Stocks from the gold mining industry are trading at all- time lows currently, presenting a great opportunity for people to invest in them. However, you should be careful while investing in them, because not all mining stocks are investor friendly currently. Some stocks are trading at very low rates, simply because they are not able to sustain in the market. There are two main problems that these stocks face – mining being carried out in very risky countries and the mining companies being overburdened by debt. The following are some of the companies that you have to stay away from in the gold mining sector, if you want to protect your investments.
Huge debt cover
What do you make of a company with a market capitalisation of just above $100 million but total debt of $580 million? This is the adverse situation that the mining company Allied Nevada (ANV, Financial) is in right now. With the current gold prices not favouring the company, cash flow too is not good enough to pay off these debts; hence Allied Nevada is in a very precarious position right now. The company is indeed staring at a tough year ahead and has very little chance of survival in spite of reporting a good production of gold (214345 ounces) &silver (1.81 million ounces) in 2014 and Nevada, one of the world’s best mining sites, being its prime mine for its new Hycroft project.
Currently the new Hycroft project is also at cross roads because this would require a capital investment of $768 million at least, which Allied Nevada cannot manage right now. The future looks so bleak that no company would be willing to shell out this huge money and buy out Allied Nevada, because of the company’s low potential to succeed. To add insult to injury, it would not be possible for this company to enter into a partnership with a big name to take its business forward, because even in this scenario, Allied Nevada should contribute at least $300million towards capital, which would be a huge and almost impossible ask from it. The following chart shows the huge fall of share prices in the last few years.
Risk-ridden geography
Though Allied Nevada suffers from a huge backload of debt, it at least took refuge in the fact that its prime mining spot, Nevada, was one of the best in the world. There is an even more dangerous gold mining stock that not only reels under the cover of massive debts but also has the additional risk of operating in difficult geographies. We are talking about Banro (BAA, Financial), a gold mining company based out of Canada. The market capitalisation of Banro Corporation is only $36.10million, but it has debts worth $285.82 million, which is quite a bad situation to be in. Also, it runs its mining operations in one of the riskiest geographies in the world – Democratic Republic of Congo.
This area is considered risker than tinier and remote locations like Tanzania, Eritrea, Kenya, Zambia, Mongolia and bigger countries like Russia. There are lots of restrictions on the mining jurisdiction in Congo that reduce the shareholders’ worth in forms of royalties and taxes. For the last few years, the share prices have crashed to a very big extent as evident from the chart below and it looks like there are no green pastures for this company to move on to. Hence, investors must exercise caution and avoid investing in this, as doing so, will only result in huge losses and mental stress.
Conclusion
Gold mining is always a risky industry and only companies who are strong in their financials can survive through stormy conditions. This is an industry that is extremely affected by government laws and regulations and the market rate of the precious metals like gold and silver. The companies mentioned above do not have enough potential to wade through the challenges presented by these external factors. Hence it is safe to avoid these stocks however attractive their prices may seem to be.
