At the present juncture, investing in gold, gold stocks, and gold mining stocks is rampant. Which brings up an important question: Why should an investor buy the stock of a gold mining company? The crux of any mining company’s success revolves around the property to be mined and the productivity of the property. To attain productivity, a number of logical and progressive benchmarks are necessary. Once these benchmarks are achieved, a mining company may be viewed as established. Essentially, the road to success involves three steps: mining, management, and politics. A brief overview of the steps is provided below. The example utilized is Pershing Gold, which, so far, fits the standard template.
Mining
A company will either refer to a property’s resources or its reserves. The difference between the two terms is important. Resources refer to the metals/minerals that may exist in the ground of a property. Neither the quality nor the quantity of the metals has been confirmed. The term reserves is used when extensive and reliable testing has taken place and the company is assured of the quantity and quality of the metals in the property. As a rule, new mines or deposits are found near or along a trend of existing mines. Initial work on such properties includes geological, geochemical, and geophysical work. Based on these results new exploration strategies are determined until drill targets are defined.
Successful exploration can result in dramatic increase in the value of Pershing Gold and is therefore of great significance to the equity markets. Once a mineral/metal discovery is made, it is important to define the size of the ore body in tons and the grade or quality, for example, the amount of gold as ounces per ton of ore. This ultimately sets the valuation of the deposit, which, in turn, affects the value of Pershing Gold and the company’s share price.
The next step involves feasibility studies. Pershing Gold has to establish the economic viability of the resource project. Engineering and financial models of the project are constructed to determine the economic return that might be expected. If Pershing Gold determines the return is sufficient to warrant the capital expenditure needed to develop the mine, then the project will proceed.
Once the feasibility study justifies the project, then access to the ore body takes place, either by open mining or underground mining techniques. Pershing Gold will need to provide support infrastructure for the project and the processing plant, transport, power, and water facilities.
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