Miner Limbo: “How low can you go?”

I have to apologize to some of you poor, tortured souls right up front for the topic of this post. I am genuinely sorry. I understand that for many, the mere mention of the word “miners” will immediately trigger some form of Post-Traumatic Stress Disorder. Maybe the blood pressure will rise and the jaw will clench, or perhaps you may instantly develop an uncontrollable facial tick, like Chief Inspector Dreyfuss whenever someone mentions the name Clouseau.

“Miners!”

Are you twitching? Nobody would blame you. We know you have been to the 4th circle of hell, broken through support there, and kept dropping into the 6th circle. We know that you refer to the mining stock table on your computer as “The Red Sea”. Even self-medicating doesn’t help much, because that bottle of scotch seems comforting at first but then it reminds you that liquor companies are up 41% over the last two years. For that matter, pretty much EVERYTHING is up 41% in the last two years. Dog poop is probably up 41% in the last two years.

So I tell you with complete sincerity that you have my deepest sympathies, and I am truly sorry for what you have been through. You deserved better, and instead you got one of the most bizarre devaluations any of us have ever seen.

That said, I want today to discuss a possible scenario that I have considered, and I believe it may be worthwhile for us to think it through. Please understand I am not saying or predicting this is going to happen, only that it is possible and I want to be ready if it does.

The three-part hypothesis of this post is very simple:

1. Miners have been absolutely slaughtered, diverging tremendously from the overall stock market

2. Stocks in general are overbought and may be poised for a significant correction

3. If this happens, it could take miners to truly insane lows. I want to be ready.

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Part 1: The divergence of miners from the broader market.

GDX plotted against the S&P for the last 2 years. Feel free to self-medicate.

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Part 2: Potential for a major correction in stocks

Lance Roberts of STA Wealth Management published a recent article noting multiple variations of a stock metric he likes to follow that was developed by Professor Robert Schiller, called Cyclically Adjusted P/E or CAPE (link) Anything over 15 is overvalued relative to historical averages, and we are now at 24.6. The short version is, in the last hundred years or so whenever CAPE was above 24 this indicated an extreme level of overvaluation, and each time (1903, 1929, 1966, 2000, and 2007) a severe market correction between 30-80% followed… and we just crossed above this level again:

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Part 3: If the market sells off, how low can the miners go?

It is possible, of course, that even in a market correction, the already low share price of miners relative to the value of the underlying assets would insulate them from the effects of a sell-off, and miners would largely outperform the broader market.

HAHAHAHAHAHAAAAHAAA!!!!! Whooo-boy, that was a hoot, wasn’t it? Mining shares being bought and sold based on the underlying value of the assets and companies? God, I kill myself with this stuff.

Anyway, suffice it to say that if history is any guide, the miners will be beaten like a rented mule if we see a major market correction. Oh, they might go down somewhat less than the overall market (say, a 20% drop while the market as a whole is down 30%), but it seems likely that they will be sold off with everything else. And given how insanely low they already are, it is possible- just possible – that we could witness some of the greatest deals any of us will ever see in our lifetimes. So I wanted to begin researching and do some due diligence, so that I could be ready to pounce and know what it is that I’m hunting for, in case this scenario plays out.

Valuations: Making a list, checking it twice

I have the great good fortune to have a Turdite friend by the name of Steven B. Horse, and SBH…well, let’s just say he trades a little bit. I ran this idea past him, and asked about several ideas including screening companies based on Price to Book value, and he very generously sent me back the following tables. In them, he screened for gold and silver miners whose current price to book value is ALREADY below 1. Now please note that this is by no means a perfect metric, and that there are many others you could look at. This is simply meant as a starting point to generate discussion and in the context of this post, gives us a view of just how crazy some of these stock prices would be if you lopped-off another ten or twenty percent in a market correction. Perhaps generous Turdites can come up with other metrics and lists of potential buys in the comments section of this post. Please note that SBH also included Price to Cash on the right-hand side of the chart, a fascinating addition to the table. Here is what he wrote to me about this exercise:

Mining stocks are trading at valuations that are silly. You will have the contingent of people who will disavow miners for various reasons, but there are plenty of people that will be interested in a list like this. Here is a screener that I ran for gold/silver miners with Price to Book <1. P/B is a decent metric. You will invariably get arguments from people that P/B isn't "the best" metric to use. I would say, however, that it's useful and is one of many that you can use to value a company. Price to Cash on the other hand is hard to argue with. With SSRI for example, you are buying a company today that has cash and securities valued at $6.74 per share for the price of $6.00 per share. So you are getting all the assets (plant, property, equipment, inventory, reserves, intangibles) for free.

Gold Miners Screener PB < 1

Ticker      Market Cap ($MM)           P/E           P/B           P/Cash

VGZ           $ 27.81                                                  0.55             0.89

EGI            $ 46.95                                                 0.94               0.9

AKG           $ 169.25                                               0.73               0.91

RIC            $ 40.39                                                 0.37                1.6

GSS           $ 114.00                                                0.52                1.71

THM         $ 36.29                                                  0.63               1.81

ANV           $ 321.60                            8.8             0.41               2.06

RBY            $ 250.98                                              0.58               2.1

IAG            $ 1,510.17                         10.55           0.41               2.74

SBGL         $ 666.95                           11.49           0.83               3.24

BAA           $ 150.13                            21                 0.3                 3.48

NGD          $ 2,332.86                        11.78            0.81              4.15

KGC           $ 5,149.07                                             0.77               4.43

EGO           $ 3,947.01                        21.23          0.67                5.29

HMY          $ 1,129.09                                            0.35                5.4

AUQ           $ 879.79                                              0.46                 6.28

GFI             $ 2,788.77                       47.37          0.66                 6.3

BRD            $ 136.63                           6.56           0.56                 6.44

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Silver Miners Screener PB < 1

Ticker      Market Cap ($MM)          P/E              P/B                P/Cash

SSRI          $ 474.03                                                 0.56                0.87

HL              $ 825.70                                                0.62                2.79

PAAS          $ 1,526.20                                            0.61                 3.47

SVM            $ 413.29                         16.13             0.98                3.69

CDE            $ 1,049.10                                             0.46                4.96

EXK            $ 341.01                          12.67             0.97               10.24

Importantly, my friend also wrote: I would certainly note in bold italics all caps that this is just a screener, do you own due diligence. I would only add that disclaimer because people on the internet are _______s and most can't/won't do any research. Then they will come back and talk shit, b/c they are ______s.

You heard the man. Do your own research. And no whining.

So to sum this up, I am keeping a close eye on Price to Book and Price to Cash in the case of a major market correction. It seems almost impossible that SSRI, for example, could fall another 15 or 20% but who knows what these insane markets are capable of? If we see a company with 6.74$ per share in cash on hand, going for five bucks a share, well… I’m taking the free money and the free company that goes along with it. I may well do something similar for a number of companies listed on this screen. In short, I am making my list and checking it twice. Of course none of this may come about. The rising QE vapors, directional algos, and Permanent Open Market Operations cash may simply continue to magically levitate this market to infinity, CAPE be damned. But if they don’t, and we see the kind of pull-back historically associated with markets at these overbought levels… well, I want to be waiting in the weeds. Just to see what comes along.

Happy hunting, friends.

120 Comments

dgstage's picture

This Is Good

sierra skier's picture

2nd

The miners have been decimated by those who run everything.

Now for the read.

As with dog poop, what goes in comes out remains about the same. The only noticeable increase is in the cost of what goes in. I have never been gutsy enough to become involved with the miners, yet.

Bollocks's picture

Miners?

What are they?

Turds are up 43%, by the way Pining, not 41%.

Mr. Fix's picture

4th

If gold and silver are ever to be true money again, the miners will be decimated first, nationalized, or wholly owned by the bankers, as they will leave no one with the ability to simply dig money out of the ground.

I don't think they will ever rebound.

Turd Ferguson's picture

Excellent work, Pining

MODERATOR

Just thought I would add my own chart.

Groaner's picture

Crazy low prices

What's annoying now is they are under pressure from Tax loss selling too. We may not see a big move until January.

StevenBHorse's picture

I would like to add

The screener that I ran was on FinViz.com, if any of your were curious how to come up with a list on your own.  The screener is limited to stocks that are listed on the nyse, amex, and nasdaq.  

treefrog's picture

ate

how time flies...   this week monica lewinski turns forty!  it seems like just yesterday she was crawling around the white house on her hands and knees.....  they grow up so soon....

edit:  i got this in an email from a friend.  i checked with wiki, and it was last july.

infometron's picture

google finance screener includes the TSE

FYI Google finance also has a stock screener that includes the Toronto Stock Exchange where most miners are listed.

ag1969's picture

The Sun Shines on Silver

With 5.3 gigawatts of new capacity in Japan in 2013 and up to 30 gigawatts added in China over the next three years, the solar industry could potentially have a big impact in the silver market. Silver is a key component in solar panels due to its unique electrical conductive properties, with approximately 80kg of silver required to generate 1MW of electricity. According to the Silver Institute, one megawatt of solar power requires as much as 2.8 million ounces of silver.4 China and Japan’s solar projects combined will add up to 27 gigawatts over the next three years. This capacity will require approximately 91 million ounces of silver, which means that China and Japan’s new demand could consume up to 11% of global mine supply – and that’s if the world produces as much silver as it did in 2012.

http://www.silverseek.com/article/sun-shines-silver-12345

ivars's picture

Are those miners not being

Are those miners not being pressed into sale of assets? Why do they not go private if their stock price is so important.

chucka's picture

Turd, Could this be the low

Turd,

Could this be the low in miners? There are increasingly positive divergences in the miners. The XAU topped on December 7, 2010 at about 230. This correction in miners to this day has lasted 3 years which time wise  is more than the average cyclical bear market corrections of 2-2.5 years. XAU price on Dec 6,2013 could be the final bottom. Also  XAU and HUI  are at 1996 levels ( not just 2004 and 08 levels). The miners are trading as if the bull market since 2000 never even happened. Truly unbelievable.

Turd Ferguson's picture

Even a dead cat bounces

MODERATOR

The HUI almost HAS TO bounce from these levels. Even if it's just 20% in a quick short squeeze.

murphy's picture

Shipwreck on the Red Sea

Normally the mining "analysts" create impossibly high earnings per share and revenue estimates so the miners can never hit them and they can be kicked in the stones over and over. Last month First Majestic posted following data: eps .21 vs .15 estimate, beating T. Reuters estimate by .06. Revenue of $76.9M vs. estimate of $74.38. While the previous year eps in the quarter was .25. This years quarterly revenue was up 20.9% on yoy basis.

Additionally, they brought online a 1000 ton per day cyanidation machine on 11/20/13

Question: Guess what happened to their share price?

Answer: They were bitch slapped like all the rest.

To see my miners on the Red Sea you can zoom in the below picture

https://maps.google.com/maps?q=19+38%2745.99%22N+37+17%2742.17E&hl=en&ll=19.645791,37.295065&spn=0.005911,0.01295&sll=38.226896,-112.298641&sspn=0.001863,0.004785&t=h&z=17

shipwreck of the SS Murphy Miner

Urban Roman's picture

Remember what SRSRocco has

Remember what SRSRocco has told us about miners, though -- at current PM prices, mining is not a profitable industry, due to rising energy costs and declining ore grades. Little mining companies are going broke and big ones are mothballing projects because of this -- and the light at the end of the tunnel keeps going out.

Which probably explains why the sector is a sea of red.

Price-to-cash is pretty hard to argue with, though. What are the factors that can make the cash disappear??

rl999's picture

Bought NUGT & JNUG today

This is my first foray into the miners and I am very interested to learn what the other members own.

the_circle's picture

Gotta agree, dgstage.

Gotta agree, dgstage. Listened to it last night- definitely the best SGT report I've heard. (apart from Turd's... obviously heart)

tyberious's picture

Economic Hitmen and the

Economic Hitmen and the American Empire with John Perkins

from The Lip TV

John Perkins, author of Confessions of an Economic Hitman, and much more, discusses the corporate worldwide empire, global debt trap, and how the planet’s economic engine runs on blood and suffering in this Buzzsaw interview. The mega-selling author discusses the truth about financial oppression and conspiracy, and how the world can be rewired to liberate humanity with host Sean Stone in this uncensored interview on TheLipTV.

Turd Ferguson's picture

Yep. Dr Janda is terrific...and a loyal Turdite!

MODERATOR

Quixote2's picture

My predicted March 2014 black swan event.

My fantasy prediction is for the IMF to declare a new TDR, Trade Drawing Rights, in March 2014.  The TDR will be one kg of gold, valued at 10,000 Yuan per gram or approximately $50,000 per troy ounce.  The TDRs are used by nations for trade and freely exchanged back and forth with the IMF for national fiats.  Trade transactions are made in TDRs and can be converted to fiat.  Payments can be made in fiat or gold, excess fiat can be converted to gold.  The IMF market is not available to individuals.  The nations in the IMF will establish a second price for the private markets.  This price will be approximately $5,000 per troy ounce.  Any private sales above  $5,000 per ounce will be taxed at 100% above the $5,000 level plus penalty.  The gold mine reserves around the world will be nationalized.  The governments will pay the gold miners $5,000 per ounce to recover the national reserves from the ore body.  The governments will not sell gold to individuals.  The governments will ultimately "Hoover up" the national private gold inventories at approximately $5,000 per troy ounce. 

"Gold is the money of kings (nations); silver is the money of gentlemen; barter is the money of peasants;, but debt is the money of slaves."

----- With apologies to Norm Franz

There will be open markets with privately owned gold bought and sold for approximately $5000.  The government will always buy gold coins and scrap at $5,000 per ounce.  There will be black markets where gold will be bought and sold for more than $5,000 where other nations agents are purchasing gold for $10,000 per ounce or more to convert to TDRs in their countries account.  Any one caught buying or selling in the black market will be subject to fines and imprisonment.

Silver will continue to bought and sold on the open market, primarily as an industrial precious metal.  The price will be approximately $100 per troy ounce.  Gold miners that also recover silver will be allowed to sell the silver on the open market.  The nations and TPTB are not interested in monetization of silver.  There is a reason for the current gold to silver ratio and why China is not buying silver as they are buying gold.

TPTB would not want the serfs (thats us) to benefit when the international community returns to gold backed money, TDRs.  There will be a two tiered money system.

Bollocks's picture

(No subject)

tyberious's picture

What China's Silver Imports

What China's Silver Imports Really Mean

China's demand for silver has its own shape and causes...

ANALYSTS at Barclays Bank recently noted that silver imports were down 28% in the month of April year on year, writes Miguel Perez-Santalla at BullionVault.

But in an article reporting that news, the author makes it sound like demand was also off significantly for unwrought silver, for silver powder, and for jewelry manufacturing as well.

Of course, if you take a myopic view then these assumptions are correct. However, just because trade between China and the rest of the world is down does not mean that silver demand is down. What it does reveal is a decrease for external demand of silver from the Chinese market. China still remains a net importer of silver even with exports up of silver products. To me it's amazing that they need to buy silver through imports at all.

In 2011 the Chinese government incentivized the mining industry in an effort to get off of dependence for base metals from foreign countries. With China experiencing growth as high as 10.4% over the last four years and in 2011 a 9.3% growth their demand for metals and minerals for construction and industry has grown exponentially as well. China is the number two industrial consumer behind the USA. Then of course, as any wise business would do, they look for cheaper more productive forms of sourcing.

In an effort to reduce their costs they have invested in the mining and smelting sector. In doing this, according to a Thomson Reuters GFMS report for the Silver Institute, production at China's copper, lead and zinc mines were estimated to have increased by an average of 57% in 2011. This is significant to silver, because as opposed to the average world supply – where silver is mined 71% of the time as a byproduct of other metals – in China the figure is much higher at around 95%. 

So logically if production of base metals increases, then production of domestic silver will increase as well.

Now, according to the US Geological Survey, China's direct mine production was up 100 metric tonnes from 2011 to 2012. The drop in April 2013 signifies around 48 tons of silver. Obviously that looks like it represents nearly 50% of the increase of supply. But mining supply continues to grow as reported by Thomson Reuters GFMS that the Ying operation completed a mill expansion in mid-2012 that increases their operating capacity by nearly 25% and other dedicated silver miners such as Minco and Silvercorp may come on board growing annual production possibly another 170 tons or more as well.

http://goldnews.bullionvault.com/china-silver-052820135

Turd Ferguson's picture

And please watch this

MODERATOR

From last week. Jonathan Turley is a constitutional law professor. He's also a "liberal". He's also a patriot. He's also correct.

His full opening remarks here: http://judiciary.house.gov/hearings/113th/12032013/120313%20Turley%20Testimony.pdf

 

 

Turd Ferguson's picture

Steve continues to crank out

MODERATOR
RockerBoxer's picture

Rainbow?

fbn8mUW.png

Just waitin' for the Rhino horn, from these levels ten bagger seems reasonable. Typical slaughter junior chart.

Ice fishing time Eh?

RockerBoxer

metalsbyamile's picture

Just joined the forum

I left my first comment/ salutation  on the thread regarding Carrol Quigley so I will not be repetitious here ,one quick comment.

If memory serves Another stated all miners paper would burn and go to zero.

Seems this prediction has taken hold as the miners get nuked in to oblivion.

Or is it the case of a severe correction? I lean towards Another's thoughts as it is playing out exactly as he wrote oh so long ago.

I have not followed the 'other Another's' anyone know if they subscribe to that very same theory-all miners are paper will go zero.

Seems to me he said all paper will go to zero, all corporation paper listed on a stock market anywhere was heading to zero in a planned scenario to wipe out so many?

ag1969's picture

The great game accelerates…

Alasdair Macleod – 09 December 2013

In the jigsaw that is the Great Game of Asia pieces which heretofore made little sense on their own are beginning to slot in to give us an idea of the final picture. These disparate pieces are as varied as China’s claim of territorial rights over Japan’s Senkaku Islands, NATO’s backing off from Syria, America’s détente with Iran and the surprising move by Iran to improve relations with the other Gulf States. The Chinese yuan is now second only to the US dollar in trade finance, displacing the euro. George Osborne, UK Chancellor at very short notice recently flew over to China, when there was already a British delegation there. And this week, again at little notice David Cameron flies to China for top level meetings with the new president and the premier, promoted by the British media as a trade mission.

There are also a few gold-coloured pieces in want of a slot in the puzzle. The Arabs are recasting some of their gold into one-kilo bars ahead of the introduction of a spot gold contract on the Dubai Gold and Commodity Exchange in a deliberate move away from LBMA standards. Chinese gold imports are far, far greater than Western analysts acknowledge. Despite accelerating physical demand from the Far East, Western capital markets insist on suppressing the gold price, forcing physical metal to rapidly disappear from Western vaults into the anonymity of Asia.

http://www.financeandeconomics.org/the-great-game-accelerates/

HappyNow's picture

Speaking of global gold production

That has always bugged me when fantasizing about a gold backed currency.

Gold is not evenly distributed throughout the world.   Countries like Russia or China would be laughing all the way to our banks.

Heck, look at how petroleum rich countries are doing right now.    Of course gold isn't as well concentrated as petroleum but then again Russia and China also have a serious industrial base to work with, and plenty of other geological resources to go along with it.

We worry about money printing.   If we were on a gold standard China would have the world's largest printing press.

Look at SRSRocco's graphs.  Think about Gold as King.   Where do you think the throne would be?

Be careful what you wish for.

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