Gold Stocks: No One Left to Kill?

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An Interesting Juncture for Gold Stocks (A good read with links)

Note that CEF in the above chart trades at an 11% discount to its 60%/40% holding of gold and silver bullion after a four year down-trend–note that this is either hyper-bearishness or massive extrapolation of trend-following.   Apple’s cash hoard could buy the entire public mining sector.   Gold stocks are cheap for a reason: poor capital allocation, poor cost control, and dilution of shareholders revealed in the five-year long bust from an epic boom from 2001 to 2011 caused investors to flee.   Since then many managements have gained religion on cost control and capital discipline (Note Barrick, ABX). All cycles turn, but when? If we knew, then no opportunity.

I always hear investors or analysts ask, “So what is the catalyst?”  If the market is at all efficient–and I would say that it is except at major inflection points–then if we knew the catalyst, then the opportunity would be arbitraged away.  How about the law of low prices or the law of supply and demand.

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Ironically, as gold has declined in US dollar terms, it has risen in real terms versus commodities showing its mettle in a credit contraction.  TSI BLOG

1-Divergences-complete-772x1024The HUI, a gold stock index, is showing relative strength versus gold.   However, certain gold stocks like Novagold (NG), Sabina Gold (SGSVF) or Agnico-Eagle (AEM) are in incipient uptrends or, at least, vastly outperforming their indexes such as GDX or GDXJ.  You must diversify amongst the highest quality producers, developers, and explorers.

This post is not a recommendation but a historical reference point for a hated asset class.  I see much less RISK in a terrible industry such as gold mining than wonderful businesses such as Amazon, CRM, or GE.

7 responses to “Gold Stocks: No One Left to Kill?

  1. So, what do you mean when you say “highest quality producers, developers, and explorers”?

  2. Highest-Quality would mean for the balance sheet, property, management experience/corporate governance.

    So NOVAGOLD has cash and no debt on the balance sheet with a high quality property (size of deposit, grade in g/ton) that they won’t develop until economic so it is a long-dated call option on higher gold prices.

    Sandstrom has lower quality deposits/customers than Royal Gold but it is much cheaper and would do better on much higher gold prices like $300 plus vs. RGLD who could really snap up properties if gold fell another $200.

    All is a trade-off.

    For developers/explorers, look at EMXX (Eurasian minerals) Management is experienced in selling and finding prospects–diversified.

    You need to figure out your criteria.

  3. Thanks for the response.

    I guess I don’t understand why more emphasis is put on high quality instead of great value, although I’m not saying that the ones you mentioned don’t have great value.

    This is a topic where big resource investors like Rick Rule and Eric Sprott seem to have different opinions. You seem to agree more Rule, in that you want the companies with the best management teams and the highest-grade deposits. I tend to agree with Sprott, in that a rising market lifts all boats, so cheapness trumps quality.

  4. Would ASM as a low cost producer count as high quality? Or is it not cheap enough?

  5. Dear Daniel:

    Both are right depending upon point of view. The highest cost miners (and with debt) would rise the most on a sharp rise in the gold price (in US dollars) while cash rich, high quality deposit (low ASIC cost) miners would rise but not at the same rate.

    The worst the business (mining is in that category), then the need for better management with great operating skills/capital allocation. A monkey could run Mastercard and still profits would flow.

  6. John,

    I agree with you that a mining company with incompetent management will likely have a greater chance of failure than most other types of businesses. If you have two mining companies that are the same in every way, except one is run by more competent management, then obviously that one would be the better buy. However, almost never is this the case. Ones with less competent management usually are selling for less because that information is priced in to a degree. I guess what I’m trying to say is that I don’t associate highest quality with greatest bargain, after taking all available information into account. At times, it may be the case that the miners that are of the highest quality are the greatest bargains, but in no way do I see that as necessarily so. To clarify, by “bargain” I mean the greatest discount to objective value.

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