Read on Twitter
Gold stocks.
Commodity inputs, commodity output.
Poor capital allocation.
Poor governance.
Growth capex > depletion.
Upside operating leverage dampened by resource nationalism.
LT fair multiple for an average stock: 20.
Fair multiple for a gold stock: 10.*
Commodity inputs, commodity output.
Poor capital allocation.
Poor governance.
Growth capex > depletion.
Upside operating leverage dampened by resource nationalism.
LT fair multiple for an average stock: 20.
Fair multiple for a gold stock: 10.*
*On mid-cycle margins.
Some mitigating factors:
Jurisdiction. First World (property rights) and pro-mining (permissible) better; i.e., lower discount. E.g., Australia, Canada, Nevada.
Valuable undeveloped properties.
Competent and upright management. (Rare.)
Some mitigating factors:
Jurisdiction. First World (property rights) and pro-mining (permissible) better; i.e., lower discount. E.g., Australia, Canada, Nevada.
Valuable undeveloped properties.
Competent and upright management. (Rare.)
The market is there for a lot of producers today.
Do you adjust upwards or downwards for margins? Maybe down a bit to be conservative. Total cost for most producers is ~1300+ now. Pre-tax maybe 1200. So you will not see prices below that, unless gold goes out of fashion.
Do you adjust upwards or downwards for margins? Maybe down a bit to be conservative. Total cost for most producers is ~1300+ now. Pre-tax maybe 1200. So you will not see prices below that, unless gold goes out of fashion.
There are many counter-cyclical buyers (smart money), including EM retail and central banks.
Gold prices are more stable than other commodities, partly because demand is less economically sensitive, but also because production is more fragmented, so the cost curve is smoother.
Gold prices are more stable than other commodities, partly because demand is less economically sensitive, but also because production is more fragmented, so the cost curve is smoother.
Dividends are scant, and floats are diluted. Negative buybacks!
So return is (meagre) yield plus production growth per share. Not every ounce is created equal, as margins vary, but in a larger diversified miner, you can often normalise ounces.
So return is (meagre) yield plus production growth per share. Not every ounce is created equal, as margins vary, but in a larger diversified miner, you can often normalise ounces.
This is a valuation short-hand for a large miner. For a single-asset or smaller multi-asset operator, it's better to use the long-hand of net present value (NPV).
Never believe company projections!
Technical reports a fantasy.
Look at historical financial performance vs projections, for same-corp, or comps by deposit characteristics.
This is a bit of an art. And a science. This is where your trusty gold stock analyst comes in handy.
Technical reports a fantasy.
Look at historical financial performance vs projections, for same-corp, or comps by deposit characteristics.
This is a bit of an art. And a science. This is where your trusty gold stock analyst comes in handy.
With the seniors you can make money on price & valuation. The torque comes in with the juniors, on a discovery, or a takeover. Greenfield speculation has little alpha even for a high genius geologist.
Industry heavies are not smarter than you. They use their influence to gain unfair advantage from preferential placement terms and material non-public information.
Post-discovery, you can ride the wave over days or months. But you must be nimble. Quick in; quick out.
During resource definition, study, permitting, and financing, valuations often compress and create value opportunities. Then takeover or production catalyses a rerate.
During resource definition, study, permitting, and financing, valuations often compress and create value opportunities. Then takeover or production catalyses a rerate.
In the self-build case, which is financially suboptimal due to higher capital cost and operational inefficiency, post-production results often disappoint, and a sell-off occurs.
Altogether, this is know as the Lassonde curve, after $FNV chairman Pierre Lassonde.
Altogether, this is know as the Lassonde curve, after $FNV chairman Pierre Lassonde.
This curve moves relative to gold price. Price drive margins, giving you operating leverage, which cuts both ways. A rising tide lifts all boats. A falling tide lowers all boats.
Juniors have far more beta, and far more idiosyncratic risk. As a group, long-run returns are lower. But return dispersion means most of the wealth is created by the juniors. Pareto's principle, or, the 80-20 rule. Yes, pre-revenue companies can have value. A rich deposit.
Ways to win:
1. Discovery spike
2. Undervalued deposit or producer via rerate or M&A
3. Gold price
1. Discovery spike
2. Undervalued deposit or producer via rerate or M&A
3. Gold price
To cut a long story short:
Do NOT buy gold stocks. Unless you like to gamble or watch money burn.
However, the sector is an enduring source of speculative gains (and losses).
Once or twice per decade the sector is a buy.
Outside of those troughs, you need to specialise.
Do NOT buy gold stocks. Unless you like to gamble or watch money burn.
However, the sector is an enduring source of speculative gains (and losses).
Once or twice per decade the sector is a buy.
Outside of those troughs, you need to specialise.
Subjects to study:
Geology
Engineering
Finance
Politics
Industry players
Market psychology
Geology
Engineering
Finance
Politics
Industry players
Market psychology
There are the monetary factors, such as:
The derivative (rate of change) of the gold price is correlated with real interest rates.
Much sampling bias and subjectivity make it open to interpretation.
This is all part of the lore of the sector.
The derivative (rate of change) of the gold price is correlated with real interest rates.
Much sampling bias and subjectivity make it open to interpretation.
This is all part of the lore of the sector.
Do not be fooled. It's all macroeconomic bafflegab. Promoters tell the same stories over and over in every market environment throughout the cycle:
Money printing
Inflation
Doom and gloom
The more they talk macro, the less legitimate the company or properties.
Money printing
Inflation
Doom and gloom
The more they talk macro, the less legitimate the company or properties.
Homestake Mining went up 7x in the Great Depression, plus huge dividends. Which is a hundred-bagger relative to the stock market. They love to spin that yarn.
Well, the Homestake Mine orebody graded an ounce per tonne. Nowadays you're looking at half a gram.
Well, the Homestake Mine orebody graded an ounce per tonne. Nowadays you're looking at half a gram.
If they drill another Homestake Mine, buy it. Else, beware blue sky projections.
The 1970s. Gold had perfect negative correlation to the stock market, which means it mostly went up. Miners had leverage. Promoters have been predicting return to stagflation since...the 1970s!
The 1970s. Gold had perfect negative correlation to the stock market, which means it mostly went up. Miners had leverage. Promoters have been predicting return to stagflation since...the 1970s!
If you buy, buy on the deposit's merits and valuation alone:
1. Grade is king.
2. Scale amortises fixed costs.
3. Shallow > Deep.
4. Good metallurgy. (Few toxic or refractory minerals, for high recovery.)
5. Infrastructure. (Power, water, road access.)
6. Jurisdiction.
1. Grade is king.
2. Scale amortises fixed costs.
3. Shallow > Deep.
4. Good metallurgy. (Few toxic or refractory minerals, for high recovery.)
5. Infrastructure. (Power, water, road access.)
6. Jurisdiction.
Consider the managers' record of shareholder value creation in past ventures.
The only intelligent reason to buy a stock is for:
"Net income attributable to common shareholders".
Or even better:
"Earnings per common share".
Miners are like techcos: they manufacture shares.
The only intelligent reason to buy a stock is for:
"Net income attributable to common shareholders".
Or even better:
"Earnings per common share".
Miners are like techcos: they manufacture shares.
Acquaint yourself with the Four Ds of mining:
Dilution
Depreciation
Decline
&
Depletion
Mining dilution: Mining waste with ore, lowering head grade, and margins
Financial dilution: Continuous share issuance, especially to insiders at a discount to the lowest possible price.
Dilution
Depreciation
Decline
&
Depletion
Mining dilution: Mining waste with ore, lowering head grade, and margins
Financial dilution: Continuous share issuance, especially to insiders at a discount to the lowest possible price.
Depreciation: Steel rusts. Equipment wears out.
Declines: Best ore is mined first; margins decline.
Depletion: Deposits are mined out and reserves must be replaced with exploration (high failure rate) and costly acquisitions. The market for properties is competitive.
Declines: Best ore is mined first; margins decline.
Depletion: Deposits are mined out and reserves must be replaced with exploration (high failure rate) and costly acquisitions. The market for properties is competitive.
With seniors you get the 4Ds including operating dilution.
With juniors you avoid them all, but get nonstop financial dilution. Share creation will exceed your wildest dreams. Australian nanocaps have billions of shares. Canadian companies do serial reverse splits.
THE END
With juniors you avoid them all, but get nonstop financial dilution. Share creation will exceed your wildest dreams. Australian nanocaps have billions of shares. Canadian companies do serial reverse splits.
THE END
