“All the perplexities, confusion and distress in America arise not from the defects in their constitution
or confederation, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit and circulation.” —John Quincy Adams
After the wildly enthusiastic response to my piece last week (on selling your gold jewelry) I thought I’d look at what you should do with your new-found cash.
Potential-investor folk, while pausing from watching people on television singing and dancing, have noticed that the share prices of gold miners have risen. This ‘price-rising phenomenon’ is normal, and generally happens in gigantic secular bull markets that have lasted for over nine years… It’s nothing to be worried about. Take a few deep breaths. Watch some soccer.
Having finally noticed a bull market of some duration, investors usually stab themselves, and then ask if they should still invest. Take more deep breaths, this gold bull is far from over. (Not sure about the rise of fine wine though…)
Why should gold continue to rise in price? First of all, bull markets continue because of supply demand imbalances. People outside the U.S. are buying gold like crazy. Supply is stuck at 2500 tonnes a year. Scrap is up, but not enough.
And secondly, none of our titanic economic problems have been fixed. Unemployment continues, dissipating 33 of our 50 state unemployment funds: http://money.cnn.com/2010/04/08/news/economy/state_funds_jobless_benefits/index.htm?eref=googletoolbar The real estate bubble continues to deflate, sinking home prices, sales, and building permits. Fannie Mae and Freddie Mac continue to need gobs of money just to stay alive. Bonds and CDs yield nothing. The stock market has been flat for a decade. Our arrogant American empire continues to throw money at unwinnable wars. Our banking system is mostly insolvent, because over 60% of their capital was loaned out for real estate, and now we have a oil spill that will ruin most of the Gulf coast, throwing businesses, homeowners, and struggling state governments into poverty. Big Uncle Brother Sam is printing money 24/7, which continues to undermine (pun intended) gold’s only competition, the dollar. The only good employment news is with census takers and Homeland Security security guards. Investors are stumbling around asking, “What the hell can I buy?”
HEY, THERE ARE LITTLE MINING COMPANIES OUT THERE!
What’s working is commodities, driven by growth in places like China, Brazil and India. And gold is the king of commodities; silver the queen. Yes, you should start with PM coins and a gold fund or two, but if you’ve done that and are getting aggressive, find a miner that’s growing, and ask a lot of questions:
1. Dude, where’s my project? Where are the company’s projects located? A huge downside risk in mining is political seizure. The gold has all been mined from the pleasant, politically friendly jurisdictions, and mining companies now have to visit lousy locations to prospect for gold. Those jurisdictions are usually lousy for a reason. Newmont Mining Corp. (NEM) got a mine taken away in Kazakhstan a couple of years ago. Nevsun Resources (NSU) suffered a long shut- down in Eritrea by government thugs . Most recently, the risk of nationalization was demo’d by Venezuela’s Presidente Chavez who snatched Crystallex (KRY). Seizure is the death penalty for miners today, AND the miners face extra taxation (Australia’s 40% Super Profits Tax) which may bring about the same result.
So try and play in a dictator-free sandbox. (Don’t look so smug there, Americans.) Look for Canadian companies that have ops primarily in Canada and the U.S. Mexico (so far) is also Ok. There are problems in Venezuela and South America, as well as in Russia, and certain parts of Asia. Africa is okay only if you like operating difficulties, exotic diseases, and additional dictators with a taste for Swiss bank accounts. You just won’t make any money in politically kleptocracies. The locals will somehow, some way, screw you out of most of it.
2. How close is the miner to actual production? The mining sector is basically divided into explorers, developers and producers. Junior explorers are like a long-shot horse running at triple-digit odds at your local track. It’s going to take a horse trailer full of luck for you to collect at the pay window. It can happen though; I bought Miramar Mining for a buck a share and Newmont bought me out for $6. (Don’t ask about the other nags I’ve thrown money at. I go to meetings for my affliction.) Geologist Mickey Fulp also appreciates good junior mining stocks.
Some junior explorers to consider today are U.S. Gold Corporation (UXG) Rob McEwen in Nevada, and Romarco (RTRAF.PK) drilling in Mexico and North Carolina.
The big downside for an explorer is bad drill results, i.e., no metal. The other risk is Junior finds something, but deposit isn’t economically recoverable. “Ore” is a deposit that is economically viable. NovaGold Resources, Inc. (NG), found a giant pile of gold in Alaska which is covered in sulfides and involves ugly mining and refining costs. The project is now suspended, and the company’s stock has crawled away and died. (You want gold to be surrounded by oxide dirt rather than sulphides. And Oxide deposit is heap leachable, which is cheap. Sulphides require an autoclave and heavy money for complicated refinery operations.)
The least risky non-production company is a developer. They’ve got drill results showing a viable, economic ore body, and they’re slogging through the necessary steps for funding, building, permitting, hiring, and start-up, etc. The development process is almost always more time consuming and costly than the ever-optimistic PR department says it will be. The average time it takes to pour a bar of something precious from a mine is 10 years after somebody found it. At present, Golden Queen (GQMNF.PK) is “close” to finishing its gold project near Bakersfield, and European Goldfields ((EGFDF.PK) is “nearing” a start-up for its gold project in Greece.
3. Is the company profitable? Some geo-politically safe producers that are probably still underpriced as of this writing include Minefinders (MFN) and Northgate (NXG). Hecla Mining Company (HL) has high priced mines and is making money now that silver is above $18 an ounce. As I’ve recommended before, look at the Sample Letter at www.goldstockanalyst.com. Letter writer, John Doody has said that of 300 publicly-traded mining companies, there may only be 30 worth buying. You’re going to have to kiss a lot of frogs to find that Prince or Princess. Keep a hankie handy to wipe off frog slop.
4. Does the company have money in the bank? Miners who are not generating cash must sell stock or borrow money from the capital markets. Developing, drilling and exploring are capital-intensive activities, and require regular infusions of cash. The financial meltdown of 2008-2009 really hammered the junior mining sector. Investigate before you invest.
5. Is this company a takeover candidate? Finally, there are take-out dreams. Yes, as the mining industry gathers momentum, M & A will heat up. Most companies making an acquisition will typically do a stock deal, which will be dilutive to the acquiror, but great for the acquiree. You want to own the latter.
Likely acquiror companies would be North American majors such as Newmont Mining (NEM), Goldcorp (GG), and Yamana Gold (AUY). Institutional investors have been buying the big guys already, and their shares are probably fairly priced. In the next few years though, the gold bull will make some serious money for serious investors in juniors.
But if you’ve a hankering for junior miners, but don’t want the individual stock risk, take a look at the Junior Miners Index (GDXJ). Inspired by Rob McEwen of GoldCorp fame, it’s an ETF that includes 40 juniors and intermediates.
FF owns developers GQMNF.PK, EGFDF.PK, and profitable companies MFN, NXG, HL, GG, AUY, also GDXJ. He wishes he’d never heard of Crystallex.