Hedley Widdup is a seasoned stock picker at Lion Selection Group (ASX:LSX), a specialist fund focused on the mining and junior exploration sector.
He knows what a great gold company looks like.
He also knows what a bad one looks like and, without naming (many) names, provided a list of five factors bettors should consider before pouring money into any company.
1. An average gold project in a good location > exceptional project in a questionable location.
Sometimes you find that the best yields are not taken from the best geology.
People talk about “jurisdictional risk,” which is basically the risk that comes with doing business in a foreign country.
The biggest aspects of jurisdictional risk are corruption, protecting local legal systems and things like personal safety, Widdup says.
Based on the protection of the law and personal safety places like Australia, Canada and North America are wonderful jurisdictions to do business.
In contrast, other jurisdictions, such as those in Africa and Southeast Asia, can be mineral-rich but very risky.
Here are two examples from the history of Lion Selection.
Many years ago, Lion was a very large shareholder in a company called Catalpa that had a gold project in WA called “Edna May”.
Edna May is a low-grade ore body of about 1.5 g/t located in an extremely accessible location about halfway between Kalgoorlie and Perth, Widdup said.
“You could be on the freeway and throw your coffee mug out the window and it would land in the pit. It’s not very far from infrastructure,” he says.
It was successfully developed and became one of the core assets of mid-level miner Evolution Mining (ASX:EVL).
Thanks to this long-term project, EVL was able to take care of a large number of assets that made it the company it is today.
But Edna May is not a stunning project, says Widdup.
“Edna May will never turn off the lights. The owners won’t thank me for saying that, but what they would point out is that Edna May always managed to keep the lights on,” he says.
“This project was nothing special, but generated wonderful rates of return for its owners.”
Widdup contrasts this with a Lion Selection project that just sold out.
“We sold about a 33% stake in a gold project in Indonesia called Pani,” he says.
“Wonderful geology. The resources are almost 5Moz, but the holes drilled since that was done say 10Moz without even breaking a sweat.
“It would be an open pit mine with easy metallurgy and it would bring in tons and tons of money. But the problem is – it’s not in Australia.
“And for that reason, a lot of investors are not prepared to give a good valuation.”
It’s much easier for a mining company to stand up and say “buy this WA project,” says Widdup.
“Actually, I don’t even need to sell you WA at all,” he says.
“In the meantime, if this is a good Indonesian project, I should stay here for 10 minutes to sell you Indonesia itself.”
2. Is the rating king? It is complicated.
You often see a company doctor stand in front of a crowd and say “the note is king”.
This well-known proverb assumes that higher grades are important above all to the economics of a potential mining operation.
Grade is probably king — all things being equal — but investors should be very careful not to be blinded by headline numbers, Widdup says.
“So many high-grade deposits have a high-grade pod here, a little pod right there; and developing the mine from one to another, the companies are running out of money,” he says.
“It doesn’t matter how high your rating is if it’s too expensive to mine.”
READ: When it comes to gold deposits, grade is NOT king
3. Metallurgy is VERY important.
Once the ore has been extracted, it must then be upgraded or concentrated and transformed into metal.
This step is called metallurgy.
“Gold metallurgy is usually very easy, but I want you to look for deposits where you get around 95% ROM [run of mine] recovery,” says Widdup.
“Exceptionally large projects, like De Grey’s (ASX:DEG), can get away with lower recoveries because they will be doing large-scale things that will generate savings.
“In this case, you can negotiate down to the lower 90%.
But if an explorer or miner tells you they can only get 60% recovery, you need to look at their costs very, very closely, says Widdup.
“There are gold projects that operate at 60% recovery, but they usually don’t last very long,” he says.
4. How many ounces do you have per vertical meter?
Widdup doesn’t just look at ounces in the ground (the total resource) – it assesses “ounces per vertical meter”.
“[De Grey technical director] Andy Beckwith referenced it when he said the Hemi deposit was around 10,000 oz per vertical metre,” he says.
“That means if you dig the top meter of the deposit, you’ve dug 10,000 oz.
“If it’s closer to 1,000 oz – which is around the benchmark for what’s becoming economical – then you have to move a lot of material around to free up those ounces.
“So the denser the gold in a vertical sense, the better off you can be in terms of profitable mining.”
5. Find a champion to invest in.
This is probably one of the most critical factors in selecting a high-quality stock investment, says Widdup.
“Most people talk about good management teams. I’m talking about a champion,” he said.
“There are about 600 ASX-listed companies exploring some sort of commodity. Many are gold.
“And each of them will tell you they have a good management team.”
In some cases they are correct but most of the time they are not.
Many exploration management teams often fail to recognize, or pretend not to recognize, that their project is a pile of garbage.
“Now they can’t be blamed for this. It’s their job to promote something — that’s what they’ve been asked to do,” Widdup says.
“But in the end, these companies are unlikely to succeed.”
But once in a while, a company has a champion – someone who attracts talent and points it in the right direction.
“I think champion qualities are a central person that holds everything together and attracts good people, because they are good people,” Widdup said.
How do we find this person?
It’s often best to meet them in person — at a conference, for example — before passing judgment, says Widdup.
“Do you think they know their job and do you think they are honest with you?”