Anyone buying gold miners or just me?

[original mungerville]

1. Last year Gold essentially tied the $US as the best performing currency globally as it was flat in $US terms - at around $1200 per ounce... Meanwhile gold miners tanked into November 2014, probably to one of their lowest levels relative to the gold price ever.

 

2. While the miners are up some from the low in November, Oil dropped almost 50% in the past months with a big part of that coming in December/early this year.

 

3. Apparently, energy (I am told mainly Oil) makes up 1/3rd (33%) of the cost base of gold miners which is huge. If one assumes the following:

a) profit margins are a hefty 20% (ie high - which for the purposes of this back-of-the-envelope is conservative);

b) energy costs drop not 50% but say 30% for the miners;

You would get margins expanding from 20% to an additional 30% X 33% = 10%. This is a 50% increase in earnings as long as gold stays above, as it has lately, at at least $1200 going forward.

 

Gold could of course drop, or it could rise. But it seems to me the valuation of gold miners (at least in the short-term) could rise in the coming quarters if oil remains low. Now oil could rise say next year and reverse this 50% increase in earnings.

 

In any case, if you want an asymmetric hedge against global monetary debasement, there are probably worst ideas out there than buying gold miners at this time. I just kept it simple and bought LEAP calls on GDX (an index of gold miners).

 

 

 

[DTEJD1997]

I have several investments in gold miners...also copper & silver & iron.

 

This is a difficult industry for sure....

 

I try and focus on miners with very solid balance sheets, profitable operations, AND PAY A DIVIDEND!

 

Most mining companies have a bad habit of continually putting money back into the business.  You've got to be able to pull some out, otherwise when the mine plays out, where is your investment?

 

Some of the names I've been working with are; Mandalay Resources (MNDJF), and Caledonia Mining (CALVF). 

 

Caledonia is interesting, as they pay a huge dividend and have good potential to significantly increase production...but it has some issues.

 

Mandalay is very, very well run.  I sleep well at night with these guys.  I'll be looking to put some more $ to work with them.

 

Another interesting one is Rambler Metals (RAB.v).

[ItsAValueTrap]

The management teams of gold miners are bad for shareholders.  Most of them pay for stock promotion.  Go to theaureport.com and look at all of the sponsors (the front page lists them all).  This is a silly industry where companies are pretty blatant about promoting their stock.

 

Institutional investors are stupid.  They will continue to get killed in these stocks.  This includes big names like Klarman and Eric Sprott.

 

The right way to model these stocks is net present value.  If you blatantly lie in their projections about NPV or their reserves... there are few to zero repercussions to doing so.  Very few institutional investors have the sophistication to figure it out.  They don't even do basic due diligence like seeing if the numbers make any sense.

 

Good luck.

[yadayada]

Buy pawnstocks instead. Also exposure to gold, and anything is better then a goldminer basicly

[anders]

"A hole in the ground with a lier on top"  ;)

 

I like the mining comps at these prices.. but have great respect for the sensitivity in gold price..

 

I have bought some and continue adding on these prices, the stars being the royalty companies.. also like the picks & showels to mining industry..

 

The majors have done some aweful aquisitions in the past, then refocused cf on the balance sheet during the financial crisis, then shifted it a bit to the pnl - reducing cost basis.

 

Imho, some come with solid balance sheets, pay a fair dividend (adjusted to gold price), and have great upside if gold stays at these levels. The gold demand clearly outstrips supply and should correlate sooner than later. Looking at history, gold price does not really correlate with higher interest rates and the great depression / HUI index scenario could very well rhyme..

 

yeah, im bullish  ;D   

 

 

[Patmo]

I have several investments in gold miners...also copper & silver & iron.

 

This is a difficult industry for sure....

 

I try and focus on miners with very solid balance sheets, profitable operations, AND PAY A DIVIDEND!

 

Most mining companies have a bad habit of continually putting money back into the business.  You've got to be able to pull some out, otherwise when the mine plays out, where is your investment?

 

Some of the names I've been working with are; Mandalay Resources (MNDJF), and Caledonia Mining (CALVF). 

 

Caledonia is interesting, as they pay a huge dividend and have good potential to significantly increase production...but it has some issues.

 

Mandalay is very, very well run.  I sleep well at night with these guys.  I'll be looking to put some more $ to work with them.

 

Another interesting one is Rambler Metals (RAB.v).

 

Interesting, I created a post for both of these gold miners but neither got much traction. I agree with the sentiment on both of those, although I feel more comfortable owning MND and just trade Caledonia for a sliver of my book. Last time I bought in the 60's and sold in the early dollar. I intend on repeating this time, although I am prepared for a wide range of outcomes. Caledonia does warrant a hefty discount in its share price with Mugabe and his little buddies pillaging at will, and Blanket looking like it might be on its last breaths.

 

Also take a look at Karnalyte resources which is not a gold miner but owns a large potash project in Saskatchewan, an idea courtesy of shadowstock. Currently trading for a little more than half of net cash as of last reporting date. Has a 2mil/q cash burn, trading at 24mil, cash is 43mil. Monstrous upside if things work out, relatively limited downside if they don't. I expect not to go to 0 if things don't work out but I think money would be lost.

[jawn619]

1. Last year Gold essentially tied the $US as the best performing currency globally as it was flat in $US terms - at around $1200 per ounce... Meanwhile gold miners tanked into November 2014, probably to one of their lowest levels relative to the gold price ever.

 

2. While the miners are up some from the low in November, Oil dropped almost 50% in the past months with a big part of that coming in December/early this year.

 

3. Apparently, energy (I am told mainly Oil) makes up 1/3rd (33%) of the cost base of gold miners which is huge. If one assumes the following:

a) profit margins are a hefty 20% (ie high - which for the purposes of this back-of-the-envelope is conservative);

b) energy costs drop not 50% but say 30% for the miners;

You would get margins expanding from 20% to an additional 30% X 33% = 10%. This is a 50% increase in earnings as long as gold stays above, as it has lately, at at least $1200 going forward.

 

Gold could of course drop, or it could rise. But it seems to me the valuation of gold miners (at least in the short-term) could rise in the coming quarters if oil remains low. Now oil could rise say next year and reverse this 50% increase in earnings.

 

In any case, if you want an asymmetric hedge against global monetary debasement, there are probably worst ideas out there than buying gold miners at this time. I just kept it simple and bought LEAP calls on GDX (an index of gold miners).

 

what do you mean by it's the best performing currency but still flat?

[yadayada]

Take a look at OZ minerals.

[SI]

A few months ago I stumbled on a cef I thought was interesting, GTU. I have had some interesting in speculating in gold near $1,000. By buying a closed end fund that invests only in physical gold, via a vault in one of Canada’s largest Banks, Imperial Bank of Canada, at the 11.5% discount I purchased it in the 1st week in November – it was synthetic means of getting quite close at its then $1,145/oz spot gold price.

 

 

[original mungerville]

The management teams of gold miners are bad for shareholders.  Most of them pay for stock promotion.  Go to theaureport.com and look at all of the sponsors (the front page lists them all).  This is a silly industry where companies are pretty blatant about promoting their stock.

 

Institutional investors are stupid.  They will continue to get killed in these stocks.  This includes big names like Klarman and Eric Sprott.

 

The right way to model these stocks is net present value.  If you blatantly lie in their projections about NPV or their reserves... there are few to zero repercussions to doing so.  Very few institutional investors have the sophistication to figure it out.  They don't even do basic due diligence like seeing if the numbers make any sense.

 

Good luck.

 

1) Every one of them? Are you talking more about the juniors rather than the mid cap and seniors?

2) The mismanagement you note for the industry is precisely the one big reason they are trading at all time lows. However, in the last couple years the Barricks of the world were forced by investors to get their shit together from a shareholder return / capital deployment perspective because investors had enough (your sentiment). So the ship has started to right somewhat just recently with the seniors already. This gives me a little more comfort.

3) I am not investing because I like gold miners, I just think this is a good entry point and they will serve as a great asymmetric hedge against currency debasement over the next couple years. Its more of a currency play, where I can get asymmetry (ie a perpetual call option on gold), and a good entry price (gold is having trouble breaching below $1200 'cause looks like China mops up everything below $1200 - so I see that pretty stable now, but I am no expert; miners' stock price was at a low relative to gold; and oil just tanked)

 

I like GDX - for the reasons you cited - rather the GDXJ as GDXJ is full of juniors. But, to a large degree, the price is a reflection of that mismanagement.

 

 

[original mungerville]

Buy pawnstocks instead. Also exposure to gold, and anything is better then a goldminer basicly

 

I am buying gold miners for the asymmetry but also silver bullion - again because its price should move more than gold's. I view them both as perpetual call options on gold to protect against currency debasement which, I believe, will accelerate over the next 2-3 years.

[original mungerville]

1. Last year Gold essentially tied the $US as the best performing currency globally as it was flat in $US terms - at around $1200 per ounce... Meanwhile gold miners tanked into November 2014, probably to one of their lowest levels relative to the gold price ever.

 

2. While the miners are up some from the low in November, Oil dropped almost 50% in the past months with a big part of that coming in December/early this year.

 

3. Apparently, energy (I am told mainly Oil) makes up 1/3rd (33%) of the cost base of gold miners which is huge. If one assumes the following:

a) profit margins are a hefty 20% (ie high - which for the purposes of this back-of-the-envelope is conservative);

b) energy costs drop not 50% but say 30% for the miners;

You would get margins expanding from 20% to an additional 30% X 33% = 10%. This is a 50% increase in earnings as long as gold stays above, as it has lately, at at least $1200 going forward.

 

Gold could of course drop, or it could rise. But it seems to me the valuation of gold miners (at least in the short-term) could rise in the coming quarters if oil remains low. Now oil could rise say next year and reverse this 50% increase in earnings.

 

In any case, if you want an asymmetric hedge against global monetary debasement, there are probably worst ideas out there than buying gold miners at this time. I just kept it simple and bought LEAP calls on GDX (an index of gold miners).

 

what do you mean by it's the best performing currency but still flat?

 

Well the $US was the best performing of the major currencies and gold declined only slightly relative to the $US in 2014. So together they are the best performing currencies for 2014 (even though, priced in $US, gold had a lackluster year). If you held Canadian dollars instead of gold, you lost. If you held Yen instead of gold, you lost. If you held Euros instead of gold, you lost in 2014.

[ItsAValueTrap]

1) Every one of them? Are you talking more about the juniors rather than the mid cap and seniors?

 

Most of them.  the juniors are worse than the seniors.

 

2) The mismanagement you note for the industry is precisely the one big reason they are trading at all time lows. However, in the last couple years the Barricks of the world were forced by investors to get their shit together from a shareholder return / capital deployment perspective because investors had enough (your sentiment). So the ship has started to right somewhat just recently with the seniors already. This gives me a little more comfort.

I don't know about that.  I feel like most institutional investors haven't figured out the game, e.g. capitalizing stripping expenses to inflate GAAP earnings.

[Patmo]

MND Mandalay just released production/sales results, stock went up a few %. I'm just collecting dividends and plugging along for the ride. One of my more comfortable bets, but more highly valued too. I can understand why some people enjoy paying up for "quality" (well that's as quality as gold mining will get), it might earn less money but it sure is soothing.

[jawn619]

Novagold is an interesting miner that has a 50% stake in a huge gold mine. Klarman also has a stake.

 

http://seekingalpha.com/article/2782045-novagold-resources-and-its-elephant-sized-gold-deposit

[Aberhound]

I have been selling. Perversely as the price of oil drops and miners costs drop the price of gold is likely to drop similarly. My thesis is that there are other sources of gold not reported and this gold is sold to manage price down while propaganda like King World News are used to keep demand up with phoney stories that there is a shortage of gold.

 

It is like diamonds. Oppenheimer as a young geologist hired natives to pick up diamonds in baskets in South West Africa in such quantity that after the war, despite being German, he was able to negotiate a deal to become CEO of De Beers. Those diamond are now in London. There is no shortage of diamonds and prices are artificially high. Isn't gold the same? How many military reserves are sited on gold deposits? Has the military built underground bases and tunnels and if so, what gold deposits were discovered? What about sea vents? Aren't black smokers dense with heavy metals? What about transmuting elements in nuclear reactors or otherwise? What about the gold recovered during the war from the Japanese after the Japanese looted Asia? What about remote detection of mines by satellite? How many new mines have been discovered? Are all the new mines publicly disclosed? Is gold recovered while dredging rivers like the Fraser and the Amazon? What about high spin gold. Does it exist? Does it mimic salt and noble elements and if so are places like the Dead Sea massive gold deposits? Are new production methods available to produce gold where the particle size used to be too small? Did someone figure out how to transmute Tantalum (73) to gold (79) in 2011?

 

http://www.infomine.com/ChartsAndData/GraphEngine.ashx?z=f&gf=110539.USD.kg&dr=max

 

Gold pricing is mysterious so I have concluded there are unexplained factors to consider, hence the list. My overall bet is that human ingenuity will drive prices down. Throughout history there have been groups like the Rosicrucians who enjoyed advanced technology. It is the same today but perhaps more so due to more rapidly advancing technology and greater numbers of educated people.

[ItsAValueTrap]

Novagold is an interesting miner that has a 50% stake in a huge gold mine. Klarman also has a stake.

 

http://seekingalpha.com/article/2782045-novagold-resources-and-its-elephant-sized-gold-deposit

 

That's a stock you should short.  Barrick passed on the project when the price of gold was much higher.  They greenlit a lot of questionable projects.  If we assume that Barrick is somewhat sane and greenlit all of their better/less-mediocre projects, then that means that Donlin Creek is even worse than the stuff that they greenlit.  So... Donlin is likely hopelessly uneconomic at current gold prices.

[DTEJD1997]

MND Mandalay just released production/sales results, stock went up a few %. I'm just collecting dividends and plugging along for the ride. One of my more comfortable bets, but more highly valued too. I can understand why some people enjoy paying up for "quality" (well that's as quality as gold mining will get), it might earn less money but it sure is soothing.

 

Yes, MND has moved a bit over the past month or so...

 

However, over the past twelve months, there have been several opportunities to sell it over $1/share and buy it back at $.80 (or less).

 

If you can get MND near it's 52 week low, you are most likely at a good entry point.

 

These guys are very good operators and it makes almost every check list.  Good, honest management.  Good operations/mines.  Solid balance sheet.  Return of capital in the form of dividends.  Management runs the company for the benefit of shareholders.  They understand finance & have a very track record.

 

One of the best I would argue...

 

Hope they keep it up!

[Patmo]

Novagold is an interesting miner that has a 50% stake in a huge gold mine. Klarman also has a stake.

 

http://seekingalpha.com/article/2782045-novagold-resources-and-its-elephant-sized-gold-deposit

 

That's a stock you should short.  Barrick passed on the project when the price of gold was much higher.  They greenlit a lot of questionable projects.  If we assume that Barrick is somewhat sane and greenlit all of their better/less-mediocre projects, then that means that Donlin Creek is even worse than the stuff that they greenlit.  So... Donlin is likely hopelessly uneconomic at current gold prices.

 

Barrick is definitely not somewhat sane, it is nuts. Not that it matters though.

 

The 2 issues I see at first glance in this article are that the DCF uses 5% as its discount rate and that estimated project costs use a less than 20% contingency. I'm no expert on construction and whatnot, but as far as I'm aware the tendency is to plan out with much larger wiggle room than that, and everybody still gets massive overruns anyway. Case in point, here is an excerpt from that very article:

 

"Barrick said that the capital cost for their Pascua-Lama project was estimated to be 50-60 percent higher from the top end of the previously announced estimate of $4.7-$5.0 billion"

 

So essentially you would probably be best served to factor in a 50% overrun on Donlin's estimated development cost, including current contingency. Tag on that a 10% discount rate instead of 5% and see where that goes.

[rukawa]

This includes big names like Klarman and Eric Sprott.

 

I always felt like Klarman invested in NovaGold not because it really made obvious sense but more because it was a out-of-the-money option in case gold prices sky-rocketed in the case of hyperinflation. Klarman has always had a strong skepticism of QE's and believed something bad would happen. I never really believed his thesis of inflation. The same as I have never believed in Prem's deflation thesis. But my impression was that Novagold is basically an out of the money option on gold since the Donlin mine isn't economic at current gold prices.

[Hielko]

Decent write-up on NG on Seeking Alpha today: http://seekingalpha.com/article/2815355-sell-novagold-market-vastly-overvaluing-donlin

[original mungerville]

I have been selling. Perversely as the price of oil drops and miners costs drop the price of gold is likely to drop similarly. My thesis is that there are other sources of gold not reported and this gold is sold to manage price down while propaganda like King World News are used to keep demand up with phoney stories that there is a shortage of gold.

 

In my view, there are quite a few things wrong with the above statement. Firstly, why is your thesis that there are "other" sources of gold not reported and this gold is "sold to manage the price down".

 

I would really like to know what these "sources" are - in your view, and then I will share with you my view.

[KinAlberta]

^Agree on the Klarman speculation that Novagold may have been seen as cheap insurance.

 

Regarding Barrick (below), maybe it should have read...  "its senior leaders’ personal [ future ] wealth..."

 

 

Barrick Gold faces shareholder wrath over pay hikes at annual meeting Tuesday

Toronto-based mining giant's board of directors in hot water over ‘exorbitant’ executive compensation plan.

 

"Barrick already overhauled its compensation system after investor outrage over Thornton’s $11.9 million signing bonus in 2013, when the former Goldman Sachs president was hired to co-chair the board with company founder Peter Munk as he was being groomed as Munk’s eventual successor.

The company contends that under its new pay structure, compensation is aligned with performance and that its senior leaders’ personal wealth is directly tied to the company’s long-term success."

 

http://www.thestar.com/business/2015/04/26/barrick-gold-faces-shareholder-wrath-over-pay-hikes-at-annual-meeting-tuesday.html

 

[Travis Wiedower]

2) The mismanagement you note for the industry is precisely the one big reason they are trading at all time lows. However, in the last couple years the Barricks of the world were forced by investors to get their shit together from a shareholder return / capital deployment perspective because investors had enough (your sentiment). So the ship has started to right somewhat just recently with the seniors already. This gives me a little more comfort.

I don't know about that.  I feel like most institutional investors haven't figured out the game, e.g. capitalizing stripping expenses to inflate GAAP earnings.

 

Unless it's recently changed, I believe stripping expenses can be capitalized under IFRS but not GAAP.

[ItsAValueTrap]

Unless it's recently changed, I believe stripping expenses can be capitalized under IFRS but not GAAP.

 

Hmm so I don't know the actual rules.  KPMG has a white paper on the subject:

https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/first-impressions/Documents/first-impressions-production-stripping%20-costs.pdf

 

From skimming their white paper, it seems that there were changes in 2011.  After the changes, mining companies are allowed to capitalize stripping costs.

 

2- Sometimes I say GAAP when I mean to say accounting earnings (US GAAP, Canadian GAAP, IFRS, etc.).