Tag Archives: gold mining

Four Ways to Value the Stock Market; Shareholder Rape; Mal-investment Lunacy

Chick Magnet

 

 What is the Real Value of the Stock Market?  This:

Nominal Stocks

or this:

Stocks in gold

 

Four Ways to Value The Stock Market

http://mises.ca/posts/articles/four-ways-to-value-the-stock-market/

Case Study in Management Rape of Shareholders

from: Bob Moriarty Archives   May 7, 2014

In 13 years running this website and visiting dozens of projects yearly I have run into every sort of charlatan, crack addict, drunk and all-round scam artists among the legions of fools who believe they can run a mining company successfully. In most cases, they have been lucky enough to collect absurd salaries long enough before the abused shareholders toss the bastards out.

Write these names down and keep them handy. If you ever see them associated with any company you are considering buying, prepare yourself to be raped. Ian Rozier, President of Newport Exploration, Barbara Dunfield, CFO of Newport and David Cohen, Director of Newport. What they pulled on Newport Exploration wasn’t just your typical screwing shareholders that we all expect on a regular basis, they raped Newport shareholders on a continuing basis.

I would describe Newport Exploration as pretty much a shell company. In November of 2010 they entered into a JV with another pretty much shell company named Reva Resources. This action can be considered one of the first examples of rape since two significant shareholders of Reva are directors of the Company. So in essence, directors of a shell company with enough cash in the bank to pay salaries to people for doing nearly nothing does a JV with another shell company that they just happen to own much of. If you are kind you can think of it as a sweetheart deal.

As a result of the unannounced press releases detailing the royalty payments, Newport shares were trading on the open market for $.04 a share while management knew that they had $.17 in cash at the end of October. In effect, company A paid themselves in company B shares worth four times as much in cash as in the open market because nobody reads quarterly reports from companies not doing anything. So the real issue is, was this a conflict of interest between the interests of management and the interests of shareholders and what exactly is a material disclosure? I think both questions are easy to answer.

Read more: http://www.321gold.com/editorials/moriarty/moriarty050714.html

The Current State of Mania

Junk Bond Mania

Embracing Leverage Again http://www.acting-man.com/?p=30331

MI-CC732B_CLO_J_20140504170904

Mal-Investment Lunacy: http://www.acting-man.com/?p=30313

Outsider CEOs (Skilled Management vs. Shareholder Rape)

A Great blog: http://student of value.com/notes-on-the-outsider-ceos/

returns-of-outsider-ceos

Part 2: Analyzing a Gold Mining Company–Initial Steps

Mark Twain: “A mine is a hole in the ground with a liar standing next to it.” 
2-BGMI-Gold both-W2 (1)

Initial Steps

We first have to understand the product/market of our gold company. Gold companies produce gold and silver which is money. What is money?  Precious metals have exchange value which makes up a large part of their value.  You first have to understand the gold market. Note: why did gold go down LESS than other commodities such as oil in the 2008/2009 credit crisis?

You need to draw up an industry map. How? Find out who the participants are.

Start with history: http://www.fgmr.com/gold-mining-stocks-have-outperformed-the-djia.html

BGMI http://www.sharelynx.com/chartstemp/free/fchart-BGMI.php

QUIZ: What is the best environment to invest in Gold mining equities. Why?

We will circle back to an industry map after you have read about the industry.

What determines the price of gold: http://www.acting-man.com/?p=10251 Also, do a search for gold and/or mining stocks and then read his posts.

The Case For Gold by R Paul

Gold Dollar by Rothbard

Roubini Why Gold Won’t work

Study: www.monetary-metals.com

Gold as collateral: http://www.alhambrapartners.com/2014/02/26/gold-and-reverse-repos/   Also, do a search for gold.

Read free research on gold as money: http://www.myrmikan.com/port/

View all five videos on money: http://hiddensecretsofmoney.com/

Two excellent books: Gold, the Once and Future Money by Nathan Lewis. Also, Gold: The Monetary Polaris by Nathan Lewis.

Gold and inflation: http://www.garynorth.com/public/department32.cfm

The case for gold:  http://www1.realclearmarkets.com/2011/11/18/my_thoughts_on_lewis_lehrman039s_gold_standard_120618.html

Understand royalty companies: http://seekingalpha.com/article/1341411-gold-and-silver-royalty-companies-part-1-the-pros-and-cons-of-royalty-companies   (read all five parts)

Then read presentations of Royal Gold, Silver Wheaton, Franco-Nevada, Sandstrom from their websites for a good overview of the gold mining market(s).

These sites can get you started. Don’t believe the hype!

www.goldsilverdata.com Also, go to http://youtu.be/VjjLhPqO8bY to view video on valuing gold and silver stocks.

Go to www.youtube.com and search for Jim Grant AND gold,   John Doody and mining stocks.  Ditto for Brent Cook, Rick Rule. Search for their comments.

That will get you started and then next week, I will post an industry map. Ask questions.   In two weeks we will crack a company.

Update March 17, 2014: Discussion of Junior Resource Sector

Gold1800to2000

 

Part 1: Analyzing a Gold Mining Company–Where to Start?

Idaho_Gold_Minegold mine 2

Gold mine 3gold mine

 

 

 

Assignment: Analyze and value a gold mining company

Mario Gabelli once suggested to a group of Columbia MBA students to become an expert in an industry. The process will take at least six months of intensive reading and research to get to a level of what you need to know and what you can ignore. Then in a year or so move on to another industry. After five or six years you will have competency in five to six different industries.   Since investing is all about context, we first need to learn about the gold (precious-metals) mining industry.

Whether you will analyze a gold mining company, a shipping firm, a title insurance business or a media company, you will need to develop an understanding of the industry within which your firm operates.

Since we do not have six months to study, we will move at an accelerated pace.

OK, so what do you need to start with and how would you begin?  Pretend that you wanted to build a mining company from scratch, how would you do it? If you were airdropped into Northern Pakistan, what would you first need after hitting the ground?

Friday, I will post my suggestions and information sources. Meanwhile, you can think and search for yourself. Eventually, we will move on to the particular company.   Don’t hesitate to post questions if you are unclear or my instructions are incomprehensible.

Good luck!

Readers’ Questions

Flasher

In the second decade of the twenty-first century, America is faltering under the weight of a dual crisis. Its public sector teeters on the ragged edge of political dysfunction and fiscal collapse. At the same time, its private enterprise foundation has morphed into a speculative casino which swindles the masses and enriches the few. These lamentable conditions are the Janus-faces of crony capitalism–a mutant regime which now threatens to cripple the nation’s bedrock institutions of political democracy and the free market economy.

….Once the Fed plunged into the prosperity management business under Greenspan and Bernanke, however, the subordination of public policy to the pecuniary needs of Wall Street became inexorable. No other outcome was logically possible given Wall Street’s crucial role as a policy transmission mechanism and the predicate that rising stock prices would generate a wealth effect and thereby levitate the national economy. — David A. Stockman (former Budget Director under Reagan and a former Partner of Blackstone Group) from The Great Deformation, The Corruption of Capitalism in America.

READERS QUESTIONS

Reader Question #1:  What Accounting Books Do You Suggest? I want to improve my intermediate level of understanding so I am ready for my investment analyst internship.

My reply: http://www.barnesandnoble.com/s/?category_id=394924

Buy and work through the problem sets. Accounting problems must be done rather than reading texts because then the concepts will sink in.

Also, to combine that with analyzing financial statements, read http://seekingalpha.com/article/1019951-book-review-what-s-behind-the-numbers

Interview of the writer: http://www.businessinsider.com/whats-behind-the-numbers-a-chat-with-john-del-vecchio-2012-10

Companion website for the book: http://deljacobs.com/

Also, look at: http://www.footnoted.com/report

http://www.accountingobserver.com/PublicBlog/tabid/54/Default.aspx

http://www.offwallstreet.com/research.html Go download several research reports then obtain the particular annual report and study the numbers. Do you agree with the analyst’s report on the company? Study cases.

Financial Shenanigans by Schillit. His books are great for practicing your financial statement skills to undercover weaknesses and strengths.

Also, view short seller blogs like www.brontecapital.com

Reader Question #2: How to begin?

My reply: Investing for beginners:

Obtain a few of these books on the cheap to get a perspective. Then find an industry like beer, soda or trash hauling (one that you can easily understand) and order the annual reports, then pick a company and go through the numbers with your books at your side to look up what you don’t understand. Go back and forth and note your questions. Try to find answers for those questions.

http://www.fwallstreet.com/intro/

http://www.classicvalueinvestors.com/

Wall Street on Sale by Timothy Vick (A good book but perhaps out of print?)

The Little Book of Value Investing by Christopher Browne

The Little Book that Builds Wealth by Pat Dorsey (A good intro to franchises)

Reader’s Question #3: How Do you Invest in Gold Mining Stocks?

My reply: Very carefully………….

GOLD

Dr. Ron Paul was interviewed by Fox after the U.S. Federal Reserve confirmed it will continue its QE program highlights the importance of gold as money.

On July 13, 2011, when Dr. Paul was a U.S. Congressman he asked U.S. Fed Chairman, Ben Bernanke, “Do you think gold is money?” and Bernanke replied, “No, it’s a precious metal.”

Dr. Paul countered, “Even though it’s been used for 6,000 years?” But Bernanke denied gold was money and said, “No, it’s an asset. Just like T-Bill’s are not money.”

The Fox News interviewer then commented, “Cyprus has taught us that governments can confiscate money that you’ve earned or even paid taxes on. Rampant quantitative easing and price fixing by governments may prop up the stock markets but it doesn’t keep unemployment down. The U.S. Fed is going to continue its QE program which is good for gold.”

goldcore_bloomberg_chart4_21-03-13

First, I do not want this subsection to be more than 35% of my portfolio, then I want 12 to 15 companies for maximum specific company risk diversification, then I have a range of low cost producers like Yumana, Eldorado then Streamers (Royalty Companies) like Royal Gold and Silver Wheaton, then more obscure, smaller companies that are beginning their production.

I suggest visiting www.goldstockanalyst.com Listen to all the audios and videos. Read: GSA_2012_User_Guide and GSA_sanfranpresentation  

Also, a book, Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks by Adrian Day

Go to www.kitco.com and listen to the investors, miners and analysts of the mining industry.

From GSA:

Investors must choose from two major groups: Explorers, of which probably 1,000 are publicly owned and Producers, of which only about 50 trade in North American stock markets.

To this latter group, we can add near-Producers, miners that have taken a deposit through the bankable feasibility stage and an independent engineering firm’s analysis has shown that:

1)      drill holes are close-enough spaced to have high confidence about the ore grades in-between the holes and thus justify the Proven and Probable Reserves (P+P) classification, and

2)      that the capital investment required to put the site into production will yield a profit, or economic return. Just as an independent auditor’s sign-off on a company’s financial statement is critical for investors, so too is an independent engineering firm’s sign-off on the deposit’s economics, and it’s required by the US SEC for a miner to be able to call its ounces in the ground P+P Reserves.

Gold Stock Analyst only follows producers and near-producers as they are the only miners with data confirmed by 3rd parties and thus have solid numbers that can be analyzed.

The Gold mining industry is unique. All the miners produce exactly the same final output, ounces of Gold. Unlike Coke and Pepsi, they spend nothing trying to tell consumers that their Gold is the best. The miners simply accept the current Gold price when they sell. With all ounces the same, and selling for the same price, one might think the stock prices would reflect similar valuations for Miner A’s ounces versus Miner B’s ounces. But, in fact, the stock market is not efficient and the valuations can vary widely. This gives an opportunity for investors.

The gold stock analyst uses three filters:

  1. Market Cap/oz P + P Reserves
  2. Mkt.. Cap/Oz Production
  3. Operating Cash Flow Multiple

Essentially, you can use his filters to pick your own gold and silver stocks. I monitor some of the well-known gold and value investors like Sprott, First Eagle Fund, Van Eck, Tocqueville and note some of their holdings, then I run the numbers and compare. I want to buy the cheapest ozs of gold (producing or in the ground) that I can with management that has been successful before and with a decent balance sheet or highly probably access to the capital markets.  Many junior gold mining companies are going to go bust due to the prior boom creating over-capacity (too many mining promoters or two guys and a mule with pick and shovel) and to tight financing conditions today. Great conditions for those companies that survive.

By the way, here is one gold bug who will not hire MBAs:

http://www.kitco.com/news/video/show/on-the-spot/55/2012-10-25/There-Will-Be-Panic-Into-Gold-Casey-Research   (see 4 minute 30 second mark)

Interviewer: Do they need a good degree to work at your shop (www.caseyresearch.com)?

Doug Casey, “We don’t care if someone has an MBA or college. We don’t care whether they went to college. We ask, “Do they have good character, intelligence, diligence, are they hard working and do they want to improve themselves? I don’t see how a college degree has anything to do with that, especially what they are teaching today—gender studies, etc. If someone comes to work for us today with an MBA, we look at them and say, What’s going on in your head that you allocated $100,000 and two years of your life to get more theory instead of doing in the real world.

….be careful.