All that Glitters

Price of Gold USD/Ounce

I had my usual weekly phone call with the CEO of a very promising, but becalmed, silver junior which is on the verge of production.

“No one has any fucking money,” said this 30-year veteran of the junior mining biz. Of course, he’s right. For junior explorers and developers, this has been a hugely difficult year. Their share prices are bumping along the bottom which means that raising money by way of private placement results in huge dilution for very little money. We’ve been here before. 2008.

In October 2008 gold hit a low of just over USD $720. Exploration dried up, development of known deposits came to a halt and producers cut back their higher cost operations. Everyone “hunkered down”. If you spoke with CEOs as I did, the pessimism was literally awful. Exploration geos were laid off, drill rigs were put into storage and the sentiment was that gold and precious metals would be dormant for at least a decade.

In August 2011, literally a year and a half later, gold was selling for over USD $1800 an ounce. The junior market reflected in the TSX Venture Index went from a low of just over 700 in November 2008 to a high of over 2400 in February 2011. Drills were turning, private placements were oversold and people made a lot of money if they had bought in the 2008 trough.

TSX-Venture Index

Veterans, filled with 20/20 hindsight, came to see 2008 as a useful event which shook the “weak hands” and “lifestyle miners” out of the market and left the market healthier overall. Maybe. But it was, as my friend and I agreed, not so terribly much fun to have been in the market coming into Christmas 2008.

I am working with a group putting together a concept and then product which collects and displays data relevant to mining investment. Can’t disclose much at this point but I hope it will be a premium part of this Substack when I launch subscriptions (which will be soon). Part of the exercise is looking at stock price activity relative to precious metals prices.

As 2008 to 2011 illustrates, there is obviously a correlation which is hardly a great insight. What may be of more value is that the correlation works differently for different types of companies in the sector.

The price of gold is directly relevant to producers. If the all in cash costs of producing an ounce of gold rise above the price that ounce can be sold at, even the biggest producers will take a hit. Most have options in the sense that they have multiple operations with differing AICCs. Even within a single mine, there are often areas which are lower cost which can tide a big company over.

For development and exploration companies, production is in the future and while PEAs and even basic resource estimates make assumptions about the price of gold or silver (or, for that matter, copper or tin or zinc) those assumptions dictate whether the project will go forward. Right now, a promising gold deposit with estimated All in Cash Costs of $1900 an ounce is not making a lot of sense as a development project. The same is true for exploration companies which are just defining what they hope will be an economic deposit.

In downtimes like these, we tend to hear a lot about “fundamentals”, “real demand” and the “paper” versus “physical” markets. Silver shortages are almost always “looming” and “fat fingered” traders on the COMEX pushing “unbacked” paper on an unsuspecting market. All of which might very well be true, but it does not do you a lot of good when the exploreCo shares you bought for $0.50 are trading for $0.10. No Porsche this year, damnit.

People who lived through 2008 and held on did very well if they were smart enough to sell in 2011. Their wisdom, such as has been related to me, comes down to three things a company must have, at least some cash in the bank, good management and a story which has held up. In this sort of market, as we wait for a turn in the precious metals prices, having cash keeps the doors open and the story progressing. Having cash is also the sign of good management.

Physical vs Paper

Nathan Rothschild, bought hard in the panic which followed Napoleon’s defeat at the Battle of Waterloo is famously supposed to have said, “Buy when there is blood in the streets even if that blood is your own.” I heard that quote a lot in 2008.

What my CEO pal and I enjoy debating is whether the bloodletting is done or if there is more to come. We are coming into tax loss season and, well, a lot of people invested in the junior resource sector have a lot of losses they may want to crystalize.