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| Updated: Feb 27 2005 |
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February 27,2005 This question was recently posed to me by some investors wanting to provide some funding for a gold operation. I must admit, that I had to stop and think about it a bit, but I gave them the number one answer, in the form of a question. "Where else can you purchase gold for $200/ounce?" This price of $200 per ounce was the projected cost of operating the gold mine. The astute investor quickly replied "well, gold is selling for $417/ounce, who would sell you gold for $200/ounce?" "Precisely, no one would. However if you own a gold mine that produces gold for $200 per ounce, you just bought gold for $200/ounce", I promptly replied. "Yes", they replied," but the risk is greater than stocks and other investments." It was again my turn, so I said "certainly mining is a risky investment, but I do recall that you told me that you frequently purchased commodities on the margin, and in this investment, you can loose much more than your original investment. In mining, the most you can loose is your original investment. So there are other more risky investments out there. Mining risks can be managed, just like any risk. For instance, during the most important phase of mining, exploration, until a reserve is found in sufficient quantity and quality to justify a mine, verified by the best practices of geology and engineering, the largest capital intensive phase of mining (building the mine and plant) is not begun, limiting the risk to only exploration expenditures. And, during exploration, there are many techniques that can be used initially to point one towards an area that has a high probability of containing gold. When the knowledge and skill of a good field geologist is added to the exploration equation, the capital expended is relatively minor, until a potential target for further, more detailed exploration is delineated (drilling). Using these methods, which are standard practice in the mining industry, will manage the risk, and maximize the return on exploration capital. So, you see, in mining, risk can be controlled, somewhat, too." There was a long silent period from the group of investors, as they digested my statements, then finally one spoke. "Well, the reward part is quite plain, gold obtained for $200 per ounce while it is currently selling for $417/ounce, is a potential profit of over $100%. Now the risk part is not quite as foggy as it was earlier, I never thought about managing risk in a mining investment. I always thought of just investing money into multiple projects, hoping that one would pay off enough to make up for the ones that went bust. But, if by reducing the risk of the investment, one could actually reduce the number of bad investments, the average return on investments would be much higher. Great idea." And as they say, it may be the beginning of a new gold mine . . . . |
| But that's just my opinion Charles Kubach Mine-Engineer.Com |
