Gold News

Good Mines, Bad Mines

Knowing the difference is key to gold mining investment...
GOLD and silver markets are turning the corner and moving back to the uptrend, reckons Julian Phillips at the
Mining companies are now recovering quite nicely, too.
Ahead of the 'credit crunch' in 2007, the common belief was that almost any mine was a good investment. Since then, many investors have learned a salutary lesson on the subject often seeing his investment fall to a level far below the price he paid. 
Each investor has his favourite gold shares and may continue to believe his chosen vehicle will reward him the most. Nevertheless, it's good to review what a gold or silver share is and what principle should govern an investor's selection of shares over all other principles.
What are your investing objectives?
Each investor usually has an investment objective, whether it is short-term profit, capital gain, dividend flow or the broad concept of 'total return' (capital and income returns added together). Which one do you fall under?
The most successful investors have the advantage of being able to reinvest their income flow from investments getting the joys of compound returns. This means that they have invested with shareholders in mind. When looking at an investment, one has to define it carefully, particularly in gold, silver mining companies.
After all, a mine is not gold and silver; it's a derivative of the metals, in that it relies on the prices of both gold and silver for its success. But it remains a corporation run by fallible people facing many corporate risks. A great deal has to happen in this structure for the individual shareholder to benefit from the gold or silver prices.
The first rule of investing in gold mining and other precious metal companies is to look for a company that is focussed on rewarding shareholders. This means that the cash flow they receive is targeted at paying dividends to shareholders.
Some companies do this by formalizing an agreement to pay shareholders a percentage after tax cash flow. They also define what costs they will be spending their capital on, including exploration costs. As a shareholder you can relate your investment potential to gold and silver prices.
Without this, how will you know the gold share will benefit from a rising gold price?
This was highlighted in the publication of Australian gold production in the December quarter. Remarkable on a low gold price, gold production had risen. At 74 tonnes, gold production was the highest it had been since June quarter of 2003.
Why? Gold producers are treating less low-grade material, which results in higher output and reduced costs. Lower prices forced a switch from lower grade ores to higher grade ores because of the need to maintain a particular level of profitability.
The cut in reserves being seen among producers all over the world has the effect of shortening the life of the mine while production rises. Producers usually aim to maintain profitability, not necessarily to increase it. So if the gold price rises, we expect production to drop as miners return to lower grade material -this extends the life of the mine, but is it in the interests of shareholders? Of course not! 
The days of pre-2007...when shareholders were content to see mining company stocks rise in price...are all long gone. The uncertainties of the financial world demand a specific return on the shareholders' capital employed. In other words, the investor needs to maintain a cash flow that justifies the capital value placed on their shares. 
What's important to investors is that the companies behind the shares are not companies who extend the life of mines at the expense of shareholder cash flows. 
Gold and silver producers who link their profits to dividends irrevocably reward shareholders. Investors should look for these companies. Such policies should be encapsulated in Mission Statements that define their approach to rewarding shareholders. A mining share will only reflect moves in the gold price, if the path to shareholder rewards is spelled out. If it isn't, then the link to gold is muddied, and risks are heightened.
Of course, the gold company that keeps increasing the size of its gold reserves faster than it uses these to produce gold, is the one that extends its life no matter the gold, silver price. The rate of production is then defined by its capacity and ability to produce. This number divided into the reserves is what defines its life.
This is the ideal mining company to choose.

JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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