Chris: Doug, as you know, gold’s had a big year, up 15%. Do you see this trend continuing? And if so, what’s a specific catalyst that could send the gold price – and gold stocks – higher?
Doug: Oddly, even as gold has moved from $1,100 to $1,500, these crappy little junior mining stocks, the explorers and developers, have gone nowhere… But the big ones have done okay.
Why might that be? It may be because they’re just too small. In a world where big companies have market caps from $500 billion to a trillion, junior miners aren’t even small caps. They’re not even micro caps. They’re nano caps – some are almost pico caps. They don’t even exist as a viable asset class for fund managers. And professional managers are much more important than in the past.
The whole world has become very financialized. It’s one consequence of the many trillions of new currency units that have been created since the crisis started in 2007; most of that money has flowed into stocks, bonds, some types of real estate, and various institutional financial products. The public no longer buys individual stocks. They buy ETFs, mutual funds, and things of that nature. But those vehicles, and institutions like pension funds, can’t buy small, risky stocks. They don’t qualify under the “prudent man” rule for fund managers. They’re too small to assign an analyst to. Big brokers even loathe to let individuals buy them. This has actually created a very big opportunity.
They are very under-owned relative to what they have been in the past, and relative to the price of gold. This has created a particularly good opportunity to run counter to the trend and get into small resource stocks.
Chris: Got it. Is there anything to keep in mind when speculating on gold stocks?
Doug: Mining is one of the worst businesses in the world. Even if you get lucky and find a deposit, you have to spend much more money developing it, to show that it may be economic. Let me emphasize the “may be economic.” And if it seems to be, after tens or hundreds of millions in drilling and engineering, then you build the mine. Which may cost billions. And your troubles have just started…
The problem is that all of this investment is upfront – cashflow is always years in the future, if it ever comes. An additional danger is that most of the governments in the world are bankrupt today… they’re greedy to charge taxes, royalties, fees, and various shakedowns. The only good news is that governments will no longer try to confiscate your mine and try to run it the way they did before the Soviet Union collapsed – they’re pretty stupid, but they’re not that stupid anymore. They’ve learned that nationalizing something and trying to run it the way the Soviets or the Chinese did before Deng Xiaoping, is just asking for trouble.
Nationalization is no longer a risk; they want to keep people around that know how to run the mine. The risk today is that they will tax it, directly and indirectly, as much as they possibly can. The current political environment, plus increasing “save the planet” eco-hysteria, makes mining stocks more like burning matches than ever. Mining’s been the crappiest industry in the world since World War 2, but now it’s really dangerous politically, too.
In the past, you never had to worry about NGOs [non-governmental organizations]. You know, professional do-gooders – they didn’t really exist until the ’60s. Now there are thousands of them and they love to zero in on mining as one of the most evil industries.
In the past, you never had to worry about the so-called indigenous people. They weren’t an element. Somewhat later on, they were happy to see the miners come in because they might actually give them a job, teach them something, and make their worthless, middle-of-nowhere land worth something. But now they’ve learned to perform shakedowns.
These are among the many political factors that make mining a really bad business. The problem is, if you want civilization, you need the things that are mined. The industrial world is created out of things like nickel, copper, aluminum, lead, zinc, cobalt, iron and all the other elements. Most of the 92 naturally occurring elements, and most of their compounds, are mined. They don’t magically appear. In any event it’s becoming more unprofitable and expensive to mine. And that’s very destructive of progress itself.
Chris: How can mining be such a bad business yet present such a big money-making opportunity?
Doug: Well, right now, copper is a good example. For years, the world has been using more copper every year than has been discovered. Most of the copper mines in the world are old and running down. When the ore is gone in a deposit, you’d better have another one.
And as the world uses more copper every year, copper usage has been growing two or three percent per year forever. You’ve got to mine that much more copper every year. But who wants to make the huge investment that’s necessary in order to do that, to take it from discovery to production? Nobody with any sense, at least at current metal prices.
Where does this end up? At some point, there’s going to be a real supply/demand squeeze and the price of, not just copper, but all of these metals, is going to explode because they’re almost all in exactly the same position. That makes now a very good time to get interested. The fundamentals that I’ve been talking about, from the political problems to the supply/demand situation, are all pointing in the same direction. The supply is actually starting to drop for most metals while the demand continues to go up.
Another factor is that right now it’s hard to make any money mining. I mean, yes, you can make some money, but not a lot, adjusted for risk and the time value of money. Most mines are marginal; most metals are selling at or even below their true cost of production in most mines. There’s going to be a real supply/demand squeeze. I’m not saying tomorrow morning or even next year, but it’s going to happen. When it does the psychology of investors will change radically.
Mining stocks can again become the new darlings, which they have been a number of times in the past. There was a time, about 30 years ago, when all the oil companies wanted to buy mining companies. And they did, for outrageous prices. Of course, although oil and mining are both resource businesses, they’re totally different in character. It was a disaster for the oil companies to buy the mining companies, certainly during a price bubble. But metals and mining companies are ultra-cyclical; there have been a number of bubbles in the past, and there’ll be bubbles again in the future – as hard as it is to imagine now, during what’s been one of the longest and worst “busts” in mining history. I’m looking forward to the next bubble. They’re great fun.
Chris: Sounds like everything is lining up for mining stocks right now. Is there anything else interesting happening in the sector today?
Doug: The world has totally changed from the days when a couple of prospectors with a mule would go out and find a fortune. The Treasure of the Sierra Madre days are long gone. And so is all the low-hanging fruit. People have been looking for metals since day one of civilization, and the easy to find high-grade stuff sitting on the surface has almost all been discovered.
What’s left is mostly in places that are politically challenging. Places you want to avoid because the natives make it impossible to do anything.
When you do find a deposit today, it’s likely very low grade. In Roman times you could only really mine ultra high-grade deposits, an ounce or maybe a minimum of half an ounce per ton. Or perhaps placer deposits. Now you can mine not even a 10th of an ounce, you can mine deposits that are 100th of an ounce per ton. 2,000 pounds of rock have to be transported, crushed, and treated to recover just a teeny weeny bit of metal. Doing that is necessarily very high tech, and very capital intensive.
The methods of finding metal are more and more high tech using satellite imaging, geochemistry, geomagnetics, geostatistics and all kinds of things far beyond gut feel and eyeballing things the way prospectors used to do.
Chris: Now, longtime readers know that you have a proven method when it comes to evaluating the best resource stocks in the world: the “Nine Ps”…
Is it time to add a 10th P to address the new tech entering the sector?
Doug: That’s a good question. Dave Forest, who writes our International Speculator newsletter, is an active geologist, and always looking for new science that can be applied in the field. No doubt mines are going to become even larger scale, and lower grade. You’ll have to process ever more rock to get a given amount of metal. That means they’ll have to be even higher tech, and higher in capital costs.
Here’s the takeaway of all this. The 2,000 or so publicly traded explorers, developers, and junior miners are the source of the great majority of future economic deposits. The big companies do very little exploring. When the market gets hot for them again – right now there are very few people who even know they exist, much less care – the whole sector could go wild. The sector as a whole could go 10-1, with some standout companies going 100-1. Some even more. It’s happened in the past, and I’ve owned several of them.
But nothing, including markets, lasts forever. In the future, we’re going to mine the asteroid belt. That’s still a couple of decades away, but that’s where all the metals are going to come from in the future. One of the advantages to that is working in a zero-gravity environment, where pollution and energy are non-problems. In addition, the asteroids themselves are ultra-high purity and grade deposits. That’s where mining is headed and it’ll change everything. But how long from now is that going to be? I’ll guess a couple of decades.
The Greater Depression will likely hurt consumption of base metals but it’s going to help gold; I’m reasonably confident gold is going to be re-instituted as day-to-day money. I’ve touched on various factors on the base metals, but I’m generally much more bullish on gold.
All of the world’s governments are continuing to print up money by the bushel basket full. Not just the US, but all over the world. And as this goes on, it’s going to evidence itself in retail inflation. At the same time both stocks and the bond markets, which are at all time highs, could collapse. People will panic out of securities. Where are they going to go? I think they are going to panic into gold. And gold mining stocks in general, and small explorers and developers in particular, should be huge beneficiaries.
I’m a buyer.
Chris: Great stuff. Thanks, Doug.
Doug: You’re welcome.
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