The gold bull market is really back, at least when it comes to newsletter promotions. Probably the quickest off the starting line was Porter Stansberry with his “Metropolitan Club” plan and introduction of the Stansberry Gold Investor service in late March that drove a lot of investor attention to the gold mining sector (not many publishers, if any, can access larger mailing lists than Stansberry)… but many of the major publishers have gotten on board and are pushing gold ideas these days.
The general sentiment for gold, which in shorthand is that negative interest rates and global unease will send gold prices rocketing substantially higher over the next year or so, is clearly being reflected in the mining stocks. Gold itself has risen this year (up 20% YTD), but gold miners have been off to the races (big miners, on average, are up 80%) — and though that’s a recurring pattern we’ve seen for years, where gold miners are leveraged plays on gold, it’s been much more dramatic in the last six months than we’ve seen in quite a long time.
I’ve got some more blatheration for you about the general performance of gold stocks and the connection to gold prices and other “safe” investments, but I’ll save that for the end… for now, let’s just see what another newsletter guy is getting excited about in the gold market…
This time it’s Sean Brodrick, who has been around newsletterdom for many years with a couple different publishers — he’s trying to sell subscriptions to Oxford Resource Explorer ($79), which hasn’t used gold in its promotions for a while that I’ve noticed (recent pitches for that letter have focused on LNG and on Sasol’s GTL “gasoline without oil” plans).
And, as is pretty typical with pitches about natural resources companies, he teases gold miners as a way to buy gold cheap — in this case, “How to “Buy Gold” at $165 an Ounce” … which sounds, especially to folks who are new to resource investing, like a no-brainer. The intro letter from Andrew Snyder that links us to Sean’s ad says:
“So how do you play this situation? Sure, you could buy gold…
“But our own Oxford Club gold expert, Sean Brodrick, has uncovered a backdoor way to play it.
“Sean’s just off the plane from visiting two miners in Mexico…
“And he’s found a way to “buy gold” right now at $165 an ounce.
“That’s a 91% discount to gold’s current price… and a 98% discount to $9,053-per-ounce gold.”
Golly, a 98% discount! Who wouldn’t want that? The ad itself then gets more specific, this is how Sean Brodrick gets our attention at the very top:
“Resource Expert Sean Brodrick Predicts Gold to Soar 47% by Year’s End…
“His Odd Recommendation Today: ‘Don’t Buy Gold!’
“Rather, he’s just uncovered a ‘sister’ play with potential 800% gains on its $2 shares over time…
“But you must get in NOW.”
He says that the opportunity to “grab 800% gains” is on the table now, and he thinks the gains will come within 24 months, but that “on September 20 the opportunity will be gone.”
That’s the date of the September meeting of the Federal Reserve Open Market Committee, which meets about every six weeks to make decisions about the Fed Funds Rate (among other things). Everyone in the market freaks out about Fed meetings, as they’re doing today (I’m typing this in the morning, we’re expecting Janet Yellen’s press conference at 2pm as she reports on the Fed meeting held yesterday and today), and there is constant speculation about when or how the Fed might raise rates.
Before a weak report or two and the fear over the “Brexit” vote, the assumption was that they would raise rates several times this year, including in June, but sentiment shifts quickly and expectations are now low for interest rate hikes… but yes, the next two meetings are on July 26-27 and September 20-21, and Yellen’s press conferences are only scheduled for every other meeting, so the next “big” meeting is September 20.
The big catalyst for higher gold prices that Brodrick cites is the same one everyone else is also citing: Negative interest rates. Governments charging you to lend money to them is an abomination in the eyes of pretty much any logical capitalist, and any move to a negative interest rate policy in the US as an attempt to further stimulate the economy would put even more pressure on retirees and the pension funds and insurance companies on whom those retirees depend, and probably continue to crush banks, who would really like to see some gradual rate increases. But it would probably be good for gold. Money has to sit somewhere when it’s not being actively used or “risked”, and if the “safe” investments like Euro, Yen or US$ sovereign bonds have negative returns and banks don’t pay any interest, gold looks better and better as an alternative.
Some folks go further and talk about negative interest rates causing a real societal collapse, and destroying currencies and forcing us to return to some sort of “gold standard” that could drive gold to $10,000 an ounce… Brodrick doesn’t get that specific about his predictions (though his target of $9,053 is close to the number that “gold standard” folks often use), he just implies that he thinks the September Fed meeting will be the beginning of the end as the Fed eases more or goes “negative” and drives more people into gold…. in his words, “On that day I expect the Fed to publicly announce negative interest rates are just around the corner.”
Maybe Yellen’s in the process of raising rates right now, as I type, and will surprise us all with a higher Fed Funds rate at 2pm today and make this point moot… which could easily drive gold back down sharply. But probably the Fed will continue to be “dovish,” keep rates the same this time, and will keep their forecast of only raising the rate once or twice this year an interest rate expectations in the market will continue to be “lower for longer,” and probably gold will be up slightly and miners will, on average, be up a little bit by the end of the day as the risk of a rate hike disappears for at least another month.
So if we assume that Brodrick has a reasonable argument, what are the investments he likes as a “sister” play on Gold?
Here’s some more from the ad:
“Gold miner stocks aren’t just cheap right now. They’re stupid cheap. Many of them are turnaround stories, just waiting to head higher….
“I use a five-point screening system to explain why I like (or hate) mining companies and their stocks ‘in a nutshell’ after an on-site investigation.
“My main filters include Management, Land, Cash, Opportunity and Plan.”
That’s not terribly different from other mining-focused folks — many of them stress management first, and it’s also clear that projects in “good” countries or near existing mines are favored, as are companies who either have enough money or an obviously clear way to raise money to build their mine. The “opportunity” stuff is just about relative valuation, whether the company is at a good price relative to their “management, land, cash” etc.
Then the specific clues roll in…
“Gold Supercharger Play #1: Turn $5,000 Into $20,000
“Let me show you one of these miners… as an example of how this leverage will work for us in the coming days and weeks….
“Management is as good as it gets. The CEO was the founder of what is now a gold company with a $15 billion market cap.
“He recently saw an even bigger opportunity – and took over this little-known miner that could soon come to dominate the industry too.
“It is already on good land with working mines that generated $15.6 million in cash flow in 2015. It ended the year with $31 million in cash….
“It is in the process of getting permits to mine right next door to Barrick Gold’s largest gold mine.
“It is looking at a total of 4.2 million ounces of gold worth $5.3 billion.
“And the market cap? Just $650 million.”
So who’s that? This is McEwen Mining (MUX), which is run by Goldcorp founder Rob McEwen… and which is clearly one of the “favorite” junior mining stocks that the market has focused on. The market cap was around $650 million about ten days ago, but now it’s over $900 million… that’s how crazy it has gotten of late. They have operating mines in Argentina and Mexico, two mines in development in the US, and one exploration property in Argentina.
They do have about 4.2 million ounces of gold resources (including reserves), according to their website, though it’s always important to remember that resources are not the same as reserves. Resources (measured, indicated or inferred) are what the miner is pretty sure is in the ground after doing enough drilling to understand the potential, reserves (proven and probable) are what the miner and an outside expert have determined can be produced in some feasible economic scenario.
And about half of those resources are in their two development projects in Nevada, both of which are fairly close to Barrick Gold’s huge Goldstrike mine in the Carlin Trend. Gold Bar is the one that’s likely to be permitted and ready to start construction next year, Tonkin is the one that’s bigger and closer to Goldstrike of the two, but also was abandoned by previous owners because it’s got what they call “complex metallurgy”… whatever that means.
McEwen is just becoming profitable, and production is expected to plateau for the next couple years before growth resumes when the Gold Bar mine starts producing, which they expect in 2018. If you want to get a bit more of a picture of the company, they have a very enthusiastic investor presentation here, from their annual shareholder meeting a couple weeks ago, that includes lots of colorful charts about anticipating gold’s rise, and plenty of exclamation marks.
They are expected to produce 99,000 ounces of gold this year, or 144,000 ounces of “gold equivalent” if you include the 3+ million ounces of silver expected. At “all in sustaining costs” of about $900 an ounce, that leaves room for some nice profit as long as gold remains in the $1,300 neighborhood — that means more than $50 million in gross profit potential, and probably other operating costs will be half of that, so perhaps they could be showing $25 million in profit or so by next year. That’s not exceptional for a company with a market cap near a billion dollars now, so I suspect investors are looking either to higher gold prices or to the production increases that are expected in a few years (or beyond).
Beyond that, I don’t know a lot about McEwen, but they do have a very good balance sheet and they are profitable (they even pay a tiny dividend of one cent), and they do have a strong controlling shareholder who is personally very motivated to increase the value (McEwen owns 25% of the stock, and they have not been diluting him or other shareholders by selling more shares). The Gold Bar mine “go ahead” decision is expected in January of next year, they say, and they do have enough capital on hand to fund that construction — it’s not a huge mine, capital costs are estimated at $60 million, and annual production is forecast to be 65,000 ounces of gold, but it should be profitable. They don’t talk about the Tonkin project in their presentation, so presumably that won’t be actively developed for quite some time.
Oh, and no, it’s not really “buying gold for $165 an ounce” — that’s just a turn of phrase that divides the potential resources by the market cap (though with the market cap rising, that number would now be $215 an ounce for McEwen). Gold that’s still buried in the ground is always worth far less than gold coins or bars, of course, and $200 an ounce for resources that are still in the measured and inferred category is not particularly cheap. If it costs $935 in “all in sustaining costs” to produce an ounce, and the company has “equity value” of about $200 an ounce, then you can also use these kinds of assessments to calculate that folks who buy the company now are counting on gold being well over $1,100 an ounce to justify the current valuation of the company (the $200 per ounce that you’re paying to buy your equity stake in the company, plus the $935 per ounce it will cost the company to dig up that gold and turn it into gold bars for the market).
That’s a flawed and simplistic look at the financial merit, to be sure, and it doesn’t count their meaningful silver or copper resources, but if you run the numbers you’re likely to find a lot of other early-stage producing miners or explorers that are trading for a lot less per ounce of “resources” in the ground. That also doesn’t account for the different production costs at different mines, or different levels or risk or taxation or the rate of expected production of those resources or reserves, it’s just a “napkin sketch” that pundits like to use when describing why a company’s assets are potentially more valuable than its current market capitalization.
Interesting? Your call. It’s certainly a favorite of many investors, along with smaller producers or near-producers like Pretium (PVG) and Novagold (NG), but that’s all I know about McEwen.
And we’ve also got two other “supercharger plays” to look into for you from this ad, but I’ll get to those tomorrow. Let me leave you with the general blatheration that was coming out of my keyboard, stream of consciousness-style, as I thought about gold and Brodrick’s ad this morning…
During the second half of last year, when gold was down about 10%, the big gold miners (represented by the GDX ETF) dropped about 25%… and the smaller (but still fairly large and operational) “Junior” gold miners (represented by the GDXJ) were doing about the same.
But since the market bottomed out in mid-January, gold has risen pretty sharply, up 17% … and the miners have taken that lead and rocketed forward, GDX is up 94% and GDXJ 120%, and lots of the “real” juniors — the explorers and small cap names that don’t make the indices — are up far more dramatically than that, some by 500% or more. In five months.
That’s why people love investing in the natural resources space, because small changes in sentiment or commodity prices can make a huge difference for producers and create huge amounts of value… and send some of the little guys really soaring.
Of course, the reverse happens as well… and mining tends to be a tough business, so if you go back 10 years you’ll see that gold is up by 120%, and the big miners (GDX) are down 23%. Gold itself may be a “buy and hold” asset that you want to use to provide some stability to a portfolio, but gold miners don’t tend to be worthy of that sentiment.
Even the royalty and streaming companies, which try to avoid being directly tied to some of the risks of mining (cost overruns, permitting, labor disputes, etc.) have not always done dramatically better than the metal itself — we’re still talking about a short time period (many of the royalty companies haven’t been public for ten years), and Royal Gold (RGLD), Franco-Nevada (FNV) and their smaller competitors have done much better than the average big miner over long periods of time, but sometimes their performance is not necessarily dramatically better than the move in the gold price (FNV has generally been the big winner over most time periods — including during this bull run, when it’s up 130% to RGLD’s 50% and the 94% turned in by the GDX index fund).
But still, those are huge numbers no matter how you slice it — and they’re more dramatic than the last time we saw a big spike in gold and in gold mining stocks, which was back in 2012. That time it was the “taper tantrum” inspired by Fed Chair Ben Bernanke’s comments about cutting off some of the easy money from the Fed’s QE programs, which drove up interest rate expectations a bit… but it was also one of the heated times of panic about “Grexit” in Europe, and gold had just fallen 20% from the highs a few months earlier — lots of crazy sentiment then. Gold went up about 15% from May 15 to October 2 in 2012, and the mining stocks jumped up 36% (that’s the GDX… And yes, the royalty guys outperformed then as well, RGLD and FNV were both up close to 60%).
So this is a big deal, caused by fears of negative interest rates (which are great for gold if you think of it as a currency) — and probably stoked both by the fearmongering of an election year and by the general unease in global politics (Brexit, Syria, ISIS, oil, etc.).
That doesn’t mean gold will go straight up this year, and we’ve already seen a huge move that dwarfs the leverage that miners had to gold the last time gold had a strong few months… but lots of folks are certainly expecting higher gold prices — and if the Fed fails to raise rates, that probably will continue to help. One impediment to gold as a “place to hide,” beyond the fact that the gold market is pretty small by institutional standards, is that it has carrying costs — it effectively comes with a negative interest rate, because you have to store it. For the past five years the other “hiding place” for global money has been US Treasuries, and falling interest rates have made it far more profitable than gold — the 10 year note ETF (ILTB) has a total return of almost 50% over five years, while Gold itself has fallen 18% and the GDX has a total return of -50%.
I am very sympathetic with the assertion that gold should go higher in this environment, but I’ve certainly been wrong about that a few times in recent years. There could be really, really sharp moves up and down in both large and small miners as this shakes out over the next year or two, and I still like having some exposure to gold miners personally, but I’m very mindful of not levering too much of my portfolio to gold. It’s when you’re profoundly certain of a particular macroeconomic outcome that you’re likely to make the biggest mistakes.
Right now, beyond my physical gold holdings that I try to gradually add to from time to time (and which I really consider to be “savings,” not investments), I personally have exposure to a few genuinely tiny juniors, and I’ve taken some of those profits off the table particularly for time-sensitive holdings (warrants and options) as gold has soared in recent months — but I’m keeping a good allocation to my favorite gold miner fund, the Sprott Gold Miners ETF (SGDM) and to LEAP options on the GDX index, and continue to have a substantial position in Sandstorm Gold (SAND) as well as exposure through both equity and options or warrants to a few smaller players that tend to be pundit favorites, like Brazil Resources and First Mining Finance…. but I also think it’s pretty reasonable to avoid getting too deep in the weeds with specific small miners and focus just on the big ETFs or royalty players — those aren’t going to go up 500% in six months, like Brazil Resources has this year, but they are likely to provide pretty substantial leverage to gold and they don’t carry the same “fall 50% overnight on bad news” risk as the smallest junior stocks. My equity portfolio is roughly 10% in gold stocks now, after taking some profits in the last six weeks, and physical gold makes up about 30% of my savings.
I’ve also been kicking myself for not adding a little exposure to silver miners during the early part of this year, since those tend to have extra leverage (silver tends to move with leverage to the gold price, and silver miners are levered to silver), but we’ll chatter about that another day … perhaps tomorrow, as Brodrick seems to be looking at silver with one of his other ideas (perhaps that’s what he means with that “sister” play term). More to come… and if you’ve got gold thoughts to share, or thoughts about McEwen in particular, let us know with a comment below.