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It is a bit hard to fathom but nearly three years have lapsed since I
penned a rant called "Why Gold Stocks Suck" (Mercenary Musing, April 30, 2012) after a
Cambridge House conference in Calgary.
At that time, I had little inkling that the bear market for gold
exploration and mining companies would continue into its fifth year and be
deeper now than in the spring of 2012.
The Toronto Venture Exchange Index, which serves as a good proxy for the
overall health of the junior resource sector, is down an additional 51% since
my last musing addressed this particular subject:
Since closing at 2440 immediately prior to the PDAC in March 2011 and
given yesterday's close of 683, the TSXV Index has lost 72% of its value.
That folks, is one mother of a bear market and it continues unabated.
There are several new reasons why gold stocks still suck. To wit:
·Gold underwent two corrections in April and June of 2013. On April 20,
2012, the gold price was $1642; it closed yesterday at $1202 for an overall
drop of 27%:
 
·The US dollar, as measured by DXY, has gained 24%, from 79 to 98. That
said, the price of gold has actually increased in many currencies since
mid-July 2014 when the US dollar started its meteoric rise from the 80 level:
·The number of companies classified as "mining" on the Toronto
Venture and Toronto Stock Exchanges has dropped 13%, from 1716 to 1471 at the
end of February.
·Back in the early days of the downtick in 2012, most junior explorers and
developers were still viable concerns. That certainly is not the case now.
Based on research by Vancouver-based CPA Tony Simon, 589 of these companies
(40%) currently have negative working capital and thus are subject to
regulatory delisting for not meeting the minimum requirement of $50,000 in
cash reserves.
The continuing demise of the junior exploration and mining sector is aptly
illustrated by the TSXV:Au ratio. It fell from 1.71 in early March 2011 to
0.85 on April 20, 2012 and currently stands at 0.57:
My 2012 missive documented the dismal performance of the junior gold
sector during the bull market run for gold and related equities from early
2009 to 2011. Retail speculators and institutional investors alike were never
rewarded, left the junior gold market, and have not returned.
Compounding the problem, work by Cipher Research has shown that seven
major gold miners were not profitable from 2003-2013 despite a gold price
that escalated over 250% (Mercenary Musing, February 2, 2015).
To quantify its evaluations, Ciphers utilized a methodology called the
Adequacy Ratio, which is a simple measure of a company's inflows of cash
divided by the outflows of cash. For mining companies, the Adequacy Ratio is
defined as Revenues divided by OPEX + IMP + debt repayments + dividends paid.
A ratio >1.0 is healthy (in black below); a ratio <1.0 (in red
below) over an extended period means that the company has continuously raised
money from outside sources in order to fund its operations:
Adequacy Ratio = Revenues / (Operating Costs + IMP + Debt Repayments +
Dividends Paid)
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2013
|
2012
|
2011
|
2010
|
2009
|
2008
|
2007
|
2006
|
2005
|
2004
|
2003
|
Avg
|
|
Avg Gold Price ($)
|
1,411
|
1,669
|
1,572
|
1,225
|
972
|
872
|
695
|
603
|
445
|
410
|
363
|
1,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agnico Eagle
|
0.81
|
0.80
|
0.94
|
0.50
|
0.49
|
0.29
|
0.59
|
1.10
|
1.04
|
0.97
|
0.76
|
0.75
|
|
Barrick
|
0.60
|
0.82
|
0.96
|
1.02
|
0.60
|
0.84
|
0.91
|
0.70
|
0.84
|
0.80
|
1.03
|
0.83
|
|
Eldorado
|
0.83
|
0.76
|
1.08
|
0.94
|
1.29
|
1.20
|
0.78
|
0.42
|
0.22
|
0.50
|
0.74
|
0.80
|
|
Goldcorp
|
0.65
|
0.82
|
1.05
|
0.93
|
0.71
|
0.62
|
0.60
|
0.82
|
1.05
|
0.77
|
0.97
|
0.82
|
|
Newmont
|
0.80
|
0.74
|
0.83
|
1.07
|
0.78
|
0.52
|
0.63
|
0.89
|
0.88
|
1.05
|
0.72
|
0.81
|
|
Randgold
|
1.06
|
0.94
|
1.06
|
0.82
|
0.82
|
0.93
|
1.03
|
1.02
|
0.85
|
0.49
|
|
0.90
|
|
Yamana
|
0.73
|
0.77
|
1.15
|
1.13
|
0.70
|
0.84
|
1.00
|
0.33
|
0.23
|
0.92
|
1.08
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average AR
|
0.78
|
0.81
|
1.01
|
0.92
|
0.77
|
0.75
|
0.79
|
0.75
|
0.73
|
0.79
|
0.88
|
0.82
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This telling table illustrates that none of the seven gold miners
generated sufficient revenues from operations to sustain their existing
business models over the 11-year run of high gold prices. In only one year,
when the gold price hit its all-time high in 2011, did the companies have a
cumulative ratio of 1.0.
Because the major miners did not reward shareholders during the bull
market for gold, investors also fled the large cap mining sector.
Now we are in a situation where venture capital money is no longer flowing
to the junior explorers so few and fewer deposits are being discovered and
advanced. Concomitantly, with investors no longer attracted to the major gold
miners, their share prices suffer and capital budgets, including the usual
kitties for strategic alliances, joint-ventures, and M&A activities, are
significantly pared down.
Because of poor performance at both ends of the spectrum, the small to
mid-cap gold miners and developers are having difficulty accessing capital
for advancement of their projects. In a normal and healthy market, these are
the companies that become acquisition targets for the majors.
Simply put, gold stocks still suck. In fact, they suck way more than when
I first wrote about this issue three years ago.
That said, as a trained and experienced scientist, give me a problem and I
will diligently work to provide a solution.
In the case of gold stocks, I think this solution is relatively simple. In
my opinion, three things must happen to kick-start the business again:
·Junior resource companies that do not pay their bills should no longer be
allowed to trade shares on the public market. The Toronto Venture Exchange
must follow its own regulations and delist the hundreds of zombie miners that
are in violation of minimum listing requirements. Eliminating the scams,
shams, and scofflaws in the mining business is a logical first step in
convincing retail speculators to reenter the marketplace.
·The major gold miners must focus on producing high margin ounces versus
the paradigm that ruled the previous 13 years of growth for growth's sake.
Gold mining is a value industry and corporations should adopt this core
philosophy of healthy per ounce margins in order to become profitable over
the long haul.
·The gold price must rise in real terms versus the US dollar. For the near
term, that depends in large part on economic machinations by Old Yeller and
the Fed.
Finally, I leave you with this parting thought: The baddest bears
always beget the bestest bulls.
Stay the course, my friends, and you will be rewarded.
Ciao for now,
Mickey Fulp
Mercenary Geologist
Acknowledgment: Gwen Preston is the editor of MercenaryGeologist.com.
The Mercenary
Geologist Michael S. "Mickey" Fulp is a Certified
Professional Geologist
with a B.Sc. Earth Sciences with honor from the University of Tulsa, and
M.Sc. Geology from the University of New Mexico. Mickey has 35 years
experience as an exploration geologist and analyst searching for economic
deposits of base and precious metals, industrial minerals, uranium, coal, oil
and gas, and water in North and South America, Europe, and Asia.
Mickey worked for junior explorers, major mining companies, private
companies, and investors as a consulting economic geologist for over 20
years, specializing in geological mapping, property evaluation, and business
development.In addition to Mickey's professional credentials and experience,
he is high-altitude proficient, and is bilingual in English and Spanish. From
2003 to 2006, he made four outcrop ore discoveries in Peru, Nevada, Chile,
and British Columbia.
Mickey is well-known and highly respected throughout the mining and
exploration community due to his ongoing work as an analyst, writer, and
speaker.
Contact: Contact@MercenaryGeologist.com
Disclaimer and Notice: I am not a certified financial analyst,
broker, or professional qualified to offer investment advice. Nothing in any
report, commentary, this website, interview, and other content constitutes or
can be construed as investment advice or an offer or solicitation or advice
to buy or sell stock or any asset or investment. All of my presentations
should be considered an opinion and my opinions may be based upon information
obtained from research of public documents and content available on the
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based upon information believed to be accurate and reliable, but my opinions
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