Junior Gold Miners Are Dirt Cheap

Wrong again.

Numerous pundits have made a big deal of stocks’ recent rally and gold’s plunge. Some even went so far as to claim that gold has lost its “safe haven” status. They’re horribly mistaken.

For one thing, gold has held up incredibly well compared to both stocks AND commodities this year. Stocks have fallen 32% in 2008 thus far. Oil is down 26%. Zinc is down 58%. Gold is only down 16%.

In simple terms: Had you put all of your money in gold at the beginning of 2008, you would have outperformed virtually every asset class in existence. It’s also worth considering that much of the downward pressure in gold has come predominantly from the “paper” market.

As I’ve written on these pages before, the physical or bullion market in gold is extremely tight due to unprecedented demand. The US Mint has stopped producing several coins because it cannot keep up with investors’ appetite for bullion. Indeed, most bullion dealers are now charging premiums of 8-9%. This time last year premiums were only 2-3%.

However, due to institutional liquidations and outright manipulation in the paper market, gold struggles to clear even $800 an ounce. And while the paper market for gold has been hit pretty hard, gold mining stocks, particularly the juniors, have been absolutely creamed.

It’s not hard to see why.

An individual gold mining junior might have a daily dollar volume of $5-$10 million. Even smaller hedge funds ($50 million in assets) could crush one of these with a $1-2 million sale (never mind intentional crushing from shorts).

The result is that gold mining stocks are at historic lows relative to the price of gold. If you go back to 1984, mining stocks have only been this cheap relative to the price of gold two other times: 1986 and 2001, both of which were around the END of BEAR markets.

In fact, today, numerous gold juniors are so cheap that they’re trading below book value. Let me put this in perspective: at these levels these companies are cheaper than their mining assets alone. By buying today you are essentially getting the gold reserves for FREE. Below is a screen I ran last week. The data comes from Yahoo! Finance.

Company Name	Symbol	Market Cap	Total Cash	Total Debt	Price/ Book
NEVSUN RESOURCES	NSU	41.0M	59.9M	0	0.966
RICHMONT MINES	RIC	37.2M	25.2M	0	0.801
KIMBER RESOURCES	KBX	27.2M	5.5M	0	0.799
ALLIED NEVADA GOLD	ANV	107.2M	51.6M	2.2M	0.709
ENTREE GOLD	EGI	47.0M	61.9M	0	0.698
VISTA GOLD NEW	VGZ	32.0M	33.4M	22.4M	0.601
KEEGAN RES	KGN	13.1M	10.2M	0	0.547
CENTRAL SUN MINING	SMC	7.2M	4.7M	0	0.177
OREZONE RES	OZN	57.1M	13.2M	0	0.165

The most common accusation leveled against gold juniors is that the credit crisis will stop them from receiving the credit necessary to fund their operations. However, as the above table shows, many of these companies are already sitting on substantial cash hoards. In addition, some that are already producing gold throw off enough cash to fund their operations without additional loans or credit.

I can’t tell you when gold will finally break to new highs again. And I certainly cannot vouch for the above companies as being great investments (I haven’t done nearly enough research to formally recommend any of them). But one thing I can tell you is that taken as a whole, gold mining stocks are at extremely cheap levels relative to the price of gold. If you’re looking for value in today’s market, this is a great place to start.

Comments

[adan:]

nice info and qualifiers (re value of miners listed) - suggests an excellent way to start a search

thanks!

ps - though the "related stocks" items just before comments will lead to more info on each stock, why not include links within your article? just an idea, not a biggie :-)

2008 Nov 05 03:09 PM

[stio:]

:-)

2008 Nov 05 06:10 PM

[Analytical ...:]

I love the jr. gold miners, I started buying them 4 years ago, but they haven't performed as well the past 2. I still like them but some reserve is in order, pun intended. The Fed is printing money, lots of it, so expect the largest bank in the world to sell gold miners down, not kill them, but keep the dollar attractive in comparison as it has always done. Also the demand for actual gold is simply not going to be anything like the spot price. The economy is slowing so gold miners are an attractive bunch to accumulate over say the next 2 to 3 years but if they are accumulated by brokerages and dumped for whatever next big idea of the moment becomes then what. One thing that would help is the talk of November or December stimulus package all over again for everyone, a considerable amount of that would find it's way into the market, and glistening gold ornament at Christmas is always a welcome surprise under any tree. The problem with gold as a hedge against a slowing economy is that nobody trades gold directly, that is there are no scales at the butcher shop like in the prospector days, so converting it outside of a pawn broker in the real world is a hassle, and then the high gains tax. I see gold more as an ingredient in industry, electronics, electroplating, gold leaf, Goldschlager, gold embossed greeting cards, gold wedding bands,etc. all the uses for gold in small amounts that add up big more so than any big block sales of bars and bullion itself. Gold has been very high over the last 2 years and miners are way underpriced so in theory they should out perform the metal itself, they had not I think mainly because commodities trade with less restriction and increased leverage, but then fall back just the same dragging everything with them, so it's really a crap shoot no matter how cheap they appear, that said the jr. miners do look a lot better than much of the market, even if gold dips to $600 they are cheap, If gold goes to $800, will they rally enough? The miners are making money period, it's the brokers holding the stock that are horsetrading with the associated shares.

2008 Nov 05 08:47 PM

[beabaggage:]

Dont forget NXG long NXG. Instead of hoarding their cash, they bought cheap AUS mines to diversify and produce as Kemess South winds down, hidden written off asset in Kemess North that could get permitted if CN economy gets bad enough. One more lake ruined, who cares. Plus lots of other great assets, great management that knows how to get the gold out and improve yield, supposedly producing 120,000 oz of gold this quarter with some copper (hedged) credits against costs(Thats $90million in cash at gold $750 minus copper credit cost) - cost of diesel/oil going down, labor costs should settle down with all the other mines closing (PAL, etc.) .
no debt, weird ARS on the books as cash but not really cash, but still paying interest so they could monetize these ARS at some point, someone will buy them. CN banks are flush with cash and still lending, no cr problems like other world banks.

Lots of good juniors out there, lots of mergers coming for sure.

2008 Nov 06 08:54 AM

[beegdawg007:]

Good post. Thanks for the info and research. One comment in regards to your statement that many of the junior gold miners are trading below book. That is true, but it is true because the asset valuation is based on the price of gold when the companies acquired the right to mine a given area. If the price of gold were to drop a lot.. which could happen in a deflationery environment... the assets for many of these companies would actually fetch a far lower price than is their current book value. That of course is relavent because the theory behind buying a stock based on a BV of less than 1 is that, even if the company is liquidated, the stock would make money.

2008 Nov 11 05:22 PM