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The "disconnect" between the price of gold and the valuations of the companies digging it out of...

The "disconnect" between the price of gold and the valuations of the companies digging it out of the ground hits John Paulson, whose Advantage Plus fund lost 6.7% during April thanks to big bets on gold miners. Gold-mining stocks have gotten hammered of late - far worse than what the price of bullion would suggest. Why a reversion to the mean may be in the offing.
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Comments (55)
  • anonymous#12
    , contributor
    Comments (552) | Send Message
     
    I already own some gold, so i'm going to buy gold miners now as Central Banks around the world would keep pushing for inflation to ameliorate debt overhangs.

     

    And of course, some miners are trading at deep discount valuations....
    5 May 2012, 12:19 PM Reply Like
  • The Geoffster
    , contributor
    Comments (4106) | Send Message
     
    It's a good time to load up on the miners. They may get cheaper, but when the bond market collapses, they will be be tres cher.
    5 May 2012, 12:52 PM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    The Geooffster, the main problem I see with the mining industry is, you will never see the 3 to 1 ratio advance ratio investors experienced in the 80's...In fact, you not even likely to get a twofer...

     

    If this is the case, why purchase a miners with all the downside risk? Let's get physical, physical, I want to get physicalllly!
    5 May 2012, 02:58 PM Reply Like
  • TruffelPig
    , contributor
    Comments (4106) | Send Message
     
    Leverage if you buy miners. More risk, more reward or loss.
    5 May 2012, 04:27 PM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    Sorry, TruffelPig, (delightful user name) leverage is what one got in the 80's...

     

    Leverage is gone due to ETFs, coin stores, Internet, and gold certificates. Today's investors has so many different ways to play gold, that the leverage factor has been played out..Call it placer fatigue.

     

    Unless, of course, you are referring to positing with margin.
    5 May 2012, 06:01 PM Reply Like
  • TruffelPig
    , contributor
    Comments (4106) | Send Message
     
    No, no margin for me. Never. That way I am in control - or so (lol) - I at least have some time.

     

    You do not think that the effect of Gold price changes to the company income are more than the change in the price? Example: if company has a 10% profit margin of the price of mined gold and the gold price increases 10% the company income effectively doubles. Obviously also works the other way around.
    5 May 2012, 06:40 PM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    I wish what you said was true, Truffel, but after investing in this industry for the last five years and losing a boat load of money in the past 18 months, I do not think it will happen...

     

    We are waiting for 2 quarter results, for the few Au miners that we still follow and if the earning results do not sparkle we plan to shift to the silver market.

     

    The gold miners have had a 11 year run in the metal, but have only produce so so earnings.

     

    Their cash cost per ounce continue to climb unabated, which has hurt the bottom line and shareholders alike.
    5 May 2012, 09:51 PM Reply Like
  • Husky Financial
    , contributor
    Comments (212) | Send Message
     
    High oil has hurt their mining costs.. if Oil goes up 20% and Gold goes up 20% there is not as big a disconnect as people would first think. With that said, they still look cheap. I like ABX as a best of breed
    5 May 2012, 12:55 PM Reply Like
  • nicolò
    , contributor
    Comments (59) | Send Message
     
    You are perfectly right, so oil cos and miners should be a perfet hedge... wrong...many oil like Petrobras, Eni, Total or Suncor are collapsing like miners.

     

    Gold between $1600 and 1700 and oil close to $100 mean nothing????
    5 May 2012, 01:44 PM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    Great and masterly point, Nicolo!
    5 May 2012, 02:59 PM Reply Like
  • David Urban
    , contributor
    Comments (1036) | Send Message
     
    That is only if they have not properly hedged their books. ABX has done a magnificent job of hedging.

     

    An interesting point is that many of the new projects are coming online with a combination of LNG/HFO where appropriate. This should lower costs long-term.
    5 May 2012, 04:17 PM Reply Like
  • The_Hammer
    , contributor
    Comments (4282) | Send Message
     
    Hey nicolu, start looking forward not thru the rear view mirror.
    Suncor? Suncor is projecting to produce 1mil barrels a day by 2020.
    Gold miners are at dirt cheap levels. will they act like they did in the late 1970's probably not due to the availability of gold trusts and etfs but these valuations are pretty damn cheap. It is obvious gold gets no respect and will prove these skeptics wrong!!!

     

    <<Gold between $1600 and 1700 and oil close to $100 mean nothing????>>

     

    Mean nothing? the cos are generating huge cashflows. Maybe u need to look at the financial statements and valuations not the stock prices.
    5 May 2012, 06:22 PM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    Sorry, Hammer, but until bring that huge cash flow to the bottom line, which they have not, they will be nothing more than a value trap.
    5 May 2012, 09:43 PM Reply Like
  • The_Hammer
    , contributor
    Comments (4282) | Send Message
     
    Bottomline? the p/e's are single digits. in some cases the miners are producing free cashflow and paying a dividend.

     

    <<An interesting point is that many of the new projects are coming online with a combination of LNG/HFO where appropriate>>

     

    what's HFO?
    Looking at the charts mining shares have collapsed since like March, but so have oil service and cyclicals. May be some huge rotation out of these by hedge funds.
    6 May 2012, 04:57 AM Reply Like
  • David Urban
    , contributor
    Comments (1036) | Send Message
     
    HFO is Heavy Fuel OIl
    6 May 2012, 09:17 AM Reply Like
  • The_Hammer
    , contributor
    Comments (4282) | Send Message
     
    Urb,
    I see u like abx any others?
    any miners able to take advantage of the nat gas situation in N America? Although in time I do think that Int'l LNG price differential will shrink vs current NA gas prices.
    NEM has huge operation in N America. I would hope they could somehow get access to nat gas.
    Eventhough costs have been rising it appears that margins have still improved.
    6 May 2012, 10:21 AM Reply Like
  • David Urban
    , contributor
    Comments (1036) | Send Message
     
    It is not as easy as one thinks and this is partially why I think a lot of people need to look at mining differently.

     

    It is not as simple as just throwing up a factory, flipping a switch, and letting everything run. Mining is a much more complex business.

     

    I have to go back and look at my notes but adding the LNG portion to the HFO plant will cost a couple of hundred million dollars. That is a huge expenditure but over a 20 year period it more than pays for itself.

     

    In mining you cannot take a short-term view especially when confronted with a 20+ year project that will cost billions to get into operation.

     

    The natural gas situation is the US is a complete mess because we are subsidizing producers to pull it out of the ground only to have it stored back underground.

     

    In terms of stocks I am looking over the first quarter earnings reports now.

     

    It is very tough to make a call here because gold is forming a reverse head and shoulders at a time when the market is forming a head and shoulders top but the correlations between the two are still positive when they should be negative.
    6 May 2012, 12:36 PM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    ABX has no hedge book based on what I know..

     

    http://bloom.bg/J25N2x
    6 May 2012, 01:11 PM Reply Like
  • David Urban
    , contributor
    Comments (1036) | Send Message
     
    Not for gold or silver but they have hedged their costs in very creative ways and this is something that get no respect from the market.

     

    They bought an energy company to produce oil in order to hedge fuel costs and have done so to the point where a $10 change in WTIC equates to a $1 change in cash costs.

     

    In addition, they signed an agreement with a Japanese tire manufacturer to build a new truck tire plant in order to guarantee a steady supply.

     

    I believe they have more than 85% of AUD costs hedged as well but I would have to check that number.
    6 May 2012, 01:39 PM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    Mr Urban, their latest quarterly report shows increasing cost and a very margin growth for EPS...

     

    Seven millions ounces of Au, produced $4.43 EPS, which apparently the market is not to impressed with...

     

    You must know, Mr Urban, there are always two sides to a hedge? It is not always a stairway to heaven...
    6 May 2012, 02:06 PM Reply Like
  • The_Hammer
    , contributor
    Comments (4282) | Send Message
     
    hey blue, you seem to refer to market all the time. If u think the "market" always prices securities right why bother with individual securities?
    6 May 2012, 02:22 PM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    In general, Mr Hammer, there is equilibrium, but as you and I know not always and hence the opportunities...

     

    I am of the view, that miners have sold off, because of investors discontent and disappointment, after giving the industry a pass for a decade...If you feel otherwise, back up the truck because the whole industry is selling at near 52 week lows...

     

    Does anyone remember "where's the beef" commercials?

     

    Forget the great cash flow, where are the earnings???

     

    Forget the increased P&P, where are the dividends???

     

    Forget the increased in production, where is my stock appreciation???

     

    If you Au miner investors are pleased with a mark to mark of the physical, then by all means behold your beloved paper and your voting writings...Unlike gold, you do have someone to call and complain to..

     

    If you do not get it or are able to put this argument into perspective, then only the treatment of a supervised physician will do...

     

    This is not Werner Von Braun rocket science...
    6 May 2012, 02:52 PM Reply Like
  • David Urban
    , contributor
    Comments (1036) | Send Message
     
    You should read the earnings report to get a detail on ABX's hedges on the cost side.

     

    I can tell you just grabbed numbers and did not read the release.
    6 May 2012, 03:34 PM Reply Like
  • Garfield23
    , contributor
    Comments (162) | Send Message
     
    hammer: yes gold and silver are cheap right now, - miner are producing record profits so both the physical or the miners are good plays...
    6 May 2012, 05:32 PM Reply Like
  • Julius Ferraro
    , contributor
    Comments (495) | Send Message
     
    This is the cheapest i've ever seen gold miners however i don't understand why there not being bought up so i will avoid them also. Well great job losing money Paulson. I guess thats why you make headlines and I don't
    5 May 2012, 01:33 PM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    JF, I will tell you why; they can not make a decent return nor a pay any golden dividend?

     

    Until that changes the miners are *******. Check the Ag miners instead...
    5 May 2012, 03:02 PM Reply Like
  • nicolò
    , contributor
    Comments (59) | Send Message
     
    Miners have never been so cheap in their history.

     

    Barrick Gold p/e, starting from 1980, has never been lower than 13X. Estimates for 2012 are 8X and if gold won't collapse, will be further lower in 2013.

     

    The reason for this anomaly?
    Istitutional investors like pension funds simply buy big caps, avoiding medium and small cos.
    5 May 2012, 01:38 PM Reply Like
  • Ray Merola
    , contributor
    Comments (3987) | Send Message
     
    nicolo,

     

    I like your thesis on the GDXJ, but what do you believe is the end game? Do the small/midcap miners languish in the dumps for years, or will there be a reversion to the mean and they will perk up?

     

    Will the big guys come back to them, or anyone else, or is it just dead money?
    5 May 2012, 02:46 PM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    No, the real reason are the following:

     

    1) ETFs
    2) No Viagra earnings
    3) No dividends
    5 May 2012, 03:06 PM Reply Like
  • David Urban
    , contributor
    Comments (1036) | Send Message
     
    Mid, small caps, and juniors are being beaten up for two reasons:

     

    1. Most capital budgets are filled out through 2015 and nobody wants to add another major project to the pipeline.

     

    2. When you have companies like Goldcorp and Yamana finding organic growth for less than twenty-five cents per ounce and Barrick making massive discoveries in Nevada the juniors become less attractive.
    5 May 2012, 04:19 PM Reply Like
  • nicolò
    , contributor
    Comments (59) | Send Message
     
    Ray,
    I honestly don't know.

     

    Obviously equity is better than governatives bond, actually characterized by negative real rates. In fact, pension fund are increasing percentage of equity selling highest rating bonds.

     

    On the other side, investors are selling mutual funds. Numbers in april are really terrible.

     

    I am personally not pessimistic on China, they are slowind down simply because decided to switch from an export oriented economy to a more consumistic economy.
    World in 2012 probabibly will grow 3,5%, that is enough.

     

    So, why market pessimism is so high? Why market don't buy value?
    Eurozone and its semi-failed banking system are not the answer. Eurobond and euro devaluation will help.

     

    The answer probably is 2008. Investors are still shocked.
    Both istututional and private don't like risk anymore. They simply sell beta.

     

    It will take time to recover.
    Then, suddenly, these beaten asset class will explode in few weeks, giving great relief to patient investors.
    6 May 2012, 04:01 PM Reply Like
  • TruffelPig
    , contributor
    Comments (4106) | Send Message
     
    I have loaded up on BRD - one of the most undervalued ones. They are ramping up production, get more gold/ton, and production costs go down.
    5 May 2012, 02:04 PM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    We did it twice and each time we got home half was missing.

     

    They are changing their name to Mirage Gold " we may not deliver, but we promise."
    5 May 2012, 03:20 PM Reply Like
  • David Urban
    , contributor
    Comments (1036) | Send Message
     
    BRD is on my radar. Change in management has brought deliverable results and if they can get costs lowered the stock should see a jump.
    5 May 2012, 04:20 PM Reply Like
  • TruffelPig
    , contributor
    Comments (4106) | Send Message
     
    @Blueice - read their last report! The new guy is finding it and they did something I initially hated but now I like it. They did a secondary to have cash and opened up many new areas they are getting gold out (forgot the work for it, English isn't my first language). So, instead of waiting they are hitting it out of the park. Costs are decreasing. The gold/ton in the mine is really increasing and much better than predicted! I start liking this.
    5 May 2012, 04:40 PM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    Truffelpig, your English is better than mine! We have taken two positions in this miner and both times the tunnel collapsed.

     

    I do wish this miner well and as a penny stock one could see very high appreciation...

     

    Just watch their level of production, if it starts going rapidly, then it may be a fine play...Production must grow by at least 25% annually or it will never generate adequate revenue or profits.
    6 May 2012, 09:26 PM Reply Like
  • lancejay
    , contributor
    Comments (99) | Send Message
     
    This group has been hit very hard and unjustifiably so. I have been trading FCX recently successfully although I realize that long-term, this stock will be a solid winner rising from the $36 level.
    5 May 2012, 03:02 PM Reply Like
  • New Low Observer
    , contributor
    Comments (2150) | Send Message
     
    Greetings,

     

    We believe that P/E ratios and "historical" low levels in ratios like the gold/xau ratio is looking at the horse from the wrong end.

     

    Our Gold Stock Indicator suggested on February 8, 2012 (found here: http://bit.ly/x44zCJ) that gold stocks were going to decline and a position in DUST was warranted. So far, DUST is up +77.89% in the 3 months that have followed.

     

    Gettting away from the fundamental approach to viewing gold stocks would be the first step in the right direction. We've been explaining this point since 2008 in the following Seeking Alpha articles:

     

    Why Gold Will Decline More Than the Markets(http://bit.ly/JL6Amk)

     

    Gold Not the Safe Haven People Think It Is(http://bit.ly/JL6Amn)

     

    The Coming Precious Metals Dividend War(http://bit.ly/Jnmj8S)

     

    A Strategy is Needed(http://bit.ly/A51m00)

     

    South African Gold Stocks: No Margin of Safety(http://bit.ly/nFL9mm)

     

    We are huge fans of gold investing, however, it doesn't make sense to overlay seemingly rational valuation metrics on irrational "securities." Additionally, we really would rather make money than lose it.

     

    Regards.
    5 May 2012, 04:21 PM Reply Like
  • untrusting investor
    , contributor
    Comments (9973) | Send Message
     
    NLO,
    Good links. Miners starting to look fairly cheap.
    5 May 2012, 09:53 PM Reply Like
  • diederen
    , contributor
    Comments (2) | Send Message
     
    I started buying these mine companies lately. I am down a few percent now, but will buy more if we go deeper. I believe in the fact that in the end, all fiat currencies will end and the only hedge is silver and gold then. I foresee a golden future for these stocks.
    5 May 2012, 04:24 PM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    Shareholders are losing serious money when gold slides, but are only receiving par when gold advances..
    5 May 2012, 09:54 PM Reply Like
  • JosephN
    , contributor
    Comments (52) | Send Message
     
    I'm surprised nobody here has talked about QE3, or lack thereof, which I believe is the real reason these stocks have languished as of late. Without additional easing on the horizon, investors who have bought these stocks in anticipation of such now have to divest and that is driving prices down.

     

    There is also the issue of demand in India, where a recent tax increase on imported gold was passed. I have heard jewelry makers are boycotting importing precious metals in protest at the moment while trying to get the law changed. Could be a serious crimp in wedding season demand this year.

     

    And finally, if the economy is recovering and QE is done, it is time to sell the gold and go long stocks as the cycle turns.
    5 May 2012, 05:42 PM Reply Like
  • Boxed Merlot
    , contributor
    Comments (1585) | Send Message
     
    demand in India,...serious crimp in wedding season demand this year...

     

    Just out of curiousity, has anyone delved into the average amount of gold used for an Indian wedding? How many weddings / doweries are consummated in a given year? Has the amount been increasing, like inflation? Or is it relatively stable as reflecting the amount of gold per capita?
    5 May 2012, 06:55 PM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    Good point, Merlot...Not only that, but the Central government is now increasing the import tax as well...
    5 May 2012, 09:56 PM Reply Like
  • Abraxix
    , contributor
    Comments (348) | Send Message
     
    The problem with the gold miners is that it is too easy for a lot of their inventory to fall through the cracks in the floor boards.
    5 May 2012, 06:37 PM Reply Like
  • The EconomicJoker
    , contributor
    Comments (961) | Send Message
     
    If they would stop hedging their gold to banks, they would be doing better. So would the gold price.
    5 May 2012, 08:38 PM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    Joker, most miners no longer have any hedge book...
    5 May 2012, 09:57 PM Reply Like
  • dividend_growth
    , contributor
    Comments (2898) | Send Message
     
    During the 1979/80 gold bubble, gold price was making new highs while gold miner stocks languished.

     

    The equity market is not that stupid.
    5 May 2012, 10:52 PM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    Growth, gold miners did rally a year later, which I must admit is rather strange indeed.

     

    A historical chart of Newmont Mining:

     

    http://bit.ly/JDUvex
    6 May 2012, 12:02 AM Reply Like
  • New Low Observer
    , contributor
    Comments (2150) | Send Message
     
    Greetings BlueIce,

     

    Your observation is correct. This from our article titled "A Strategy Is Needed for Lagging Gold Stocks" (found here: http://seekingalpha.co...):

     

    "To add to the consternation of gold stock investors, the period after the peak in the price of gold in January 1980 showed gold stocks held up better than the metal. This threw off “seasoned” gold investors because it gave the false impression that gold’s collapse would recover somehow."

     

    In the article we demonstrated how gold stocks routinely lag behind gold by a wide margin throughout the clearest gold bull market in history. This has been the case in any period when gold or silver companies have been publicly traded.

     

    Regards.
    6 May 2012, 12:21 AM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    Super Greetings Herr New Low Observer,

     

    I can only speculate that earnings and dividends began to arrive, which brought more investors into the market place.
    I should add for the uniformed, that gold prices remained high for at least two years, although declining...Furthermore, inflation reached nearly 15% in 1982, which provided additional support for both the metal and stocks.

     

    Let me add another factor that did not exist thirty years ago and that is vast number of publicly traded stocks, especially if one includes the Vancouver and Toronto exchanges.

     

    In fact, my last count of world publicly traded Au miners was 359 firms.

     

    We due plan for a DD before investing into the Ag sector.

     

    Our previous experience was with Silver Weaton (SLW), with the entry point at three bucks and selling in the $11 to $13 range. It will be interesting to see the increase in Ag and whether the common provided superior performance...

     

    We require a minimum of a 2 to 1 ratio, in order to take a risk position in this industry..I suspect, New Low, that you may be correct in your assessment of silver and we may abandon the PMs entirely and take positions in either an ETF or physical...

     

    Let me make this clear to all miner investors, if Ag trades at $30.oo and doubles, then your equity position needs to MORE than double or else you are merely betting again the house and will loss returns on your investments. In this example, the risk takers are not being compensated.

     

    I think more and more investors are now beginning to see the light, that today's returns are not taking into account the risk in ownership of a publicly traded stock.

     

    No more Johnny Apple seed investing for us..
    6 May 2012, 01:14 AM Reply Like
  • David Urban
    , contributor
    Comments (1036) | Send Message
     
    English please.

     

    ...and Silver Wheaton is not a miner it is a royalty company. Very distinct difference since they have none of the risk that a mining company takes on in the exploration, development, or production phases.
    6 May 2012, 02:21 AM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    No more Johnny Apple seed investing for us.. meaning, investing in a sector simply because the trend is up, casting seeding (capital investments) at random..

     

    Mr Urban, you are correct about SLW, nevertheless, miner or no miner they are dependent upon the price of the mineral...
    6 May 2012, 12:58 PM Reply Like
  • remurraymd
    , contributor
    Comments (2287) | Send Message
     
    (GLD) a much safer place to INVEST 200%+ profits for us over the last 5-7 years or so we use it to buffer our dividend growth stock holdings.We love the miners in the form of (http://bit.ly/Je8v2V) for "buy the dip sell the rip" short term TRADING. Did one in Jan 36% profit in 3 weeks putting another on right now exponentially on dips. Weak hands with margin calls in bad markets tend to dump the miners first so we prefer Gold for long term investing for 5000% return in 50 years to date. APD
    6 May 2012, 06:36 AM Reply Like
  • blueice
    , contributor
    Comments (3825) | Send Message
     
    You have a valid point, remurrayMD!

     

    Au and the GDX index began to separate in the 1st quarter of 2008...The tread is quite alarming, to say the least...

     

    May Day, May Day, GDX is crashing...

     

    http://bit.ly/IzZZYu
    6 May 2012, 03:37 PM Reply Like
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