Rule: Small Gold Mine Will Never Make You Big Money
Source: Mineweb, Lawrence Williams (10/12/09)
"It doesn't make sense just to buy the sector."
How does this tie in with an often held view that it is junior miners and explorers whose stocks may provide better returns at high gold prices and in a rising gold price scenario?
It does fit well in fact. In any investment—particularly mining stocks—one needs to be selective. It doesn't make sense just to buy the sector. And in junior stocks this is doubly true, particularly with the explorers who may be operating on a wing and a prayer. Sometimes they find something significant and money can be made. Often they don't. Caveat emptor.
Basically Rule is correct. There may be exceptions, but in general a small gold mine (e.g., one that will only ever produce a maximum of say 30,000–40,000/oz. of gold a year) will never make big money, yet still exposes you to all the risks inherent in gold mining investing. Small producers also usually have short lives with insufficient reserves to prolong mine life. Again there are exceptions with some managing to work on a hand to mouth basis for a considerable amount of time, but generally these are the exception rather than the rule.
Be careful in your choice. Do your homework. Don't necessarily believe everything a junior miner or explorer tells you. They mostly present everything in the most favorable light they can. Pick operators that have at the very least the potential for significant expansion, even if they are only a small producer at the time of the investment—and also those run by people who have a good track record in the industry. That should help mitigate some of the inherent risks.