Gold Mining Stocks
What's Wrong With The Juniors
Kenneth J.
Gerbino
Archives
Kenneth J.
Gerbino & Company
Feb 4, 2008
The reasons Junior mining stocks
are underperforming are as follows:
1. The larger companies are
getting all the action from newly-converted gold enthusiasts
and interested investors.
2. The junior market is still
being weakened by insiders and promoters who are always sellers.
3. There are hundreds if not
thousands of new promotional mining stocks being foisted on the
readers of gold pages in the last three years and there is just
so much money to invest in this sector. Therefore premium prices
are diluted.
4. The invasion into the Hard
Money camp by the Uranium companies. Every investor I know who
owns gold and precious metal stocks but never owned a uranium
stock now owns some. This diversion of capital to uranium diluted
some funds that would have entered the Junior market.
5. Gold ETFs. Investor money
can now go into an easy way to invest in bullion. This also could
be argued that it helps the miners as it creates demand for gold.
6. Delays in drilling, engineering
reports, permits.
A Big Rally Soon?
We are very near a major turning
point in the mid tier and junior mining sector. The table
below shows the lowest junior mining valuation ratios in the
last six years. We are using the TSX S&P Venture Index which
is mostly mining stocks. The current ratios are at levels
that in the past have signaled a major and substantial rise in
the smaller gold and silver mining stocks.
As a reality check we can look
at the ratio of the XAU to the Gold Price to see if this ratio
is at a speculative level that may be signaling a major top in
the making for all the gold stocks, which would of course
include the juniors. During the above mentioned time period (September-November
2002) the Gold/XAU ratio was 4.8 (not shown). Today it is 4.8.
This means the XAU gold stocks are tracking the gold rise at
the same ratio when gold was $320, signifying a stable relationship.
It confirms that the juniors on a relative basis are extremely
undervalued and that a substantial rally should be starting soon.
New money into the gold arena is going into the
big names. These managers and investors have not started to look
at Canada and the junior sector yet. But as they eventually get
more familiar and comfortable with the industry they start looking
for smaller growth and value situations and that leads them into
the junior sector. Quality juniors will eventually have a substantial
move up from these levels but most others with speculative exploration
programs will be left behind because of the stark reality that
only one exploration stock out of a few thousand ever produces
an ounce of minerals. This old ratio should change for the better
as high metal prices, technology, more sophisticated exploration
groups and increasing demand for resources increase their chances
but it is still long-shot investing.
The Three Amigos
Gold has many developments
impacting its price and we have mentioned them many times.
But currently we see three drivers at work that spell out a higher
gold price: 1) The dollar has nowhere to go but down since
interest rates are being sent lower and lower by the Fed to bail
out the banks and our friends on Wall Street. 2) The credit/mortgage/real
estate bubble dictates inflating the money supply or face possible
immense institutional disasters. 3) Global money supply increases
are continuing at a torrid rate especially in India and China.
Mining Analysis
The mining sector despite the
volatility allows one to have a very clear idea of value. This
intrinsic value is an inventory of basically rocks. These rocks
contain a certain known percent of minerals. When companies spend
$20-50 million with hundreds of drill holes and thousands of
man hours on an area the size of 3-4 city blocks (maybe 400 feet
thick, and underground) you have a pretty good idea what is in
that mass of rock and what it is worth at various metal prices.
When they do sophisticated testing on sometimes 5-10 miles of
drill core, one can evaluate how easy or hard and costly it might
be to extract the minerals.
Basic mining costs are known
from hundreds of other mining projects: the cost to build the
roads, buy crushers, build small towns for the workers, power
and food costs etc. These are known factors and estimates can
be made. Then it's a matter of math and know how. That's how
you find winners. That is how you know if you have a good project.
That is all we care about at my company on hundreds of projects
and mining companies. You should try and do the same if you want
to get serious about investing in this sector.
The key to making an above
average return is competent evaluations and patience. This sometimes
takes many years. Patience will outweigh the volatility of the
gold and silver mining sector as intrinsic value eventually gets
recognized. The laws of supply and demand let you sleep comfortably.
Inflationary Future
With all the money, people,
and industrial progress globally we are confident that minerals
(especially the precious ones) will be well above average investments
for the next decade.
We are at a time when the central
banks should be at least attempting to control inflation but
instead most are printing more money. As the future unfolds and
inflation accelerates, tangible assets especially mining companies
with known resources of valuable minerals should be a top priority
for investors.
For more articles on gold,
the economy, and stock market visit our website at: www.kengerbino.com.
Feb 1, 2008
Ken Gerbino
Archives  Kenneth J. Gerbino & Company
Investment Management
9595 Wilshire Boulevard, Suite 303
Beverly Hills, California 90212
Telephone (310) 550-6304
Fax (310) 550-0814
E-Mail: kjgco@att.net
Website: www.kengerbino.com
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