Facebook
Twitter
Too many investors buy mining stocks with no idea what they are
really worth. We’re going to change that by giving you the tools to
figure out if that exploration stock is a good buy or not.
Last Thursday I discussed the
reasons behind regulation in the mining sector and
described, at a high level, this regulatory framework.
Today I’ll get into the nitty-gritty and outline the different
classifications of gold and silver ounces in the ground, what each is
worth and how you can tell if a mining stock is a good buy based on how
the market values those ounces.
Admittedly, this isn’t the most riveting material. But if you own
even one share of a mining company you need to know how valuable ‘your’
ounces are, so this information is critical.
Since a mining company’s exploration efforts take years, the
regulatory framework of the Canadian Institute of Mining,
Metallurgy & Petroleum (CIM) requires companies to
incrementally gather and report the data to you in the form of scoping
studies, prefeasibility studies and feasibility studies – and updated
versions of any of the above.
This reporting format is a good thing. It provides transparency to
the market on an ongoing basis, creates milestones that help a company
seek funding, and tells you if a mining project is likely to be
profitable – and thus make your shares of stock go up.
Without these checkpoints you’d be flying blind.
The CIM’s framework outlines three main categories and two
sub-categories for exploration-stage projects. The category each
potential ounce falls into depends on the quality, quantity, detail, and
interpretation of geological data, and ultimately the level of confidence
in this data.
Typically, a miner’s goal is to move ounces that fall into a ‘lower
confidence’ category up to a higher confidence category by gathering more
data (i.e. drilling) to increase confidence that the ounces can be
profitably mined.
This hierarchy of categories creates intense motivation for mining
companies to firm up their resource base because higher-confidence ounces
typically receive a higher valuation by the market.
While all three main categories are deemed to have some economic
value and are worth considering as part of a mining operation, it’s the
two sub-categories that include the