Which Rookie Gold Miners Are Poised To Thrive?

February 3rd, 2016 by

As has been documented, the gold mining industry is in a transitional phase. As part of this sea change, the one overarching theme is that the biggest players are losing their grip on the industry. New business models are emerging as years of low prices are taking a toll on major mining firms that believed they could weather the storm.

Brucejack Mine, located in Canada. Source: Pretium

Brucejack Mine, located in Canada. Source: Pretium

This opens the door for a new crop of up-and-coming gold miners that will try to displace their larger counterparts in the industry.

In a wonderfully instructive article that appeared on Mining.com, Mining Engineering PhD Vladimir Basov offers some insight into some of the most viable open-pit and underground gold mining projects. These projects are mainly owned and operated by small junior miners, though bigger names—like Eldorado (NYSE:EGO; ASX:EAU; TSX, SWX:ELD) and Barrick (NYSE, TSX:ABX)—also make appearances.

Open-Pit vs. Underground Mining

Dr. Basov breaks his list into two categories: open-pit mines and conventional underground mines. The difference between these two methods is an important consideration not merely because of the different techniques involved, but because of the costs, risks, and trade-offs associated with each type of mine. Here’s a good explanation of the two types of operations—it deals with uranium mines, but the same principles apply to gold mining.

New Liberty Gold Mine, located in Liberia. Source: Aureus Mining

New Liberty Gold Mine, located in Liberia. Source: Aureus Mining

Basically, open-pit mining is safer for the workers and less expensive. Underground mining comes with greater radiation concerns and requires more expensive equipment, but these costs are counterbalanced by the higher grade gold ore that they usually yield. (You’ll see evidence of this in the list below.)

How Gold Mining Is Different

It’s worth briefly quoting Dr. Basov’s explanation of what separates gold mining from just about any other type of resource extraction:

The gold market is not a traditional mineral commodity market where one is able, under certain assumptions and limitations, to analyze supply/demand relationships and to make reasonable forecasts regarding future prices and absorption rates for a selected metal. While fundamentals play a role gold is most often valued in terms of an investment instrument or other intangibles including its attraction as a “safe haven”, especially at times of global economic upheaval.

Primary gold producers, mining companies, add just a couple of percent of gold to the overall accumulated gold inventory annually, and thus can barely predict, not to say control or influence gold prices.

In the light of highly volatile gold market, established and soon-to-be miners have to have superb assets . . .

The point here is that judging which emerging gold mines (what Basov calls “rookies”) will do well is much less straightforward than, say, picking a viable copper or lead miner. That is, unless you know what to look for.

Top “Rookie” Gold Mines

The first chart below from Mining.com lists underground mines, while the second chart pertains to open-pit mines.

rookie-miners1rookie-miners2Notice that the general rule about the highest grade gold ore coming from underground mines holds to form here: All of the open-pit projects have lower average gold grades than their underground counterparts.

Also, gold’s universal character comes through the charts, as the 10 mines are represented by 9 different countries. These sites range in geography and climate from the snow-capped mountains of northern Canada to the lush green forests of Liberia in West Africa. (Compare the images at the beginning of the article for reference.)

The moral of the story is that the metrics normally used to evaluate mining companies in general must be tweaked a bit when it comes to gold miners, especially newly commissioned projects.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.