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ABCs of Gold Stock Analysis

Founder & Chief Editor of Gold Eagle
April 17, 1998

Every week we receive email from many parts of the world requesting information about HOW TO EVALUATE A GOLD STOCK. Addressing this growing need we present a general procedure analysis that the average investor can perform by himself. It is by no means a definitive and all encompassing evaluation method. Nevertheless, it will provide the investor a rational basis for investment decision.

Most of the evaluation time will be in acquiring the data - simply because Wall Street is too preoccupied with hawking the DOW to 100,000. NO, there is no typo. Wall Street would have everyone believe that the "New Investment Era" has miraculously dispatched henceforth economic and market cycles to only history existence. Consequently, the average naïve 20-something year-old stock broker believes the markets will continue to rise until the HEREAFTER. UNFORTUNATELY, LIFE "AIN'T" THAT ACCOMMODATING. Never has been… never will be.

Following is a minimum evaluation all should make BEFORE committing more than 5% of his total net worth to gold mining stocks. By going through all the steps, the investor will be better informed than 95% of others who purchase precious metals mining shares - and even more knowledgeable than 85% of the brokers out there. It will be educational and enjoying - something you may want to share with family, friends… indeed, even your stock broker… that is if he has an open mind.

Three Basic Approaches

A complete analysis should contemplate the three basic areas of Security Analysis: FUNDAMENTAL, TECHNICAL and INTER-MARKET ANALYSIS. Again, it is noteworthy to recall THIS IS NOTE A DEFINITIVE evaluation method - RATHER, it is the minimum due diligence a person should exercise before making a substantial investment. The over-riding assumption for this analytical technique is focused on medium to long-term investment purposes - AND NOT FOR SHORT-TERM TRADING, which necessarily takes into account a whole different set of factors.

In the event some of you analysts out there feel strongly that another aspect should be included, then by all means send it to GOLD-EAGLE for inclusion. Most of the evaluation steps are in descending order of importance per the opinion of this analyst. Undoubtedly, some analysts will dispute the sequence, because it is somewhat subjective.

Fundamental Analysis

  1. Reserves -

    Preferably, gold reserves should be increasing or at least stable for a number of years -- indicating that new reserves are keeping pace with production depletion. Extra bonus points would accrue to a firm which demonstrates growing annual production and a healthy reserve picture. In this same regard a company's focus on searching for new gold property discoveries is a definite plus.

    Total Capitalization to Reserves should be calculated and compared to the same ratio of other mining stocks to determine how 'expensive' the reserves are. This is calculated by the simple formulas:

    Total Market Cap = Total Number of Shares Outstanding X Price/Share

    Price of Reserves/Share = Total Reserves/Total Number of Shares Out

    This reflects the market's value of gold in the ground

  2. Capitalization -

    It should NOT have an inordinate amount of shares outstanding. However, this analyst still has not found an exact standard or reference point, which would allow one to ascertain what indeed is over-capitalization. Nonetheless, comparing the number of shares to total reserves and annual production will give some measure of over-capitalization. The latter needs then be compared to the same data of other gold mining companies. One of this analyst's preferred indicators of over-capitalization is comparing the market price per ounce of production of a particular company - and comparing it to the same ratio of other gold mining companies.

    Total Market Capitalization/Total Annual Prod = Market Price/Ounce Prod

    This reflects the market's value of gold production per ounce

  3. Quality of Management -

    It should have a proven record of outstanding experience in the mining industry. Also, it is imperative to know whether management identifies with the company's success - manifested by a meaningful share ownership.

  4. Mine Life -

    It should be more than 10 years.

  5. Institutional Investors -

    It is always comforting to know that there are well-recognized institutional shareholders - who know how to evaluate mining companies, and obviously have done their due diligence. In the absence of any Institutional investors, more in-depth study and evaluation are called for.

  6. Merger or Acquisition Possibilities -

    Extra bonus points accrue to companies which might be subject to merger or acquisition by a senior gold producer. A HYPOTHETICAL EXAMPLE might possibly be a "Barrick Gold," evaluating the extreme low cost of acquiring substantial gold reserves by merging with a "Durban Deep." The HYPOTHETICAL EXAMPLE is described in minute detail in the GOLD-EAGLE study entitled, "Mother of All Gold Mergers" - which may be found at:

  7. Production Costs -

    Compare the company's production costs per ounce to other gold mining firms. During normal times lower production costs are the most ideal and profitable. On the other hand, when prices are soaring, a company having high production costs will through the leverage (gearing) effect probably enjoy greater market appreciation in its shares. This is especially true when production costs are at or near the price of the yellow metal, just before gold prices begin to rise. It is meaningful to recall many South African golds enjoy high leverage.

  8. Price Earnings Ratio -

    Compare your company's PER to that of the rest of the industry - current and historical.

  9. Earnings Per Share -

    Compare your company's E.P.S. growth to that of the rest of the industry - current and historical.


Technical Analysis

Unfortunately, Technical Analysis is far less an exact science than Fundamental Analysis. Consequently, it is much more complex to understand and difficult to interpret. And although an explanation of the various technical methods is beyond the scope of this report, we will mention the most used TA methods used by this analyst -- but providing specific period parameters. All refer to daily bar charts.

  1. Trendlines - the use of a 12-inch ruler is one of the most reliable of ALL TA methods.
  2. Moving Averages - 50 and 200 Day.
  3. Slow Stochastics (89 x 5)
  4. RSI (14)
  5. MACD
  6. Money Flow
  7. Momentum (34 and 50)

There are various software packages which will automatically plot these TA methods for you. They are well worth their cost.

Although there are literally thousands of books on TA, this analyst's favorite is "TECHNICAL ANALYSIS of the FUTURES MARKETS" by John J. Murphy.

Inter-Market Analysis

ALL MARKETS are to some extent inter-related. At times they may become "decoupled" due to exogenous inputs. However, eventually they reassume their traditional inter-relationships. One of the best examples is Gold versus Paper investments. Over the long haul both have gone in separate directions. Another interesting example is interest rates and stock prices. Historically, rapidly rising interest rates have been the death knell for Wall Street.

Further comment regarding the nuances and the relative importance of inter-market analysis is also beyond the scope of this report. Suffice it mention the most definitive work EVER WRITTEN on the subject was also authored by John J. Murphy. The name of the book is "INTERMARKET TECHNICAL ANALYSIS." No serious market investor should be without the knowledge this work offers on all markets.

As indicated in the beginning of this report, the above does NOT pretend to be a definitive nor exhaustive evaluation procedure. But it is a MUST MINIMUM if you are planning to place more than 5% of your total assets into gold mining stocks. It will indeed facilitate a well-informed decision… and hopefully, will make us a pot full of money. Without it we are just gambling.

We invite readers to suggest additional analytical methods to be incorporated into the above for sharing with others interested in gold mining investments.

Founder of Gold-Eagle in January 1997.  Vronsky has over 42 years’ experience in the international investment world, having cut his financial teeth in Wall Street as a financial analyst with White Weld. Vronsky speaks three languages with indifference: English, Spanish and Brazilian Portuguese.  His education includes a degree in Petroleum Engineering from the University of Oklahoma, a Liberal Arts degree from Hartnell College and a MBA in International Business Administration from UCLA – qualifying as Phi Beta Kappa and Tau Beta Pi for high scholastic achievements.  Vronsky believes gold and silver will be recognized as legal tender in all 50 US states and many countries worldwide.  You may reach I. M Vronsky at: [email protected] and/or [email protected]

Gold is perfect for use in coins and jewelry as it does not react with air or water like many other metals.
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