Miner Limbo: “How low can you go?”

Mon, Dec 9, 2013 - 9:50am

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.


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.


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.



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:

  Image cannot be displayed


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


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.

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