500 an ounce, that’s super cheap and that’s going to be a very valuable mine. However, if you have a deposit and it’s going to take you $2,500 to extract an ounce of gold.
Well, then at $2,000 gold, you can’t make a dime. So the price of gold would have to go way, way up to make it worthwhile at all. And even then, it will still be a mediocre mine. So I hope this video gives you some things to consider when investing in these development companies.
And when you see these mining promoters say, buy our stock because we’re trading at $5 per ounce of gold in the ground. Well, when they say that, you can have pretty good idea that there’s a lot of problems with their deposit that are causing investors
To value it at such a low amount. Thanks for watching. And next, watch this playlist of videos that are going to help you become a better mining stock investor. And I’ll see you over there.