The Two Asset Transition: Why Multiple Producing Assets Matter for
Gold investors tend to focus on the gold price, grades and costs when assessing a producer. The number of mines a company operates gets less attention, but it shapes how much risk shareholders carry and how a company can grow.
Global investment manager VanEck said that when you buy a gold company, “you’re buying a leveraged, operationally complex business that produces gold.” A company with a single producing mine concentrates every part of that operating complexity in one place, opening up to several risks. Having a second asset could potentially increase profit and revenue and assist a company in diversifying geographically and having exposure to another commodity.
Toronto-based Golconda Gold (TSXV:GG;OTCQX:GGGOF) aims to benefit from the multi-asset upside. For years, its South African Galaxy gold mine has been its only producing asset, but the company is now restarting the gold-silver Summit Mine in New Mexico.
Single-asset risk in junior mining stocks
A single-asset producer depends on one operation for all of its revenue and cash flow. Any setback at that mine flows straight through to the company’s results.
Value the Markets wrote that “a flood, fire, equipment failure, geotechnical incident, or grade shortfall at a junior’s only producing mine can wipe out the investment thesis in a single quarter.” Depending on one asset means sending any setback at that mine straight into the company’s operations.
Location is another factor. VanEck says that “where a mine is located is one of the most important variables in its value, and perhaps one of the most difficult risks to understand and manage.”
A single-asset producer is dependent on the stability of its jurisdiction’s regulatory, labor and power conditions. Changes in any of these can mean a company-wide crisis.
There’s also the fact that single-asset producers are valued differently than those with multiple projects to their name. A paper from Research Square said that “multiple-operation companies consistently achieve higher valuations due to diversification benefits, while single-asset producers often trade at discounts reflecting greater operational vulnerability.”
What to watch when gold miner stocks move from one mine to two
A company’s ability to go from having one asset to starting or restarting another is measured not through theories, but through an actual stress test. While having multiple assets can lessen overall operational risks, executing the two-asset transition comes with risks of its own.
These dangers are mostly concentrated during the restart or ramp-up phase, where project viability is forecasted. A professional geologist noted that 75 percent of ramp-up time delays often come from equipment issues, 20 percent from equipment inadequacy and five percent from process failures.
Investors can track these milestones…
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