| Private Equity, simply put, is investing in a company | | | | enjoying a strong period of growth, where do they |
| that has not yet listed on any recognized stock | | | | go? Well more and more companies are seeking |
| exchange. Typically, the company is in its earlier | | | | other means of financing, often through Private |
| stages of growth, has already enjoyed some of | | | | Equity. It's either that or before reserves are proven, |
| success, but has reached a plateau of growth that | | | | they succumb to a lower offer from one of the golf |
| requires some form of cash injection to help take | | | | giants. |
| them forward to the next stage. | | | | For many years private equity has been the |
| Valuing a gold mining company is a little different | | | | investment area of banks and institutions, however, |
| from gaining a value on other types of company. It's | | | | over the last few years, more private equity |
| valued not only on what it produces each month but | | | | companies are offering the opportunity to invest in |
| also on the amount of gold it can prove to be in the | | | | these lucrative situations to individual investors. The |
| ground for future production. So if a company has | | | | prospect of being involved in this early funding phase |
| been doing exploratory drilling, trying to build up a 3D | | | | which, be warned, can typically mean tying up capital |
| geological picture of what deposits lay underground, | | | | for between 2-3 years, can potentially offer a return |
| they have a 'rough' idea of what is there. These then | | | | in the multiples if, of course, you've chosen to invest |
| are their 'Probable reserves.' Unfortunately, these | | | | in the right company. |
| count very little towards their overall valuation. To | | | | The private equity group will nurture the project and |
| bring these numbers onto the balance sheet they | | | | when a growth target has been achieved and proven |
| need to embark upon a much more intensive drill | | | | reserves brought to a suitable level, an exit is then |
| program. Taking core samples in a grid pattern every | | | | sought, through either traditional listing or a suitable |
| 1.5 - 2M or so allows a much clearer picture to | | | | merger partner within the gold industry often eager |
| emerge and the amount of gold in the ground waiting | | | | to snap up these rich pickings. |
| to be mined can be calculated - these finally are the | | | | So does it work? |
| 'proven' reserves and on average, about 30% of | | | | Well, there are big risks with early stage companies |
| their value can be added to the company's valuation. | | | | of any kind, but then there are also massive rewards |
| Unfortunately, these core samples can cost $20,000 | | | | when they succeed. Investing in just one project can |
| or more each, so this is often why the company | | | | be very risky so if you were looking to tread these |
| needs to raise money. | | | | rich waters, a more solid strategy would be to build a |
| Most companies when they reach this point will start | | | | portfolio of several different projects. Some in the |
| looking into the possibilities of a public listing but are | | | | gold industry of course because that is where huge |
| then shocked to find how much work is involved to | | | | potential currently lies, but look also to diversify into |
| prepare the company and then the prohibitive cost | | | | other areas and spread the risk. After all, that's what |
| involved in becoming listed. | | | | all investing is, managing our risk. If just one project |
| A visit to the banks in this turbulent year of 2009 will | | | | in a portfolio of companies hits it big, then a return of |
| quickly put paid to any idea of drumming up finances | | | | 10 to as high as 1,000 times the initial investment, |
| through the banking system, even if they're digging | | | | easily justifying any losers or smaller wins. |
| gold out of the ground. So although they're still | | | | |