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Precious Metals Stocks: The Most Undervalued Asset Class

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Russ Winter writes a rebutal to Paul Price's recent article: Gold Mining Shares: Less than Glittering.

Precious Metals Stocks: The Most Undervalued Asset Class

By Russ Winter of Winter Actionables

An inordinate number of articles that are lacking in perspective have been circulating of late about the failure of mining stocks as a precious metals investment vehicle.  On Wednesday came yet another example with Paul Price's article, "Gold Mining Shares: Less Than Glittering." Price makes a skewed argument about the poor performance of gold stocks by selecting points of reference that begin in the confine of late stage bull markets such as 2003 and 2008, and end in the depths of bear markets. 

Although mining is clearly a challenging business, bear markets are not the sole domain of this industry. For those who may have forgotten, there have been some doozy boom-bust cycles witnessed in many asset classes during the last 15 years. In the case of mining, there have been three terrific booms -- and now three nasty busts -- over the last 20 years. 

But rather than write post-mortem analysis articles about the most recent bust, a far better exercise is to analyse whether valuations are now conducive to creating the conditions for another bull market. The time has come to do some real digging into what the mining industry has to offer.


Chart Source: Morris Hubbartt

Mining market bears frequently tie their litany to three extreme examples: John Paulson, one of the big losers of this bust; Barrick's ill-conceived Pascua-Lama project on top of a mountain in Chile; and the all-in-cost (AIC) method of valuating mines.

In Paulson's case, he simply bought high during the boom and lost. Pascua-Lama is an extreme outlier that doesn't represent all projects. And while AIC is a useful tool for looking at the economics of the exploration and development of a new mine from start to finish, it doesn't accurately gauge valuation of existing mines.

AIC uses cash cost plus capex (development cost), discovery cost, depreciation and general administrative to determine the total cost of producing one ounce of gold. This formula is far less relevant when applied to advanced-stage discoveries or when a gold miner's stock is trading well-below its initial capex, which is commonplace right now.*

Once an economic ore body has been discovered or a mine has been constructed, initial capex becomes a sunken cost incurred by previous investors. In these instances, the primary considerations should be the stock's current enterprise value (EV), gross profit relative to a reasonable gold price (say $1,275) and the leveraged optionality value from higher gold prices.

Canadian miner Detour Gold (DGC) is a prime example a miner selling well below capex or development cost. It currently trades at $8.50, representing $900 million EV (market cap minus cash plus debt). The capex that brought it into commercial production was $1.5 billion. The "market" doesn't assign any value to Detour's in-the-ground reserves, its 21-year, expandable mine life or its reasonable cash cost.

When Detour kicks into full gear in 2014, it will produce 570,000 ounces for a cash cost of $550 per ounce, generating a gross profit of $400 million. If gold prices move higher, it will offer investors even more profit leverage. Therefore, the real opportunity for substantial gain is not in the ETF or physical market. 

The overly used AIC approach has incorrectly valued the world's best undeveloped, feasibility-stage deposits, which are trading at 10 to 30 percent of net present value, using a 5 percent discount. It has created opportunities to invest in some quality names that are barely trading above cash. 

Once assigned a correct enterprise value, mid-tiers sell at two to three times gross profits [see Brigus] -- even using $1,275 as the price received per ounce of gold. If the prospect is located in a so-called questionable jurisdiction -- defined broadly as Africa, and about everywhere else for that matter -- anticipate about one-and-a-half-times gross profit [see Teranga].

Finally, there's the refrain that mining costs are spiraling upward. Costs did increase exponentially up until about a year ago. I have had this discussion with several mining company CEOs. They have told me that, with the exception of fuel, costs for materials, mining services, drilling and consumables have turned lower [see "Mining Costs Fall For Gold Producers"]. In sum, this is a rare opportunity for intelligent investing if you apply some perspective in identifying excellent candidates.

*The costs of mining are customarily divided into cash and total costs. The cash costs are the regular working costs of the mine. The definition varies between companies and may include smeltingrefining and any by-product benefit but generally excludes taxes, explorationdepreciationdepletion expenses and financing. 


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Sun, 07/14/2013 - 23:41 | Link to Comment rocker
rocker's picture

It is just as JPMorgan wants it.  As they drive down the things of real value they accumulate at cheaper prices.

Even their boy toy mouth piece Tommy says to buy miners.

Sun, 07/14/2013 - 23:22 | Link to Comment Nassim
Nassim's picture

Detour Gold Corporation is processing rocks that contain 0.76 grams per ton - less than one part per million by weight (and around one per 5 million by volume).  Pretty amazing really.

"total cash costs are expected to be between $800/oz and $1,000/oz." does not really tie in with the numbers above ("$550 cash cost").


Sun, 07/14/2013 - 21:40 | Link to Comment Mugatu
Mugatu's picture

A lot of people will sit there and say the miners suck versus actual gold, but they just do not understand how gold miners cycle.  In 2000 gold bottomed around $280 and cycle topped in 2008 at roughly $1000 - a nice gain of 357%.  During the same time HUI Miners Index went from $35 to $519 in one uninterrupted bull market - a whopping 1482% run.

Yes they have done like shit since 2008, but miners can blow away actual gold during bull runs.  I think we are starting a new gold bull run this summer and have finally gone long the miners in the last few weeks.  I intend to laugh at golds paltry 400% gain when Gold hits $4000 in 3-4 years as the miners will be another 1500% higher in this new leg.  

Numbers don't lie.  When gold hits very big bottoms (not small corrections), the numbers favor the miners.

Now I will sit back and read all these fucktards who claim to be burying gold in their backyard since 1970 as they drill me for saying the truth.

Sun, 07/14/2013 - 23:18 | Link to Comment Treeplanter
Treeplanter's picture

ANV is under $6.  But why would you shoot for a 600% return when you could buy a blue chip and make 6%?  Gold bugs are dumb.

Sun, 07/14/2013 - 20:39 | Link to Comment Laughing Stock
Laughing Stock's picture


Sun, 07/14/2013 - 20:38 | Link to Comment Laughing Stock
Laughing Stock's picture

Absolute nonsense


Go back to CapitalStool

Sun, 07/14/2013 - 20:09 | Link to Comment RaceToTheBottom
RaceToTheBottom's picture

I value gold, but don't understand that chart.  How can 1999 and now be used without explaining 2008.  Without explaining that the chart seems fairly useless.  No?

Sun, 07/14/2013 - 18:43 | Link to Comment Longing for the...
Sun, 07/14/2013 - 18:37 | Link to Comment yabyum
yabyum's picture

I dabble in miners, I keep the K-Y handy.

Sun, 07/14/2013 - 19:52 | Link to Comment frankthomaswhite59
frankthomaswhite59's picture

me too

Sun, 07/14/2013 - 17:09 | Link to Comment thunderchief
thunderchief's picture

When Gold goes higher the miners will with it.  No asset is without risk, even your land and house or gold.  You are a lawsuit or a gun to the head away from having them taken from you, and that is not even saying what the government can do.  Miners are just as safe as anything, and if you keep a portfolio of HUI stocks you will win big if you believe in gold rising.

Sun, 07/14/2013 - 19:52 | Link to Comment frankthomaswhite59
frankthomaswhite59's picture

I hope so too



Sun, 07/14/2013 - 16:54 | Link to Comment Blue Dog
Blue Dog's picture

Any stock is a terrrible investment. The market is about to crash and the dollar is about to die.

Sun, 07/14/2013 - 16:02 | Link to Comment akak
akak's picture

I am very attracted right now to the miners, love grabbing as many as I can and holding them tight in anticipation of them rising strongly --- simply can't get enough of them!

That said, mining stocks still suck.

Sun, 07/14/2013 - 21:27 | Link to Comment Roger Knights
Roger Knights's picture

If you don't like miners, try a "streamer" like Sandstorm (SAND).

Sun, 07/14/2013 - 17:59 | Link to Comment sunnyside
sunnyside's picture

I am very attracted right now to the brunettes, love grabbing as many as I can and holding them tight in anticipation of them rising strongly --- simply can't get enough of them!

That said, brunettes still suck.

Sun, 07/14/2013 - 16:01 | Link to Comment Bay of Pigs
Bay of Pigs's picture

"with the exception of fuel"

That is the main expense of any mining operation, and by far. That is why costs have risen so dramatically.

That said, why this sector is hated so much is pretty ridiculous. The Gold/XAU is still out of its historical average by a country mile.

Sun, 07/14/2013 - 15:48 | Link to Comment moonstears
moonstears's picture

I like JR miners, having said that, The few I'm in, well, I want to see if they get bought out/close mines as these levels are close to cash costs. 

Sun, 07/14/2013 - 16:07 | Link to Comment blindman
blindman's picture

fraudulently induced trance work.
they have mastered this SHIT.

Jon Rappoport - Hour 1 - The Surveillance State & War on the Individual
July 12, 2013

Sun, 07/14/2013 - 15:46 | Link to Comment 0b1knob
0b1knob's picture

The gold miners are viewed so negatively right now that I'm tempted to take a position.   But if they are such a bargain then why isn't there more insider buying?   Always follow the insiders is my motto.

Sun, 07/14/2013 - 16:14 | Link to Comment russwinter
russwinter's picture

There has been a slew of insider buys even at higher prices.

Insiders back up the truck on juniors.

Sun, 07/14/2013 - 16:00 | Link to Comment honestann
honestann's picture

I think the answer is two-fold.  The insiders spent a lot to buy shares a few years ago.  But more importantly, insiders clearly KNOW they (actually "gold" and their "gold-bug" customers) are number one "enemies of the state".

Face is, physical gold buyers are probably the group most likely to be pro-liberty, anti-statism, anti-tyranny, anti-authoritarianism, anti-government of any "seemingly unrelated group".

What I mean is this.  An average, completely clueless citizen would probably not recognize the connection between "physical gold" and "pro-liberty".  Hell, these folks don't even know what is the "federal reserve" or "fiat money".  But you can bet your butt that virtually all buyers of physical gold are absolutely aware of the federal reserve and fiat money.

And the insiders certainly know this too.  And therefore the insiders realize the predators-that-be may do everything in their power to royally screw the folks who they know hate them most, and who are taking real actions to undermine them (at the very least, converting fiat paper into physical wealth).

So the insiders are in the same boat as everyone else who is awake.  We simply don't know how far the predators-that-be will push gold into the toilet.  They seem extremely serious at this point, do they not?  They have proven they are willing to allow enormous quantities of physical gold flow to adversary countries to punish the few gold advocates here in the west.  They seem willing to completely exhaust supplies of available physical to settle futures contracts in the next year or so.  They almost seem willing to completely blow up the fiat system to screw gold holders (which is what may happen if delivery of physical defaults, defaults, defaults and continues to default on the exchanges).

In fact, I worry very much that they might WANT this to happen, because this will be their lame excuse to steal physical gold from everyone in the USSA... again.

The insiders know all this too, and it has them worried.


Sun, 07/14/2013 - 17:19 | Link to Comment auric1234
auric1234's picture

Yes. But tn the meantime, gold is on sale! Enjoy the discount.


Sun, 07/14/2013 - 17:39 | Link to Comment honestann
honestann's picture

Exactly correct.  But the important point is this.  You are buying gold at a great price now.  The buying power of the gold purchased now will never be much lower than today, but will almost certainly be much higher within two to five years.

In contrast, the value of many gold companies may become zero if the gold price is artifically depressed for more than another 6 to 24 months.  If you're holding those stocks, you get wiped out.  If you're holding gold, you are not hurt.

The best choice seems clear to me, and many people who understand that gold is real, and ALL stocks are just pieces of paper.  Even if you hold 51% of the stock, the government can render your company worthless with appropriate manipulation, or by confiscation.  And you can't avoid confiscation of a company the way you can lose your gold in a boating accident, or send your gold out of the country with relatives who visited you last year.

So you're exactly right.

Sun, 07/14/2013 - 20:00 | Link to Comment Professorlocknload
Professorlocknload's picture

"and ALL stocks are just pieces of paper." 

Thar 'tis!  Green on that, there hon. These just aren't normal times, and real-in-hand has few substitutes in uncertain territory. My concern is an over bought general market drags all down when it corrects, including the under bought. Check out the HUI in Oct 08. 

Re, confiscation, miners did well because they were the only choice as a gold play, no?

Sun, 07/14/2013 - 17:47 | Link to Comment auric1234
auric1234's picture

The asset whose price are depressing is not gold.

They can depress it as much as they like, but this doesn't garantee that gold will follow suit.

I only hold unhedged miners.

If they don't go bust, the benefit will be huge because they're highly leveraged.

I know it's risky but I take my chances. I may be able to buy more gold in the end than I would if I sold them at this ridiculous price.

Then again, I may not. Who knows?


Sun, 07/14/2013 - 19:49 | Link to Comment frankthomaswhite59
frankthomaswhite59's picture

I hope so

Sun, 07/14/2013 - 15:54 | Link to Comment disabledvet
disabledvet's picture

the general rule is "crushed for five years means crushed for five more." to say "i would wait" is an understatement. there appears to be some ancient long thought dead creature on the prowl here...

Sun, 07/14/2013 - 17:00 | Link to Comment 0b1knob
0b1knob's picture

"some ancient long thought dead creature on the prowl here..."      Ancient long thought dead creature = deflation?

Sun, 07/14/2013 - 16:04 | Link to Comment Dead Canary
Dead Canary's picture

I don't like miners because of: political unrest, unions, gooberment bullshit etc...

I don't trust anyone or anything right now except my shiny stuff at the bottom of lake Minnestash.

Sun, 07/14/2013 - 16:47 | Link to Comment tardball
tardball's picture

Oh, that was your stash I dug up in the lake the other day? nice stash, brah

Sun, 07/14/2013 - 19:45 | Link to Comment frankthomaswhite59
frankthomaswhite59's picture

now that you know who it belongs to,

why don't you give it back?  bra

hah!... finders keepers losers weepers?

huh bra

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