Saturday, September 5, 2009

Choosing a Gold Mining Stock

Gold Mining Stock ChartOver the past couple of years while most investments have slouched and gold has held steady, the most profitable investment for me has been my gold mining stock segment, which have increased in value a fair bit. The returns may not be life changing, but making a reasonable profit is much better than losing a ton!

Since gold mining stocks are a good option and could be for some time, what makes a solid gold mining stock? The average person might just look at their stock price over the past few years, and if it's going up they think it's a good stock. But that's a bad strategy. You have to look at the value of the gold mining company's assets and compare that to the stock price.

You need to know the value of the company's proved gold reserves. Proved reserves means the amount of gold that has been determined, within reason, to be present and accessible through mining. These are the company's main assets. Let's say gold company A has $20 billion in proved reserves, and there are 10 million shares, and each share costs $100. But when you divide 20 billion by 10 million (the number of shares) you discover that the value of their assets is $200 per share. That means that this is an undervalued stock. You should buy this stock.

There is also the converse situation in which a company's stock is overvalued when you divide the number of stocks into the value of the company's proved reserves. As with all stocks, gold mining stocks can be under or overvalue but when they are, that means there will be a correction at some point not too far down the line. You want to buy undervalue stocks.

There is another way to measure potential value of mining stocks, and that is by probable reserves. Probably reserved are thought to be present, but their presence is not definite so they factor into the price of a company's stock at a discount rate. If you find a mining stock with a large number of probably reserves that turn out to be truly present, you could make a lot of money. If they turn out not to be present, you would lose a lot of money. So I prefer to be a little more secure and I only look at proved reserves.

This is a simple guideline and not exact. To find out the real value of the stock you would also have to factor in the cost of extracting gold from the ground.

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