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No matter which gold miner you buy, you are going to expose yourself to some risk. 
Further complicating the issue, the least risky companies are nearly always overvalued on a purely quantitative basis. However, there are 6 ways that an investor can mitigate the risk associated with investment in mining stocks [and they are outlined in this article.]
The above introductory comments are edited excerpts from an article by Ben Kramer-Miller (goldstockbull.com) originally entitled 6 Tips for Picking Winning Gold Miners.
The following article is presented courtesy of Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.
Kramer-Miller goes on to say in further edited excerpts:
In order to increase my chances for success, I look to do the following 6 things when investing in a gold miner.
1–Invest alongside management
You want to bet on management teams that have a substantial stake in the company. A good rule of thumb is a 10% minimum, but the threshold should be higher for smaller companies.
When management owns shares in the company it means that its members want the company to succeed, and it also means that they believe it will succeed. When managers don’t own a significant stake in the company, it can signal that management’s interests aren’t as closely aligned with shareholders as they should be.
2–Invest alongside winners
Find companies that have management teams that have succeeded in the past and that are using their past success to leverage their potential future success.
Management teams that have succeeded in the past are more likely to do it again. Furthermore, they are better able to overcome the challenges that will arise as they bring mines into production…
3–Pick good places to mine
….I like mines that are near, but not too close to, minor cities…[as such] areas have easy access to key infrastructure which can determine whether or not a mine is economic. Access to roads and other transportation, water, electricity, and labor are all critical elements.
Mining camps have an added advantage because they have communities of people who are a part of a mining culture…[and companies located in such areas] are more likely to attract talent, get financing and [become] permitted, and find more gold (gold deposits are often found adjacent to other gold deposits).
4–Pick low-cost miners
While grade is a key component in keeping costs down (the higher the grade, the lower the cost, the greater the profit margin),…management teams that keep costs down are another extremely important component…. They know how to operate mines efficiently and have a greater chance of creating long-term value for shareholders…
Operators of low cost mines have a way of thinking about mining that allows them to bring out efficiency, and I think they have a better chance of generating shareholder value and leverage.
5–Emphasize small gold miners
Small companies are often riskier, but with greater risk comes greater returns. If you are able to perform your due diligence and narrow your choices to the small cap stocks with the best prospects, the returns can be astronomical…[In addition,] while most investors assume that larger cap companies are of higher quality, there are other reasons to consider smaller miners:
- small companies are easier to manage because they have fewer projects. Executives at larger companies have to oversee a dozen or more mines, and they wind up spreading themselves thin. What smaller companies lack in project diversification, they often make up for with a laser-like focus on optimizing the economics at their core project.
- small companies are often overlooked by the investing public, who focuses on the 5-20 largest companies and only companies that trade on the NYSE or NASDAQ. If you think small, you’ll find companies that large mutual funds and hedge funds simply can’t buy. Their stock price is below $5, they make lack liquidity and the funds would have to purchase a significant share of the company to move the needle. With small cap stocks, you will often encounter companies where management owns 15% – 25% of the outstanding shares. This means your interests and managements’ are aligned. Finally, you’ll find companies that can make small acquisitions that can move the needle.
- large companies have to deal with Wall Street scrutiny more often than smaller companies, who only have to deal with scrutiny from industry insiders. This means that management at large companies have to focus on quarterly numbers, and this could lead to short-term decisions that aren’t always in the best interest of shareholders.
- large-cap miners have a limited number of projects significant enough for acquisition potential and they can only sell unwanted projects to other large companies.
- large companies simply lack the same percentage growth potential of smaller miners. Their growth curve has flattened and the chances of hitting a home-run with the major miners is pretty close to zero. The limited returns they offer do not adequately compensate for the operational risk. Investors might as well own the metal or pick up diversified ETF such as GDX.
6–Find companies with assets that compliment one another
When you construct your portfolio, you don’t just group together a bunch of stocks, bonds and commodities. You diversify and balance risks, and you try to find assets that compliment one another. Mining companies that have assets that “work together” or compliment one another can succeed in many different scenarios…
Conclusion
The above are by no means hard and fast rules…[but they are] easy to follow, even if you don’t have a degree in mining, business, or geology, and very effective…[so I] hope that by using them as guideposts you…[will have above average success in] picking the winners in the next upswing in the gold bull market.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*https://www.goldstockbull.com/articles/6-tips-picking-winning-gold-miners/ (Copyright © 2014 Gold Stock Bull – All Rights Reserved; If you prefer to let us do the research and heavy lifting for you, click here to subscribe to the GSB Contrarian Gold Report.)
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