Should I Invest in a Gold Mine?

Old Gold mining tools of the trade
Old Gold mining tools of the trade
Flickr-User: kristi welton-kidder

A few weeks ago ago I asked Yiannis X (a business partner of mine in Athens, Greece) to investigate the laws and licensing required to buy gold and precious metal scrap in Greece since I was considering expanding my operations to Europe. A few years back Yiannis helped me set up a phonecard operation in Athens.

After making a number of inquiries, he sent me the following email describing a business proposition offered to him (I redacted certain portions to protect both the innocent and guilty party):

Bernie good morning

Please read the following and let me know your opinion, I received this mail after a meeting with this person:

"Dear Sirs,

Further to our conversation of today and due to the fact that your client have interest In gold area I like to inform you for the following options:

Participation in a Gold mine in Ganna capacity of 6 7 grms per tone

Import of Gold dust / ngts from West Africa countries on monthly basis

Ownership and development of a Gold mine in Senegal at Sotabolo area

Waiting your prompt replay

Best Regards

Nxxxx Bxxxxxx"

I replied:


I have known dozens of such proposals - they were all scams. Anyone who owns proven gold reserves does not need investors - any big gold mining company will gladly lend them money.

As for a mine with an ore grade of 6 to 7 grams per ton - this is not the most important factor - more important is the actual dollars per ton operating cost. A mine with high operating costs can lose money with a grade of 20 grams per ton while another mine with low operating cost can make an extremely large profit with a grade of half a gram per ton. Because this person does not give you dollars/ton operating costs means he does not know the gold mine business.

I certainly am not interested and I strongly urge you not to invest or have any further dealings with this person.

I get two or three variations of emails like this from my friends every few months asking me for my opinion on these schemes. None of them are genuine offers from mining companies.

For those readers interested in the details, there is a formula I use to determine whether a gold mine can turn a profit or not:

Profit=(GP*OG)-DT where GP is the price of gold per gram, OG is the ore grade in grams per ton, and DT is the cost to mine the gold in dollars per ton. For example, at today's price of gold, $53.05/gram; and an ore grade of 7 g/t (which is quite high) ; ignoring all other factors the mine will make money when the operating cost is less than $371.35/t.

There is more than a daily cost though; we must consider initial and final costs as well. The initial costs are paving roads, setting up processing facilities, living quarters, offices, etc. Final costs are facility removal and area replacement - this last depends on whether there are laws requiring the mined area to be "replaced" or filled in so as not to leave gaping, environmentally unappealing eyesores.

After computing the total initial and final costs, we must then consider the reserves of gold available at that particular mine in order to determine the number of years of gold production. Other factors are the number of ounces we can recover in one day, the percentage ore recovery loss (the average mine is 10%), and the temperature and humidity of the area.

Some mines cost as little as 20 or 30 bucks a ton to operate, some can cost many times more depending on whether it is deep underground, open pit, close to water, etc.

So an ore grade by itself is quite useless.

As to why I know these things: my wife's brothers and I operated a gold mine near Winnemucca, Nevada back in 1977, see my article Mark Steyn on trial - why it`s OK to hate.

The best way to invest in gold is to simply buy a gold coin or bar from a reputable dealer. Leave the gold mines to gold mining companies.

### End of my article ###

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