I attended the Guide to Mining seminar organised by SGX a couple of days ago. This was an initiative by SGX to build more public awareness on mining companies as they were looking to bring more of such companies to list on their Catalist exchange.
The content of the presentation was very technical, with emphasis on the mining industry, extraction process and mining risks. It wasn’t exactly what I was looking for as I had expected part of the presentation to cover on the evaluation of a mining company. This was covered only very briefly.
However, what I did gain from the seminar was an awareness of the various risks facing a mining company – from regulatory, exploration, legal to operational.
But the two greatest risks that affect the profitability and operating margin of a mining company are factors that are totally beyond their control – the price of the commodity as well as the exchange rate.
Since the earnings are potentially so volatile, valuation methods like the discounted cashflow method would have a very big margin of error.
And there’s simply no easy way to compare mining companies. Looking at factors like mineral reserves and ore quality in isolation is not sufficient as many other factors affect the operating cost. Even something like location of the mines and their accessibility to local skilled miners would affect the cost of extraction.
All these factors led me to a conclusion that I would never ever want to do individual stock picking for mining companies. 🙂
One interesting point raised during the Q&A session was that even though gold price was rising, the profitability of many gold mining companies did not go up in tandem because they had to unwind many of their long term price hedges. Ironically, these hedges were put in place mostly because their banks required them to lock in the selling price of gold (in case it went down).