This page has been archived and commenting is disabled.

Gold Mining Shares: Less than Glittering

ilene's picture




 

Gold Mining Shares: Less than Glittering

Turning a Near Quadruple into Losses

By Paul Price

From this week's Market Shadows Newsletter 7-9-13, Fail and Fail Well

Jesus was hailed as a miracle worker when he turned water into wine. What would the appropriate name be for the Wall Street geniuses that managed to turn a 258%, decade-long rise in the underlying price of gold into losses for investors in most gold mining companies?

The per ounce price of the yellow metal has almost quadrupled from its 2003 low point even after pulling back from its Aug. 2011 pinnacle above $1900.

clip_image001 

Almost two years later, gold sits 35.6% below the 2011 top and pundits are now calling for $700 - $1,000 on the downside before bottoming.

True believes were not big sellers even at the peak. Most were of the view that fiat-based money was on its way to worthless and that gold was simply pausing on the way to $5,000, $10,000 or higher.

Even if they missed exiting at the top, owners of physical gold have made nice profits over the past decade. Players who used the SPDR Gold ETF (GLD) or its equivalents ("paper gold") have also done decently. The GLD did not exist ten years ago. It began trading on Nov. 18, 2004.

clip_image002 

Traders who bought shares of gold mining companies as a way to play rising metals prices made a huge miscalculation. Shares of all the major producers have posted significant losses for the past one and two years. Excepting Goldcorp their price declines dwarfed the fall in the actual per ounce price of gold.

clip_image004 

Three of the four highlighted gold-mining shares also showed horrible results over the most recent five and ten-year periods. Goldcorp (GG) managed to record a moderate gain since July 6, 2008 and more than doubled investors’ money since July 6, 2003. Still, that was substantially below the 258% percent increase of the underlying metal. 

Why did mining shares do so badly?

clip_image005 

Per share production costs vary by company and geographical area (chart below). All four of the profiled companies spent from $910 - $1149 per ounce based on their 2012 "all-in sustaining costs." That metric is defined in Newmont Mining’s (NEM) company information.

clip_image007

clip_image012 clip_image011 clip_image009  

At today’s gold price, miners’ profit margins are anemic compared with the past couple of years. If gold declines much further, none of these companies would remain profitable.

Emerging market governments are having money problems just like those of Europe and America. Politicians in many countries are trying to renegotiate valid contracts with miners to dramatically increase royalty payments. This is a very real threat. Multi-billion dollar capital investments in foreign lands can’t be picked up and moved elsewhere. Legal remedies are ineffective. They are costly, time consuming and hard to enforce even if successful. 

Environmental groups are pushing for ever tighter controls on waste treatment and disposal of toxic materials needed for processing ore. At best, this will make business more costly. At worst it could kill production entirely in some areas.

Every mining company depends on replacing their proven reserves. They do this through exploration and/or more efficient extraction techniques. The low-hanging fruit has been picked. This should be a matter of grave concern for long term shareholders.

Bottom line? If you hope to profit from a resurgence in gold, you are better off owning physical gold or gold-based ETFs. Avoid mining shares which have severely under performed and have every reason to continue along that path.

Read: Market Shadows Newsletter 7-9-13, Fail and Fail Well

Previous Articles on Gold:

What have you done for me lately? Precious (metals) little. 

All That Glitters… 

Hidden Dangers in Gold – Part One

Hidden Dangers in Gold – Part Two

Gold’s ‘Highly Inflated’ Track Record

Mettle Trumped Metal

Disclosure:  No position in any stocks mentioned, no gold holdings.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 07/11/2013 - 17:21 | 3742910 rex-lacrymarum
rex-lacrymarum's picture

Timing of this article: Less than propitious.

Not one of the things discussed here can be called anything other than 'conventional wisdom' at this point. In other words, as investment advice it is less than useless. 

As to the trends discussed, let's see:

1. rising costs. Yestertday's news. Many costs have in fact begun to fall, a trend that is set to accelerate as the global economy weakens further

2. Political friction: companies have learned to walk away from projects when governments become too pushy (see KGC and Fruta Del Norte). The limits of resource nationalism have been reached. 

3. Environmental issues. Yawn. Really? That's news? 

4. Replacing reserves. Seriously? Nowadays new reserves can be bought for a song. There are countless juniors with viable deposit that trade at the value of their cash in the bank. 

5. Gold price falling. Pobably has bottomed, and if it hasn't yet will bottom soon. 

The gold sector recently was at its most oversold since 1942. And now we get snowed in with articles like this one? 

Thu, 07/11/2013 - 20:43 | 3743513 Longing for the...
Longing for the old America's picture

The article detailed the miners' performance over a 10-year period versus that of the physical metal and the Gold ETFs.

Timing was not an issue. The problems discussed all existed before but they are getting to be much worse lately.

Caveat emptor.

Thu, 07/11/2013 - 11:02 | 3741520 DeadFred
DeadFred's picture

Goldcorp has one of the lowest debt loads for a major company that  I can see (please correct me if you see otherwise) and likely to weather the slump until the price reverts. The biggest danger for miners now is that they default on their loans and get absorbed into the JPMorgue. Avoid the miners like Barrick that have very high debt. Coeur d'alene is my favorite silver miner for the same reason (again correct me if needed)

Thu, 07/11/2013 - 10:21 | 3741315 FieldingMellish
FieldingMellish's picture

So many articles like this are now appearing. All we need is for Time or Newsweek to publish a "Death of Gold Miners" article and the bottom is guaranteed.

Thu, 07/11/2013 - 10:17 | 3741291 BlueCheeseBandit
BlueCheeseBandit's picture

Backward looking analysis proclaiming the end of a beat down asset? Maybe I should buy.

Thu, 07/11/2013 - 10:15 | 3741281 topshelfstuff
topshelfstuff's picture

So youdon't think an Order was issued to take out, take Down and Hammer the Miners ( another fully approved risk-free, guranteed winning "Bet", dished out like a "Contract" to a cosa nostra Button-Man to handle.

Also no mention of the reason, though I don't fault you for that, since I don't hear this mentioned anywhere. Maybe people forgot this insertion of the words "Deep Strorage" in the US reporting of its Gold Holdings...the thought being that Deep Storage is actually referring to Gold in the ground, not yet mined, though carried on the books where Bulllion Holdings were. Lets see who owns North American mines in a year. I think Uncle Sam

Thu, 07/11/2013 - 10:04 | 3741175 thunderchief
thunderchief's picture

I still think you folks are missing the point in HUI stocks.  Right now they are squeezing blood from the stone.  When the paper market blows up, which it will at some point, all that paper will have to chase something tangible in the gold market.  The only place to go will be miners at that stage, and just as they are a multiple of physical metals manipulation, they will do the same on the upside.  Every smashdown in the HUI is a buying opportunity. 

There is also no perfect company and no stock in the world that is not fraut with risk, including miners.  And that is a thought you can extend to everything, from your guns, to your gold and your god.

Thu, 07/11/2013 - 08:42 | 3740974 taketheredpill
taketheredpill's picture

Seriously.  If Gold does nothing you lose.  If Gold takes off 50 pre-teens with assult rifles show up...

 

Thu, 07/11/2013 - 08:39 | 3740967 taketheredpill
taketheredpill's picture

If you're buying a Gold company as insurance, why would you want the mine in a country whose name you can't pronounce?

 

You wouldn't buy home insurance from a company in Kinshasa.

 

EM Politicians:  "Thanks for the Gold...Stupid!"

 

 

 

 

Thu, 07/11/2013 - 08:28 | 3740926 CheapBastard
CheapBastard's picture

Greed also. I dumped AUY when their CEO paid himself $12 million bonus (or something like that) b/c of 'strong profits' but gave no dividend. Prompty dumped it as many other did also. Depriving the shareholders of their share only works for so long.

Greed, mismanagement...call it what you will.

When there is a middle-man between you and the resource it can get dicey. As some say, If you don't hold it, you don't own it."

Thu, 07/11/2013 - 10:48 | 3741458 dirtbagger
dirtbagger's picture

Amen to that.  Management has been using shareholders as an ATM as shown in the 10 year chart.  It's a given that mining share prices can be volatile but no point in taking the risk without returns.   In the 1980's there was substantial share appreciation that mirrored the price of gold.   

The mining industry has been taken over by the Financialization Gurus.  More money and fees to be extracted with mergers and marginal property acquistions than to actually having to dig and process ore. 

Thu, 07/11/2013 - 08:08 | 3740872 Counterfiat
Counterfiat's picture

stupid Ilien

Thu, 07/11/2013 - 08:01 | 3740831 Quinvarius
Quinvarius's picture

Honestly, I think it is too late to profit from this advice. 

I think the central Bank violating its full employment mandate by wiping out an entire global sector with obvious manipulation would be a more interesting topic.

Thu, 07/11/2013 - 09:51 | 3741194 augustusgloop
augustusgloop's picture

No doubt. Let's wait until the miners hit 20 years low to show how they under performed bullion. Something 100x more useful and insightful was Hugh Hendry's piece "Insane to Hold Miners" Oct 2012 when HUI was above 500 or before it made a 50% dive.

 

Thu, 07/11/2013 - 07:47 | 3740790 thunderchief
thunderchief's picture

More horrible advice for gold investors. Don't buy the best leveraged and cheapest component of the gold market, the HUI, buy an ETF like SLV or GLD.

Thu, 07/11/2013 - 07:29 | 3740763 Fred C Dobbs
Fred C Dobbs's picture

Is this a joke?

Thu, 07/11/2013 - 07:10 | 3740728 Motorboat
Motorboat's picture

Nice hit piece, but very, very late.  Paul Price has perfect 20/20 hindsight.

Thu, 07/11/2013 - 12:52 | 3741910 ilene
ilene's picture

Paul has been consistently bearish on gold and gold stocks since at least Sept. E.g. http://marketshadows.com/2012/12/03/gold-the-biggest-risks-are-the-ones-...

Thu, 07/11/2013 - 07:28 | 3740760 GetZeeGold
GetZeeGold's picture

 

 

Had it been a perfect hit piece.....you would now be dead.

 

I'd buy more gold shares if I had a solid option on killing management.

Thu, 07/11/2013 - 01:18 | 3740515 the grateful un...
the grateful unemployed's picture

an economy facing monetary chaos, crisis of leadership, and structural changes to the economy even more pronounced than during the first depression. billions of people in the third world who buy gold as a consumer choice, coming into the global market. demand, hoarding, limitied supply. demand mostly.

Thu, 07/11/2013 - 00:51 | 3740482 russwinter
russwinter's picture

This is post mortem after fact analysis. Virtually every mine with a cash cost even as low as 600-750 is trading for roughly 1/2 their capex costs, with deposits for free. Many are at 2 times gross profits even assuming 1250 POG. They represent the buying opportunity of the decade.

I will open accesss to just one example:

 http://winteractionables.com/?p=4238

Fri, 07/12/2013 - 01:33 | 3744124 Nero Tulip
Nero Tulip's picture

What russwinter said. This is complete after the fact news. So I also saw this article on Yahoo Finance's stupid breakout session today:  "The Trade: Dump Gold Miners". Are you fucking kidding me? People finally getting around to bashing gold miners. Classic.

GDX is down 46% YTD and GDXJ is down 52% YTD (even after the huge bump today). If anything, this asset class should be looked at as an opportunity. Anyone jumping on the "Gold Miners are Bad" bandwagon right now is a little late to the party.

People want gold. This means more of it needs to come out of the ground. Somebody has to do this.

Fri, 07/12/2013 - 02:15 | 3744179 New World Chaos
New World Chaos's picture

GDXJ out-of-the-money Jan 2015 calls are surprisingly cheap.  Got a couple hundred bucks worth a couple weeks ago.  My options buying has generally been a disaster but I couldn't resist.  There is a good chance the Great Ponzi will collapse and we will have hyperinflation within a year and a half (been saying that for four years, I know).

Thu, 07/11/2013 - 05:53 | 3740676 fredquimby
fredquimby's picture

Not had any mining shares since I sold HL, so I'll put my money where your mouth is (so to speak). Brigus gold now set to buy at todays open (max bid $0.53) showcasing my knife catching and lack of DD at it's finest, no wonder I still have a day-job. Tallyho!

Thu, 07/11/2013 - 09:53 | 3741204 Odin
Odin's picture

So not only did he leave out market manipulation (anyone who actually follows the precious metals market knows that this is essentially the sole reason for price declines), but he then argues that we shouldn't be buying extremely undervalued stocks that would rise many multiple times the underlying cost of the metal if and when prices head back up again... Speaking of miscalculations...

Thu, 07/11/2013 - 01:52 | 3740400 One World Mafia
One World Mafia's picture

Why not call increased cost of mining 'inflation' since its in your list of separate things that explain why the cost of mining is up?

Inflation but a falling gold price.

Left out manipulation.

 

Thu, 07/11/2013 - 10:03 | 3741234 boogerbently
boogerbently's picture

Miners are the first step in the supply chain. They just need to charge more for their product. What will the rest do.......NOT buy?

Do NOT follow this link or you will be banned from the site!