Investing in Mining Ventures: Factors to Consider

It is not normal for anybody to take serious medication for an unknown illness or disease, based on information obtained in a hairdressing saloon. Investment decisions however are often taken based on informal discussions and "investment information" obtained from people with no real understanding of the complexities if making sound investments.

Investing in any business enterprise takes time and effort by the investor to ensure that his or her investment is a sound one that will produce the desired growth and return on investment.

The investment decision for a mining venture, as for most investments is a difficult one. The process of finding and evaluating a suitable mining investment includes both an objective and subjective factors.

Unlike the value of other companies, the real value of a mine is not accurately determinable until such time as the mine is entirely worked out. Despite this it is possible to make estimates and in some cases educated guesses that can guide the serious investor in making a decision about when, where and how to invest in a mining venture.

The Factors

The factors to be considered when evaluating in a mining venture includes the normal financial measures that one will use when evaluating an investment in any venture.

Financial

Financial information is used in making a wide range of operational, management and strategic investment decisions. It is a well known fact that flawed financial information can cause wrong investment decisions to be taken. If investors makes a decision on information they believe to be true, but in reality the information is not a true reflection of the facts, it will most certainly lead to losses in the long run. Unreliable financial information is an open invitation to certain disaster.

One of the primary ways to be sure that the cost information used as a basis for decisions are accurate, is to do a rigorous trend analysis of the financial rations based on information that can be extracted from the income statement and the balance sheet of the mining venture being considered for an investment. In times of economic downturn care should be taken not to be too conservative with the commodity pricing model that is used.

The Management Team

Another important consideration when evaluating a mining investment is to assess the ability and experience of the management team. From an investment perspective, a good management team can make the difference between having made a sound investment in a successful mining company or having buried your investment in a pit of uncertainty and loss. The correct management team can ensure that a mining company outlive bad economic times and do extremely well in better economic times. The management team should have a proven track record with suitable experience and, knowledge in the specific type of mining and commodity being mined.

The Deposit

One of the largely unknown factors that are normally associated with evaluating a mining venture is the magnitude grade and horizontal and vertical geographical distribution of the ore body. Initial work on an ore deposit normally includes geological, geochemical and geophysical work. These processes are normally used as initial prospecting tools.

Even when advanced exploration has been conducted through mechanisms such as extensive drilling and bulk sampling of the ore reserve and this process resulted in a classified of the deposit as an indicated resource and the techniques of discount cash flow modeling have been used to place a value on the project, the value of the deposit are uncertain. The estimation of the grade and its distribution through the ore body as well as the ensuing calculations are normally based on samples. Most ore bodies do not have a uniform grade across the deposit and statistical analysis is used to estimate the in-situe reserves.

The investor should interrogate the data as well as the methodologies used to estimate the in-situe reserves and should not blindly trust the geological reports and associated calculations.

It is important to remember that new mines or deposits are normally found near or along a trend of existing ones and claims of now discoveries in unknown and unproven areas often turns out to be high risk ventures unsuitable for the regular mining investor.

The Political Environment

Getting a good return on an investment in a new mining venture one should remember that the duration of the investment is normally required to be much longer than with most other investments. This results in the investor having to tie up his money for a much longer time, leading to risks that is normally ignored or disregarded in other investments. One such risk factor is the political risk of the country where the mining venture is located. A multi-million oz deposit may not be a feasible investment if the local or government imposes punitive restrictions, excessive taxes or nationalize the mine once it is operational.

The investor should consider the history of the county and stability of the Government in an effort to determine this risk. There are professional political risk specialists who can be approached for advice of this.

The Geographical Location and Infrastructure

The geographical location and infrastructure available to the mine are also important determinants to establish the potential for sustainable success of a mining venture. The quality and volume of water to mine and process the ore as well as the cost and availability of electricity and other forms of energy is critical. In remote locations it is also important to evaluate the availability of local labor and housing for expatriates. One should also consider that labor cost will be higher if the area does not offer a suitable social environment.

Conclusion

The good news for investors is that a lot of people have made heaps of money investing in mining ventures. On the other hand numerous investors have lost their hard earned cash by only considering the traditional investment factors.

It is a fact that mining is a risky business with the potential to provide the careful investor with returns that exceeds the investment potential of most other opportunities. These types of investments are normally not for the faint of heart and those that are only investing to get a quick return.

Mining ventures by its nature takes time to overcome the multiple risks involved at the steps to turn an initially discovered ore body into a operating mine that pays handsome dividends to investors.