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Gold/Mining/Energy : Precious and Base Metal Investing -- Ignore unavailable to you. Want to Upgrade?

To: Stephen O who wrote (6390)	12/26/2002 12:28:10 PM
From: Elizabeth Andrews	Respond to of 39344

There are many reasons. Usually they don't have the management depth required especially on the technical side. Mines are complex and there are many problems in the start up phase that can be fatal if the company doesn't have the resources to hang in. The estimate of the mineable reserve is a very difficult exercise and requires more work and money than junior companies normally spend and there are many examples of mines built with inadequate resource engineering and subsequent serious problems. And the design of the processing circuit itself is partly a guess with respect to the metallurgy as most ores are complex and getting the metal out to the level expected usually takes some modifications, sometimes major, to the milling circuit. It's a big jump from the lab to the site. Also, the banks usually want the production loan hedged, which means the company has to sell most of its production forward and that’s a bad thing right now. Also, the institutions usually won't buy single mine companies as the risk very high for all the reasons I'm talking about. And, it is very difficult to make any money on 100,000 oz per year production, as unexpected costs always seem to eat the cash flow. The small company always thinks it can operate on a smaller margin and it’s usually management that’s thin and that’s usually where the weakness is and the flaw in the business plan. The other problem is that these companies can rarely add the second or third mine to the portfolio as they don't have and can't get the cash or skills required. Or if they do, the properties are usually in different companies and you end up with duplicating everything that's required to run each mine so there's little synergy accomplished. The transition from finding to mining requires very different management skills and the finders do not usually have that set. And, due to the human ego, the finder usually thinks he can be the developer. It doesn’t usually work. So, if you are fortunate enough to own a little gold exploration company that develops a property that becomes a small mine history suggests that the best course of action is to sell it very early as it enters production. Check the holdings of the Prudent Bear Fund or other funds that specialize in these companies. You'll find that they do buy junior companies but ones that are in the development stage with a gold resource. They tend to sell them as the resource is developed, or in the best case, bought by a company that has the skills and resources to develop mines. You should follow that.