The risk associated to gold projects investment is greater than that of average business ventures because physical and economic characteristics of the gold deposit are never known with certainty. Considering that the merits of a potential mineral investment cannot be fully appraised without consideration of the impact of the investor of the possible favorable events associated with the adoption of the gold project, methods of risk analysis are important in gold project evaluation and investment selection. The conceptual framework for risk analysis and the means by which some of the recommended practices might be implanted are studied and analyzed during the development of the project.
The philosophy of risk analysis is based on the value and overall risk of the company at the time of the investment decision, the profitability and risk of a potential investment, the expected effect of the investment on the risk position and value of the company, the revision of the investment value of a potential investment after each profitable one is added to the company’s operation. The profitability of the gold project as a random variable is influenced by gold grade and tonnage of the deposit, future gold prices, future mineral discoveries, capital and operating costs and taxes.
To the investor all stocks are substitutes and can be traded to suit his own preferences for risk and monetary reward, dividends and growth in value per share. For investment in high risk stocks, it is expected that the average and returns to the investor constitutes a cost for the operation. The risk of the company changes through time as its operation changes in response to modifications in the structure of the general economy and capital markets and as the makeup of the company changes due to new investments.
Another important aspect of risk is that it is not homogeneous; that is, an investment of certain kind might be accepted even though it is high risk while an investment of equal profitability and risk, but of a different nature might be rejected. The reason for this is that one project compliments the company’s operations by diversifying its holding, thus lowering the overall risk. A lower risk implies a lower cost of capital and increased value of the company operations. In addition to the normal business risk due to market forces, the physical and economical characteristics of the orebody are not determined with total exactitude, for only partial or indirect information is available such as data from drill cores or surface and underground workings.