Fool's Gold Miners: A Story Of What Can, And Will, Go Wrong With "Miners" In Ten Pictures

Tyler Durden's picture

Several weeks ago, when sharing his latest outlook at the Economist's Buttonwood gathering, Hugh Hendry had this to say about gold miners: "I am long gold and I am short gold mining equities. There is no rationale for owning gold mining equities. It is as close as you get to insanity. The risk premium goes up when the gold price goes up. Societies are more envious of your gold at $3000 than at $300. And there is no valuation argument that protects you against the risk of confiscation.” For those confused, what he means is quite simple: the higher the price of gold goes, the greater the temptation of those extracting it (usually mined in various locales where worker satisfaction with labor conditions is less than stellar - see recent events in South Africa) to strike and demand higher wages (i.e., lower EPS), or of host government to nationalize it. The end outcome is a collapse in the extracting miner's cash flows and profitability, if not outright liquidation. The paradox is that the fewer actual global miners in operation, the better for the price of the actual hard commodity, as less supply means lower price, means greater probability of more miners suffering the same fate, means even higher gold price and so on. But back to the topic of gold miners. Below, for those still confused, is a simple story courtesy of the BBC in 10 pictures, summarizing the bitter dispute over Kyrgyzstan's gold production.

The Bitter Dispute over Kyrgyzstan's Gold... in 10 pictures:

At 4,000m (13,120ft) above sea level, the Kumtor gold mine in Kyrgyzstan is one of the highest in the world, situated in the permafrost of the Tien Shan mountains of Central Asia. But the beauty of the local scenery is in stark contrast to the ugly dispute over the mine's future. (Photos: Kubat Chekirov, BBC)

There were weeks of protests in Kyrgyzstan following a call for the mine to be nationalised in October. The dispute is essentially about access to the country's rich natural resources and has caused turmoil.

Those who support nationalisation argue that because the mine is frequently the subject of environmental scares, it should be run by the government. They say such a move would guarantee a fairer distribution of profits.

Centerra - the Canadian-based company that runs the mine - is adamant that there is no evidence to suggest that it is environmentally unsafe, despite a highly critical report by the Kyrgyz parliament warning of possible toxic spills of waste water.

The economic importance of Kumtor's mines can be seen by the fact that it accounts for 12% of Kyrgyzstan's GDP and more than a half of all its exports in 2011. The stand-off over its future illustrates deep political divisions in one of the region's poorest countries.

Criticisms over the level of safety at the mine have led to calls in parliament to renegotiate Centerra's contract. While the company admitted earlier this year that it had to cut output at the mine because of "ice movements at the site" it is unlikely to relinquish control without a fight.

A Kyrgyz state commission that is continually monitoring activities at Kumtor has criticised environmental management at the mine, as has the country's parliament which has regularly raised concerns over possible toxic spills.

A recently-released report also warned there could be catastrophic consequences if a dam near the mine was to fail because of earth movement, which in turn could lead to flooding from a higher lying glacial lake.

Supporters of the Kyrgyz opposition nationalist Ata Zhurt party recently took to the streets of the capital Bishkek to demand that Kumtor be handed to the state.

The demonstrations ended with an attempt to storm government buildings, leading to the latest bout of instability in a country which has seen two governments replaced in public uprisings and serious inter-ethnic violence

* * *

To summarize, the biggest losers in this latest gold miner saga will soon be Canadian miner Centerra, which will likely see its local production facilities nationalized, and shortly thereafter the government of Kyrgyzstan, which will find itself less than qualified to run a mine and extract gold with the same efficiency as a private firm dedicated to doing just that. And of course, all those who have been long Centerra stock. The biggest winners: holders of physical gold, as few incremental tons of gold are prevented from entering the market due to government inefficiency, stupidity and greed.

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killallthefiat's picture

I almost agree.  I still hold my Krystallex shares.

Urban Redneck's picture

It's hard to entirely agree with an over-simplification. Why not be long oil and short the oil producers if it actually were that simple? The concentration of money in ETFs can create significant resistance for the most descriminating equity consumer, but the primary other way to be "long gold" without acquiring and storing the physical variety (which is not necessarily even "investment") is to own a "gold" ETF which introduces "other" risks...

SWRichmond's picture

Wait...the people demanding the naitonalization of the asset have it all wrong.  there IS no global scramble for real resources, printing money isn't inflationary at all, currency debasement is a good thing, real capital DOES come off the printing press in limitless quantities, and these peope should stop protesting and go back to dollar-standard-land.

What the hell is wrong with them?  Nationalizing a real asset?  It's like they don't trust the money, or something!

SafelyGraze's picture

"Money and the Limbic System's Need for Neurotransmitters: A central banker talks with a director of the IMF about how to go a-moneying"

it's a 6 minute xtranormal dialog about money

James_Cole's picture

There are many many safe / stable districts for Gold & Silver miners. This piece by Hendry is bizarre. I mean he cites Kyrgyzstan & Centerra?? 

Miners are extremely volatile but seasonally you can bank on them pretty well. I like juniors and mid-tier and there are many having record production and lowering their costs. Read their financials, study their projects and invest seasonally. 

Paint a whole industry through the lens of Centerra? Total nonsense.

GetZeeGold's picture



It's sorta hard to pin down the actual Mark Twain quote...but the variants go something like this..


A gold mine is a hole in the ground with a liar standing by it.




A gold mine is a hole in the ground with a liar on top




A gold mine is nothing more than a liar standing next to a hole in the ground.


I'm sure you get the idea. If you'd like to invest in my gold mine I'll be happy to take your money. We'd prefer payment in gold.

vast-dom's picture

if miners go bust, then gold supply shrinks, and miner stocks go up in scramble to extract more gold. but that's in a FREE market, not the one we find ourselves in today. Thank the Fed and ECB et. al. for stealing liberty and freedom of capital flow. Gov is out of control.

Spitzer's picture

hugh hendry doesnt  know wtf he is talking about. The average person doesnt know or care what the fuck the price of gold is. Oil and wheat however, they do care about

They even had oil company CEOs infront of congress when oil was one forty a barrell. The oil producers did not fall because of it.

Mining is not that risky of business. You dont have to market gold.

JOYFUL's picture

You've lost the thread ol' sock....

regardless of what HH knows or doesn't know, [gold] mining is risk incarnated...

imagine if the world's biggest oil producer was a rogue agent of the moneypower dedicated to artificially reducing the market price of petroleum products via a system of interlocking political and market manipulations that served an agenda hidden to the public gaze.

That's the real situation in the gold industry, with the largest player by far(Barrick Gold) an entity set up to operate as a laundry and gold miners' chopshop...nationalization, falling ore grades, rising energy costs????...that's nothin a'tall compared to living in a fish bowl with a shark as neighbor.

JPM Hater001's picture

"It's hard to entirely agree with an over-simplification."

Agreed but what is true at the extremes will also be true at the mean.

Nationalization and greed in the mines is to be feared.

If you cant touch it you dont own it.

Urban Redneck's picture

I'll take Sinclair over Hendry any day, when it comes to gold and the non-financial political risks of running a gold mining operation.

However, there is a confiscation risk that exists outside the limited confines of the Sinclair-Hendry debate.

4 Any gold confiscation/prohibition actions commenced by the US:

- This risk issue is complicated. Most people frame the discussion in the context of FDR's Executive Order 6102, which basically prohibited private ownership of gold in the US while the US was on a gold monetary standard. The risks associated with a reintroduction of EO 6102 are largely and relatively negligible. The most significant and relevant risk is actually a reintroduction of JFK's Executive Order 11037 (which you should read- it's not the silver one). In the context of the collapsing Bretton Woods monetary system, the rising price of gold, the failure of the London Gold Pool (price suppression scheme), et al., Kennedy dictated, "no person subject to the jurisdiction of the United States shall, after the effective date of this section, acquire, hold in his possession, earmark, or retain any interest, legal or equitable, in any gold coin, gold certificates, or gold bullion, situated outside of the United States" Some contemporary issues which could be viewed as parallels to the previous episode include the decline of USD reserve currency monetary paradigm, the rising price of gold, or even the use of "monetary instruments" such as gold to bypass the Central Bank controlled financial and monetary systems by such “terrorists” as Iran (or that gazillionaire with the Swiss bank account who isn’t paying his fair share- Mitt Romney).

SafelyGraze's picture

other executive orders not to worry about:

9201 war relocation authority

9066 war relocation to detention camps based on ethnicity

the director of the war relocation authority was the younger brother of .. you've got to be kidding me .. 

HungryPorkChop's picture

Sure the metals are safer but they don't have the 10:1 or sometimes 50:1 leverage of a mining company.  In the 70's some mining stocks went up 50x to 100x far outpacing the price of gold and silver.. 

Ignatius's picture

True enough what you are saying, but we can't drive well looking in the rear view mirror.

When bonds and promises fail, gold rises.  It will become apparent to the sovereigns that a gold mine is literally pulling money (value) out of the ground.  With great risk comes great reward goes the cliche', but wealth at this time will be marked as it usually is:  by possession.

OpenThePodBayDoorHAL's picture

That's because there was no easy way for retail to own gold. Now there is. At least paper gold, that is. And even real gold is only a few clicks away.

Newager23's picture

I like Hugh Hendry a lot. In fact, I think Hugh and Kyle Bass are the two best macro analysts out there today. However, I would like to know how he is shorting the miners. That seems a risky proposition. Why short at a bottom? The HUI is way off its highs. It makes no sense to short at the bottom.

I personally think that GDXJ (Mid Tier Gold Miners ETF) and SIL (Silver Miners ETF) are at fantastic entry points and will likely outperform just about any other investment over the next 3-5 years.

He has a point that there is substantial risk investing in gold & silver miners, but to call it insane is a bit over the top. I think it is perhaps the investment of a lifetime if you pick the right stocks. Many of these stocks (I like Canadian mining stocks the best) will be 10 and 20 baggers. Where else can you get those kind of returns? And once we get into the mania phase of this gold bull market the mining stocks WILL participate.

Ironically, some of the arguments he makes could actually be good for mining stocks. For instance, if mines close due to nationalization or labor problems, this will drive the gold supply down. A lower supply of gold will drive up the price of gold and thus the stock price of the strong mining stocks. Also, the weaker and more risky mining stocks will potentially collapse in price and be easy pickings for the stronger stocks, which will likely explode in value.

So, don't think the entire mining sector is going to languish at higher gold prices. If you think shorting gold & silver mining stocks is the way to go, that is a very risky proposition. We have seen mining stocks struggle since 2010, but I don't think that is going to last much longer. As soon as we get new highs ($1920 in gold and $49 in silver), I expect the mining stocks to do incredibly well. (for gold & silver mining stocks)

archon's picture

First of all, the same argument may be applied to any commodity or physical property.  If food were scarce, would that force farmers out of the market?  Perhaps at some point the government would be tempted to nationalize agriculture, and many (communist) nations have done that, but just how scarce would gold have to be before this happened?  $5k?  $10k?  Secondly, this is happening in Kyrgyzstan because this one mine dominates the national economy, which is not the case for most mines.

achmachat's picture

All your base are belong to gov

fonzannoon's picture

When gold starts going parabolic people who can't afford gold at $3k an ounce or whatever price will probably go scrambling for whatever they believe is the next best thing. For a period of time the miners may seem like a great way to have exposure to gold and they will shoot to the moon. At that point You had probably get the hell out as everything above will probably come true.


Bay of Pigs's picture

Yes, once again, half the story. Let's not forget Hendry recommends owning gold ETF's and futures.


Oquities's picture

this is prolly the best max leverage gold play for the average person. as he says, sell into the big rally when/if it occurs. GDXJ is the play.

Al Huxley's picture

I agree.  It's happened with every gold bull market in the past, so I don't see why it wouldn't happen now.  There's no reason to expect the market to price mining equities rationally, and at some point (who knows when) the sector will catch the public's imagination again and we'll get another manic spike. 


Currently, though, what seems to be a big factor in why that's not happening is the manifest inability of so many of the larger players to make any money at the current prices.  Whether this is just horrible and incompetent management, or really due to the lower grades and more difficult mining conditions, I don't know.  Also like your comment below on the idea of mines withholding supply until pricing is more favorable - os many seem to do the opposite - selling at the worst possible time and price.  The industry as a whole seems more interested in 'finding reserves to replace current depletion' than 'capitalizing on the price of gold to make some money'.

Tirpitz's picture

"The industry as a whole seems more interested in 'finding reserves to replace current depletion' than 'capitalizing on the price of gold to make some money'."

Basically I too agree with you here. Just -- how would they do the latter, without selling a year's productio five or ten times over? Not every enterprise can operate like a bank on the principles of pretend (to have the money, or gold) and extend (repayments, or delivery of bullion).

Al Huxley's picture

I know, it's a a problem.  I think it comes back to refusing to operate the business at a loss.  Typically, when the price of oil or gas drops below productionc costs, the producers for the most part shut in production and stop exploration until the price rises.  Miners don't seem to do this, just keep issuing shares and debt, and plug along at a loss.  Slightly idealized version of reality, but I think it captures at least part of the issue.

Ignatius's picture

A tendency among corporations of late and those that run them causes one to wonder:  are they mining the metal or is management mining the corporation?

onelight's picture

Good question...evokes a sense of irony, doesn't it?

Reminds me of Mark Twain's old definition of a gold mine: "a hole in the ground with a bunch of liars standing around it." 

Still, and whatever the difficulty, gold is essential to own, for all the reasons we find here.

Robot Traders Mom's picture

Kudos on the Caddyshack 2 reference.

I may change my name to Mrs. Estherhouse.

Winston Churchill's picture

The Govt. requires fair shares.

Wonder where I heard that recently.......Hmmm,

Conax's picture

That 'barbarous relic' sure does stir up some trouble. 

The government can't run any business, much less something as demanding as a mine.

The government seized, but couldn't run the Nevada brothel called the "Mustang Ranch". A license to rent, er, women and sell liquor and they still lost money and closed it up.  How are they going to run the mining industry?  Right into the ground.  (pun intended)


JustObserving's picture

Thanks, Tyler.  If you had run this article a year earlier, I would have thanked you more.

Market cap of GLD is $68.8 billion and that of GDX (Gold Miners ETF) is $8.5 billion.   So if you buy GLD and short GDX, that will really kill GDX.

BTW, GDXJ market cap is only $2.81 billion. So it should be hammered even more by buying GLD and shorting it.

That has been the story for the last two years at least with GLD outperforming GDX by more than 40%.

And GLD has outperformed GDXJ by more than 60% in the last two years


Nobody For President's picture


And thank YOU, JO. That chart saved me some time.

nscholten's picture

and what do you think the chances of open pit mining an area of that size of having an envirmential impact???

and the company mining being objetive?

AgShaman's picture

"Samuel Clemens, please report to the famous quotes designing room"

Boxed Merlot's picture

 “A gold mine is a hole in the ground with a liar on top.”



If it's productive, it's just a hole, if it's played out, it's for sale.  I expect the federal reserve to be on the block soon.

fonzannoon's picture

There is a particular silver miner I follow who finally followed Sprotts advice and stopped selling when they felt the price was too low. They just started stockpiling it. They waited until the price rose to a point where it was substantially in their best interests to sell. Expect more and more miners to start doing the same. The physical will control the paper at some point. Also expect them to link their dividends to the price of the metal. I think you will see money pulled away from the ETF as people look for income. But who the hell really knows.

Conax's picture

+1 fonz.

The miners should create a cartel of their own.  Why they do not is a mystery...

Monedas's picture

Cartels need police power of the state(s) to exist .... haven't we learned anything ?  Twinkie cartel wasn't a cartel !

dark pools of soros's picture

like Diamonds? or OPEC?  it goes to show you that Gold is Money since it is too easy to exchange hands and not be controlled (except in paper form)

Conax's picture

I was thinking more like the London Fix. A weekly conference call to come to an agreement about pricing.

Our banking overlords get away with it every day. 

Just a little stealthy cooperation among the producers.  Won't happen, I'm sure they are all beholden to some bank for credit, and dare not interfere with the current status quo.

hidingfromhelis's picture

Not allowed for those bucking the ponzi; only those perpetuating it can play those games.

Water Is Wet's picture

Clearly the Canadian government should plot to overthrow the Kyrgyzstan government on behalf of Centerra, you know, like the U.S. did to Iran on behalf of BP.

dark pools of soros's picture

Canada's CIA is too busy trying to figure out when the NHL will start its season

EnslavethechildrenforBen's picture

Any country that does not freely hand over all of their resources to white people are terrists

Urban Redneck's picture

Xi. Obama, Putin- white people you can believe in.  FORWARD!

AgShaman's picture

Bring back Ghengis Khan.....

He will sort them out

stacking12321's picture

or like the US did to the independant nation of hawaii on behalf of the american sugarcane and pineapple producers there?


Stoploss's picture

Short gold miners until nationalization.


Wheres the duster at, sounds like a new train leaving the station?

After this long?

So, im a dumb ass for shorting miners last year and early this year (when it paid too).

[ " You want to be long gold miners, since the share prices will keep going up along with the metal prices " ]  ( Stoploss laughs, respectfully. ) Responds: Umkay..


disabledvet's picture definitely well of its highs so you have me on this 30 billion in market cap miner. let's look at one backed by Oil and Gas: Newmont getting hammered too. How's the English on doing: getting clobbered too. How about this doozy:
"yeah, right behind you Kyle Bass and Co." And at lest check "number of prosecutions of Bankers=zero." i'm sure with the imminent bankruptcy of New York City, New Jersey and...well, we'll see about Connecticut and how much exposure it has to Manhattan. "Manhattan on wheels" has done fine thank you very much: and how about good old fashioned kiln dried 2x4's: wow. friggin WOOD is more valuable than gold. no news there of course since "we don't live in golden houses" but "that will still cost you 100,000 to build. to start with." how's this for a pop you lumberless phucks: plain old 2x4 "upside the head" is all he you need with these clowns. those are lumber LIQUIDATORS that are soaring you idiots. "and of course the means to get it there." wow, 145% for gypsum board...YEAR TO DATE. shit, from 1980 to now gold is barely up 100 percent! wow..."you guys must really know something." tell me Hugh "dipshit" Hendry..."how long can a debt monetization last?" You can just call it a "house building scheme" if you like. The word "forever" comes to mind...since unless you're on a gold standard...that is all you're doing is it not? And of course...sure, most Americans can support 500,000 homes in California...AS A MEDIAN PRICE. But "most of the planet sure can." American Dream BITCHEZ. "It sells." well apparently. "Long Desperate Housewives" it would appear.

TheCanadianAustrian's picture

Not reasonable to expect anyone to read that post.