Here’s an interesting report on just what it takes to sort out how likely a gold miner is of becoming a major winner…
By Louis James
In the investment world, there’s no such thing as a sure thing, and if anyone tells you they have such an investment, you should run the other way. Fast. But sometimes, the odds are so clearly stacked in one direction that it comes pretty close.
How can one be so sure? Due diligence, of course; the devil is in the details—and so is the profit.
It’s impossible to illustrate this without tooting my own horn a bit, so please bear with me on that. The point of the story is critical to investments in all sectors and should help you with your own.
My sector—my specialty—is mining. I’ve been kicking rocks around the world for more than a decade now, learning geology and engineering and metallurgy from world-class experts in their fields. But the point is to make money, not just to figure out nature’s geological puzzles, so I’ve also immersed myself in the world of legendary investors, learning all I can from their successes and failures.
The result is that I now have an encyclopedia of mineral exploration and exploitation projects in my head, as well as experience with thousands of companies in the field—and the outcomes of their efforts. This enables me to very quickly sort the wheat from the chaff.
I’m sure it won’t surprise you if I say it’s mostly chaff out there (I’m being polite), so the due-diligence “trick” is to disqualify an investment idea as quickly as possible. That way, you spend precious time digging deep into only the best opportunities and risk precious funds only on the very best of the best. I can knock out more than half of the pitches that come my way in 60 seconds or less, and I can knock another four out of five opportunities within five minutes. The real contenders can take hours or even days to thoroughly vet, depending on how responsive management is (or how clever they are about hiding potentially fatal flaws).
Now we get to the part where the rubber really hits the road. When an investment opportunity looks great on paper and it has survived my best efforts to disqualify it, my MO is to go see the project in question. Due diligence in person—literally kicking the rocks in my case, on surface or underground—looking for that rarest of rare beasts: a metals deposit with clear evidence of the capacity to become a profitable mine.
Usually the result of all this due diligence is a level of comfort; the opportunity has survived all my efforts to drop it, has a clear value proposition for investors, and looks like a reasonable speculation.
It does happen sometimes—very rarely—that I come away from a due-diligence investigation thinking, “Wow! I can’t believe the market has overlooked this great story.”
I can’t honestly quantify it for you (I intend to keep track going forward), but I can tell you that when an opportunity impresses me this way, it almost always turns out to be a spectacular winner. It’s never a sure thing, but the odds are great, and the returns… well, they’re measured in three-digit percentages, or sometimes even four.
A case in point would be a trip I took to see a high-grade gold project in Canada last year. I can’t name the company in fairness to my paying subscribers, but it’s a well-known story that fell from grace because the mine builder the company hired to take the project to production adopted much stricter criteria, slashing the “official” grade of the deposit. For technical reasons, this was the right thing to do, but the market hated the drop from ridiculously high grade to merely high grade.
So the stock was selling cheap, but the question was: will the new mine plan deliver and send the share price back up again?
On paper, it looked like the company was deliberately pursuing an “under-promise and over-deliver” policy, but when it comes to the reality of blasting a bunch of rock to rubble and shoveling it through a delicate chemical plant, there’s really no way to know without inspecting the operation in person.
Again, my usual hope is to fail to find any fatal flaws, leaving me with a reasonable speculation on a positive outcome that can “move the dial.” This time, just about everything I saw exceeded my expectations:
- No expense was spared on new, state-of-the art vital equipment, but not a penny was wasted on cosmetic foolishness or management perks.
- Underground drilling right in the guts of the deposit was finding more gold than the company resource model predicted, not less.
- Great pains were taken to ensure worker safety (even at its best, actual mining is still dangerous).
- The project had major production cost advantages due to being located right in the heart of a prolific high-grade mining camp with plenty of water, power, and trained personnel available, as well as strong government and community support.
- Nothing was sloppy; everything looked to be executed to the highest standards. The technical people all exhibited high levels of knowledge and competence.
- Key point: the project looked far more advanced than the company’s timetable for starting production implied it should be.
That last point really impressed me. I came away convinced that the company would start producing gold sooner than anyone who hadn’t been there would expect. That made this opportunity one of my top picks for 2015. And now the news is just out that I was right; the company has started processing ore earlier than forecast.
As I write, the stock is up 45.6% from its 2014 low, which was hit last November, but due to the volatility in the gold market, it’s still relatively cheap, making it a great speculation on my other forecast: that the mine will be profitable at current gold prices, can still make money at substantially lower gold prices, and will perform phenomenally well at higher gold prices. That’s all to be determined, but I’m very bullish.
The takeaway here is that it all comes down to due diligence. There are no sure things in the investment world, but serious due diligence can show objectively undervalued opportunities poised to deliver in spades.
Granted, this is my specialty, but I’ve met individual investors in the field as often as I have other professional analysts, if not more so. It may not be easy, and parts of it may be boring, but it is something anyone can learn to do, and it’s the key to stacking the investment odds in your favor.
This is why I always say that if one wants to make serious money investing, one has to get serious about due diligence.
For a glimpse at the kind of in-depth research that goes into every one of my recommendations, click here to read more on the mining company mentioned above. I don’t expect shares to stay where they are for long.