Sunday, 31 May 2015

The Real Value of Gold in the Ground - Mickey Fulp / Cipher Research

Mercenary Geologist Mickey Fulp continues to publish an interesting series of deeper studies with Cipher Research.
Previously looking at the real long term costs and profitability of gold mining and "adequacy ratios".

The recent publication looks at the more junior "gold in the ground" explorers and developers, identifying points of over and under-valuation.

A case study of Rainy River, (with it's perfect bull ending at the start of 2011), subsequently bought out by New Gold makes clear the cycles of value creation and destruction for investors buying at different points in the discovery and development process and in particular during the bull and bear phases when capital floods in and out of the relatively small gold mining market. Valuations are leveraged to peak and increasing gold prices rather than more conservative and eventually pessimistic assumptions.
Whilst Fulp dismisses Rainy River as never being on his radar due to over-valuation it is clear that in bull markets for gold miners go-to stories emerge which can move well over "fair value". Value is far easier to find in bear markets but cheap can get cheaper until the turn.

Fulp leaves with some checklists to consider

  • Because the consulting engineering firms operate in a highly competitive business environment, they are hired with the expectation of tailoring technical reports to the client’s needs and desires.....For this reason, investors must scrutinize engineering reports carefully. It is often necessary to make adjustments to the assumptions and key variables to arrive at a more realistic project value at any point in time........As an aside, have you ever come across a negative feasibility study? Remember folks, for every failed mine, there was a positive feasibility study
  • Too often we find the so-called “experts” that lay investors choose to rely upon are not experts at all. Instead they are brokers, investment bankers, or in-house promoters whose primary interest is in collecting commissions or fees for selling stock, deals, and private placements, or earning consulting fees from the company....Folks, please make sure that you understand the motivations of any expert, analyst, broker, promoter, writer, or talking head whose advice you choose to follow. Here are a few questions you can ask that will afford valuable insight into this matter:
    • Does he own shares in the company and at what price? 
    • Is he participating in the deal or placement with his own personal funds?
    • Will he collect a commission or fees for selling you the stock or deal?
    • Does he get paid to promote the company via fees, stock, and/or options?
    • Is he or his firm underwriting the deal for a fee, commission, and/or warrants?
    • Will he give you a full disclosure statement regarding his financial relationship with the company and/or project?

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