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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Robot Traders Mom's picture

I saw the first "Seeking Alpha" page and moved on. I had no idea there were 37 linked Seeking Alpha articles.

tenpanhandle's picture

I am a gold miner!  Don't short me bro.

Monedas's picture

Canadian socialist mine operators drank their own Kool-Aid .... they think only Americans are hated ! LOL  Up with domestic producers !  Maybe MGN .... an ore body with no mine ?  Cheap as dirt .... pun ON/off !

Kreditanstalt's picture

Socialism.  It's the BBC...what did you expect?

Eventually, however, ALL governments will abandon the idea of protecting privately-held property altogether.

Long-John-Silver's picture

Eventually, however, ALL governments will abandon the idea of protecting privately-held property altogether.

Then you get Communism like they had in the Soviet Union. We know how that ends.

Blue Vervain's picture

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.

Reckless behaviour is usually the most efficient, if you don't factor in the long-term consequences.



Monedas's picture

As the Australian PM has discovered .... no need for messy expropriation .... just tax them into the dirt .... pun ON/off .... guys like Chavez have no problem with expropriation .... Comrade Castro Confiscates Canadian Nickel Mine .... Canadians protest .... "We stood with you ? Why us ?" (serving suggestion)     LOL

Monedas's picture

When Gold regains it's place in the World's monetary systems - you'll find it is even more coveted than petroleum !  People will kill their partners .... even their brothers for it .... that's the power of real capital .... as it should be !

dark pools of soros's picture

it never left... what's in your lake?

Monedas's picture

My Nebraska uncle still had his depression gold when he died .... he never turned it in !      I'm afraid US gold has left .... but they won't tell us .... we .... the peeple ?

atlee's picture

You forgot to add a picture of the Todds on the show Gold Rush drilling test holes on the wrong claim or  disposing of the old tramel before the new is even built!

Long-John-Silver's picture

I remember watching that crap on DirecTV. I finally gave up on DirecTV when my monthly bill exceeded $100. I purchased a ROKU Box where 95% of everything available is free. I do have an $8 a month Netflex subscription and sometimes I'll get something on VuDu or Amazon. It costs so much less and so much more high quality stuff is available. There is no way anyone could ever watch everything available during a lifetime even if limited to the free stuff.

HurricaneSeason's picture

The wrong claim is the one they ended up mining and the new trommel (if it works or gets there) process many more yards per hour and the washplant wasn't catching half their gold. Tony Beets told them to strip in the fall and not wallow around in the mud, but the investors wouldn't have gone for stripping one fall and then coming back the next year to process. They've already broke one dozer. One tenth of an ounce per ton. I think that's what they shoot for. I thought it was more like an ounce a ton.

Conax's picture

You all should scan SRSrocco's latest article, all about rising costs and ore depletion...

Good stuff- With charts and graphs, nice presentation.

Monedas's picture

Scarce capital is spent more judiciously (Jewdeliciously) !  Fewer flying fuck investments far from home in despotic countries !  ATTE:  Monedas .... the antidote to Keynes !

orangegeek's picture

Gold fell last week, but Gold Bugs Index tanked (index of gold stocks).


Gold stocks may also be leading gold priced in US Dollars lower - and yes, this is an unpopular comment.

Al Huxley's picture

I've heard this a few times this week as a reason for the sudden dumpfest in the gold stocks, but I don't see a lot in the way of historical precedent.  Can you provide some backup on when in the past a marjor selloff in the gold stocks preceded a collapse in gold price?  Because normally it seems to be the otheer way around....  Thanks

HurricaneSeason's picture

Usually, when the stock market takes a dump like it has lately, gold goes down fast to at the start. The story is they sell gold that has perfomed well for the year to cover their leveraged facebook investments and such. That really didn't happen this time. Gold actually increased it's lead over the S&P 500 to a 354 point lead. I don't think the lead has been that high since gold hit it's peak of around $1900.

Monedas's picture

I live for the day when Chicom foreign investments are expropriated by the Kircheners and Chavez' and Mugabes !  Imagine the stoic, expressionless, inscrutable (inscrewedable) faces of the Peoples representatives ?

The Duke of New York A No.1's picture

The best part of Gold Bullion vs Gold Stocks;


Gold Bullion = No Counterparty Risk.


Gold Stocks = Dozens and Dozens of Layers of risk, IE: Permitting, Cave-ins, Landslides, Weather, Theft, Title Dusputes, Cost Overuns, Incompetant CEO's, Striking Wortkers, Pollution Risks, Sediment Run-Offs, Cost Inflation, Resource Depletion, Lack of Skilled Labour... just to name a few.  

augustusgloop's picture

orthographically challenged, 

hendry is THB--if you're short miners, why tout their upside?

not all miners are created equal. so one could mitigate risk by owning miners in fairer juristictions (Canada), offer govs/locals JVs + C level, managerial + tech positions so they would be disincented to nationalize (though not totally), disperse risk by not owning a single mine, deep/complex mines (SLED vs. RAID in way back computing terms), owning low cost / high grade mines, miners very high insider / CEO ownership - skin-in-the-game CEOS (not just option granted hacks). 

By now, the meme is miner risk rather than miner leverage, everyone knows the long the metal (well, futures) / short the miner trade. HUI to Gold ratio is at very low level. so well placed investments after EOY tax loss selling wraps up would seem to be an OK contrarian play.

Al Huxley's picture

Yes, miner risk is the meme, rather than miner leverage, and has been for several years, now, but really, based on the recent results of some of the producers, where, on the whole is the leverage?  As long as the industry can't figure out how to make money with $1700 gold, they're going to have a problem convincing potential buyers with the leverage argument.  Early 2000's people took it more on faith, there's justified doubt now.  Maybe the grades just don't support profitable mining at this price, I don't know...

earleflorida's picture

'they still love their mothers' tongue [ussr], and never too forget her aurora's mysterious bond via masochistic top-down ambivalence,... this 'sixth-sense-of-security' that only a mother grizzly can show its brood's club of 'nursing-chuckling-cubs'- fraternal`eternity's mystical closure that only 'putin's motherland' can provide ?'

Bastiat's picture


"There is no rationale for owning gold mining equities. It is as close as you get to insanity."

Short miners at historic lows to gold price and book value? 

Repeating what I said the other day on this topic: the biggest risk to miners is funds shorting them.  The market cap of the whole sector is small enough that this has an outsized effect.  From 2003 to 2008 what happened to the miners as the price gold took off?  How many were nationalized? 

Every company is different, every mine is different and every country is different in its dealings with resource extraction. 

What will really be insane is watching the shorts try to cover in a tight market when gold explodes out of this very long consolidation. The last two like this ended with a doubling of price for gold.

Someone's talking their book.   We'll know who's right on this play in the next 6 months.

Obnoxio's picture

I agree Bastiat. Miners with mines in safer areas like North America will be worth more than riskier mining areas. I usually like Hugh Hendry but this is one of the stupidest things he has said in my opinion. Gold in the ground has value and with funds like his shorting gold shares they have become a good investment in my opinion.

prodigious_idea's picture

Sell Puts, buy Calls at zero net cost.

Monedas's picture

Computers are like methamphetamines .... they don't make you smarter .... just stupid faster ?  Evil is empowered since it has to propagate it's lies .... the socialist death spiral is accelerating downward .... only an all nuclear holocaust can slow it down .... I'm old .... give me a thrill before I die !

AndrewJackson's picture

I have been trying to drive this into people's brains for years. Physical gold bullion has vastly outperformed gold equities. Physical bullion has had much lower volatility and better returns. What more reason could one need to own physical gold over stocks? That being said, if you are a very good analyst and can recognize an opportunity when it is given, by all means go for it. Other than that, get the physical.

strannick's picture

Let the government run it. Theres the solution to banish corruption and increase efficiency

Monedas's picture

The Chinese economic model .... no corruption ?  Chinese coal mines average .... 3,000 (?) deaths per year .... what price efficiency !  Communists treat people like dirt .... Henry Ford paid his workers $5 a day (4 trounces of silver) ! Only government employees make that and more today ?

SilverDoctors's picture

SRSrocco has been all over the gold and silver miners' issues- as ore grades for both silver and gold have plummeted over the past 1-2 years.  Plummeting ore ratios as well as skyrocketing US silver exports to London (likely to put out fires at the LBMA) are the basis for SRS' latest article discussing the supply/demand fundamentals that will push silver prices well north of $100/oz.

Monedas's picture

Maybe some miners are reverse window dressing to confuse the taxers and takers ?

jonjon831983's picture

I keep recalling a story about some contractor who built a patio, but tore it up afterwards because they never got paid for it.  Or of a tombstone maker who took back a fancy tombstone because the family never paid for it.

Segestan's picture

The authors opinion is just that.

q99x2's picture

Thanks for explaining Hendry's message.

dolph9's picture

There will be a mania in gold companies eventually, because the physical metal market is not large enough to absorb the trillions in fiat capital that is floating around the world.

I am leaning more and more to not participating in it even though there's money to be made.  I've seen too many manias now, and they don't end well and they're difficult to time.

I think I'm just going to sit back with my metals and watch the folly of humanity from a distance.

Divine Wind's picture



Manias end badly for those who enter late in the game.

Get in early (like now), move them into direct registration or to certificate form and file them away.

You will be rewarded.

Bastiat's picture

The crunch at the exits for the short trade could be epic.

mt paul's picture


another freakin reason

to buy more gold ..

Stuck on Zero's picture

Miners are not the only targets.  Anyone or anything that produces anything is a target today. 


hungrydweller's picture

Agreed.  "shares" of anything are just a financial derivative even if some claim that they are representative of undrlying assets.  Shares in mining companies should be traded just as you would an ETF.  The only buy and hold item there is is something you can buy and hold.

Douglasnew's picture


Bastiat's picture


Nuggets?  Are you kidding me?

MeelionDollerBogus's picture

The concerns are valid.

Many gold miners overseas from North America don't really care about preventing / compensating for cyanide & other spills.

The best solution is to make the mine pay enough to afford the people can relocate to safety. In the case of the higher up glacial lake the mine should be forced to pay for a ton of things, lake included, to 'own' the space. No need to nationalize when it's only really a matter of price. People moving to where it's safe is a matter of price. Let the mine pay. Any profits made from non-consenting harm to the property & food/water safety of others is strictly anti-market protected activity from non-market intervention.

One's right to produce & profit is not a right to attack, harm or poison others.