Gold miners (like AEM, GG, NEM) haven't always proved great at the "beat-the-number" Wall Street...

Gold miners (like AEM, GG, NEM) haven't always proved great at the "beat-the-number" Wall Street game, as recent results have shown, but that doesn't mean they're bad investments, Bill Fleckenstein argues - just ask whether you can buy ounces in the ground cheaper than above ground.

Comments (10)
  • Uncle Pie
    , contributor
    Comments (4322) | Send Message
    securities analysts calculate the "net asset value" of gold mining companies and oil companies by discounting to the present the estimated future cash flows of the companies based on their proved and probable reserves of resources. For some reason which I don't understand, these analyses almost always show gold mining shares selling at a considerable premium to their "net asset value", while oil and gas companies typically sell at a discount to their "net asset value". For a sample analysis of oil company prices vs. their respective net asset values, you can look at the work of oil analyst Kurt Wulff on his website, Other analysts' work is similar. Can anyone explain why gold companies usually sell at a premium to their net asset values, while oil and gas companies usually sell at a discount?
    6 Aug 2011, 07:57 AM Reply Like
  • Neil459
    , contributor
    Comments (2636) | Send Message
    Sure, risk. Ever heard of a gold spill?
    6 Aug 2011, 10:41 AM Reply Like
  • Tschurin
    , contributor
    Comments (381) | Send Message
    "ask whether you can buy ounces in the ground cheaper than above ground" Just don't forget that the "ground" may belong to someone else [i.e., another country] and that they can take value from the mining companies through taxation, new regulations, renegotiated royalty agreements, renegotiated labor contracts or even the threat of expropriation.
    6 Aug 2011, 11:21 AM Reply Like
  • losbronces
    , contributor
    Comments (992) | Send Message
    Yes, there is a lot of risk associated with mining and especially with gold mining.


    The term "nugget effect" in geostatistics evolved from the difficulty of modeling gold resources. There is a significant risk just in the resource model. So no one actually knows how much gold is in the ground until its been extracted.


    Then there is the price risk, gold that is economic to extract at $1500 prices may not be at a $900 price. The gold metal can be sold readily though and will have some value. A gold resource may lose its value with dropping prices.


    Then there are the geotechnical risks. Its difficult to understand all of the geotechnical aspects needed to properly design a mine based only on Nx core holes. Sometimes geotechnical problems can lead to having to change to more expensive mining methods, loss of ore from the reserve or an increase in the stripping required.


    Additional risk on the cost side (not related directly to governments) includes energy cost (you have to process the ore), supply cost, equipment cost and labor cost due to increased competition for the limit talent pool. At times these costs will rise more quickly than gold price--look at some the miners' financial results over time and you will see this.


    Often cyanide is required to process gold ore as well and this can produce a "spill" issue. The mercury spill at Yanacocha (a Newmont/Buenaventura mine) was immortalized in a film by the United Steelworkers for example.


    There is a big difference between gold in the hand (already processed into metal in a salable form) and gold in the ground and all the risk that is associated with extracting that gold.
    6 Aug 2011, 01:06 PM Reply Like
  • tjohn1
    , contributor
    Comments (151) | Send Message
    I agree 100% with Bill. The asset value( What you have in the ground ) is a better measure of value than earnings which could be impacted by so many variables. Yes the present value of what the miner is going to realize in the future is what matters. Not your quarterly EPS.
    6 Aug 2011, 02:11 PM Reply Like
  • Venerability
    , contributor
    Comments (3043) | Send Message
    Re Oil producers versus Gold producers: Very easy distinction, really.


    Oil producers still hedge heavily. Gold producers no longer do.


    (And there are no Gold producers in the Dow.)
    6 Aug 2011, 03:36 PM Reply Like
  • Boxed Merlot
    , contributor
    Comments (1596) | Send Message
    (And there are no Gold producers in the Dow.)...


    As holder of proven reserves in a family owned deeded mineral right in the CA mother lode, (previously owned by JPMorgan), I find it somewhat amusing this topic is now finding its way back into conversation. The foundation of the financial empires in the empire state, (and their handlers at the FED, IMF, EU and BIS) can all trace their lineage to the barbaric relic, but all try to keep this skeleton in the closet.


    "Gold is not money", per Mr. Bernanke, yet every where one turns comparisons are made to the "gold standard". Take for instance, the recent comment by Mark Zandi, chief economist of Moody's Analytics. "U.S. Treasurys are still the gold standard." What's that supposed to mean? That "US Treasurys" are not money? I guess technically he's correct. They're debt instruments.


    But they certainly are not an asset that carries with it no counter party risk, otherwise they would not have an interest bearing component.


    My experience of "gold in the ground" has been the definition of manic depressive. Not terribly unlike the market in recent years.


    "Buying" and hoarding gold makes as much sense as "buying" money. Its function and value is in it's trade-ability. For the person "holding" it, it's good for a future one time transaction, unless one is able to trade off the good faith and credit of the fact of ownership. For this reason, it's true value is ethereal, fleeting and contrarietous.


    Ultimately, it may have to do with a person's view of actions occurring in a linear or cyclical fashion. That, and the fundamental element of trust.


    Interesting days ahead. imo.


    7 Aug 2011, 02:46 AM Reply Like
  • tradewithjoy
    , contributor
    Comments (27) | Send Message
    WLT can see bids anywhere from 110 to 140 at the current price. The pricing for their production, is not effected. It can expand up. The coal related stocks will huge rise next week this takover for Wlt can possibly happen next tweek.
    7 Aug 2011, 04:19 AM Reply Like
  • yumy87
    , contributor
    Comments (209) | Send Message
    No takeovers for coal companies in a recessionary bear market!
    7 Aug 2011, 08:06 PM Reply Like
  • Uncle Pie
    , contributor
    Comments (4322) | Send Message
    there's a coal company in Australia being taken over in the news this morning.
    8 Aug 2011, 08:15 AM Reply Like
DJIA (DIA) S&P 500 (SPY)
ETF Screener: Search and filter by asset class, strategy, theme, performance, yield, and much more
ETF Performance: View ETF performance across key asset classes and investing themes
ETF Investing Guide: Learn how to build and manage a well-diversified, low cost ETF portfolio
ETF Selector: An explanation of how to select and use ETFs