Miner Limbo: “How low can you go?”

120
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.

“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.

.

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:

.

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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ancientmoneyrealitybiter
Dec 10, 2013 - 2:08pm

@realitybiter . . .

No, I'm not wrong on Medicare. I didn't mention it at all.

I agree that Medicare is a Ponzi of the highest order, but again, it didn't get that way because of the everyday citizen. GW Bush added to the problem big-time when he added drug coverage--that was to help his, and Congress' buddies in the pharmaceutical lobby.

I have imagined what it will be like when it all blows up. That's why I moved into the country years ago, have my own well, 40 acres of land, and a means to protect it, along with my neighbors.

Having an ability to make income will be meaningless during the time of chaos. Most people won't be able to get to work, if their job and employer still exist.

I have a hope that my family will survive this chaos, which will last many months, if not years. If they can, then my stack, which is all wet, might help them start a new life.

There is a reason the DHS has piled up 2 billion rounds of ammo--they know the blow-up is coming.

realitybiter
Dec 10, 2013 - 1:58pm

ancient money

You are right that SS is not much of a problem, but you are wrong about medicare. It is 100 trillion plus disaster.

You are right about the derivative timebomb and it is just a matter of when. Imagine, that both problems "blow up". So not only do you lose your government entitlement, but then you also lose your savings. That is some messed up stuff. All you will have left is your ability to create income. I'm not paranoid. Really. I'm not. kidding....Imagine the Hell this will be for those 60 and over....

It is a freakin' mess and folks that refuse to believe it are worse than paranoid, they are delusional and irresponsible. Then again, why worry. You have the NFL, NBA, MLB and college sports to keep you distracted.

I Run Bartertown
Dec 10, 2013 - 1:56pm
ThorusHappyNow
Dec 10, 2013 - 1:50pm

A contract requires both sides to agree . . .

>>>It's not 'entitled' it is the payback on the deal. Payed in for years, with the deal that I can get it back when needed. <<<

HappyNow,

I can understand where you're coming from. Your perspective is very common among my peers.

I think the problem comes in because there was in fact no "deal".

A true "deal" requires willing folks on *both* sides of the deal.

Many of the young folks who would have to pay for our SS & Medicare will be at least as emphatic as you are that they did ***not*** sign up to any such "deal". Their perspective is that us older folks all signed this deal amongst ourselves. No one from the younger generation that will have to pay the bill in 10 or 20 years was any part of this so-called "deal".

Therefore . . . there . . . is . . . no . . . deal . . . it can be gone tomorrow afternoon, or 10 years from now, if that were the way the votes in Congress went.

To be sure, my life and the lives of most of my peers will be better and easier if the rest of the country sees things your way. So in that sense, I wish your side of the discussion all the best.

But I can't much fault the 35 and under crowd for not being so willing to sign on to a "deal" they didn't get a chance to decide on for themselves.

Very Respectfully,

Thorus

realitybiter
Dec 10, 2013 - 1:47pm

Solution

Lets do a good ol fashion bankruptcy. All folks that have paid into the system will be treated like bondholders. They have bought into the system through their govt dictated payroll deductions. All payments that have been paid out by benefit will go against what you have paid in, using real accounting,not Govt BS. If you have received more than you contributed (adjusted for inflation and returns (chuckle), you are lucky you don't get billed. You get nothing. If you have paid through the nose and received nothing in benefit, you got some money coming. If you are young, and haven't contributed anything, or little, you get the knowledge of how not to run a system and the joy of knowing you didn't suckered for your entire working career (like me!)... Reset Going forward, we create a real system that can be sustainable. We take care of our old folks in a sustainable way. Detroit has been forced to do this.....but only after they destroyed the city. It is always "I'll start dieting tomorrow, but today I want that cheesecake"

ancientmoney
Dec 10, 2013 - 1:42pm

Hey, guys, Social Security and boomers are not the problem

Here is the problem:

"So the world is currently every bit as exposed as it was in 2008 to this triple combination of counterparty risk, with the associated contagion risk, which can then set off a fatal episode of liquidity risk (i.e. another institutional bank run), that could melt the system down in a matter of days – or even hours.

This is all closely tied in with the rapid spread of "bail-in" rules and procedures around the world, for the International Monetary Fund as well as the national governments are keenly aware of the dangers within this complex chain of interrelationships.

The IMF and the various nations are acutely aware that derivatives exposures can help set off another chain of counterparty risk, contagion risk, and liquidity risk that could rapidly bring down both the banking system and national governments.

This is precisely why, as covered in my article, "Did An Obscure IMF Document Start A Global Bail-In Revolution?", so many nations are rapidly moving to have the ability to directly seize assets from unsuspecting lenders, investors and depositors, in order to deal with these risks which are in fact greater now than ever before."

https://danielamerman.com/articles/2013/QErealityC.html

The problem is that the Fed had to lower interest rates to ZERO, and create $19 Trillion to give to the TBTF banks, because the Wall Street party was never reined in by the pols and bankers. Clinton's rein allowed the take-down of Glass-Steagall, which opened the doors to the greatest WS party, at taxpayers' expense, that the world will ever see. The Fed created more money in a few weeks, to save the banks (and the financial system as we know it, with the TBTF banks in control), than all the money in peoples' hands after 200 years of existence.

The TBTF banks, and the Fed, and the politicians since at least Clinton, and actually all the way back to Wilson, FDR, etc. are to blame. The voters, while stupid and uninterested, can't be blamed for what goes on in secrecy at the highest levels.

StevenBHorse
Dec 10, 2013 - 1:21pm

Boomers vs Boomers

Love to see fellow boomers bantering back and forth about whether or not this shit is their fault.

As an old millennial/young x-er it delights me to no end.

It will be funny to see how x deals with this problem when it's their turn to lead. They will stop this nonsense to the benefit of their children, and to the horror of those drawing benefits.

I have heard many a boomer proclaim that they can change the system, but only after they die.

Of course, everyone drawing now or in the near future will continue to do so. The million dollar question is what will those dollars buy in that future.

Until X runs the show, inflation will be the order of the day to pay for these entitlements.

HappyNow
Dec 10, 2013 - 1:18pm

Thorus I totally

Thorus I totally disagree. You may be well enough off to afford such a noble attitude but many are not.

I notice you use the word "entitled". It's not 'entitled' it is the payback on the deal. Payed in for years, with the deal that I can get it back when needed. No qualms about paying taxes anytime in my life.

I tell my kids to think long and hard before taking the easy way out and screwing those who don't have much useful working life ahead of them.

ThorusAlienEyes
Dec 10, 2013 - 1:17pm

Why should our kids make the same mistake?

>>>They never mention that boomers paid through the nose for SS.<<<

AlienEyes,

As we see the results play out, it doesn't necessarily look like us boomers are going to get our money's worth out of Social Security.

How can we blame our kids for seeing a financial Niagara Falls coming up and having the good sense to paddle to shore and get out of the way of the disaster? Once on shore, the millennials will look at us boomers going over the edge of the falls to the rocks below and wonder: "why in world didn't they do something to avoid that?"

Getting clear of the obligations/burdens of SS and medicare seems to me like a reasonable and prudent decision on their part.

Very Respectfully,

Thorus

AlienEyesrealitybiter
Dec 10, 2013 - 1:17pm

Not so fast....

One might want want to take another math course and realize what the contribution of boomers REALLY was, adjusted for inflation.

Better yet, convert yearly contributions to gold at that year's gold price. Add them all up and then convert those gold ounces to Obama bucks. In 1966, gold was $35 an ounce. Duh.

Now you deal with it.

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