Gold Miners

[frith2012]

Anyone done any recent work on the gold miners?  I know these are perpetually hated but they've been getting crushed lately on no news.  Specifically, Allied Nevada (ANV), a Baupost holding, is down over 60% this year.  They've been selling but still hold about $35m worth. Any thoughts would be appreciated

[stahleyp]

Hasn't Baupost been cutting ANV quite a bit over the last quarter or so?

[no_free_lunch]

They are mostly horrible businesses and I would do much DD even with the pullback.  I don't know ANV specifically, most of them though just don't ever seem to generate much profit.  Just make sure you consider share dilution and capital expenditures.  Many of them are putting everything they make back into capital expenditures and yet their output doesn't increase.  So if all of your profits are getting reinvested to generate the same profits later, in spite of record prices, that is not a good situation.  When you add it all up it almost seems like raw gold is the better investment if the miners can't make money at the current price.  If you find a diamond in the rough though, please post it.

[no_free_lunch]

+1 for energold.  I was actually thinking about it after I posted and going to mention it but liberty beat me.  It is my only "gold" holding and due to it's diversification should do well when gold/oil rebounds.  It probably deserves it's own board post.

[netnet]

The mining business is horrible often a hole in the ground with a liar on top. BUT on the other hand the royalty business is wonderful.  That's how Seymour Schulich made his money.  Check out Sandstorm and Altius.

[ItsAValueTrap]

I don't know ANV specifically, most of them though just don't ever seem to generate much profit.

A lot of the companies are there to mine the stock market unfortunately.  Usually the senior miners will:

A- Overstate their forecasts.

B- Say production is going to go up.  With gold this hasn't happened despite gold prices skyrocketing over the past decade.  Too much money chasing the same projects.

C- It's very difficult to prove fraud because resource estimation and production forecasts are estimates based on many subjective factors.  Mining is not an exact science.  So many people get away with lying.

 

The junior mining sector is far, far worse.  It is an awful, awful industry because everybody is trying to mine investors (a negative-sum game after all the ridiculous stock promotion expenses).

 

2- I own Altius, Northfield Capital, and Pinetree.  (Pinetree is a horrible company with an unscrupulous CEO.  It's a very small position.)  These are ways to play metals right now.  Northfield owns a lot of gold stocks but is extremely illiquid.

 

3- I'm extremely skeptical about companies that constantly raise capital all the time- Sandstorm and Energold are examples.  The underwriting commissions and shareholder dilution (from selling stock below market value) are major costs. 

 

You sell shares because:

A- The company is overpriced.

B- The part-time CEO's salary has to come from somewhere.  (Yes, most of the CEOs and CFOs are part-time.  They have various different companies going on at once.  Consolidating the companies would avoid problems with being undercapitalized and they would have lower overhead from listing fees and other fees... but that is not how you mine high net worth individuals.)

 

I do like Sandstorm's royalty strategy though.  It's incredibly difficult to value its assets though (except for any Argentinian royalties, which are close to worthless).

[premfan]

3- I'm extremely skeptical about companies that constantly raise capital all the time- Sandstorm and Energold are examples.  The underwriting commissions and shareholder dilution (from selling stock below market value) are major costs. 

 

I dislike that too in general, but if you look at what Energold did specifically with they money it raised, I think they get a pass because of the kind of returns on incremental invested capital they get (just look at what they paid for Dando!) and because debt is dangerous in such a cyclical industry.

I'm in awe how cheap energold is . Investors are not realizing that bertrams earnings will go straight to the bottom line in 2015.  The current price its trading is absolute madness in what its going to earn in 2015. This is also modeling in horrible earnings from the mineral division.

 

 

 

[ItsAValueTrap]

The Venture exchange is filled with companies that SAY they are going to make money.  Very few of them actually do what they say they will do.  I think that Energold will be a decent company going forward... I just don't understand its niches enough to get comfortable with it.  Plus I could just own Altius instead- Altius has a superstar management team, a track record of doing smart things and making money, and it's cheap.

 

With Energold you have to understand:

- The supply/demand situation for portable rigs for metals drilling.  This is mostly tied to juniors who go exploring in crazy countries with little infrastructure.

- Why they diworseified out of their core competency.

- Outlook for energy drilling

- Economics of manufacturing drilling equipment (for various uses, some of Dando's stuff isn't for metals or energy drilling).

- Is Fred Davidson a good CEO?  He originally ran a junior exploration stock... he is one of those part-time CEOs that I dislike (there was a time when he was running two companies).

 

EDIT:  Let's this discussion about Energold to the Energold thread:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/egd-energold/

 

[ubuy2wron]

I have been buying ABX hand over fist in the last few days. I do not have an opinion on GOLD but you will find that ABX is selling at 3 SD below historic valuations in relation to GOLD.

[JEast]

ABX is selling at 3 SD below historic valuations in relation to GOLD

 

Is ABX still a gold company  ;)

 

Cheers

JEast

[no_free_lunch]

Since gold miners are getting close to multi-year lows and the stock market is at an all-time high, I am bumping this thread.

 

What is the best-in-class gold mining company?  Or, would it be better just to invest in a gold etf?

[ItsAValueTrap]

1- The real problem with gold miners is that the management teams are pretty bad.  Some of them have reasonably good management teams.  However, even those guys are playing the game where they use their overvalued stock to roll up other companies (e.g. Goldcorp).

 

So even if management is rational, the stock is overpriced.

 

There's a reason why these guys aren't buying back their shares.

 

2- Some ways to play gold:

 

Short leveraged ETFs.  Really, the idea here is to short leveraged ETFs in general.  Their transaction costs are a little ridiculous and they have to trade every day.

 

Long NFD.A  - You get a portfolio of speculative junior mining stocks.  Management compensation is very reasonable and this company is definitely off the radar.  You can go to archive.org and look at their old website.

 

3- There's a reason why Buffett hoarded physical silver instead of buying silver miners.  I think he rightfully figured out that mining stocks are way, way too hard.

 

*Though Buffett did buy Cliffs (CLF) at one point in time.  Cliffs may have owned steel mills back then.

[Patmo]

1- The real problem with gold miners is that the management teams are pretty bad.  Some of them have reasonably good management teams.  However, even those guys are playing the game where they use their overvalued stock to roll up other companies (e.g. Goldcorp).

 

So even if management is rational, the stock is overpriced.

 

There's a reason why these guys aren't buying back their shares.

 

2- Some ways to play gold:

 

Short leveraged ETFs.  Really, the idea here is to short leveraged ETFs in general.  Their transaction costs are a little ridiculous and they have to trade every day.

 

Long NFD.A  - You get a portfolio of speculative junior mining stocks.  Management compensation is very reasonable and this company is definitely off the radar.  You can go to archive.org and look at their old website.

 

3- There's a reason why Buffett hoarded physical silver instead of buying silver miners.  I think he rightfully figured out that mining stocks are way, way too hard.

 

*Though Buffett did buy Cliffs (CLF) at one point in time.  Cliffs may have owned steel mills back then.

 

The big name gold miners are a joke, last time I checked they were trying to pay themselves fat bonuses for bleeding money. There are a couple picks that I like in the mining space, but from the looks of it nobody gives much of a crap about either of them.

 

To answer no_free_lunch, my personal pick for "best in class" is Mandalay Resources. I made a quick writeup on the company but it didn't generate much interest. Probably because my writeup sucked, lol :-[. I suggest you look into it (the company not the writeup). This company doesn't actually issue equity out their asses to fund their operations/expansion, which puts them on top of 99% of small miners with this one fact alone.

[no_free_lunch]

Thanks Patmo, I missed your write-up originally but on the surface that is the type of company I am looking for.  I've got some DD to do.

[DTEJD1997]

1- The real problem with gold miners is that the management teams are pretty bad.  Some of them have reasonably good management teams.  However, even those guys are playing the game where they use their overvalued stock to roll up other companies (e.g. Goldcorp).

 

So even if management is rational, the stock is overpriced.

 

There's a reason why these guys aren't buying back their shares.

 

2- Some ways to play gold:

 

Short leveraged ETFs.  Really, the idea here is to short leveraged ETFs in general.  Their transaction costs are a little ridiculous and they have to trade every day.

 

Long NFD.A  - You get a portfolio of speculative junior mining stocks.  Management compensation is very reasonable and this company is definitely off the radar.  You can go to archive.org and look at their old website.

 

3- There's a reason why Buffett hoarded physical silver instead of buying silver miners.  I think he rightfully figured out that mining stocks are way, way too hard.

 

*Though Buffett did buy Cliffs (CLF) at one point in time.  Cliffs may have owned steel mills back then.

 

The big name gold miners are a joke, last time I checked they were trying to pay themselves fat bonuses for bleeding money. There are a couple picks that I like in the mining space, but from the looks of it nobody gives much of a crap about either of them.

 

To answer no_free_lunch, my personal pick for "best in class" is Mandalay Resources. I made a quick writeup on the company but it didn't generate much interest. Probably because my writeup sucked, lol :-[. I suggest you look into it (the company not the writeup). This company doesn't actually issue equity out their asses to fund their operations/expansion, which puts them on top of 99% of small miners with this one fact alone.

 

Glad that we are thinking along the same lines...

 

Mandalay is one of my bigger holdings in the mining sector.

 

I would further suggest NevSun Resources (NSU).  Debt free, plenty of cash, net earnings, strongly cash flow positive, decent dividend, earnings should increase nicely in the next 12 months.  They are also a future play on zinc.

 

Caledonia Mining (CALVF) is another one I would nominate.  Debt free, tons of cash, huge dividend....potential future expansion.  This one could run nicely, especially if things in Zimbabwe ever get better.

 

Finally, Rambler Metals is also another one to look at.  They are up in Canada.  Debt free, net earnings, fully funded.  P/E of something like 6.  Might be paying a dividend relatively soon.

 

Lots of opportunity in the mining sector...