Way back in the day, people traded precious metal around by weight, say grams, in exchange for stuff. Those who messed around with their weights were boycotted and/or harassed and driven out of business. Money was thereby kept honest. Then some king or other conquered the area and gave the weight a special name, like "dinar" instead of "gram". One "gram" of gold became one "dinar" of gold, placing the imaginary concept of "face value" at the forefront over actual weight by inventing some imaginary proper noun with a nice ring to it. Then the king took control of the private mints and stamped his own face on the precious metal. Now, with his face on the metal, his own proper noun for the coins, and control of the coin-making equipment, he proceeded to make the coins out of higher and higher percentages of cheap scrap with the same imaginary face value. The gold and silver he kept for himself to buy soldiers and conquer more areas. By the time people figured out they were trading around scrap metal and the king took everything, they were already poor and miserable.
Today things are worse monetarily. The last mass-produced silver coins were minted in 1964. The last copper pennies were minted in 1982. The last zinc pennies will be minted this year. Even paper itself is being phased out in favor of digital numbers in a computer. Governments everywhere now have full control over the face value names, mints, and banking systems the world over.
But the worst part of it all is that we have actually been trained to admire our modern monetary rulers when they further cheapen our money. It stimulates the economy, they claim. The problem is, when every country tries to "stimulate the economy" at the same time, then it's just a currency race down to absolute zero. That's where we stand now.
This environment creates a boon for gold, but a serious problem for gold miners. With government-issued money becoming less and less valuable, it becomes more and more expensive to mine for precious metals, which will be in extremely high demand when the citizens of the world realize that their government money isn't buying anything anymore. The price action in the HUI index, consisting of gold mining stocks, has been horrid lately considering gold's historic rise. A 5 year chart shows the extent, with GLD up over 80%, the HUI is actually down close to 10%. (Chart courtesy of Yahoo)
The only rational explanation for this is that the cost of mining has gone up so quickly caused by the very price inflation that is in turn causing gold to rise out of all historical proportions. While a gold coin in the hand can sit there and soak up the energies of currency debasement, two gold coins in the bush (or in this case the mine) have to drag along with them the added costs of putting them in hand. So many gold stocks have not seen commensurate growth in accordance with gold's rise. Taking one snapshot to illustrate this, Newmont Mining (NEM) earned $791M from selling its gold in FY 2006, back when gold was trading at an average $604 an ounce. In FY 2011 with gold trading at an average $1572 an ounce, it earned $366M. Granted, this is an extreme example with other problems involved, and other miners like have done much better, but cases like Newmont (and there are others) show why the sector has been struggling as a whole and the HUI has taken a beating, especially in the last week.
At some point, this price imbalance will be fixed and liquidity will flow hard back into the HUI. For now though, what is needed for miners investors is a business plan that can successfully deal with the high cost of mining. On January 1, a new gold miner hit the scene with one that may fit the bill. Southern USA Resources (OTC:SUSA) showed up for trading with what can best be described as a 19th century treasure hunt using 21st century technology.
Much of the cost of mining for a junior gold miner is incurred in the time, testing, and regulation hassles of simply looking for the stuff. While a company is searching, it is certainly not making any money and its balance sheet is taking a big hit along with your stock price, as investors begin to doubt whether it will find anything at all and that maybe all it has going for it is a bunch of mining equipment, in SUSA's case, a bit over $1M in equipment paid for in stock. If the technicals of mining equipment mean anything to you or you are a maven in the machinery, you can read about SUSA's here.
The catch with SUSA, however, is that while it is technically an exploration stage company, it is exploring not virgin earth, but mines that were abandoned in 19th century Alabama. Grey County, where its mines are located, was a booming gold town in the 1830's when the hard money Jacksonians ruled over the United States and the gold standard was respected. Then the 1849 gold rush happened and all mining labor and capital were moved to California almost overnight.
Using old mining data from the 19th century, SUSA is firing up these mines for the first time since the 1890's in the youngest cases. Armed with 21st century mining technology, it is much better equipped, even with its meager $1M of hardware, to find a lot more than what the Alabaman ancestors found 200 years ago.
The biggest dangers with SUSA are two, one short term and one long term. Short term, it has no open lines of credit, and may need to finance through equity offerings if it runs out of money without opening a line. SUSA's balance sheet suggests this is certainly a possibility. Long term, the biggest risk is that the mines are empty or insufficient to earn the company significant income. This is less likely, though of course possible.
If significant deposits are found where the old Alabaman miners left off in 1890, SUSA will start seeing revenues fairly quickly, perhaps within a quarter or two, as the basic infrastructure of these mines is already developed and ready to go.
As for hard numbers, there isn't much to work with, but here's what investors need to see for growth: SUSA currently has a market cap of $49M. Assuming a median gold price of $1750 throughout 2013, it will need to find about 20,000 ounces to earn its current worth in revenue. To put that number into perspective, Barrick's (ABX) revenues last quarter were $3.4B, with a market cap of $34B, which gives them a P/E ratio of 10. To match Barrick's P/E, it will have to find $4.9M worth of gold, which translates to a little over 2,000 ounces a quarter. During the Alabama gold rush in the 1830's, an estimated 50,000 ounces were mined with quite primitive technology. If SUSA can produce more than 2,000 ounces a quarter, its stock price will start inching upwards. Additionally, as gold goes up generally and the currency race to absolute zero intensifies globally, one may suddenly feel a lot safer in an old 1830's Alabama gold mine to ride out the money storm.