Contributor since: 2011
Thanks for the heads up on DGC Barry,
It's an interesting company and is closer to production than NG. Their P&P reserves are currently valued at $181/oz so higher than NG, but reasonable as they are closer to production. It has a little more of a concentration risk as their operations are focused around a single mine. Personally, I prefer to have Barrick as a partner compared to John Paulson whose record as of late has been spotty at best.
Yes costs of recovering the gold are in the billions of dollars, but 20M of Proven and Probable reserves are worth $30 billion at today's prices. The company has a market cap of $2 billion today, so there is a potential large upside - although it is a SPECULATIVE play. Don't suppose you'd like to share why you believe it to be absurdly overvalued would you?
Hi James,
I'm not an economist, but if, "the whole of the Euro Zone will undergo a massive inflation", will this not result in the Euro losing a substantial amount of its value compared to other currencies (assuming of course that they are not also experiencing massive inflation in their respective countries)?
Lol. That's the right question, but i doubt Jamie will be discussing that on the conference call...more likely to hear how any regulation is "anti-american".
Thanks for your comment JW. I suspect that there are a lot more people like you out there (some may even be reading these articles) who for various reasons are fully in cash. I'm concerned that at some point, you could even argue its happening already, the Fed/Govt are going to try and inflate their way out of their debt problems. When this occurs there will be a massive transfer of wealth from the people (at least from the savers) to the government.
I wouldn't be at all surprised to see a pullback in the markets either so waiting for a better entry points makes sense as long as you don't have to wait too long. Good luck!
Great article Denis,
You forgot to mention another difference; the canadian banks all pay dividends and always have. When the american banks start (are allowed) to pay dividends again some of these gaps should start to close, but until then being long US banks will lead to a few sleepless nights.
Thanks! As part of a diversified strategy I would also be holding cash.
To quote you, "Sitting in cash and gold is certainly one way to go, but probably not the most profitable."
I concur and this especially true over long time horizons. The strategy is to make a reasonable return while minimizing risk.
Thanks for the advice JF. Read the article again, it is not suggesting a buy and hold strategy. It is suggesting that you control the few things that you can and many of these points also apply to purchasing precious metals. Having a cash buffer is great, but if you leave everything in cash for 10+ years your principle will get eaten away by inflation. Technically bonds have been in a bull market for the past 30 years vs 10 for gold and in 1999 technology had been in a bull market for years - the point is predicting when these markets are about to change is difficult, having everything in gold is a risky strategy!
Hi Gratian,
I agree that you should always have a few months of spare cash (more if possible) on hand and that also counts towards diversification. My reason for writing the article was to highlight the fact that if you leave ALL of your savings in a bank even if you do not lose any of the principal, your purchasing power will decline over time.
There is a surprisingly large portion of the population who earns next to nothing on their savings - this article was primarily directed towards them. Even moving your money into a credit union won't keep up with inflation over time, although you are likely to get a better return than with the large banks.
Thanks Enneagram! I haven't done the analysis yet, I'm waiting for some of the volatility to ease in the market and to see where gold settles at. I'm still bullish mid-term, but don't want to try and catch any falling knifes so I'll wait until a floor on the price has been established. I will post an article after i've done the analysis, but I amlooking for exploration companies where major producers have already invested in, such as NovaGold and Evolving Gold.
Hey Challenger,
Fair points. Over the last several years operating costs have risen, but the price of gold has risen faster which has lead to increasing profit margins. The other concern which i didn't really touch on in this article is nationalization of resources, but that is why i prefer the global players, such as NEM and ABX, with operations globally and quite a large portion of their production in stable democracies.
Great article and summary of the Canadian banking system Bob!
Canadian banks are almost utilities in nature: low beta, growing dividends, conservatively run, fairly tight regulation and a captured deposit base. However that being said, they will also collapse in price if the global turmoil continues, e.g. eurocrises, looming US deficit crises, mideast turmoil etc. On the other hand their price should also bounce back more quickly than a lot of their peers. I am looking to get back into Canadian banks following another sell-off.
Thanks Grasshoppa!
Lots of people share your view on the Equinox purchase, I certainly would have preferred to see more money go back to shareholders. ABX did get beat up in the mkts over that purchase and today trades at a lower PE and a similar ROIC to NEM. I prefer to split my investment between the companies and i'm also looking for a third, although smaller, investment in one of the juniors.
Cheers Hammer,
Yes, they are both equally attractive to me. I am looking for a slight pull back with NEM before I pull the trigger. Long term they both look good, especially now that they are starting to increase their dividends.
It will be interesting to see what happens after the lock up period ends (6 months after the IPO) and all the insiders are allowed to sell their stocks.
It's a tough environment for sure, especially heading into winter. I saw that one of the cokers is currently down as well. That's why after their Q3 release i was pleasantly surprised to see that they were hitting all of their production targets. Still even with these unplanned outages COS is staying with their predictions for year end production numbers.
I don't think this affects the capex in the 2012-2013 time frame as this project isn't in the budget. Capex in 2012-2013 is primarily moving/upgrading mining trains, managing tailings ponds and emission reductions projects. (so I'm not sure what the analyst in the article you quote is referring to?)
Short-term it could be a positive, but long term a negative as future earnings growth would be reduced. Also since Imperial is just one of several partners, I'm not convinced that future expansion will be affected, yet. Ultimately the decision will be driven more by expectations for the future price of oil.
I agree they do not hedge because they cannot predict the future price of oil, but also many investors prefer that they go unhedged as it means the share price will be higher correlated to the price of oil (allows you take more of a direct position on the price of oil). If global economies are subdued for the next couple of years then oil will probably drop, unless there is trouble in the middle east or if we have all ready reached peak oil...
On the dividend, if oil prices stay close to what COS budgets then i think they will increase the dividend next year. If oil drops and stays at $65 for any duration then yes kiss that dividend goodbye!
Hello Hammer,
Capex is higher this year than last year as COS is replacing and relocating several mine trains and will peak in 2012/2013 before dropping back in 2014. It's definitely something to keep an eye on, but as long as there are no large delays or cost overruns it will all be finance out of cash flow from operations and should not affect the dividend. The capex was actually less this quarter than projected.
If the capital expenditure is planned I do not see how you can hedge against it. Who would be on the other side of that trade?
The latest royalty numbers that i've seen do not mention an increase in 2015. Below is a link from the Government of Alberta discussing royalties. They are on a sliding scale based on the price of oil. If you have more recent data, I'd be interested in seeing it. Governments are always "tweaking" these things.
Hi Clemens,
I agree it's certainly an interesting time if you are an investor in the tanker market. Thanks for the food for thought, i need to read up on the Golden Ocean deal. It's always a worry that if there is a restructuring that the existing shareholders get diluted, however, at some point (probably not yet) there could be a huge opportunity for investors.
Yes, ditto here. I think i will trade in my shares in FRO for the book...Q3 earnings were not a pleasant read.
Clemens, what are your thoughts on Fredriksen strengthening the balance sheet with some of his own funds?
Unfortunately, with insider trading being legal for them, it doesn't really matter what you do with their pay...
Hi Mark,
Actually you can trade options on TransCanada via the Toronto Stock Exchange, ticker TSE: TRP
You might need to contact the foreign desk at your broker or set up an account via Interactive Brokers, but options do exist (although they are not heavily traded).
This is an excellent article and you do a great job refuting many of the bulls' arguments. I am amazed at how many analysts, strategists, HFs appear to be long the market ("the smart money"). Turn on Bloomberg for more than five minutes and you will see numerous well known, intelligent, investors talking about the great opportunities that the market currently offers.
I agreed with everything you've written right up to the point where you said that Microsoft is an attractive long term investment...ah well, time will tell.
Dear Dividend Inc.,
Actually the XAU started trading in January of 1979, options didn't start trading until 1983 ( I imagine that Mr. Hussman constructed a synthetic version of the index for dates prior to 1979. I'd be happy to show you how to create such a synthetic index, if you like.
Following the financial crises, some indicators and ratios have behaved differently - perhaps this is what you are referring to, however, I have heard people say that, "this time is different" and usually it turns out not to be. Ignore long-term mean reversion at your own risk.
On this point we can agree: by doing the analysis you might find stocks that will outperform the index over the long run.
I was of course partly kidding with "dig", however, when you use an alias some people may wonder what you are hiding.
I stand by my assertion that when the gold/XAU ratio is above 5, the gold mining stocks are undervalued RELATIVE to gold. However, that doesn't mean that with the ratio under 5 they are overvalued. It would be great if there was such a simple binary tool that we could use to make all our investment decisions. From a historical context, when the ratio dips below 3, the gold miners are considered overvalued.
Here are a few facts from 1974 regarding how this ratio has performed (the quote is from John Hussman, also a SA contributor, who is not afraid to use his real name and photo;))
“To put some historical context on this measure, since 1974, the Gold/XAU ratio has been greater than 5.0 about 15% of the time. When the ratio has been this high, the XAU has followed with annualized gains of 89.6%, on average – a figure that remains high even if the data is split into multiple samples. When the ratio has been greater than 4.0, the XAU has followed with average annualized gains of 27.4% (though the finer profile of returns has been sensitive to other conditions such as interest rates, economic trends, and inflation). In contrast, when the ratio has been less than 3.0 (meaning that the gold stocks are very elevated relative to the actual metal), the XAU has declined at an annualized rate of -36.6%, on average."
Thanks Chris, the next few months should be interesting and I'm sure we'll be hearing a lot more from both the Pro and Con camps.
My bad; I had placed quotes around the sentence in question with the intention of linking back to the Reuters article, but forgot the link when i uploaded the article.
Thanks Johnny J,
Yes, I would love to see someone challenge the model or suggest improvements instead of stating simply that a stock can fall to zero which misses the point. lol.
This is true, but Barrick does own Barrick Energy which will go up with the price of oil, so the effect on Barrick will not be as significant as on other gold miners.
Hey Vitautas,
Yes you could certainly add the lower probable reserves, I'm just looking at a very conservative type of model to put a floor on the price. Actually, the $20/oz and $30/oz estimates were from a few years back when gold was considerably cheaper - today these reserves would be worth more.
Thanks Brian - will check it out.
Patrails, agreed having the time decay on your side is certainly one of the advantages of writing an option, especially the shorter dated ones.