Mining's Fimbul Winter

69
Thu, Aug 15, 2013 - 10:43pm

Ok, ok already. You want to talk about gold. So here is some late night thoughts on the mining sector for you insomniacs. Feel free to talk about anything you want about gold and silver but I'm going to talk about the miners. Sentiment is at an all time low and I gotz a feeling things could start turning around soon. I'm not predicting, I'm just saying.

In the Norse mythology, the world experiences a devastating winter that last three years without any sign of light or life. Investors in gold and silver miners are in the midst of their own fimbul winter as we continue to experience a cyclical decline, with occasional glimmers of hope.

As you all know, Barrick and Kinross are closing properties and curbing production, cutting dividends, and writing off billion dollars of loss. Many small and mid tier miners are laying off workers and selling higher-cost operations. We are now experiencing the beginnings of a very painful consolidation period that has been talked about and anticipated for the previous three years. Is anybody surprised? Shouldn't be.

Unlike the 2008 crash, where speculative money quickly rushed back into the sector along with generous portions of liquidity from Washington, QE3 has not provided the impetus for investors to run back into the sector.

Those who have been investing in the miners for any time, remember the previous bust cycle, 1997-2002, when nobody cared about the junior market as investors were focused on high tech and large broader market shares just as many investors are finding more appeal in riding the trend in the broader equity markets over focusing on severely beaten resource stocks.

However, those who remained focused on the resource mining sector during the dark nights, continued to seek out economic deposits through out the decline found themselves well positioned when the cycle turned around.

Barrick Gold

Shed no tears for this bunch of scoundrels. Barrick has a long history as the bad guy. Barrick and it's bullion bank buddy JPM, were sued in a combined lawsuit of actively manipulating the price of gold and making $2 billion in short selling for profits. They have been called the "Darth Vader" of miners with a long nefarious history of hostile take-overs, and the forerunner of hedging it's production at the expense of it's investors and other miners.

Gold miners protect against falling gold prices by agreeing to sell gold at a fixed price in the future to protect themselves against falling prices. Barrick like many other producers began de-hedging their production back in 2009 to profit from rising gold prices.

According to Zerohedge back in early June, Barrick lost $6 billion of shareholder equity hedging it's production prior to 2009. Yamana, Kinross, Newmont and Goldcorp also did no favors for their investors during the 2001 to 2009 upswing in the price of gold. This is why I've rarely plopped my money into big producers and have opted for more pure gold plays in the junior's through the discovery process.

There is as much disagreement about the effect of miners hedging their supplies on the price of gold as there is the meaning of GOFO and backwardation means for short terms gold prices. I won't be resolving that debate here in this article. Feel free to go at it.

You might consider going back to ZeroHedges article written in June on the great hedging debate https://www.zerohedge.com/contributed/2013-06-27/selling-low-and-buying-high-hedging-gold-miners Briefly: Tyler Durden at Zerohedge makes the case that even if all the gold miners in the world hedged all their production that it would do very little to increase the stock piles in existence. Gold mining production is less than 2% of the annual stock piles of gold in existence. Others contend that hedging future productions is rarely conducive to higher future prices.

As Durden points also points out, that you might imagine that the world's largest gold producer with a board of directors that reads like the characters out of a Dan Brown novel would have employed a hedging strategy that would accommodate both advancing prices in gold as well as the declining cycles. Most of you saw this coming, why didn't the gold producers?

History Repeats. A Looong History

The cycle we are experiencing in the mining sector is as old as the hills. If we consider the history of mining over the centuries especially after the introduction of fiat currencies, gold mining has more often than not been a very unprofitable endeavor. And anybody that has endeavored to understand the nature of junior mining discovery realizes that the odds of an economic grade discovery are extremely low.

John Kaiser made a predictions that we would see around 500 juniors go into extinction. And even more with very little capital to withstand the consolidation phase.

In addition, we are experiencing factors that have historically been bearish indicators. Alexander Del Mar in his book "Money and Civilization" which you can download for free in Google books writes

"Previous to the introduction of paper notes for money the history of prices was one of irregular periodical rises, between which were long intervals of gradual falls, the falls being due to the cumulative stocks and therefore diminishing value of coins of the precious metals, and the rises to new and systematic resorts to mining."

The same factors that brought mining operations to their knees in previous cycles have returned where we are seeing an under-valuation of gold and silver in dollar denominated terms and paper notes flood the market. Del Mar points to 3 basic reasons why mining became unprofitable:

1) Over drilling and exploration beyond the limits of profit

2.) Periods of gold inflation where large quantities of gold were discovered or plundered and put into the market suddenly. I'd point to the period when the Spanish plundering of Incan gold. And this is where I might diverge with Zerohedge in that there have been documented times in history where the market didn't absorb a glut in gold supply. However, this little bullet point is a topic of multiple posts.

3.) Gold and metal prices were manipulated through the issuing of paper notes, credit systems, military conquest and slavery.

Another lesson we learn from Del Mar was a feature of the 1970's bull market. That significant profits in mining do not come until there is a significant inverse relationship between paper money and the price of gold. In the 1970's junior bull market, inflation was a serious concern as we entered a state 2 inflation. It was not until gold reached it's peak levels when the bull market in the junior mining sector began it's historic run. Through fed's intervention and capping of the flow of liquidity into the market, the bull market came to an end but not until investors reaped unprecedented profits.

What makes this bear phase different from the rest? Declining grades of deposits, and an extreme dirth of mines that are positioned to withstand financially the consolidation phase and an incredible demand for the metals by consumers and central banks that screams any sort of discovery in the junior minings could potentially turn into a speculative fervor.

We have yet to see the beginning of the next discovery phrase. Rick Rule, among others, have been talking quite a bit about the 9 year discovery phase. The theory is it takes 9 years of working an area before miners in that area begin seeing discovery. Well, we are in year 10 and there is nothing that says the next discovery phase will be a 10 or 11 year cycle. Once it begins we will certainly know because discovery has a strange way of coming in groups.

Let's examine the flip side of the coin and some of the factors historically that have been attributed to bull markets. Whenever the value of the metals exceeded the value of money astonishing wealth was created as result of mining discovery especially when gold or silver were coin of the realm. This fact alone has sustained an industry through the rise and fall of civilizations where abandoned mines would be reopened and mined for resources that were unrecoverable whether for geological challenges, war or suppression of metal prices.

An important point that Del Mar also makes is known resources in the ground will be mined despite the valuation of the metal even if the mine must change ownership and the price of the metals is suppressed by banks manipulating the prices of the metals. Often this is done through military aggression and slavery but right now I believe we are beginning to see the beginning of the acquisition phase.

The Red Bull In The Mining Sector

On Friday, reports came out that China's inflation only rose 2.7% lower than market expectations. The reports paint a rosey picture of a country that is experiencing a slow down . Well you can trust the official numbers from the ChiComms just as much as you can trust the words flapping out of Bernanke's mouth. Many analysts including Kyle Bass has China coming in for a hard landing and many questioning whether China has the goods to take away the title of world dominance from the Western Anglo elite.

The issue is not whether or not China is a model for fiscal restraint and healthy monetary policy. It's no secret that China operates under a tolitarian political regime and currently sports a very loose lending policy. A debtor nation is a debtor nation by any other name would smell as fusty. However, China has discovered the wonders of capitalism, economic trade and now have become the masters of bargain hunting especially in the resource sector.

It seems China is using Del Mar's historical survey of mining as a playbook. Norton Gold, owned by China mining giant Zinjin announced that it would be seeking to double it's gold output and seek out acquisitions. Folks, those closed mining fields won't be inactive too long if the Chinese have their way.

https://articles.chicagotribune.com/2013-08-04/business/sns-rt-us-australia-mining-zijin-20130804_1_barrick-gold-gold-production-australian-miners

Rio Tinto is reporting a 71% decline in profits in the 1st half much of it attributed to China's slowdown. Well clearly, China's consumption might have experienced a slow down, but their response to Rio Tinto's lagging profits was going shopping back in late July. China Molybdenum offered Rio Tino $820 million for a majority stake in one of Rio Tinto's Australian Copper and gold fields.

https://online.wsj.com/article/SB10001424127887324809004578634572567640236.html

https://www.nytimes.com/2013/07/30/business/global/rio-tinto-agrees-to-sell-copper-mine-to-chinese-company.html?_r=0

Western media as all but called the bull market in gold and silver over. Recently, Forbes ran an article about the dismal prospects of investing in the mining sector. https://www.forbes.com/sites/ycharts/2013/08/07/buy-the-miners-a-gold-myth-debunked/

With the headlines screaming that the miners are bleeding and more consolidation, my guess is investors who have exited the mining sector will be waiting for some kind of extended upward trend before deploying any amount of reasonable cash back into the sector. However, it seems that the Chinese are not too concerned about the re-establishment of a trend. Larry Roulston sent out a mining update and said that we could see some miners’s start popping while investors are waiting for a trend. Well, it’s a good thought although not sure it’s so but if you are a bargain hunter, you should be having a party.

About the Author

Green Lantern

  69 Comments

Stock_Canines
Aug 15, 2013 - 10:48pm

First - on the outside

How about that

Silverivalist
Aug 15, 2013 - 10:50pm

Secund!

Darn, thought I had my first furst!

Now to go back and read the article.

¤
Aug 15, 2013 - 11:04pm

Puck: Now let the lion beware! ~ 1894

Thanks GL....

I'm going to make this my last read of the night as I'm about to crash on the couch shortly with a late snack and my tablet.

I definitely want to get in the miners a little bit and you could just see about 2 weeks ago they showed signs of turning off their bottoms. I wish I could've got in then but I still hold a bunch of SLW calls so I remain hopeful.

Title: Now let the lion beware!

  • Creator(s): , Louis, 1866-1905, artist
  • Date Created/Published: N.Y. : Published by Keppler & Schwarzmann, 1894 November 14
  • Summary: Print shows Henry C. Lodge playing a horn labeled "Discrimination Against England", Benjamin Harrison playing cymbals labeled "Bimetallic Standard", Thomas B. Reed beating a tub labeled "Bimetallism" with a club labeled "Speech", and Whitelaw Reid playing a trumpet and holding a paper labeled "Tribune"; they are on a wharf labeled "U.S." and raising a bimetallic clamor with silver and gold instruments, against the British Lion who is smugly reclining on a bit of land labeled "England" and holding papers labeled "Free Trade", with ships along the shore labeled "To Japan, To India, To S. America, To Australia, [and] To China".

https://www.loc.gov/index.html

boomer sooner
Aug 15, 2013 - 11:28pm

Great read GL

Got into GDX/J when HUI was ~400. Been waiting for the turn and looking at doubling down, little DCA. Since I do not have time/knowledge to do in depth studies on individual stocks, I like to place 'bets' on baskets. Any one know of a good Sprott/Rule mining play? Already in PSLV & PHYS.

What if any risk/reward by just owning SLW? as I understand they have bullion owed to them at cheap prices. Only risk I could see is if mining cos. closed shop and could not supply future physical (I could be completely mistaken).

zman
Aug 15, 2013 - 11:37pm

Miners

I think a major issue for the miners is that even with a higher gold price ($1400-1700) in the next 12 months, it might not be high enough to repair the balance sheets, and to replace the reserves that were mined at a break even or loss the past 2-3 years.

Oil at 107 is also a issue, gold needs to trade 17-20 times the price of oil, at around 13 today, this Gold/Oil ratio must improve.

Base metals prices also need to move higher down the road, copper, zinc, lead, and silver are not helping.

I think the CEO of Barrick said a few months ago that $3000 gold was needed to advance many of the projects down the road, I think he is correct.

What mining company wants to start a project and then have the PM price crash -40 (gold) to -60% (silver) for the next 2-4 years? There is no margin of error at these prices, these corrections are massive sucker punches to the gold/silver miners.

I agree, I think these companies really need $2000-$3000 plus gold for many years in short order, mining at break even is really losing money when you consider the lost of the reserves.

When you think about it, a high gold price and low expenses is really a hard thing to happen for any length of time, or at all, and add in the massive corrections, it's not good.

Silverivalist
Aug 15, 2013 - 11:42pm

PNW - LCS Report

I am currently visiting the Pacific North West area for the summer and have been visiting some of the smaller coin and pawn shops here. I'm quick to learn which shops to stay away from by their unrealistic pricing, but have found a few good shops to do business with. The owner of the one shop I most frequent is getting to know me and likes to shoot the sheet. He is strictly a numi-guy, but he buys small amounts of bullion when it comes through the door.

Today he had 3 rounds in the case. An '85 Engelhard Prospector (beautifully toned), a '84 Libertad, and a completely tarnished '91 ASE. I pulled these out of his junk silver bin and asked "how much?" He said "$23 each." Thinking to myself "wow, that's spot price" I couldn't get the money out of my bill fold fast enough! Left there happy as a lark. It was a great start for the day but I was looking for a larger amount of shiny so I took a 1 hour drive into a larger bullion store in Portland Oregon. Sorry I can't reveal the location of my first stop, I have found so many great deals on cool and unusual stuff there in the last 2 months, I must protect my honey hole (small potatoes anyway)

My next stop was a shop named Gold & Silver Supply in Portland. I had found a few online ads with decent prices so I decided to give them a try. From reading their ad it seemed they would have tons of gold and silver maples and ASE's, but I was somewhat disappointed in what I found. They had about 4 total ounces of gold in one of the cases, the rest of them were partially full of appx a dozen Koala silver Kilo's, quite a few America the Beautiful 5 oz rounds, and a few 10 and 100 ounce bars (not what I was looking for.) I soon found a case with silver 1 oz rounds and 1 oz bars.

I first asked if they had any Silver Maples, he pointed down "only 2 left" I asked any ASE's? He pointed next to the maples "that's all I have left" (about 12 @ $3.50 over) I asked what do you have in one oz rounds, he said he had plenty of Buffalo rounds and OPN's in stock for $1.50 over. Somewhat disappointed, I took what he had of the Maples and ASE's and bought some generics too.

Talked to the owner a little bit and asked if he had been busy this week, he said no, not really. More buyers then sellers. He said he thought people were waiting for the price to come down before buying. I laughed and said "that's probably not going to happen" He said "yeah I know, but they will be back in droves when the price keeps rising" I said, Yes, I think you're right!

Green Lantern,

Thanks for opening up the thread to other metal related discussion. While I enjoy reading about the many aspects of market trading, I am still just a stacker at heart!

Stock_Canines
Aug 16, 2013 - 12:19am

@silverivalist

Try AJPM in DT Portland. Usually have plenty of silver and gold bullion. Decent prices.

ReachWest
Aug 16, 2013 - 12:36am

The Miner Game is Brutal.

Thanks for the article GL.

I've suffered quite a bit on my mining investments over the years. It's a brutal business and I must agree that we need to see substantially higher Gold pricing before we see a change. I know Santa has always said good companies with no debt and good resources will thrive and be good ultimate investments. I believe that's probably true - except we need to get substantially higher Gold prices before that can even begin. If the economy goes into serious collapse before Gold takes off, then I don't see the appreciation in the miners ever happening. It's a zero sum game at that point.

I suspect that a number of the smaller explorers will vanish over the next few months. Many of them are out of cash and the propects for raising any further money in the markets is non-existant. The Fed and the goons that control the price of PM's have destroyed the miners. An un-intended consequence of their interference in what should be a free market. Lots of little investors like myself hurt in the fallout - hope the Bankers got some nice homes in the Hamptons and other good shit for their efforts. Bastards.

I hold one junior miner that I do have some hope for - it still sits on around $20MM cash and they have a pretty significant near surface discovery with a NI 43-101 resource estimate of about 2.3 Million ounces. It's the only one I have continued to hold. I was always hopeful that these guys would get bought out by one of the majors (Goldcorp is nearby) before the SHTF - but - If the economy goes totally into the tank before they get a buy-out, then who the heck knows.

RationalMind
Aug 16, 2013 - 1:00am

Miners and leverage

Most of my 401K is either in mining stocks or phyzz bullion ETFs like Sprotts/CEF. The metals price increase this week have been reflected in a higher increase in miners. Given the 401K is for the long term, I am not too bothered that it's in the red since I went into miners over past 12 months.

I started going into NUGT and it's Call options (after reading about this in another thread on TFMR). That has done well for me this week, given the price increases. Will look into AGQ tomorrow after hearing that mentioned in Turd's podcast.

TREACHEROUS CRETINS
Aug 16, 2013 - 2:53am

From Pailin's Corner

Strawboss wrote: Hey Pailin - there was a suggestion on Pain Street that you should be one of the contributors as you used to post more there in the old days...

If you were so inclined - I would suggest a scathing post on the dangers of blindly following uber-bulls... :-)

Well I can see that, but I'd have reservations. The sort of posts I made back on the old blogspot and even up until about a year ago here are not where I am today. My brand of -now even further distilled- tough love isn't for everybody and I don't have much sympathy for those that hear and agree with my truth but are too weak to act. All that probably equals much backlash in comments, against me, against Turd? Yeah whatever, that happens here every time I spout a bit of off-trading bitchery. But it's microcosm of what would happen if the same was posted front page. So if Turd asked that's what I'd tell him. But for those with ears to hear...I'm always willing to fill dead air :)

I would love to hear what Pailin has to say [ and I really miss the input of Atlee

and JoeKa ] - although a trader, his perspective and experience is sufficiently

global, that it would make fascinating reading. Pithy " tough love " would be a

healthy counter-weight to the confirmation bias that this site sometimes suffers

from.

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