How to Buy Gold Mining Stocks

Gold continues to flop around like a beached octopus — there’s been a lot of flailing, but the famed yellow metal doesn’t seem to make much progress.

But then on Monday, something happened …

(Updated chart)

No wonder all the gold miners (the good ones, anyway) roared higher on Monday. Brigus Gold (BRD) gained 9.66%, Allied Nevada (ANV) shot up 10.33% and Eldorado Gold (EGO) added 9.99%. Zoom-zoom!

But the real test will come at the $1,486 to $1,487 per troy ounce level. That’s where the rally failed last time.

It’s also where the 61.8% Fibonacci retracement will collide with the descending 50-day moving average. What will happen there is important, so I’ll be watching those levels closely.

As Long as Gold Demand Continues,

Companies, Stocks Will Rise to Meet it

As you can see from the above snapshot of Monday’s trading action, investors who were patient during gold’s recent slide were rewarded nicely by its surge at the start of this week.

Now, you don’t have to be a day trader to profit from gold. The day-to-day price fluctuations don’t change the fact that there are plenty of miners with access to massive resource deposits … and the technology and leadership to bring them to market.

In particular, when gold goes up again, I believe we’ll find that the junior miners that have been crushed into the dust will be tomorrow’s value plays. Your goal, then, is to identify these “diamonds in the dustbin” today.

And right now, we are at an extraordinary period of time when we can buy actual producing miners for dirt-cheap prices. That doesn’t happen very often.

So, which companies are diamonds in the dustbin … and which will be left in the dust? Here are eight “must-haves” that I take into consideration when I’m mining for gold miner stocks.

Probably the single-most-important thing about a gold stock is …

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If You’re Selling Your Gold

(or Thinking About it) …

Gold’s been on its longest losing streak in four years. Holdings in the largest gold-backed ETF are also at four-year lows.

With gold at a five-week low, it’s clear that funds and other investors are dumping their positions in the yellow metal in favor of more-speculative returns in the market.

Should you hold on to your gold … get out while you can … or load up before the market changes its mind? Watch this explosive new video before you make any sudden moves!

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1) Good management.

Good managers have plenty of experience, are successful at bringing projects online, keep costs down, manage resources effectively, seek out new resources (and not overpay for them), know the difference between good debt and bad debt, and seek out strategic alliances.

To find good managers, find out what they’ve done before. A good track record, especially at another publicly traded company, could set a precedent for what you can expect them to do in their new roles.

You can start by looking for company names like Newmont Mining (NEM), Barrick Gold (ABX) and Anglo American (AAUKY) on their resumes. People who helped bring mid- to large-scale projects to production should make it to your list.

Then, the next thing I look for is …

2) Size of deposits.

Small miners can see their share prices go nowhere for years because few institutions will finance them and fewer companies will ever look to acquire them.

The larger the gold deposit or potential deposit, the better. However, having a small deposit doesn’t necessarily rule out a company as an investment possibility. A company with a small deposit could be attractive if it has a lot of potential to grow that deposit.

In other words, the company may own more than one mine, but perhaps not all of them are operational at a given time. Accordingly, everything can change if it has  …

3) Mines (about to come) online.

Projects that successfully come online can boost a miner from the junior leagues to the mid-tier producer level.

Also, the more working mines a company has, the less vulnerable it is to failure at any one mine.

It can take at least seven to 10 years to get a new mine up and running. Bigger companies have such a desperate need for new resources that they don’t have time to waste.

So, a junior company that is about to bring a new project online can become a takeover target. And owning a stock that is acquired by a company willing to pay a premium for it can be rewarding … sometimes very handsomely.

Why would a company pay above-market-value for a smaller outfit? A big factor is the…

4) Grade of the gold ore.

This refers to how rich the gold deposits are, and they have to be taken into context of how hard the gold is to get.

Everybody wants high grades across wide zones of mineralization. The richer, the better.

At this time, the big miners are worried that the price of gold is going to drop lower. So, they aren’t going to buy low-grade deposits. Times will change, and when it does, we’ll change our approach.

Getting to these highly sought-after metals is an expense, but you don’t want to invest in a company that is spending all of its money on pulling the metal out of the ground and bringing it to market.

In other words, you want to see them making a nice profit on the price per ounce. This brings me to the importance of getting an accurate read on a company’s  …

5) Mining costs.

Generally, the higher the grade, the lower the mining cost per ounce. And the lower the grade, the higher the mining cost per ounce.

However, miners have lied about their TOTAL costs for years, and it’s coming back to bite them.

The “production-weighted cash cost” of gold climbed for the 10th-straight year in 2011, hitting $627.96 per troy ounce, an increase of 15.8% over 2010, said CPM Group in its Gold Yearbook 2013.

This further increased to $718.37 as of the third quarter of 2012. (The consultancy explained that the data to determine these figures accounts for roughly 60% of total global mine production.)

Some miners talk about “direct cash cost” or some other weird measure that ignores the cost of smelting. In my view, these miners are to be avoided. If they have to fudge the facts, they’re not companies you want to own.

Companies that have cash, and know how to manage it, will outshine the rest … and so will their stocks.

6) Price-to-cash flow.

If the miner is already a producer, you want a low price-to-cash-flow ratio.

Mid-tier and smaller producers can sell for high price-to-cash flow because they expect new projects to come online and boost cash flow. So, it’s also good to check their pipeline and see how soon they expect to have projects completed.

It’s also good to know whether they have the means to complete these projects, whether on their own or through …

7) Access to Financing.

I like companies with a low debt-to-equity ratio and a decent amount of cash on hand. This allows them to rapidly expand their own projects, buy up competitors or junior miners for their reserves, and ride out any tough times with comparative ease.

If a company will have to raise cash in the future, you have to look at their track record of raising cash in the past.

8) Political Risk.

I’m not eager to throw money at a gold mine in a company with political troubles. And some gold miners have a history of shooting themselves in the foot when it comes to dealing with locals.

If you are going to invest in a company that has gold mines in the third world, for example, then at least pick one with good community relations.

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These are just some of the things I look at when I start researching gold companies. There are many other factors, but narrowing down your list to companies that fit these eight criteria will give you a top-notch pool of stocks from which to choose.

From there, you’ll be choosing the best of the best … an enviable position to be in!

As always, if you’re doing this on your own, be careful. But if you’d like some expert guidance here as gold tries to find its footing, my Global Resource Hunter members are up about 9% in just a few weeks on a gold-related investment. Plus, they get high-profit-potential commodity picks, many of which pay a nice dividend while they wait for the current volatility to play out.

Don’t be left behind when gold makes its next run-up — join us today!

All the best,

Sean

Sean travels far and wide to seek out small-cap values in the natural resource sector. His journey started in New England. As a youth he worked on Mt. Washington, on the cog railroad that runs to the summit.