STRAIGHT TALK ON MINING
by Keith
Barron, Ph.D.
(NOTE: With
the next month’s mailing, I’ll have a much more comprehensive, and “homemade”
update on gold’s new bull market. For
now, I’m offering this “guest” piece by Keith Barron, only slightly edited
for space, which was first carried by www.kitco.com.
As a reminder, that is just one of several excellent web sites where you
gold bugs out there can get your daily fill of the “yellow metal gospel!”)
In the past week
the Canadian national newspaper, the National Post,
had a special insert on Mutual Funds: the Precious Metals Fund category average one-year
return as of March 31st was 68.49%, the highest of any mutual fund category. . .
In Business Week magazine, April 8, 2002: In a table entitled “The Best Funds,” a
full twenty of the top thirty best performing mutual funds are precious-metal funds.
And yet, if you
were to glean all your investment advice from the telly, you'd hardly know this has
happened. If you were to “stay the
course” and had stayed in tech for the last year as exhorted by a constant parade of
“analysts” on the boob tube, you would have missed out on this tremendous run. In fact, many of your share certificates might be
expensive wallpaper now.
Back on August
20th, 2001, in an essay entitled “The Gold Moonshot,” I wrote:
“Imagine,
the investing public mobilised behind the NEXT big thing!
Imagine what would happen if the gold market became the only game in town!
Imagine the profits to be made in the next penny stock company to make a colossal gold
find! There are junior companies out there beginning to explore again. There are new
opportunities. All we need is the proverbial spark to make this market catch fire. With
share prices of gold producers on the rise, it is only a matter of time before we see new
junior companies sprouting up everywhere, and a healthy exploration scene restored.”
The gold market
is the only game in town. There is no other sector out there yielding comparable returns.
It has been 8
months now since I wrote “The Gold Moonshot.” Now every time the anti-gold
forces play whack-a-mole with the price, and force gold under the magical $300 US level,
it is rightfully seen as a buying opportunity and investors around the world, particularly
in Asia, gleefully cash in their greenbacks for bullion. We just saw this happen again.
Despite the hype
and the hoopla, and massive injections of liquidity, the “zero interest” rates
on houses, furniture and cars, the American economy has not spectacularly rebounded. The
U.S. dollar ought to be pinned to the mat, under the crushing weight of the trade
imbalance, and yet, it continues to defy gravity, but only at the acquiescence of the
Asians and the Europeans whose favours could be withdrawn at any time. The trade deficit,
like the Gold Carry Trade, is unsustainable and of finite life. It is the “second
shoe” to drop. Once the “mighty” dollar starts to head South we are due for
a massive rise in the gold price. The latest figures show that the trade deficit has
swollen to a massive $31.5 billion.
A big question
is, when all these bullish factors kick in for gold will we see gold shares rise like tech
shares did four years ago? Could we see gold
shares go to $100 apiece? Could merely the word “gold” in a company name be a
ticket to riches much like “com” was? Could we see marigolds and golden
retrievers go through the roof?
I wouldn't go
out and corner the flower and dog markets just yet....... Gold still seems to be capped at
the $301-$302 range, though in the last week or two we have seen many analysts concede
that $320 is an achievable number in the short term. My own opinion is that we won't see
massive moves in the gold market until it captures the public's imagination, and we see
people moving their entire 401K into gold shares or taking out third mortgages to buy
bullion. Recently, an analyst at a major international gathering had this sobering
statistic: the entire worldwide market capitalization of the entire worldwide mining
industry (gold, silver, base metals, industrial minerals) is less than McDonald's
Restaurants. This is part of the reason why it doesn't get covered minute-by-minute on
Bubblevision--the market is too small--but once-upon-a-time the Internet start-up market
was small as well...
The news wires
have been reporting that until mid-May we will be able to see Jupiter, Mars, Mercury,
Saturn and Venus at the same time from Earth, a phenomenon that only comes around every 20
years or so. Are the planets similarly aligned for gold?
We don't often see a conjunction of bullish gold news such as we have now.
For a start, the escalating unrest in the Middle East, a potential for more violence in
Venezuela, higher oil prices, an admission from Gold Fields that the HIV/AIDS epidemic
will add up to $10 an ounce in extra production costs raising awareness of the impact of
the pandemic, warnings from AngloGold chief executive Bobby Godsell and Gold Fields chief
executive Chris Thompson that supplies of newly-mined gold are to drop and that ounces
can't be replaced by the industry at current prices, and a survey by Beacon Group Advisors
that warned that supplies would plummet by nearly 30 percent by the end of the decade
unless prices rise from current levels. Perhaps the most compelling reason to switch your
portfolio into gold shares, or at least take a greater weighting, are the persistent
credit concerns and accounting scandals which continue to come to light on a weekly, if
not daily basis from the broad market, including the bluest of blue chips. The cupidity
and duplicity of company officers and insiders, aided and abetted by analysts, lenders,
accountants, auditors, regulators and Bubblevision is astounding. Surely the knock-on
effect of these scandals must have far greater consequences than the scandals themselves.
The gold market
is now entering a second and predictable phase. Initially, the gold shares rose in
anticipation of higher gold prices; it hasn't really happened yet. Higher bullion prices
too are inevitable, but forecasting the precise timing is near impossible. The bullion
price has only experienced modest gains in the last 8 months - not the $400, $500 or even
$600 price per ounce augured by many gold bugs as the “rightful” price. If we saw a 68.49% increase in the bullion price
from March 31st 2001, gold ought to be at $435 US. Instead,
the gold price lags behind gold shares. Who would have predicted such massive gains in
gold shares without massive rises in the bullion price? Only the delusional still suggest
that we will ever return to a gold price of $250, below the costs of most world
production, and so the downside risk for gold is minimal and the upside....well, the sky's
the limit. Savvy investors realize this, and systemic risks in the broad market are making
them shift money into gold. This is the major reason for the growth in the gold share
market.
The beginning of
the second phase is marked by a temporary shrinking in quality investment opportunities in
the gold sector, due to mergers and acquisitions. I also mean the diminishing chance of
multiplying your money several hundred percent in a gold producer (unless gold prices
rapidly and substantially rise) as share prices climb and start to plateau. Once the
golden metal began to shine again and companies could raise the bucks, they went shopping.
We all of course know about the acquiring of Battle Mountain by Newmont, the merger of
Barrick with Homestake, and the three-way merger of Normandy, Newmont and Franco-Nevada,
but these are all big gold producers. If companies want to grow, they better hustle and
secure the few quality projects in an advanced stage of exploration that are still out
there. In recent weeks we have seen Pacific Rim Mining merge with Dayton Mining, Francisco
Gold snapped up by Glamis, and Brancote Holdings merged with Meridian Gold. . .
On the
www.MiningWeb.com : “Gold supply crisis looming--Gold Fields.” Gold Field's
Chief Executive, Chris Thompson spoke of looming massive structural problems in mine
supply. Those who have been reading Straight Talk for some months have heard me talk about
this problem in almost every essay. I haven't been “Crying Wolf.”
Let me put it
this way: the tech “boom” and Bre-X “bust” compounded together to
internationally seize-up the mechanism that generates new gold projects--a situation not
experienced since 1939-45 when the world was at war (during the war of course base metals
exploration and production was fast-tracked for the war effort). By 1998, virtually all
gold exploration worldwide came to a sudden and complete halt, as the venture seed capital
which would normally go into junior exploration was voraciously gobbled up by tech and
Internet start-ups. We have had slow downs in the gold mining exploration sector many
times over the last century, but never a total abandonment and decimation of the sector.
Those of us who work down in the trenches realize how dire the situation really is--how
many of our colleagues have dropped out of exploration and are now in other professions,
and how few have been able to weather the storm of unemployment or underemployment over
the last 5 years. If you were a public-listed exploration company and have survived from
1996 to the present, the chances that you have been carrying out grassroots exploration
and generating new projects is just about nil. You have been in cash-conservancy mode and
have hung on by your fingernails. In the heady days of 1994-95, many juniors gave generous
terms to landowners in option agreements for their mineral rights. Option agreements
usually have staged payments over 3, 4 or 5 years. Front end payments are usually nominal,
but by year 4 or 5 when a company would normally know through exploration just what was
shaping up in the ground in terms of resources, payments are often in the hundreds of
thousands or millions of dollars. I know plenty of juniors who fought hard to scrape
together the cash just to hold their properties from year to year, leaving nothing for
exploration expenditures. Unless they renegotiated their agreements they were pretty much
done, because no one foresaw the depth or length of the sector downturn. The junior mining
scene has always been the incubator for most new mining projects, but fertile ground was
made sterile.
In light of all
this we have a curious and historically unprecedented situation in the gold sector. There
are virtually no new projects in the pipeline. By new projects I mean new discoveries made
in the last 3 years. And yet companies are raising substantial money for the first time in
years. Let's have a look at 10 major recent financings and make an educated guess as to
where the cash is to be spent:
*Agnico-Eagle
raised US$144 million via a convertible debenture (expansion programme at La Ronde mine)
*Cambior (CDN$28
million) (finalized feasibility study for Gross Rosebel, exploration will focus on mine
sites)
Eldorado Gold
(CDN$25 million) (Sao Bento drilling, nearby Brumal project drilling, take Kisladag to
feasibility)
*High River Gold
(CDN$10 million) (increased interest in Buryatzoloto, their Russian mining partner)
*Ivanhoe Mines
(CDN$57 million) (Turquoise Hill drilling, comprehensive reconnaissance programme, South
Gobi)
*Kinross Gold
(CDN$31 million) (joint venture in Timmins area with Placer, potential reopening of
Pamour)
*Northgate
Explorations (CDN$45.4 million) (Kemess North project development)
*Pan American
Silver (CDN$22.2 million) (expansion of La Colorado silver mine in Mexico)
*TVX Gold
(CDN$75 million) (unspecified, though the company has several advanced projects)
*Minefinders
(CDN$10.1 million) take Dolores silver-gold project to feasibility
It's of course
impossible to know precisely the plans of each company, but only Ivanhoe has stated that a
good chunk will go towards grassroots reconnaissance. The Ivanhoe story may be new to many
investors, but the Turquoise Hill discovery is not new; in fact there was a scholarly
scientific journal article published about it by BHP staffers recently. The other
companies listed above will spend bucks on exploration working around their existing
minesites. AngloGold and Newmont have recently become involved in the Red Lake gold camp
in northwestern Ontario. Everyone knows the Goldcorp story of course. Goldcorp is merely
pulling the type of mineralization out of the ground that Placer Dome's adjacent Campbell
Red Lake Mine has been mining for years, and in fact the high grade zones were known a few
years back before Goldcorp's miners strike. The Red Lake camp has been intensively
explored since 1925 and is Swiss-cheesed with drill holes. Does anyone seriously believe
that a world-class discovery still sits there waiting to be discovered? Or does the
success of Rob McEwen, Goldcorp's president, mean that from a corporate standpoint a major
has to be involved there?
Companies are
being highly conservative. Of course bringing a gold deposit into production is a noble
goal (pardon the pun), but will increasing the reserves of an ore body by 5% mean a 50%
increase in your share price? Somehow saying in a press release that you have just raised
$3 million for underground development and refurbishment doesn't catch the imagination in
the same way as a sexy drill hole on a brand new discovery. Investing in a company that is
in the development stage is like buying a company that pays dividends--you probably won't
lose, but you're not going to make 500% on your money in a few weeks either. There are
virtually no new discoveries out there. The only stories in the last few months have been
Turquoise Hill by Ivanhoe and an Olympic Dam-type discovery by Australian junior Minotaur.
Neither is a pure gold play.
One gets the
feeling that the reasons for the recent mergers and acquisitions, and the flurry by junior
and mid-tier companies to get feasibility studies completed, is to get on the various
radars of the funds. We hear the buzz phrase “leveraged to the price of gold”
everywhere, but for many companies currently holding uneconomic ore bodies a higher gold
price won't mean a substantial return on investment in a mining scenario unless the gold
price doubles. Critics call this the “game of ounces for ounces sake,” and it
almost sounds like a New Era stunt. Forget all the propaganda about “synergies”
etc., we have just gone through a phase in the business world where the “biggest”
attracts the most investment. Doesn't seem to matter if they are profitable or not, just
as long as they have a big capitalization. Gold projects that are of the best quality
almost never are allowed to get anywhere near feasibility studies before they are bought
or taken over by a major. Having ounces in the ground does not necessarily mean having
economic ounces in the ground--there are few projects out there that are going to yield
any return on investment unless the bullion price goes above and stays above $US400. . .
My own evidence
tells me that the exploration scene is not yet back. I sent some samples to the assay lab
the other day and it was dead....they started on my samples that afternoon. Normally, I'd
have to wait days or weeks. Also, yesterday I visited a company that provides field
supplies and was told that practically nothing was being sold to “mining guys”
but plenty to forestry.
In the next few
months, though, I predict we will start to see a third phase in the gold market, which
will be an explosion in new listings and IPO's. There is always a time-lag before this
happens, after the market starts to turn around. In former times there have always been a
few companies out there providing the odd bit of news to keep the penny stock market
interesting. The penny stocks are typically pure exploration plays...high risk but
potentially high reward as well, and to get in the game is a minimal investment. We've
seen them pass away over the last few years, but it's a sure bet that they'll be back.
It's usually a new discovery by a junior that kicks off a bull market in gold shares. This
bull market is odd because it hasn't been sparked by a new discovery. In Canada, the
juniors are already leaping again into diamond exploration, but not yet into gold. . .
Adrian Day of
Global Strategic Management said recently, “Exploration is very risky; we know that.
The odds are not quite as bad as the Big Game Lottery, but not far off.” I wouldn't
disagree with this, but I think the statement needs to be qualified by saying that some
individuals--both promoters and geologists--have shown remarkable talent over the years
for picking winners and finding economic ore bodies again and again. It's not a crap shoot
if you choose your investments wisely. The majority of money raised for exploration in a
bull market is wasted--always has been, always will be, because mining booms by their very
nature attract a lot of peripheral players, and the odd kibitzer or two. If we added
together all the companies that had land in the Helmo area, the Lac de Gras area, and the
Voisey's Bay area when each experienced their staking rushes we'd probably have several
thousand companies, only 10 or so of which made money. It's the nature of the beast. You
should bear this in mind when you read articles that say exploration is an “extraordinarily
unprofitable venture.” You might be feeling then somewhat bewildered as to what
constitutes a good junior company and a good discovery, and maybe a little dismayed that
you can ever pick winners early. In the next few weeks Straight Talk will present a series
of essays that will take some of the voodoo out of stock picking.
Get prepared for
the next round of new gold discoveries, because, with the market set-up the way it is
there is no telling what could happen. We'll see major companies leap into exploration
when it becomes too expensive to grow by acquisition, and juniors, when they realize that
they can once again gain a following and raise money. The recent run of the gold shares
has only been a preliminary for the main event. When a company finds the next new
discovery with potential for production costs under $100 per ounce we'll see this market
really run.
I have had a
number of E-mails over the last few weeks asking what I was up to. Like any good
entrepreneurial geologist who knows something about gold I have been off in the tropics
finding some, for my own account, and filing paperwork on new gold concessions. This to my
mind is a no-brainer. “Gotta be in it to win it!” as they say. In the next
Straight Talk I'll talk about the exploration process, starting with land selection, and
give you a few of my personal insights as well.
Keith M.
Barron Ph.D.
kmbarron@compuserve.com
Straight Talk on Mining is provided for
information purposes only. Nothing herein is to be construed as a recommendation to buy or
to sell any particular security or financial instrument. Nothing herein is to be construed
as a recommendation to engage in any particular investment strategy or trading strategy.
The investments discussed herein may be
unsuitable for investors depending on their specific investment objectives, financial
situation, and risk tolerance. Private investors should obtain the advice of a qualified
financial advisor before entering into any transaction.
Straight Talk on Mining is based on
information that is generally available to the public. The sources used are believed to be
reliable, but because the information and data that they provide are beyond my control, no
representation is made that it is complete or accurate.
References to other publications and
direct links to external Internet sites are sometimes given. The inclusion of any
publication, organization or Internet site herein does not imply any endorsement. Straight
Talk on Mining has no control over the content of any Internet site that you may reach
through links that are provided, nor can their truth, accuracy, or completeness be vouched
for.
Straight Talk on Mining is not a
financial services company nor is it affiliated with any financial service company in any
jurisdiction.
The author/publisher, Dr. Keith M.
Barron, is not a qualified financial advisor and is not acting as such in this
publication. The accuracy of any legal term or definitions used herein should be verified
with your legal advisor or the appropriate government agency.
to Home