Investing In Gold and Silver Mines

First, its important to remember that these small exploration companies want to put their best foot forward, so the data released to the public will tend to be the most positive that they have found. Rarely will a company put out a press release to say something like “We drilled 25 holes, spent over $400,000 and didn’t find a dang thing!” Even if all that was found was a little sub-economic mineralization, they will tout that and try to make those results sound as hopeful as possible. Most small exploration companies are run by folks who own stock or options and so they have a significant vested interest in seeing the stock price go up. This is why you should keep in mind most press releases are written with an eye toward promoting the company’s share price.

Carefully consider any information and recommendations from advisors, newsletter authors and analysts as well. The quality of the information they provide varies quite a bit. Many have company ties with, or ownership of, the stocks they are recommending, so their comments may not be without significant bias. In addition, while most are very good salesmen, they may or may not have any particular knowledge of geology or expertise in the field of mining itself.

Drill hole grades, widths and depths: This is probably the point where most new investors stumble. One of the most common ways for an exploration company to test a property and see if it has any ore is by drilling. Depending on the type of equipment used, the drills either produce a core of intact rock, or a chip sample. Assays of the metals contained in the sample rock are made and the results reported as the amounts of metal contained in a ton of rock (sometimes metric tonnes are used). Intercept grades and widths are perhaps the most commonly reported technical information in mining and exploration company press releases. Potential investors ask: ”What do these numbers really mean and how should they be interpreted?” Here are some rough guidelines for gold mining in politically stable, favorable working environments:
Assay grades showing grades less than 1 gram of gold per ton may indicate mineralized rock, but are usually not economic. Results in this range may indicate some additional drilling may be advisable, but they do not show any material that could be mined and processed at a profit. Grades of 1 to about 8 grams per ton indicate material that is suitable only for surface mining as it is much lower cost than underground. Grades greater than 8 grams of gold per ton might be mined by underground methods as well as from the surface, depending on conditions and proximity to the surface. Again, these numbers are only rough guidelines as to what can be profitable mined, as profitability depends greatly on many factors. Grades reported in ounces per ton may be multiplied by a factor of 31.1 to convert ounces per tone to grams per ton.
Width of the intercept is also a critical factor. If you hit intercepts of less than 10 feet of ore, especially at depth, this is only minable by underground methods. Widths up to 50 feet are minable underground in most conditions, but may be mined by open pit if near enough to the surface. Greater than 50 feet widths on an ore body would be normally be surface mined if within a couple hundred feet of the surface, but may be mined underground using special techniques. Generally, surface mining methods are cheaper on a cost per ton basis, so where the ore could be mined by either method, surface mining is preferred as it is more profitable.
So if your company reports a 10 foot intercept of 3 grams gold per ton (around .1 oz/ton) at a depth of 200 feet, that is really too small for surface mining, and too low in grade to be mined underground. So by itself, that is an uneconomic intercept, even though it indicates some mineralization is present. On the other hand, if your company reports an intercept of 200 feet of 3 gram per ton ore from 150 to 350 feet of depth along the drill hole, that is a much more positive indicator, and if further good intercepts like that one are found, it may indicate a substantial body of surface minable ore.

Quantities of minerals discovered: If a company hits a few pockets of high-grade rock, but fails to find any large quantity of material, then the deposit may not be economic. Some time ago, a company I was interested in hit a couple drill hole intercepts of about 5-6 feet of 8 ounce per ton gold - now that’s very high grade material. Unfortunately, they drilled all around there and got only low grade uneconomic vein intercepts – it was just a hot spot and not enough tonnage to even think about making a mine. A few hot drill intercepts may be exciting, and send the stock price soaring, but if you cant find more good intercepts and identify at least a few million tons of economically viable rock, you don’t have much prospect of a building a mine. Once it is revealed that the surrounding drill holes don’t show much, the price of the stock is likely to head quickly back to earth.

Local costs and difficulties such as finding qualified personnel: The actual location of an ore deposit and the accessibility of the site can make a huge difference in the cost of mining the ore and recovering any valuable materials present.  So it’s a lot easier to get supplies and hire qualified workers in Nevada than it is in the remote interior of Alaska. On the other hand, it’s a lot easier to supply your mine in the interior of Alaska than it is in the remote parts of Bolivia and some other third world nations. Poor access, bad weather, and remote locations with few qualified workers nearby can greatly increase the costs of mining. This means that some deposits, which would be viable if located in Nevada, would not be politically viable in the interior of Alaska, where conditions are more difficult and operating costs significantly higher.

Political risks: While you can pretty much figure your costs and legal requirements in stable countries like the US, Canada and Australia, it is not the same in story in some small third world nations. There, your permitting plan might be to bribe the government officials and hope for the best. Unfortunately, coups and over throws can be commonplace – then perhaps you will find out that you bribed the wrong folks. It can even happen that once you are pulling millions of ounces of gold out of the ground, the dictator decides that your bribe is too small and he nationalizes your entire operation because wants it all! In those sorts of situations, stock prices will plummet.

Management: Does the Management of the company have the ability to get the project financed and the qualified folks to permit and build a mine? Sometimes the talent needed to promote a property and attract exploration funding is not the same as what is needed for an ongoing mining operation.

Unforeseen problems related to actual mining:   You never know what unplanned problems can happen while mining. Your mine may unintentionally tap into a lake and be flooded (as happened at the rich Cigar Lake Uranium mine), or the high wall of your open pit mine may cave in burying your ore under millions of tons of waste (as happened on the Carlin trend in Nevada). Your miners may strike, there may be a hazardous material spill, or any one of hundreds of other disastrous possibilities. In fact, there are a number of examples of situations where every thing seems to be going along just great, but unplanned and unexpected events can cause the efforts of the mining company to go very wrong.

In any case, before you invest in an exploration company, study up and see what the potential really is. Know and understand the potential risks and don’t take on more risk than you can reasonably afford. Be sure not to put all your eggs in one basket – it is a sound strategy to diversify and invest in a number of companies in a variety of industries. Take the time to learn about the mining industry in general – how it works, the processes used, etc. before you jump in and invest. Taking a raw property from moose pasture to productive mine is far more difficult than it may appear. The information in this article is presented for educational purposes, and it is not intended to be used as investment advice. The ore grade numbers presented here are rough guidelines only and the reader is strongly urged to fully identify and consider all the risks before making any investment.

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