Friday, March 15, 2013


In a world where formerly hated assets are on fire, gold miners remain hanging from the investment equivalent of the naughty-tree. Despite the hate mail that routinely stuffs my inbox from the people offended by my occasional mocking views of gold itself, I would highlight that my views on the shiny yellow metal have never been "personal", but are on par with the same healthy skeptical treatment I give to any asset class or investment that has been touted, bought, annointed with deity-like powers, spawning an entire industry of proponents whose opinions, by nature of their conflicted interest, are more than worthless to the would-be investor. As for the relative investment thesis, Mr Buffett did a fine job of articulating the advantage of attractively-price assets with cash-flow (and growth potential) versus inert but highly conductive lumps of metal dug out of the ground only to be re-buried.    

All of that said, the miners are cheap by any backward, forward or relative measure. Their businesses are enviable - despite rising costs, poor management and shooting themselves in the foot - insofar as costs remain low by comparison with what they sell their product for. And they are hated. Lowly-leveraged. And under-owned. All this while their natural admirers (who I have known to mock) are hoarding last-year's coins, bars and ingots. The investment non-sequitir, of course, is that the so-called great rotation into stuff, is ignoring this gold mining stuff. Now I understand the overcapacity in iron ore, and other non-ferrous things, on top of concern about the condition of their largest consumer. Yet, the market cannot have it both ways: bidding up stuff for debasement fear on hand, and avoiding it for the opposite fear on the other. Puzzling. Yet, if it be stagflation that emerges as our nemesis, it would seem to me that the spreads between certain heavy industrial cash-flow yielding assets on one-hand, and gold mining concerns on the other, would - in the medium term - be unsustainable. For you don't have to love gold to like gold miners: just not HATE (note the upper case emphasis) it. 


Anonymous said...

An argument can be made that gold miners are as cash-flow free as gold itself. In fact, most of them make money and they re-invest it in more and more marginal operations, with ever-rising costs. Eventually, the price of gold will not cover their costs, and their investors will have seen no cash flow. This happens, to a some extent, with other resource producers, although they seem lately to be changing their ways under pressure from investors fed up with write offs and catastrophic investments.

RichL said...

The negative case is a bit more persuasive to me because costs have risen while the metal is flattish. Governments also seem inclined toward renegotiating their contracts unilaterally- see ABX and GG with the Dominican Rep., and Mongolia with TRQ.

With shale plays in oil & gas there is a declining cost curve and some sanctity of contract in the US. That said, Sibanye Gold seems OK for a small bet.

"Cassandra" said...


While I am a skeptical person, I do not share your cynicism. The number of CEOs ousted across the resource sector is immense. And I am not talking spec producers or Vancouver or hedgie promotions (like Pretium).

There are few SICs that are as flat on their backs across every measure (forward-looking, fundamental valuation metrics) as the miners. To me, this just says whatever the bad news is in the price, even if fundamentals marginally deteriorate. On the other hand, gold can rally. heaven knows there is plenty of room on the cost side, or whatever one may short against them might compress/converge without miners falling, or just falling less. It is, by definition the nature of a market non-sequitir: an instability that will rectify itself. In this case, I reckon there is at least 20% over 12 mo. maybe more with judicious selection and timing. I am just highlighting the potential opportunity. But I don't think I am early on this.

Pat Shuff said...