Colloquially we say that something vastly profitable is a “gold mine”. But this saying doesn't, in the real world, invert. It's entirely possible to be digging up gold - what we might call money - and yet run out of money doing so. A gold mine is not, not necessarily, a gold mine that is, as Scotgold Resources (LON: SGZ) has just demonstrated to us all. Running out of money while mining gold is one of those things that just doesn't compute in the vernacular, the everyday language - but Scotgold is proving that it can indeed be true in the real world.
The problem is that where you might think there is gold ore might not have any gold ore. Everything in mining is till estimation. There is not 100% certainty about anything, thus the risk of the endeavour. True, in a properly run mine these days cave ins and explosions are rare (except for the obvious dangers of coal mining and the associated methane). But it is still possible to think that the vein of ore runs thisaway and in fact find out that it runs thataway. Or even just ceases to exist at all. Scotgold's problem, as they tell it, isn't so much that there's no gold left in the mine, it's that they did too much mining thisaway where there wasn't, in fact, any gold ore.
Scotgold share price from London Stock Exchange
The announcement itself is an absolute classic of the press relations art and is to be savoured for that very reason. Of course the news is dreadful - so it's mentioned rather late in the release. We are 7 paragraphs in, 585 words, before we reach the actually important phrase “a material uncertainty”. A masterly burial of the one important point there.
This is the big and interesting point as well. Spending the money on mining through rock that had no gold ore in it (the ore vein had gone thisaway, not thataway) means that they're burnt through the operating capital. They were expecting to gain revenue from the gold produced to pay for the next bit of mining - no gold ore means no gold to sell means no revenue to finance that next stage.
The directors are looking at lending the company money, there's perhaps the possibility of an advance from their gold buyer (often a normal enough part of gold mining to be fair) but the “material uncertainty” is that, possibly, without further finance they can't continue mining.
Yes, it really is possible to have an actual gold mine and not make money out of it. Further, this was only a month after Scotgold had raised £2.5 million in new capital as well.
