Gold Chart Gone Hyperbolic

[Mark Jr.]

Ok, just a quick overview I did last night:

 

2008 lows

 

Ticker	Price	P/E	EPS	Yield	Shares Out	Market Cap
ABX	23.61	11.15	2.04	1.54%	872.26M	19.84B
NEM	26.34	22.71	1.16	1.52%	439.23M	11.43B
GG	33.06	17.12	1.09	0.8%	728.67M	13.6B
EGO	9.96	28.33	0.15	-	366.1M	1.55B
KGC	17.65	19.31	0.54	-	664.74M	5.86B

 

 

Now:

Ticker	Price	P/E	EPS	Yield	Shares Out	Market Cap
ABX	22.62	-	-0.66	3.30%	1B	22.65B
NEM	36.37	19.07	3.63	4.30%	496.84M	18.07B
GG	29.68	15.2	1.95	1.9%	812M	24.1B
EGO	7.55	17.16	0.44	1.7%	713.83M	5.39B
KGC	6.32	-	-2.20	2.3%	1.01B	7.21B

 

For the most part, EPS and dividend yields are higher now than in October 2008 (TTM) despite the shares out being higher across the board. I haven't looked at or normalized the losses on ABX and KGC to see if those are one-times (I think Kinross recently wrote down an acquisition or two).

 

Also, I added up the share price of these five and divided them into the price of gold. In 2008 it was 6.54, today it is 14.42 which to me indicates that the producers are lower now, relative to the price of gold than in 2008.

[Guest wellmont]

this isn't a gold problem. it's a gold stock problem. the price of gold is in a very normal correction. the gold stocks are in a very severe bear market, which has decoupled them from the price of gold. gold problem? no. gold stock problem? yes. if you believe in mean reversion you should be all over gold Stocks.

[Liberty]

Mark, have you looked at the changes in all-in production costs since 2008? (not just the cash costs)

[Mark Jr.]

Mark, have you looked at the changes in all-in production costs since 2008? (not just the cash costs)

 

Not yet, that's round 2. I need to pull all the individual annual reports for that, I want to look at proven & probable reserves, total cost per ounce, etc.

[no_free_lunch]

Has anyone done the research on Banro (BAA)?  There are 4 analysts covering it and they are putting 2014 earnings at around $1 against a stock with a $1.32 stock price.  When you dig into the details beyond that the story gets more ugly.  The mines are in the congo, management is going to issue 25% more shares, continued push for expansion, etc.  However, if they can meet their targets and the gold bear market ever ends they could do extremely well.

[siddharth18]

What about Sandstorm Gold? You know - the royalty based, star jockey's (Nolan Watson) company?

 

P/E seems pretty high but someone with knowledge of financials/outlook can comment (AboveAverageOdds - AAOI) ?

 

While Gold's thesis hasn't changed, Gold hasn't seen a meaningful correction in pretty long. It could be a long and rocky road before things turn around.

[giofranchi]

Moore, I hope this gets your attention. I was arguing pretty agressively a short gold stance and did in fact short both gold and silver at what looked to me to be a blow off top. Well I have switched I now have 10 percent of my portfolio in Barrick Gold which I think is as cheap as it has EVER been in relation to the price of gold and every other asset class I can think of. I am also short the US mkt as hedge against my long positions. This market is making me more nervous daily.

 

Agreed on both. Don't see any reason why gold fundamentals have changed. On the contrary we see Soros, Societe, Goldman inducing speculative shorts in gold while hot money exits to chase equities.

 

The biggest story right now in my humble opinion is that central banks will soon have to come clean that there is no exit strategy. QE will be integral to the economy from here on out. The problem market participants have yet to factor that in. Again - in our view there is no exit strategy.

 

Moore,

I established a 10% position on Gold & Silver for my firm. I guess many investors on the board, me included, are not really interested in either Gold or Silver as investments. Instead, they just view Gold & Silver as a “mean to protect and maintain the purchasing power of our capital”. Purchasing power that we want to keep as intact as possible, waiting for the right opportunity to buy the businesses we understand and admire the best.

Now, my question to you is the following: if the price of Gold & Silver could be so easily manipulated by Soros, Societe, Goldman, etc., how could we still believe it can effectively “protect and maintain the purchasing power of our capital”? In other words, have we been too naïve, and committed a serious mistake?

I genuinely think a lot of people on this board would like to know your thought on this.

 

Thank you very much,

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence. One’s knowledge and experience is definitely limited and there are seldom more than two or three enterprises at any given time which I personally feel myself entitled to put full confidence.” - John Maynard Keynes

 

[ItsAValueTrap]

The mines are in the congo

The mines are in the "Democratic" Republic of Congo.  I believe the politics there are quite complex and this is definitely not a politically stable country.

 

Some of the genocidaires from the Rwandan genocide fled into the DRC.  In the past, Rwandan troops committed mass killings against genocidaires and suspected genocidaires.  These tensions have not been resolved. 

 

At one point, Rwanda was supporting a rebel group fighting the DRC government (this is related to the genocidaires being in the DRC).  That rebel group did not win and hostilities have ended... but those tensions are still there and haven't been fully resolved.  Some of the factions in the DRC believes that Rwanda is still supporting the DRC's enemies.

 

Currently there is still armed fighting in the DRC:

http://en.wikipedia.org/wiki/M23_rebellion

 

I don't even know the whole story.  An oh yes, the DRC government expropriates foreign-owned mines.

 

Anyways, Banro falls into the "too hard" category for me.  Anybody trying to build a mine in the DRC is probably not that smart in my opinion.

[bmichaud]

Wow wow. Gld, gdx and miners down over 6% pre market.

[watsa_is_a_randian_hero]

Has anyone done the research on Banro (BAA)?  There are 4 analysts covering it and they are putting 2014 earnings at around $1 against a stock with a $1.32 stock price.  When you dig into the details beyond that the story gets more ugly.  The mines are in the congo, management is going to issue 25% more shares, continued push for expansion, etc.  However, if they can meet their targets and the gold bear market ever ends they could do extremely well.

 

caledonia is one that I am in that is similar with african exposure and low pe.  While the PE is not 1x like banro, they have also paid significant dividends.

[Mark Jr.]

Has anyone done the research on Banro (BAA)?  There are 4 analysts covering it and they are putting 2014 earnings at around $1 against a stock with a $1.32 stock price.  When you dig into the details beyond that the story gets more ugly.  The mines are in the congo, management is going to issue 25% more shares, continued push for expansion, etc.  However, if they can meet their targets and the gold bear market ever ends they could do extremely well.

 

caledonia is one that I am in that is similar with african exposure and low pe.  While the PE is not 1x like banro, they have also paid significant dividends.

 

I don't know why all you guys are sniffing around these awful obscure juniors and exploration companies. The major producers are ON SALE. Barrick had an adjusted P/E of 5 on friday, it's lower today.

 

I held Caledonia for the first 5 or 6 years of the gold bull and it is a total dog. I dumped it and shifted to High River Gold, it was a 14X or 15X off the 2008 lows (no, I didn't pick the lows then alas). HRG is about to get bought so probably not much left upside left there.

 

But that said, the majors are dirt cheap! I did a workup last night and made a "report style" PDF for my website, probably a little simplistic for the likes of this board but it gets the basics across. But I wrote it before today's continuing crash.

 

Who knows where this is going to stop, I see various opinions shooting emails all over the place with technical support points, whatever. I'm just waiting for the dust to settle but the major producers are cheaper now than in lows of October 2008.

 

I'm attaching the PDF, but remember, these numbers use friday's closing data. Not today's.

 

The main thing I'm thinking about now is with gold prices this low, what does that do to margin compression (but I guess if it impacts too much, production will slow down),

Gold_comparison_2013_2008.pdf

[giofranchi]

What Are Gold Prices Saying?

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence. One’s knowledge and experience is definitely limited and there are seldom more than two or three enterprises at any given time which I personally feel myself entitled to put full confidence.” - John Maynard Keynes

What_Are_Gold_Prices_Saying.pdf

[Parsad]

What Are Gold Prices Saying?

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence. One’s knowledge and experience is definitely limited and there are seldom more than two or three enterprises at any given time which I personally feel myself entitled to put full confidence.” - John Maynard Keynes

 

Pretty much what Prem has said for the last three years...the deleveraging process is going to slow everyone the hell down, and there is probably going to be some price deflation as commodities and demand slow. 

 

On the other end of spectrum are the others saying that inflation is down the road, and whether statistics show it or not, some price inflation has occurred in the recent past due to the monetary printing press. 

 

Does anyone really know?  ;D  Cheers!

[siddharth18]

Has anyone done the research on Banro (BAA)?  There are 4 analysts covering it and they are putting 2014 earnings at around $1 against a stock with a $1.32 stock price.  When you dig into the details beyond that the story gets more ugly.  The mines are in the congo, management is going to issue 25% more shares, continued push for expansion, etc.  However, if they can meet their targets and the gold bear market ever ends they could do extremely well.

 

caledonia is one that I am in that is similar with african exposure and low pe.  While the PE is not 1x like banro, they have also paid significant dividends.

 

I don't know why all you guys are sniffing around these awful obscure juniors and exploration companies. The major producers are ON SALE. Barrick had an adjusted P/E of 5 on friday, it's lower today.

 

I held Caledonia for the first 5 or 6 years of the gold bull and it is a total dog. I dumped it and shifted to High River Gold, it was a 14X or 15X off the 2008 lows (no, I didn't pick the lows then alas). HRG is about to get bought so probably not much left upside left there.

 

But that said, the majors are dirt cheap! I did a workup last night and made a "report style" PDF for my website, probably a little simplistic for the likes of this board but it gets the basics across. But I wrote it before today's continuing crash.

 

Who knows where this is going to stop, I see various opinions shooting emails all over the place with technical support points, whatever. I'm just waiting for the dust to settle but the major producers are cheaper now than in lows of October 2008.

 

I'm attaching the PDF, but remember, these numbers use friday's closing data. Not today's.

 

The main thing I'm thinking about now is with gold prices this low, what does that do to margin compression (but I guess if it impacts too much, production will slow down),

 

The question remains - how long will Gold fall and to how much? Unless you are a macro expert - buying gold equities is implicitly betting that Gold won't sink as to make the mines unprofitable.

 

Gold is only worth as much as the buyers think it's worth and currently the buyers are scarce. Gold also didn't rise after 2011 even as we witnessed increase in Q/E, Greek crisis, Japanese Q/E.

[JEast]

We have had this debate for some time that the US dollar sucks and it will eventually implode due to printing, etc.  I have, in general, responded with 'against what?'  Against the Chinese Yuan, Brazil Real, Gold is the most common response – maybe not. 

 

If the Yaun is 'the one', they will have to print a lot of it just to get it into circulation to even make a viable global alternative.  For now, it is in short supply and therefore scarce (insufficient supply).  If they print a lot of it to make if viable, then is it really valuable.

 

Both Japan and the US have been printing (or digitally creating) in a race to the bottom for 4 years now with only marginal success to weaken either.  The amount of Yen outstanding is so large that I can not even get my head around how big the numbers are, but nevertheless it is worth more today than it was worth 30 years ago.  Like that little pink bunny, it keeps going and going.

 

Maybe we all have this thing upside down and the more you print the better you are, much like first to market advantage. If I am Venezuelan I want dollars, if I am South African I want dollars, if I am Russian I want dollars, the list goes on.  Just a thought.

 

Cheers

JEast

 

[PlanMaestro]

What Are Gold Prices Saying?

 

Basically, gold pays no dividends or interest. It is thus expensive to hold in your portfolio when REAL interest rates are high, and cheap to hold it in your portfolio when REAL interest rates are low. When REAL interest rates are high, you have to be pretty confident that gold is going to rise in price in order to hold it in your portfolio.– DeLong

 

So the late 70s were a time of high rates but very high inflation expectations, so that REAL rates were arguably zero or negative, just as they are today. And this also suggests that many people misread that 70s experience; because high gold prices then were associated with high inflation, gold has come to be taken as an inflation indicator, whereas it’s actually a low REAL rates indicator. Last time those low real rates had a lot to do with inflation, but this time they’re taking place in a deflationary or at least disinflationary environment. – Krugman

 

 

In that view, Gold might make a little sense, but no more than that, when central banks look foolish in the face of high unemployment or inflationary episodes.  When monetary and fiscal policy is going wrong to solve the main issue (unemployment today, inflation in the 70s). So one hypothesis is that some may be thinking that central banks and governments across the developed world are finally looking less foolish.

 

And if that's the case, and consider that it might just be only an attack of Paulson's fund (RR: or maybe not http://goo.gl/nStzh) or this http://goo.gl/hWXzv, it plays against Prem's hedges.

[Liberty]

Mark, have you looked at the changes in all-in production costs since 2008? (not just the cash costs)

 

Not yet, that's round 2. I need to pull all the individual annual reports for that, I want to look at proven & probable reserves, total cost per ounce, etc.

 

This is vague, but gives an idea:

 

The industry recently introduced an “all-in” cash cost metric to try to capture the rising cost of producing an ounce of gold. It showed the costs for senior producers are between roughly US$950 and US$1,300 an ounce. But critics of the “all-in” approach point out that it does not account for corporate taxes or development capital. If those are included, the real cost of production is significantly higher.

 

http://business.financialpost.com/2013/04/15/gold-price-miners-canada/

[ItsAValueTrap]

The industry recently introduced an “all-in” cash cost metric

 

It doesn't have to be that complicated.

 

The mine engineers are always building discounted cash flow (DCF) models.  You make assumptions about the commodity price (3-year trailing average), what everything costs, and choose a discount rate.  That is what mine engineers are taught in school.  You plug your assumptions into a spreadsheet and get a net present value (NPV) figure.  For an example of this, look at feasibility study technical reports on SEDAR (or on miners' websites).

 

*Of course in practice not everything breaks down into a single number easily.  The main problem is "garbage in garbage out".  If you are overly optimistic about your assumptions, then the NPV figure will be ridiculously inflated.  But if you are going to break everything down into a single number, then NPV is the most sensible figure to use.  But it's not like anybody actually bothers to go to the library and read a mine engineering textbook to actually try to understand this industry....

 

**Nobody knows what the correct discount rate is.  Riskier projects deserve a higher discount rate.  Even miners behave like Mr. Market so the discount rate paid when acquiring/selling properties fluctuates.

[Liberty]

The industry recently introduced an “all-in” cash cost metric

 

It doesn't have to be that complicated.

 

The mine engineers are always building discounted cash flow (DCF) models.  You make assumptions about the commodity price (3-year trailing average), what everything costs, and choose a discount rate.  That is what mine engineers are taught in school.  You plug your assumptions into a spreadsheet and get a net present value (NPV) figure.  For an example of this, look at feasibility study technical reports on SEDAR (or on miners' websites).

 

*Of course in practice not everything breaks down into a single number easily.  The main problem is "garbage in garbage out".  If you are overly optimistic about your assumptions, then the NPV figure will be ridiculously inflated.  But if you are going to break everything down into a single number, then NPV is the most sensible figure to use.  But it's not like anybody actually bothers to go to the library and read a mine engineering textbook to actually try to understand this industry....

 

**Nobody knows what the correct discount rate is.  Riskier projects deserve a higher discount rate.  Even miners behave like Mr. Market so the discount rate paid when acquiring/selling properties fluctuates.

 

Unless I'm misunderstanding, you are talking about a forward-looking exercise.

 

What I'd like to know is what is the average all-in cost per ounce for existing, producing mines. Once they add up all their costs (exploration, development, mining, refining, taxes, etc), what does it cost a miner to get an ounce on the market.

[ItsAValueTrap]

Well... unfortunately you have to be forward looking.  These are depleting assets.

 

All-in costs are also a forward looking figure.  Non-cash costs such as D&A depend on estimates of mine life.  Estimating the life of a mine is completely tied to the economics of a mine- you need to guestimate reserves and you need to estimate/know your production costs.

 

2- If you really want to know what you're doing, go read some mine engineering textbooks:

http://glennchan.wordpress.com/2012/11/04/reading-round-up-books-on-mining/

 

Introduction to Mineral Exploration, Introductory Mine Engineering, and SME Mine Engineering Handbook should have information on DCF models and valuing mining assets.  (The latter two books are probably better for that topic.)

 

3- The bigger picture is this: 

 

---Valuing mining assets is pretty difficult.  Ideally, you want (A) access to engineering data and (B) a team of specialized engineers.  That's how senior miners do due diligence... because you cannot trust a technical report.  (Almost all technical reports nowadays are inflated.)

 

---Very few institutional investors actually know what they're doing in my opinion.  Most of the conventional wisdom about mining is wrong and idiotic.  Net present value is a much better metric than cash cost, all-in costs, P/E, EBITDA, ounces/reserves per share, etc.  Institutional investors should insist on getting NPV estimates for every operating mine and at least 1 page of the spreadsheet to show the assumptions behind the NPV figure.

They should also realize that they are being lied to 90%+ of the time.  Most technical reports out there use inflated assumptions and are a joke.

[Liberty]

Thanks. I agree that those metrics are most useful to value projects (which I also agree is almost impossible to do). I'm just curious about that other metric to see at which point most miners start losing money on existing mines.

[no_free_lunch]

I don't know why all you guys are sniffing around these awful obscure juniors and exploration companies. The major producers are ON SALE. Barrick had an adjusted P/E of 5 on friday, it's lower today.

 

Well first off, I did in the end pass on Banro, I just don't like the management.  Also, believe me, I did have a look at Barrick and the other majors but especially Barrick.  The thing is the low PE seems like a mirage.  Have a look at their capital expenditures.  Despite spending significantly more than they have made in profits over the past 4 years on new mines/upgrades their per share revenue is up only 60%, the price of gold went up roughly the same, maybe more.  So basically had gold stayed constant they would have the same revenues as 4 years ago and are putting all of their profits back into the mines just to stay where they are at.  I think the earnings are quite overstated when you look at it from that perspective.

[maxthetrade]

GMO is out with a new white paper on gold.

 

Conclusion

The concept of gold as a general insurance policy against systemic risks is dangerous, especially today. Gold prices are

driven both by global monetary policy and emerging markets consumers. Emerging markets have been a significant

positive force on gold prices for such a long time that it’s easy to forget that their impact on gold can very well go in

both directions. Gold prices not only have extensive exposure to China and India, but their exposure to these countries

is pro-cyclical by nature. Given both the cyclical and structural challenges the Chinese and Indian economies are

facing, we believe the risks to gold prices today are particularly high.

[PlanMaestro]

http://www.crossingwallstreet.com/archives/2010/10/a-model-to-explain-the-price-of-gold.html

[Guest wellmont]

GMO is out with a new white paper on gold.

 

Conclusion

The concept of gold as a general insurance policy against systemic risks is dangerous, especially today. Gold prices are

driven both by global monetary policy and emerging markets consumers. Emerging markets have been a significant

positive force on gold prices for such a long time that it’s easy to forget that their impact on gold can very well go in

both directions. Gold prices not only have extensive exposure to China and India, but their exposure to these countries

is pro-cyclical by nature. Given both the cyclical and structural challenges the Chinese and Indian economies are

facing, we believe the risks to gold prices today are particularly high.

 

this is the kind of paper you want to see after ABX has gone down 50% in a little over 3 months.