How to Invest in Gold Mining Stocks

Video Lectures

Displaying all 8 video lectures.
Lecture 1
How to Invest in Mining Stocks (Introduction)
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How to Invest in Mining Stocks (Introduction)
See our full introductory course on investing in mining stocks:

This video is the first in a series on learning to invest in gold mining stocks. There are four key points discussed in this video:

1. Agggressive Growth: Small cap mining stocks constitute an aggressive growth opportunity, with certain stocks yielding several hundred percent gains in a few years time. However, these opportunities are rare, and the small cap mining stocks are ultimately high risk opportunities prone to losing a significant amount of value and enduring great volatility.

2. Dividends: Established mining firms can issue dividends. For those interested in buy and hold strategies focused on the gold market, investing in major producers can be a way to earn dividends in addition to share price appreciation while capital is tied up.

3. Relatively undervalued: While mining stocks and gold bullion are NOT interchangeable, they are driven by many of the same factors. When the spread between mining stocks and bullions widens, it can signal an opportunity for appreciation in mining stocks.

4. The Next Bubble: As inflationary monetary policy continues, many are speculating as to what the next bubble will be. As funds have not yet rushed into gold but as the idea continues to get mainstream attention, mining stocks may be the next opportunity.

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Lecture 2
Reading Financial Statements of Mining Stocks (Part I)
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Reading Financial Statements of Mining Stocks (Part I)
See our full introductory course on investing in mining stocks:

In this video, I go over the basics of interpreting financial statements for mining stocks.

For a much richer look at this subject, see our collection of videos on Reading Financial Statements for Stock Selection.

The basic points addressed in this video are as follows:

1. The purpose of reading financial statements is to help us identify the best and most promising companies; those with the best shot at having the most profits. Such companies have the most share price appreciation and thus benefit investors accordingly.

2. Financials should be viewed in a relative context; relative to other companies in the mining sector and companies of similar sizes. Because of this, when you are looking to make investments in mining stocks, you may wish to consider first creating a large data set or spreadsheet, and then narrowing down from there.

3. Google Finance is a tool I've found very useful in researching stocks listed on US and Canadian exchanges. Just type the name of the company in and you can see their financial data. We'll discuss using their scanning tool to find companies later in this series.

Here are the terms noted in this video:

Market Capitalization -- the market value of the company; how much it would cost to buy up all the shares. I like to think of $1 billion to $2 billion as the "sweet spot" where stocks have proven themselves a bit and have some committment from other investors but still have great upside potential. Below $500 million are the very high reward/high risk plays, and above 20 billion are often the "blue chip" mining stocks that are very stable and yield dividends. Market capitalization gives us an instant risk profile of companies.

Current Ratio -- Current assets divided by current liabilities. This is a measure of how fiscally solvent the company is; a current ratio below one suggests a company that may have trouble sustaining operations. Especially for miners that are pre-production, ensuring they have enough capital to sustain operations is vital. For the really small companies with a market capitalization of $100 million or less, I like to see a current ratio of 8 and up.

Debt to Asset Ratio -- This is related to current ratio, but it accounts for long-term debt and illiquid assets as well. If a company has lots of long-term debt, that can be a problem if it needs to secure more credit in the future, and it can make unappealing as an acquisition target.

Price to Book Ratio -- Take market capitalization, and divide it by the Equity amount listed on the balance sheet and you get your price to book ratio. This is basically a measurement of how much the stock is trading relative to how much its assets (property rights, mining material, etc) are worth. I like to see price to book ratios of under 3 for companies with a market capitalization of over $1 billion. Sometimes, when there are big sell-offs, you can find price to book ratios of under 2 and sometimes even under 1 -- meaning the company is selling for below what it's assets are worth. Sometimes this is a signal as to there being a larger problem with the company, but it can often be a signal of mispricing as well if what caused the sell off was an extreme move driven by an irrational panic of some kind.

4. Lastly it is worth noting that being selective is very important for those looking to succeed in stock picking. The big winners are few and far between, and so using financial statement analysis to filter out stocks is a part of the game for many stock investors.

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Lecture 3
Financial Literacy for Mining Stocks (Part II)
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Financial Literacy for Mining Stocks (Part II)

In this video I go over some key aspects of the income statement -- a statement released by companies, usually on a quarterly basis, that provides a breakdown of their income and costs.

There are three key parts of the income statement focused on in this video:

1. Earnings Per Share. This is the company's profits divided by outstanding shares. It constitutes what portion of the company's profits you are buying when you buy a single share (or the company's losses if they are not profitable). Profitable companies are usually the safer bet, but of course the risk/reward principle is important here; companies that have yet to reach profitability typically offer the most potential for share price appreciation. For companies that are not yet profitable, it is important to evaluate their balance sheet to ensure that they have enough cash and low enough expenses to sustain operations until they can finance their growth off profits.

2. Earnings Growth. As income statements are issued on a quarterly basis, you can easily see how income is growing or declining (made even easier by free tools like Google Finance). Historically, companies that have growing earnings have growing share price as well. In the mining sector, growing earnings are determined by (1) the market price of the metal and (2) how much metal the company can mine and at what cost. We'll get more into the costs component of mining in future videos.

3. P/E Ratios. Personally this is one of my favorite metrics that I rely the most on. Take share price, divide it by earnings per share, and we get the P/E ratio. Currently, the average P/E ratio of the companies in the S&P 500 is about 22. If you see stocks below that that look promising, that can be a sign that the share price is low relative to the company's earnings. Conversely, during the first dot com bubble we saw the S&P 500 have an average P/E ratio of over 45. High P/E ratios suggest the company may be overvalued, or conversely, the market has high expectations for future growth. Personally, I like to focus on stocks with P/E ratios below the S&P 500. There are mining stocks that are profitable and issuing dividends with P/E ratios below 15; personally, these are of interest to me as value opportunities that have solid potential for me to buy and hold for a few years.

In the next video, we'll discuss dividend yields as well as techniques for scanning for stocks.

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Lecture 4
Financial Literacy for Mining Stocks (Part III)
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Financial Literacy for Mining Stocks (Part III)

Topics discussed in this video:

1. Cash Flow Statement. The Cash Flow Statement, published quarterly and available on finance portals like Google Finance as well as on individual company web sites, show how much cash is going in and out the company.

2. Burn Rate. One of the opportunities studying the cash flow statement allows for is a chance at estimating the company's burn rate -- meaning the rate at which it is spending capital. For companies that do not have mines in production yielding gold they can sell, one of the biggest challenges is ensuring that they have enough capital to sustain operations until they can get their mine in production. So, investors may wish to look at the cash flow statement to get an idea of how much they are spending per year, and compare this with how much cash they have left. Generally, it's good to see a company have enough cash to sustain operations for a year. If they don't, they may need to shut down, sell to a bigger company, or take on debt. Taking on debt sometimes means they have to hedge future production -- meaning the lender owns some of the gold that is eventually produced. Understanding the burn rate helps us find companies that are stable in this regard.

3. Dividend Yield. On the flip side, for companies that are already established and doing well, investors can look at dividend yield to see how much they will get just for holding the stock. Dividend yield is expressed as a percentage. For instance, let's say a stock has a dividend yield of 5%. That means that per $100 invested in that company, investors will get $5 per year just for holding the stock -- in addition to share price appreciation if it goes up (or as a way of countering share price decline if it falls). Gold stocks have great potential to issue dividends when the price of gold rises significantly above the cost of mining, and so value investors seeking dividends may come into established gold stocks with this in mind. Dividends also discourage short sellers, since short sellers have to pay the dividend out of their profits.

Scanning. There are lots of scanning tools; I'll go into them a bit more later. Scanning tools let us find stocks that meet the financial criteria we are looking for. See our shopping guide for some other scanning tools and comments about them from InformedTrades Badge members.
Lecture 5
Basics of Gold Mining for Investors
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Basics of Gold Mining for Investors
See our full introductory course on investing in mining stocks:

Here are the basic points covered in the video:

1. Economic geology is complex. This video is just to give you a taste, and to cover some of the key elements. Studying geology in depth and having a mastery of the subject is what can really help investors pick the big winners in this area. It's worth noting that many big investment firms that focus on single stock selection in the mining space employ geologists.

2. Be skeptical. Everyone says they have a great mine with the most valuable stuff in the world that can be extracted at very low prices. Most of them do not. When doing number crunching in valuing mines, conservative estimates can help. Accordingly, it's worth remembering that trying to pick explorers, while that's where the big money is, is a tough game. Most fail. Those that already have production established, earnings to prove it, and the possibility of issuing dividends are the much safer bet, especially for the casual investor/trader.

3. Check the NI 43-101. The NI 43-101 is a report issued by mining companies listed on Canadian exchanges (the vast majority of mining firms) that is an attempt at quantifying the amount of minerals the mining company has access to for their given mines. I recommend focusing on conservative numbers in the report, as it remains to be seen if the geologist who conducted the report got it correct and what the final price of extraction ends up being.

4. Cost Per Ounce. In investor presentations, many mining firms will state their cost per ounce. The simple formula for assessing the value of a mine is

(market price per ounce of mineral - cost per ounce) * number of ounces

When you have the NI 43-101 and the cost per ounce, you can do some number crunching to give you an idea of what the company's potential profit is. Then you can compare this with its market capitalization to get an idea of whether it is undervalued or not, as well as its earning potential based on how you think the mineral it mines will fare in the future.

Related to cost per ounce is the quality of the ore in the mine. This is most simply observed by looking at what the grams per ton the company is reporting. Lower grams per ton means it will take moving around a lot of rocks to get the minerals, which means a higher cost of production. Conversely, higher grams per ton means cost of production are likely lower. These days, it is common to see 1 gram per ton or less with respect to gold, although there are of course exceptions that can yield much more.

5. History. Mines with minerals that are most easily extracted tend to form around fault lines. This is one of the reasons why the same geographic regions tend to continually yield worthwhile mines. In the United States, for instance, Nevada, Colorado, and California have historically been mineral-rich regions -- and so many companies today tend to focus on those regions as well. Canada, of course, has built much of its economy on mineral extraction. In addition to having favorable mines, these regions are also accustomed to dealing with the mining industry and are often inclined to view it as an economic boon and capable of dealing with the myriad of permitting and environmental issues mining brings.

6. Resources. For serious data crunching on the value of mines relative to the market capitalization of stocks, try the following links:
Lecture 6
Mining Stock Intangibles: Management, Investors, Jurisdiction
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Mining Stock Intangibles: Management, Investors, Jurisdiction
See our full introductory course on investing in mining stocks:

In this video I discuss the three major intangible factors I look at in single stock selection: management, investors, and jurisdiction.

I think these are some of the most important considerations, especially if you as an investor are more comfortable with psychology and abstract assessments rather than quantitative, hard science evaluations.

Management: Experienced management that shows they have industry connections is a safer bet. Casey Research ( in particular identifies the top management talent and simply follows them around -- a strategy that has worked very well for them.

Investors: Personally I like to see investors that I regard as "smart money participate in the stock, particularly if it has a small market capitalization and does not yet have positive earnings. Committed investors decrease the likelihood that the company will run out of money before getting to a point of self-sustaining profitability, makes it more likely that other investors will jump on board to drive price up, and can also set the stage for an acquisition that gives shareholders a nice appreciation. I regard major investors like Sprott Asset Management and senior producing firms with market capitalization of 15+ billion USD as being firms that can help lift a small mining company up -- and allow individual investors like myself to follow along for the ride.

Jurisdiction. Being in a safe jurisdiction that is pro-mining is especially important; in many parts of the world miners are at risk of being nationalized or of having special taxes, just for them. Other areas do not have the infrastructure -- i.e. roads, power plants, etc -- that make operations tough, even if there are great minerals in the ground. Other jurisdictions may ban certain mining techniques especially well-suited for efficient mining (like cyanide heap leaching, which is legal in Nevada, USA but illegal in Montana, USA), or may be especially slow in the permitting process. Lots of investors focus on Canada, which has long been a pro-mining, mineral-rich country with a stable political regime.

Comments, questions? Share them below! :)
Lecture 7
Types of Mining Firms
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Types of Mining Firms
See our full introductory course on investing in mining stocks:

Here are the types outlined in the video:

1. Explorers. The people with little more than a promise that they have gold in the ground they have the rights to. They probably don't, but if they do, the returns could be quite significant in a short amount of time. There are also opportunities for traders here; many of these stocks will bounce around regardless of whether or not the stock actually generates much of anything.

2. Producers. The small producers, often referred to as juniors, are characterized by having a production of less than 1 million ounces of gold per year. They are often in the sweet spot of not having explorer risk while not having the limited growth opportunities seniors do. Moreover, they are also often acquisition targets for the majors. Examples include AuRico Gold (AUQ) and Minefinder (MFN).

3. Majors. The majors, often referred to as seniors, are firms characterized by producing more than 1 million ounces per year and have a market capitalization of greater than $10 billion. These stocks are often lower risk, and issue dividends as well. Newmont (NEM) is a prime example.

4. Financiers. The prospector model is one in which a company acts like an investment fund and invests in a bunch of explorers and producers, typically looking to acquire royalty streams in which they get X% of the revenue mined by someone else for a given amount of time. This model has performed particularly well over the past few years. Examples here include Franco Nevada (FNV), Royal Gold (RGLD), and Silver Wheaton (SLW).
Lecture 8
Direct Registration vs Street Registration
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Direct Registration vs Street Registration

There are three options for owning stock shares:

1. Street Registration. This is the default option. It's good for trading because it has the lowest cost and most liquidity, but it does allow your broker to sell your shares and keep the proceeds, thus introducing significant ownership issues if your brokerage firm defaults.

2. Direct registration is the option that lists you as the owner of the security with the transfer agent. This protects you against hypothecation (your broker selling your shares and keeping the proceeds) but is not as liquid and not really feasible for trading.

3. Paper certificate is the third option. Not every broker and not every security offers it. It costs the most and is the least liquid, but provides the security of "touch value" that some prefer.

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