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Before I receive tons of
e-mail flames, daggers, and brickbats, hear this: I like gold/silver
mining stocks. I manage many THOUSANDS of shares of several VERY CAREFULLY
SELECTED companies. Some you know well, some you have likely NEVER heard
of. Some I trade/sell when the profit target I sought is reached, others I
hold until kingdom come. If I make a bad choice, I quickly cut the losers
from the stable. PAY ATTENTION: I will take a locked-in, KNOWN LOSS over
any "wait and see, she might recover" nonsense ANY DAY. Some
stocks are clearly suited to trading in and out of, with caveats, while
others are only good if you hold them forever. NEVER treat all gold stocks
the same by holding them all or trading them all. If you are very
conservative and want to sleep at night, then, in the current phase of our
very young bull-market in metals, it is OK to HOLD them all, for now.
I recommend selected offerings to many, but not all, of my clients. I
am NOT your advisor, so please don't e-mail and ask for specifics. You
couldn't pay me what I am worth…you know; you can't get around the
minimum wage laws and all that. The clients that I tell to avoid stocks are commanded
to hold bullion coins in the amount that is right for them and their
objectives. I don't know yours.
Many financial advisors and monthly newsletter
gurus have plenty of industry knowledge, street smarts and are excellent
writers. I love their sense(s) of humor and
acerbic, mercurial, esoteric, acrimonious and even platitudinous witticisms.
(I throw these in so maybe you will grab a dictionary instead of writing me a
nasty e-mail…Wow, all this great advice and a FREE vocabulary lesson,
this guy is too much!). But I often pay more for their literary talent than
their market savvy. I often feel that something is missing. Of course, Dan
Denning at Strategic Investment is excluded (note: this is an uncompensated,
shameless plug). I find myself either ripping apart the envelope of the
newsletter, or getting out my trusty 10 power magnifier hoping and believing
there has GOT to be something else still hiding in the envelope. There just
has to be something valuable hidden in the fine print…AAAACK!…no dice…I paid TWENTY FIVE BUCKS FOR THAT?!?
Financial WISDOM is a very scarce commodity indeed. Even rarer than a "I hope I get a home run ten-bagger with this
one" junior/exploratory miner. I offer what I believe is a bit of wisdom.
For free. What other advisor/broker/guru ever gave you for free that
which even compares with what we provide? Your only investment is the time it
takes to read the rest of this. If you're a speed reader, you will assuredly
get your money's worth. If you're still "hooked on phonics", I
apologize in advance. The cheerful optimists say "the best things in
life are free", while their anti-matter counterparts, hiding in the
gloomy clouds of cynicism say: "well, that stuff was worth exactly what
you paid for it". You decide.
With all the hand-wringing about why the
"blankity-blank gold and silver stocks are way
behind bullion" currently festering, we seek to calm some of your fears.
Go to Hollywood with Frankie and Relax. Take a breather from stocks and pile
into physical for a short while. At least with future investment
funds. Hold your existing stocks. Actual, fully paid-for, low-premium
bullion coins in your tight little hands are always a safer investment,
especially so for the smaller capitalized/beginner investor. Gold and silver
coins may not be quite sexy enough for many investors, but I'll take their
girl-next-door beauty everyday over any sultry siren promising more than she
can deliver. As long as we know the stock risks and their potential rewards,
they are FUN to play with. So, let's all pile into the sandbox. Watch out for
the evidence of kitty cats.
Let's take a look at the long, long list of
things that have to go exactly right in order for you to even have
a cool, shiny gold coin in your sweaty little palms. Join me as we plunge
hand-in-hand down the mineshaft:
- You have to find gold, first. It isn't
everywhere, at least not in "profitable" amounts. I can take
you on a hike to many of the U.S. western states and let you stand right
on top of $10 million dollars worth of gold. Before you make your
reservations and buy a shovel, let me point out that it would take $20
million to get it out of the ground, so it stays there. At least at
today's prices, and likely for several years worth of price increases to
come. While we all would like to simply reach down and pick up placer or
nugget gold right off the ground, it isn't anywhere near that simple.
Big chunks of gold are rare. Tiny, tiny pieces (flakes and sand-size
particles) and grains invisible to the naked eye are common. It
takes experts and years of experience to recognize potential ore bodies
and see all of the competing, complex and inter-related factors clearly
enough to even bother to drill the first hole. It is an art, and
there are far too many paint by number geologists and not enough da
Vinci's. This is the reason why the geologists and consultants who
have successfully navigated the minefields needed to bring a dirty pile
of rock all the way to profitability can be counted on about two hands.
And they are well known and in great demand. For every 10 phone calls
they get from a startup, they return one. Most
geologists spend their entire career without ever finding a
"profitable at the current gold price" ore body. Pay
attention. That's a hint. Your chances of ever making money on an
explorer are greatly increased if these field marshals are on board.
Especially if they have put their money where their math is by supplying
their own shekels along with their skills.
- Gold is sometimes found in veins of quartz (you
know, silicon dioxide, or another form of beach sand) where the gold is
"massive" and can be seen with the naked eye. These lovely
little strips, ribbons or flakes of yellow payola are found with native
silver (bonus!) and various sulfides of copper
(another bonus), lead, and antimony also in the host rock. Also common
in places where gold can be profitably mined are ores containing
microscopic sulfides and tellurides
of gold, sometimes with other quite nasty interlopers we don't want,
like arsenic. All of the other things may be useful and valuable, but we
mention them for this reason: It cost more, sometimes a great deal more,
to separate the things we don't want, at least not primarily, from the
gold. Some of these other minerals can be separated and sold at a
profit; profit which clearly subsidizes the cost of the gold extraction.
There are even some mines where the copper is so rich and the gold is an
"accident" that the gold is sold to subsidize the cost of
getting the copper. A great portion of mining engineering has been
devoted to optimal techniques to separate the "good" from the
"bad". At low cost and safely for the miners, the environment,
and the marketplace. Some "Rube Goldberg on crack"
contraption may be clever, but it probably won't pass mining inspection.
- All those other things we don't want often
force the design of the ore processing facility and often the method of
mining. In some cases, the engineers have no flexibility. They have to
do it one way and one way only. This lack of flexibility is expensive
and adds overhead burden to the net cash cost per ounce finally
recovered. In many instances the ore from the same mine has different
grades or a mix of different mineralizations.
This requires expensive pre-sorting or pre-separation in order to feed
it to the correct "next step" in the process. The mine has to
be designed around everything they expect to process and this increases
the cost enormously. Gold is often found near the surface but may follow
veins below even several miles or more. Durban Deep in South Africa is
currently chasing ore 2
miles below the surface. This is outrageously
expensive, if the gold ore wasn't rich enough to justify this subterranean
maelstrom it would never happen. The host rock may be more or less
brittle and fracture or collapse as the ore is removed. This restricts
how you can take the ore safely. You can't dig big, deep trenches
without lots of expensive wood/steel lattice work added to reinforce the
whole structure. In some mines, the vein or mineralization still runs
onward, but they have to leave it in place because going further
would ingloriously bring down the whole shebang. In some locations, they
also are required to intentionally cave in the whole thing when closing
the mine to reduce danger to curious explorers. Some of this gold may
have been initially included in estimated reserves which would have
boosted the aggregate share value if removed, but ultimately was simply
left in the ground to the stockholder's dismay. We will discuss
"proven/probable/inferred" reserves and resources later. Of
course in many parts of the world there are much more, shall we say,
"liberal" mining codes than the
costly US rules. Even if you can simply run to the next village and
replace all the "brave workers" who were victims of an adverse
demonstration of the laws of physics, it is still expensive. And
terribly politically incorrect to attempt to squeeze out every ounce at
the lowest imaginable price. You have to spend a lot of extra money
to do it "right" in both a technical and moral sense.
- Once an area with good potential is discovered
by examining the surface rock, etc., it must be drilled to get a good
idea of just how much gold is in the area. How deep is it? How large
(surface acreage) is the area that contains gold beneath the surface?
What is the surrounding rock type? Can it be blasted, drilled, or forced
out with a high pressure water-hose? (You gotta
see this in action; it's a fireman's fantasy!). A detailed geological
map is made, nowadays using GPS receivers, to plot in detail every
feature on the surface. Geologists, mining experts and various expensive
personnel like chemists, metallurgists, ore processors, and plant engineers
may study these initial results and mappings for MONTHS (getting paid
everyday by YOU) before they even drill the first down hole. Wow, the
cash injection from that first 10 million
shares at a dime a share IPO is gone, and all of the experts with
"consulting service invoices" in hand ain't
even off the bus yet! "Mother Nature" has had her big
strong fists around her precious bounty for a long time; she's not
going to yield it to your tiny weak fists without a worthy
battle.
- The best way to intelligently and honestly
determine just how likely it is that any "ore body" will be
mined profitably is to sink some drill holes. You can of course use a
backhoe and dig shallow trenches, etc. as a starting point, but you HAVE
to drill to do it right. This isn't cheap; these holes are not bored
willy-nilly. Careful study and instinct lead to the selection of the
drill sites. It can take weeks to drill a single hole after setting up
the heavy, expensive rigging, especially if the area is remote or the
terrain is anything other than flat or very gently sloping. You can
imagine the drilling complexity along the side of a steep mountain deep
in a jungle. Drilling holes right in the midst of an ore body with
measurable surface gold will tell you the most important thing you need
to know: Does this gold extend below the surface? If it does, just how
deep does it go? And just how "rich" is the deposit? There
might be "some", but not "enough" to be profitable.
If we drill straight through a shallow surface deposit and find nothing,
we know this gold has likely been deposited here after being carried
away from somewhere else through weathering and erosion, earthquake
hiccups, volcanic eruption or via ancient water courses long since dried
up. Then you go looking for the "somewhere else". It may lead
you to someone else's claim just up the mountain slope. Too bad. It was fun while it lasted.
- Rotary type drilling is relatively expensive
compared to "diamond core" drilling, which is really king. The rotary drill technique loosens and scatters
the earth. It also breaks up the rock allowing inspection and assay of
the sample. Assay refers to the process of determining very accurately
just how much actual gold is in the sample and is discussed in more
detail later. Diamond tipped core drilling is the most versatile and
expensive, but gives an excellent indication of just how the gold ore
lays in the earth. Knowing this can save a great deal of time and money
during the extraction process; only the minimum amount of overburden will
have to be removed and processed. Just like taking x-rays and MRI
imaging before "cutting", the surgeon minimizes damage to
surrounding tissue and speeds the healing process. The diamond drill
uses a circular, hollow bit from about 1 inch up to about 4 inches in
diameter. Water is pumped into the hole to lubricate and cool the bit as
she grinds deeper. The ore sample is trapped in the center
of the bit as she goes lower. External sludge remains outside the drill
bit and is pumped up and out, then discarded. The good stuff you want is
tucked safely inside the drill bit. The actual process is much more
complicated, but you get the idea. The core sample is carefully tagged
and labeled to match it up with its exact
location on the geological survey maps. The core is placed in special
storage tubes or compartments and VERY carefully guarded for two
reasons; to protect the integrity of the sample and keep competitors and
"spies" from knowing just what you may have found. Oh yes,
exploratory drilling often takes many years, maybe a decade or
more for a large ore body before everything can be fully analyzed to
determine if it's going to ever be profitable to rip the metal from the
earth. Cash ponied up from stockholders via IPO's and private
placements, venture capitalists, banking concerns, etc. is being burned
throughout this very long process. Roughly 97% of all discoveries
never graduate from an exploratory dream to a producing mine; they
succumb to infant mortality even though tens of millions of your dollars
were spent in a heroic but futile attempt to save her life.
- After honeycombing the earth around the
property through drilling we have a good idea about the distribution of
the ore. The more holes you drill, the more it costs and the longer it
takes, but the better the picture of just what you have found. We will
likely know roughly where veins and mineralization pockets start and
stop, which way they run and how deep they go. Some drill holes may show
good yields while others show little or no gold in that "plug".
It is VERY important that the drill intersects the ore pocket at
right angles to its "run" or "lay" in the earth so
the thickness of the seam can be accurately determined. Drilling at any
other angle may lead to HUGE errors in the calculations about just how
much golden pay dirt is actually present. These HUGE errors can lead to
the completely erroneous assumption that there is much more gold present
than in reality. If these dubious results are published too early and
lead to massive buying of the stock, you will have a NASTY surprise
later in the drill regimen as these pockets are more clearly defined
with subsequent drilling. The area is then divided into "zones
of occurrence" typically to classify them as low grade or high
grade regions. This is kind of arbitrary and relative. An ore body with
many "low" grade zones can be profitably mined if the gold is
close to the surface, easy to get to and the mineralization is amenable
to simple mechanical and chemical separation of the gold from everything
else we don't want. By the same token, a mine with easy to get high
grades can die early. All the cream is scooped up when the gold
price per ounce is low; it's the only portion of the ore reserves than
can be extracted profitably when gold prices are low. This will kill the
mine. They will have to replace their reserves through new discovery
(outrageously expensive and hard to do), junior acquisitions (very
expensive) or mergers with rivals to survive. Otherwise, they die.
Cash flow or dividends from that stock are GONE long before you wanted
them to end. The stock price may plummet; you won't even realize a much
sought after capital-gain profit through stock price appreciation.
- What is all this mumbo-jumbo about proven,
probable and inferred reserves or measured,
indicated and inferred resources? This is one of the most
significant bits of information when considering if any resource
mining company WILL EVER BE PROFITABLE. Important caveat: All
jurisdictions do not define these terms equally. In the United States
the SEC prefers one set of definitions that must be adhered to when
quoting ore discoveries in press releases, prospectuses, quarterly
reports, etc. Canada has another set of standard definitions, which are
different from those of Australia/New Zealand, which are very much
different than the rest of the world. The definitions have VERY specific
legal import and interpretation relative to risk disclosure and fraud.
The reported accuracy of the "ore richness" terms often
becomes the central point of any nasty post-bankruptcy litigation. All
slices of "truth" in reporting are not created equal. It is
very difficult for even an experienced geologist to make relative
comparisons between mines in different parts of the world using the data
that is reported. For example, in Canada these are the standard
terms and their meanings:
- The term "Resource" is used
for exploratory and prospecting ventures that are not yet producing or
even close to producing. This is for the "dirty pile of rock"
that looks promising. That's it; nothing else is really known, so we
call it a "resource". Resources are classified as measured,
indicated, or inferred. If it is unknown, it has to be
identified as unknown. Combinations of
all these categories
are permitted. Definitions:
- Measured: The thickness, grade (in grams of gold per
ton of host rock), distribution and extent of the deposit is
"fully" known, or at least with great statistical
confidence. Where the ore starts and stops in every direction should
be "known". Many, many drill holes and assays are
completed and analyzed. Relative concentrations of gold ore to host
rock and overburden are "known".
- Indicated: Only a "few" drill core
samples and assays of those cores may be completed and sufficient to
calculate tonnage and grade. Inferred projection of the "goodies
in the ground" at a measurable distance away from the drill holes
is permissible with limitations. It is very expensive to drill every
few feet, so you have to make reasonable assumptions about what is hidden
between the drill holes; it may be a bonanza, it may be nothing.
- Inferred: Usually only crude, high level ground
survey or statistical "sampling" of the area has been
performed. Not enough actual testing has been performed. "Gee, it
kind of looks like that outcropping way over there has some gold in it
too; it looks like it starts here and continues all the way".
- The term "Reserve" is used
only for mines that are actually producing or very near
that point. Much more is known about the richness, depth and expanse of
the ore body. Drilling is complete and assays have been verified.
Reserves are classified as proven, probable or possible.
- Proven: The actual entire ore reserves are stated
explicitly in terms of the mineable tons. The chemical and
metallurgical properties of the mineralization are very well known and
documented. The mining method is clearly identified and optimized. The
estimate of the "mine life" before resources are exhausted
is extrapolated. All of the supporting infrastructure, ancillary
requirements and capital costs are identified and indexed to expected
price and "net profit" per ounce. This is the most
important category and should always be carefully analyzed when
picking a potential stock for inclusion in your portfolio. Almost
everything else is a "sales pitch". You've been warned
- Probable: Only the mineable ore grades and tonnage
are stated. The vein thickness is known and the way the gold ore lies in the ground is also known fairly well. Where
mineralization starts and stops is reasonably estimated. This is often
estimated from following industry accepted and permissible
"ethical" procedures after drill results
- Possible: This is a big estimate of how much gold might
be here; it is sometimes referred to as "potential" How many
of us know people that never lived up to their "potential"
for one reason or another? Same thing here. It may be no more than
some geo-pseudo-scientific guess based on little more than review of
earth mapping satellite imagery or surface surveys.
- The ore can migrate from one category to
another over time as the deposit is better measured and understood
after more drilling and extraction is completed. Any given "zone
of occurrence" can have only one classification at any given time.
Lodes can turn out to be either richer or leaner than initially
"guesstimated". It is NEVER an exact science, errors are
inevitable. A simple decimal point higher or lower in any
mathematical measurement can be the difference between profit and
failure.
- Dirt and rock are heavy. Well, duh! Moving tons
and tons of earth or overburden to eventually get a few grams of gold is
common. One ounce of gold is about 31.1 grams. 10-20
tons or more, often much more, of earth will have to be completely
processed to yield this final ounce. If it requires about 250 bucks of
"all in cost effort" to perform this metallurgical magic and
the metal was sold into the open market for 450 bucks, this only yields
200 bucks "profit". Be careful when you forget this by
thinking "gee, a million ounces of proven reserves; this bad boy is
worth 450 million". She's not. She may be "worth"
far less than 200 million.
- Machinery to dig, drill and transport ore is
expensive and often leased during the early years of a start up. They
have to finance the payments of expensive machinery forever or burn
start-up capital (provided by YOU via the "initial offering")
at a rate that would even scare Bill Gates. The first hundred thousand
ounces produced often have to be sold before the cash flow every
common-stock investor is seeking even begins to materialize. The
bankers, creditors and major financers always get paid first. Big
machines require big energy. Big hauling trucks use up lots of diesel,
diesel which is going up with the price of oil due to an ever more
worthless dollar and explosive Asian demand. Ore crushing machines
require lots of energy; often electricity. Getting electricity from the
nearest generator all the way to the mine processing facility requires
ground clearing, transmission wire and tower installation, and
substation power step-down facilities which are all extremely expensive.
Electricity generated from non-hydroelectric sources is also rising
rapidly in cost. Even coal-fired boiler/steam turbine power plants are
paying more for coal because China is sucking up every last briquette. Labor-wage inflation cost push has not hit the US,
yet, but it is a problem where the local currency is strengthening
relative to the nasty little US dollar, which is everywhere. (Isn't it
amazing that penalties show up everywhere, everyday and in every form
because of the worthlessness of the dollar?). Mines get fewer units of
local currency in exchange for the gold they sell in declining value US
dollars, even though the gold price is rising in those same dollars.
They have to pay locals for supplies and labor
in this harder to come by (relative to the dollar, that is) national
currency. These are only some of the reasons for a drop in
profitability in many mining operations even though the market price of
gold is increasing.
- With all of the countless rules, laws,
increasing environmental regulations (with stiff penalties and
production delays for infractions) and ever growing national tax/royalty
levies, I believe exploratory mining operations will decline in
many parts of the industrialized west in the future. I expect many of
the Yukos-type problems that occurred with
Russian oil oligarchs to spill over into every other natural resource in
the "rising from the ashes" golden Phoenix we call the reborn
Soviet Union. I personally avoid operations completely or largely
dependent on the "continuation of democratic rule of law and
protection of free-market business interests" in locales where this
is becoming an ever more naïve assumption. Ignore these
geopolitical shifts to your own peril. In the third world, on the
spot, impromptu inspections by the local mining chief, who is of course,
the village mayor's brother-in-law, always seem to find something that
is a no-no. Shakedowns and protection money payments are common in many
smaller operations. So is claim jumping by squatters who are merely a nuisance. I wouldn't want to pay the same guy every
month several thousand dollars to go away. Third world mine security
officials are often more "creative". They might pay him the
first time. The second time he will accidentally fall into an abandoned
mineshaft.
- In US territory, the EPA is merciless. If you
have submitted a mining plan that is approved for say, three cyanide leaching
pads and well, you have four, that can be a $100,000 math error, not
counting the down time for the facility if something more egregious is
found. And oh, that cyanide stuff is very nasty. Cyanide is very
inexpensive to buy, but very expensive to use because of all the process
control and clean up costs after its use. Newmont currently has a lot of
problems in Indonesia; prison sentences for high ranking in-country
corporate officials are being considered. Even if it's just a
sophisticated shakedown it will directly impact their bottom line.
Newmont can handle it and recover; many explorers or juniors couldn't.
Cyanide is both a dream come true in gold extraction as well as your
worst nightmare. It's heinously toxic to people, plants and possums. Like
most things in nature, we have to take the bitter with the sweet.
Remember we used the term "sulphide" mineralization in our
first bullet? One of the reasons that "sulphide" ores are
economically (profitably) mined even with relatively small concentrations
of gold is that the gold that is present is easily removed in a simple
chemical reaction between gold and cyanide. In a typical leaching pit,
crushed rock is piled high on clay pads with plastic liners. The rock is
sprayed with a liquid sodium cyanide solution until it is thoroughly
wet. As the liquid snakes it way to the bottom of the pile, it combines
with the fine particles of gold very easily (in many cases up to about
97% of the gold is collected), rapidly forming a "mechanical
mixture" of auriferous sodium cyanide. This mixture is heavier than
the surrounding rock; under the force of gravity (gravimetric
separation), the gold rich compound migrates to the bottom of the pile
much like the way that water sinks below oil in such a mixture. Or that
nasty stuff in the bottom of the salad dressing bottle. The bottom of
the pile is now rich in gold; a layer of the pile can be removed and
processed for the gold or the pile may be resprayed
to repeat the process. The gold is separated from the cyanide in the next
step. A tablespoon of the toxic spray liquor can kill the biggest of
humans. This stuff has destroyed many waterways, wildlife, animal grazing ranges, lakes/streams full of fish,
underground aquifers and bird feeding/migration routes as it
spilled into the surrounding environment. The U.S. and most highly
developed countries require the companies to build expensive specialized
containment vessels with concrete and other materials inside earthen
berms to keep this stuff from leaking out of the leach pits. All of the
extra precautions required when using cyanide in the recovery technique
are very expensive. Fines and shutdowns if this stuff gets out can
literally bankrupt the mine. In their defense,
mining companies always claim that under direct sunlight, the cyanide in
the area is decomposed into its "basic" elements through this
"photo-kinetic" process. But the resulting elemental sodium is
still toxic to many living things, especially fish and water creatures.
One of the worst cases on record occurred in February 2000 at the Aurul Gold Mine near Baia
Mare in Romania. Hundreds of tons of poison cyanide leaching liquid
eventually found its way indirectly into the not-so-blue Danube and
Tisza rivers. It destroyed 150+ tones of fish, decimated the local fishing
industry and contaminated drinking water for many miles of waterway.
Even though there is still plenty of gold in Dracula's backyard, the
toxic leftovers will be present for years to come. European officials
declared this the worst industrial disaster since Chernobyl in 1986. Note:
mines don't all necessarily use cyanide in the gold recovery process.
But most still do, and will for the foreseeable future. It isn't
necessary in all cases. New extraction technology avoiding cyanide does
exist and is being refined; but it is not yet as cost effective for big,
low grade deposits. I am "big" on achieving a sensible balance
of safety and respect of natural beauty during resource extraction. These things are tragic for everyone, including the investor.
- Since no mine lasts forever, the costs and
procedures required to close the mine, clean up the mess and walk away
must be considered before the first shovel full is processed. Many
regions require expensive remediation plans to restore the area to
something resembling the natural beauty before the lust for gold turned
it upside down. It is very expensive in the US and most of the
developed west, especially if the mine is large and the mining
technique was especially destructive to the environment. In fact the
EPA, Bureau of Mines, Department Of The Interior, etc. will not even
sign off on any plan that doesn't do an adequate job of apologizing and
making amends to Mother Nature when all of her wealth has been pilfered.
This "put everything back where you found it" legal and moral
requirement is extremely expensive and will divert a significant portion
of the net shareholder return. Of course, this is of less importance in
some regions of the third world that are desperate for jobs and revenue
associated with producing mines.
- A mining venture has most of all of the same
costs and problems with making a decent profit as any other modern
non-mining business. Attracting and keeping intelligent, hard- working
personnel is a problem. With the long doldrums in most metal (especially
tin, gold, silver, copper, and aluminum)
prices through the 80's and 90's, fewer young people were even
interested in obtaining a mining engineering or useful related degree.
Everybody wanted to go to a top-tier business school and become an investment
banker or stock jockey that might finance or sell mining stocks (in
between big blocks of internet gee-wizardry trash). Nobody wanted to do
the dirty, dangerous work to make it happen in the first place. Now the
good part about this is that gold and silver mining output has declined
and will decline (net-net) for years to come. Once the real, gluttonous
feeding frenzy in precious metals gets underway (we are still in the
appetizer stage), the few companies that are producing profitably
will be more than glad they did whatever was necessary to survive. So
will the savvy investors who bought carefully researched and
cautiously acquired juniors, explorers and producers and held them
tightly during the dips in the mother of all roller coaster rides that is
coming. Some derivative flavored hedging
to deliver "new" metal into the marketplace at "old"
prices was necessary and prudent to survive during the lean years.
Clearly many producers overdid it; this excess and profligate behavior will be catastrophic for many and we won't
know until it is too late. I believe we will attend the funerals
"tomorrow" of several of the well known names that look
perfectly healthy today.
So, how do we distill
all of the foregoing blather into a few generic "tips"?
- Look for the names of well known, respected successful
geologists and consultants in the press releases, offering prospectuses,
10K filings, quarterly reports, etc.
- Avoid the regions of the world where political
and social unrest, as well as dubious law-enforcement, confiscatory
royalty mindsets, minority empowerment attempts to right 100 years of
past exploitation in one week, nationalization "rumors"
and self-defeating taxation schemes are becoming the modus operandi.
Remember, a rumor is a rumor
until it's officially denied by authorities. THEN YOU KNOW IT IS THE
TRUTH. Do not be deceived by thinking: "Gee, these folks want all
of that foreign investment capital to flow into their country. They
won't do inane things that will scare away the cash they desperately
need to expand their industry and grow their economic base". I say,
in Mogambo-Speak: HAHAHAHAHAH! For the short
list of places that are in my OPINION, slightly less risky (and
not in any particular risk order), try:
- Canada
- Australia
- New Zealand
- Papua
New Guinea
- United
States
- Tanzania
- Thailand
- Vietnam
- Myanmar
- Romania
- Mongolia
- Brazil
- Wait until a comprehensive drill program is
COMPLETED before loading up on the stock. Of course the stock will cost
more at this point than if you bought it totally "blind", 20
minutes before two scruffy prospectors sped back to town in their rusty
pick-em-up-truck screaming EUREKA from one end
of the village to the other. Make sure the explorer drilled enough holes
carefully to truly gauge the scope of the ore body. Make sure diamond
drill core samples have been independently audited/assayed by at least
two respected assay houses and compared to a controlled, locked up
reference if there are any disputes about the "richness" in
grams per ton, etc. I am sure there is a "Son Of
Bre-X" out there somewhere, lurking in
the pink sheets. We won't know until after it is too late to recover
our capital. Every mania (and IT WILL BE A DOOZY) brings the charlatans
and thieves to a heady froth. This chapter in our eternal gold story
will be no different.
- If you want to play with mining stocks, as a
very crude rule of thumb and not financial advice, you, in my
opinion, should keep a portfolio of about 10 stocks. With any less,
your risks would be too large. Never buy just one, even Newmont. Don't
try to handle more than 10; you can't keep up with all the details if
you have a life outside the fine print of the WSJ. TALK TO YOUR OWN
FINANCIAL ADVISOR; I AM NOT YOURS. A strategy that has served ME
well (don't know about you, so again, this is not advice)
is to pick the 10 this way: Throw Newmont (NEM) in at the top of
your list. At the bottom, pick one of the sub
$1.00 per share puppies that has found great ore bodies, has survived
infant mortality, and is going to be actually producing good
quantities of metal within a year or two at most. I like New Guinea Gold
(NGG on Vancouver) here. DISCLOSURE NOTE: I LIKE HER AND OWN MANY
THOUSANDS OF HER SHARES. She is one of my long shots with blue sky
potential, but anything can happen to her. I won't warn you before I buy
more of her or dump her. But since she didn't cost me very much, I will
not toss her out easily. If she vaporizes, my life won't change. If she
goes to the moon, you will never see another article written by me….What's
that I hear…some of you are praying for her to go up now….?
I also like Tan Range Exploration (TNX on Toronto) here too as another
long shot because of their integrity, board of director savvy and
massive potential. I don't own her yet. I may next year. I may not.
Next, into your stocking stuff Kinross Gold Corp (KGC) in the middle of
the pack. She is hard to beat as a mid-level player. I own her. If you
like silver also (or better than gold, as some of you clearly do) toss
in Hecla (HL) or Coeur d'Alene (CDE). Now it's your turn to have some
fun. Do your own due-diligence type homework and pick the remaining five
or six. Choose carefully only after reading EVERYTHING PUBLISHED YOU
CAN FIND ABOUT YOUR PROSPECT. Diversify geographically throughout
some of the suggested areas listed in number 2 above. Call the investor
relations office and chat with them about anything you don't understand
in the published literature. Visit the place if you can on your next
vacation. It's a blast. Yes, it will be expensive, but the most fun you
can have with your prospecting boots on if you really enjoy the mining
stock casino.
- The hardest part is NOT the BUYING of
the stock, it is ALWAYS the SELLING. Greed and fear kill
everyone. No exceptions. You must decide what you want from any given
stock before you reach those bony fingers for the phone or the
mouse button. If you have made a good profit either from dividends, if
any, or through simple price appreciation, SELL ALL OR PART OF YOUR
HOLDINGS when her price is strong and her volumes are decent and take
money off the table. If the trend for gold
overall or that specific stock is still strong, you can buy her again
and repeat the process. With the upcoming volatility it may be
difficult and you could leave some money on the table, but so what? Many
fools watch real profit vaporize because they don't get while the gettin' is good. Cut losers quickly from the stable
before growing losses make you emotionally determined to hold her until
she comes back. Don't confuse tech fund liquidation of huge blocks of
your little darlings, cartel cabal malfeasance, price manipulations or
negative newsletter "top-picker" sentiments with a real dog
that isn't doing well compared to other shares, who are in marked
contrast, prospering in the same negative environment. Now, ignore this
rule with the sub buck a share long shots. If you bought them in
intelligent quantities, you don't care if they go to nothing. You only
bought them instead of a lottery ticket, which will usually be a better
bet. Even the best stock pickers get massacred now and then. I have had
my head ripped from my shoulders on many occasions. All metal stocks are
volatile and as you well know do CRAZY things like lead bullion when
they should lag and vice versa. I HAVE NO CRYSTAL BALL. BUT IF I MAKE
MONEY ON HER BY SELLING TODAY, I DON'T NEED ONE. I am taking it off
the table. What is a decent return for me may not be enough juice for
you. I have no way of knowing. It's a free country, do whatever you
want; it's your money.
Conclusion
If all of this is just too much for you,
simply buy low premium, well known/popular gold and silver bullion coins from
a reputable dealer, tuck them away safely and be patient. With gross
exaggeration, of course, about a billion things need to go exactly right
to ever make a predictable, consistent profit from a mining stock. With
finished coins, everything that needed to happen HAS happened. Think
about it. With real bullion coins in your hands, the only thing needed now to
make a respectable profit is that somebody,
somewhere wants the gold more than the paper dollars they exchanged. And
currently, about 3 billion people on the planet do. Wake up now or sleep
forever. Get on board with stocks or coins; the Auric-Polar Express is
leaving the station.
Trust Governments For Nothing. Trust God For
Everything. Trust Gold Somewhere In Between.
J. Kent Willis
J. Kent Willis is a Financial Advisor, Licensed
General Securities Representative and the President of AGAPI Financial, LLC.
He specializes in tangible assets, biblical faith-based investing seminars
and balanced life strategies. He has traded gold and silver since the mid
1970's and resides in Kentucky. He can be reached at jkentw2@aol.com..
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