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:


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.

About the Author


Dec 9, 2013 - 4:25pm

The Deviant Investor writes a lot like . . .

Jim Willie. His message, which we here know all too well, is also similar to Willies, though on a broader canvas.


Dec 9, 2013 - 4:42pm

A snippet from Alisdair Macleod's latest article . . .

"We can begin to see how our jigsaw puzzle might complete. But there is an extra piece for which there is no place, and that is the dollar. It is simply becoming surplus to requirements; and here again China has America cornered. After concluding her alliances with the Middle East she will control directly and indirectly almost all the world’s above-ground stocks of gold, which in the final analysis is more powerful than any fiat currency, reserve status or not.

One can only speculate about how much of this is self-inflicted by the Americans. Was it her overt imperialism that undermined her, or is it the Fed’s monetary policy? I also remember Alan Greenspan’s undiplomatic remarks over China’s stock of US Treasuries, when he pointed out that they had the problem, not America.

That is for post-event analysis, but for now Western markets seem to be unaware of these important developments, leaving the dollar/gold pair more mispriced than perhaps at any point in history. Physical gold is being cornered, leaving Western capital markets operating as little more than casinos backed only by hot air. The dollar will one day be a bit-player in international trade, meaning that enormous quantities are becoming redundant and will have to be sold for something else.

After the inevitable upwards explosion in the dollar price of gold, we shall be left wondering at what price we will need to offer our goods and services to get some of it back from Asia."


Sorry if this link has been posted already--don't want to run afoul of copyright laws.

Dec 9, 2013 - 6:44pm

Catch 44

When gold is selling for $1,250, it is not really worth confiscation by the filthy thieves in the white house. Especially considering the dollar's true value and the cost of coffins and death benefits for the government goons that would experience sudden "lifespan adjustment".

However, at $50,000 a pop, confiscation becomes a really good idea in the empty mind of a D.C. scurrilous bastard-rat.


Moral : If you must shoot a thieving rat fed-goon to protect what's yours, always shoot burst of three (triple tap) and always aim at the legs.

Dec 9, 2013 - 7:10pm

Anyone noticed...

that the western political leaders have all invited themselves along to Nelson Mandela's funeral?

I'm sure his last wishes were along the lines of:


Looks like the letter never got delivered. NSA-intercepted, no doubt.

Dec 9, 2013 - 7:12pm


I bet every one of those "scumbag bastards" feels deeply that they alone were responsible for Mandela's greatness. Such is the nature of megalomaniacs.

Dec 9, 2013 - 7:16pm


Absolutely. They're doing god's work.

Dec 9, 2013 - 7:18pm

Kitco Update

While in the dentist's chair today I saw on the BNN scroll that "Quebec Government prosecuting Kitco and 11 other companies for sales tax fraud". Just confirmed exact wording with Mrs. Z but there was no accompanying story on their website.

There are no new updates at Richter and Associates (trustees in bankruptcy) page.


Edit: There is a story on "The Province" (found with google search "Kitco sales tax fraud") regarding this. I seem to be unable to paste links into my comment box. Feel free to follow up this with a link post if you can.

Dec 9, 2013 - 7:29pm

Well at least Oprah and Bono are going...

I was worried sick they might not make it.

"Notable absentees include Benjamin Netanyahu, the Israeli prime minister, who cited high travel and security costs, and Mandela's fellow Nobel peace laureate, the Dalai Lama, who since 2009 has twice been denied a visa for South Africa.

Oprah Winfrey and singer-activist Bono are among several celebrity guests expected to attend."


It's going to be a day of probably the most extreme hypocrisy ever seen in the history of the world.

Dec 9, 2013 - 8:01pm

I would urge Americans to

I would urge Americans to watch this video. Very important regarding the future and entitlements.

No Free Lunches - Seniors Benefit at the Expense of Our Kids: Stan Druckenmiller at TEDxWallStreet

Some snippets for those who can't watch for whatever reason

As of now we are creating, because of the gray boom, 8,000 new seniors every day. By 2029, we’ll be creating 11,000 new seniors a day. So, in order to fund them in balance, you'd want to be creating 8,000 new young adult workers a day. How many adult workers do you think we're creating a day? 2,000. So we've got 8,000 new dependents every day on the entitlement rolls and only 2,000 kids -- I'm sorry, young adult workers -- to fund them. If that doesn't spell unsustainability, I really don't know what does.....................................

So, it's pretty simple. If you take current benefits promised plus the fact that you're creating so many new seniors versus workers plus expected tax revenues, the numbers just don't add up. Well, actually they do. They add up to a $200 trillion burden on the next generation. ...............

But there is one thing I want to say. I totally disagree with those that say we can wait 20 years to solve this problem. And there's two reasons. The first reason is if you wait 20 years to solve this problem, by the time you're at that time period, the interest payments on the debt alone will start to challenge the entitlements as a problem...........................

One solution would be to raise the payroll tax from 12 to 15 percent now, and you're done. Another possible solution would be to raise the payroll tax in 20 years, but then you'd have to raise it to 16 percent.

So I ask you, is it fair that I and the other boomers get to pay 12 percent through our working career, but these kids who are starting their working career in 2033 have to pay 16 percent? It's ridiculous, and it's wrong.

Please, let's stop kicking the can down the road. None of us want the poverty rate for the elderly to go back up to 30 percent before our kids and our grandkids are seniors.

Dec 9, 2013 - 8:10pm

Much longer read with video

Much longer read with video accompanying but worth the read if you have time either now or later.


A lot of attention was paid last week to the IMF conference presentation by Larry Summers that bemoaned the stagnating state of a global economy stuck in a zero-bound liquidity trap. Paul Krugman joined in the mournful dirge and others followed. But little notice was taken of a talk by Ken Rogoff which preceded Summers and was quite the opposite to the former Treasury Secretary's description of conundrum; Rogoff was very forward looking and discussed a framework for solution to many of the problems we have faced, are facing and will face in the future...................

....................................So, when Ben Bernanke fired up his helicopter engines he took the only path available to him to create additional debt-free money by replacing interest-bearing government debt with newly created bank reserves. The government debt thus added to the Fed balance sheet resulted in the interest paid by the U.S. Treasury being returned to the government. The result? Debt-free money, in effect, minus a service charge largely composed of a 0.25% interest payment to banks for excess reserves held by the Fed.

The problem with the Bernanke path? The helicopters dropped all the money into a hole in the ground (excess reserve accounts) and very little made its way into the economy. It was essentially a rearrangement of the balance sheets of the creditor nation with little impact on the debtor nation.

Now enter Rogoff opening a new can of worms. The possibilities for the worms that have come out of the can Rogoff opened include:

  • A pathway is open for investment banking and depository banking to be separated from each other. It is a pathway to a banking and monetary structure analogous to that under Glass-Steagall.
  • If depository banking and base money creation is under the control of the Fed without direct linkage to speculative credit creation by private banking, systemically important financial institutions (SIFI aka TBTF - too big to fail) cease to exit. There may be behemoth banks but they can fail without destroying the general payment system of the economy.
  • The operation of the Fed as a true public bank and repository for all federal banking transactions.
  • The operation of the bank in the mode of a postal savings system for the general populace.
  • The operation of a countercyclical monetary policy in the real economy becomes a simply operated and transparent mechanism.

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