Why is it
so difficult to make money in gold and silver mining stocks?
J. Kent Willis
AGAPI Financial
December 23, 2004
Before I receive
tons of e-mail flames, daggers, and brickbats, hear this: I like
gold/silver mining stocks. I manage many THOUSANDS of shares
of several VERY CAREFULLY SELECTED companies. Some you know well,
some you have likely NEVER heard of. Some I trade/sell when the
profit target I sought is reached, others I hold until kingdom
come. If I make a bad choice, I quickly cut the losers from the
stable. PAY ATTENTION: I will take a locked-in, KNOWN LOSS over
any "wait and see, she might recover" nonsense ANY
DAY. Some stocks are clearly suited to trading in and out of,
with caveats, while others are only good if you hold them forever.
NEVER treat all gold stocks the same by holding them all or trading
them all. If you are very conservative and want to sleep at night,
then, in the current phase of our very young bull-market in metals,
it is OK to HOLD them all, for now. I recommend selected offerings
to many, but not all, of my clients. I am NOT your advisor, so
please don't e-mail and ask for specifics. You couldn't pay me
what I am worthyou know; you can't get around the minimum wage
laws and all that. The clients that I tell to avoid stocks are
commanded to hold bullion coins in the amount that is right for
them and their objectives. I don't know yours.
Many financial advisors and monthly newsletter gurus have plenty
of industry knowledge, street smarts and are excellent writers.
I love their sense(s) of humor and acerbic, mercurial, esoteric,
acrimonious and even platitudinous witticisms. (I throw these
in so maybe you will grab a dictionary instead of writing me
a nasty e-mailWow, all this great advice and a FREE vocabulary
lesson, this guy is too much!). But I often pay more for their
literary talent than their market savvy. I often feel that something
is missing. Of course, Dan Denning at Strategic Investment is
excluded (note: this is an uncompensated, shameless plug). I
find myself either ripping apart the envelope of the newsletter,
or getting out my trusty 10 power magnifier hoping and believing
there has GOT to be something else still hiding in the envelope.
There just has to be something valuable hidden in the fine printAAAACK!no
diceI paid TWENTY FIVE BUCKS FOR THAT?!? Financial WISDOM is
a very scarce commodity indeed. Even rarer than a "I hope
I get a home run ten-bagger with this one" junior/exploratory
miner. I offer what I believe is a bit of wisdom. For free. What
other advisor/broker/guru ever gave you for free that which even
compares with what we provide? Your only investment is the time
it takes to read the rest of this. If you're a speed reader,
you will assuredly get your money's worth. If you're still "hooked
on phonics," I apologize in advance.
The cheerful optimists say "the best things in life are
free," while their anti-matter
counterparts, hiding in the gloomy clouds of cynicism say: "well,
that stuff was worth exactly what you paid for it." You decide.
With all the hand-wringing about why the "blankity-blank
gold and silver stocks are way behind bullion" currently
festering, we seek to calm some of your fears. Go to Hollywood
with Frankie and Relax. Take a breather from stocks and pile
into physical for a short while. At least with future investment
funds. Hold your existing stocks. Actual, fully paid-for, low-premium
bullion coins in your tight little hands are always a safer investment,
especially so for the smaller capitalized/beginner investor.
Gold and silver coins may not be quite sexy enough for many investors,
but I'll take their girl-next-door beauty everyday over any sultry
siren promising more than she can deliver. As long as we know
the stock risks and their potential rewards, they are FUN to
play with. So, let's all pile into the sandbox. Watch out for
the evidence of kitty cats.
Let's take a look at the long, long list of things that have
to go exactly right in order for you to even have a cool, shiny
gold coin in your sweaty little palms. Join me as we plunge hand-in-hand
down the mineshaft:
- You have to
find gold, first. It isn't everywhere, at least not in "profitable"
amounts. I can take you on a hike to many of the U.S. western
states and let you stand right on top of $10 million dollars
worth of gold. Before you make your reservations and buy a shovel,
let me point out that it would take $20 million to get it out
of the ground, so it stays there. At least at today's prices,
and likely for several years worth of price increases to come.
While we all would like to simply reach down and pick up placer
or nugget gold right off the ground, it isn't anywhere near that
simple. Big chunks of gold are rare. Tiny, tiny pieces (flakes
and sand-size particles) and grains invisible to the naked eye
are common. It takes experts and years of experience to recognize
potential ore bodies and see all of the competing, complex and
inter-related factors clearly enough to even bother to drill
the first hole. It is an art, and there are far too many paint
by number geologists and not enough da Vinci's. This is the reason
why the geologists and consultants who have successfully navigated
the minefields needed to bring a dirty pile of rock all the way
to profitability can be counted on about two hands. And they
are well known and in great demand. For every 10 phone calls
they get from a startup, they return one. Most geologists spend
their entire career without ever finding a "profitable at
the current gold price" ore body. Pay attention. That's
a hint. Your chances of ever making money on an explorer are
greatly increased if these field marshals are on board. Especially
if they have put their money where their math is by supplying
their own shekels along with their skills.
.
- Gold is sometimes
found in veins of quartz (you know, silicon dioxide, or another
form of beach sand) where the gold is "massive" and
can be seen with the naked eye. These lovely little strips, ribbons
or flakes of yellow payola are found with native silver (bonus!)
and various sulfides of copper (another bonus), lead, and antimony
also in the host rock. Also common in places where gold can be
profitably mined are ores containing microscopic sulfides and
tellurides of gold, sometimes with other quite nasty interlopers
we don't want, like arsenic. All of the other things may be useful
and valuable, but we mention them for this reason: It cost more,
sometimes a great deal more, to separate the things we don't
want, at least not primarily, from the gold. Some of these other
minerals can be separated and sold at a profit; profit which
clearly subsidizes the cost of the gold extraction. There are
even some mines where the copper is so rich and the gold is an
"accident" that the gold is sold to subsidize the cost
of getting the copper. A great portion of mining engineering
has been devoted to optimal techniques to separate the "good"
from the "bad." At low cost and safely
for the miners, the environment, and the marketplace. Some "Rube
Goldberg on crack" contraption may be clever, but it probably
won't pass mining inspection.
.
- All those
other things we don't want often force the design of the ore
processing facility and often the method of mining. In some cases,
the engineers have no flexibility. They have to do it one way
and one way only. This lack of flexibility is expensive and adds
overhead burden to the net cash cost per ounce finally recovered.
In many instances the ore from the same mine has different grades
or a mix of different mineralizations. This requires expensive
pre-sorting or pre-separation in order to feed it to the correct
"next step" in the process. The mine has to be designed
around everything they expect to process and this increases the
cost enormously. Gold is often found near the surface but may
follow veins below even several miles or more. Durban Deep in
South Africa is currently chasing ore 2 miles below the surface.
This is outrageously expensive, if the gold ore wasn't rich enough
to justify this subterranean maelstrom it would never happen.
The host rock may be more or less brittle and fracture or collapse
as the ore is removed. This restricts how you can take the ore
safely. You can't dig big, deep trenches without lots of expensive
wood/steel lattice work added to reinforce the whole structure.
In some mines, the vein or mineralization still runs onward,
but they have to leave it in place because going further would
ingloriously bring down the whole shebang. In some locations,
they also are required to intentionally cave in the whole thing
when closing the mine to reduce danger to curious explorers.
Some of this gold may have been initially included in estimated
reserves which would have boosted the aggregate share value if
removed, but ultimately was simply left in the ground to the
stockholder's dismay. We will discuss "proven/probable/inferred"
reserves and resources later. Of course in many parts of the
world there are much more, shall we say, "liberal"
mining codes than the costly US rules. Even if you can simply
run to the next village and replace all the "brave workers"
who were victims of an adverse demonstration of the laws of physics,
it is still expensive. And terribly politically incorrect to
attempt to squeeze out every ounce at the lowest imaginable price.
You have to spend a lot of extra money to do it "right"
in both a technical and moral sense.
.
- Once an area
with good potential is discovered by examining the surface rock,
etc., it must be drilled to get a good idea of just how much
gold is in the area. How deep is it? How large (surface acreage)
is the area that contains gold beneath the surface? What is the
surrounding rock type? Can it be blasted, drilled, or forced
out with a high pressure water-hose? (You gotta see this in action;
it's a fireman's fantasy!). A detailed geological map is made,
nowadays using GPS receivers, to plot in detail every feature
on the surface. Geologists, mining experts and various expensive
personnel like chemists, metallurgists, ore processors, and plant
engineers may study these initial results and mappings for MONTHS
(getting paid everyday by YOU) before they even drill the first
down hole. Wow, the cash injection from that first 10 million
shares at a dime a share IPO is gone, and all of the experts
with "consulting service invoices" in hand ain't even
off the bus yet! "Mother Nature" has had her big strong
fists around her precious bounty for a long time; she's not going
to yield it to your tiny weak fists without a worthy battle.
.
- The best way
to intelligently and honestly determine just how likely it is
that any "ore body" will be mined profitably is to
sink some drill holes. You can of course use a backhoe and dig
shallow trenches, etc. as a starting point, but you HAVE to drill
to do it right. This isn't cheap; these holes are not bored willy-nilly.
Careful study and instinct lead to the selection of the drill
sites. It can take weeks to drill a single hole after setting
up the heavy, expensive rigging, especially if the area is remote
or the terrain is anything other than flat or very gently sloping.
You can imagine the drilling complexity along the side of a steep
mountain deep in a jungle. Drilling holes right in the midst
of an ore body with measurable surface gold will tell you the
most important thing you need to know: Does this gold extend
below the surface? If it does, just how deep does it go? And
just how "rich" is the deposit? There might be "some," but not "enough" to be profitable.
If we drill straight through a shallow surface deposit and find
nothing, we know this gold has likely been deposited here after
being carried away from somewhere else through weathering and
erosion, earthquake hiccups, volcanic eruption or via ancient
water courses long since dried up. Then you go looking for the
"somewhere else." It may lead you to
someone else's claim just up the mountain slope. Too bad. It
was fun while it lasted.
.
- Rotary type
drilling is relatively inexpensive compared to "diamond
core" drilling, which is really king. The rotary drill technique
loosens and scatters the earth. It also breaks up the rock allowing
inspection and assay of the sample. Assay refers to the process
of determining very accurately just how much actual gold is in
the sample and is discussed in more detail later. Diamond tipped
core drilling is the most versatile and expensive, but gives
an excellent indication of just how the gold ore lays in the
earth. Knowing this can save a great deal of time and money during
the extraction process; only the minimum amount of overburden
will have to be removed and processed. Just like taking x-rays
and MRI imaging before "cutting," the surgeon minimizes
damage to surrounding tissue and speeds the healing process.
The diamond drill uses a circular, hollow bit from about 1 inch
up to about 4 inches in diameter. Water is pumped into the hole
to lubricate and cool the bit as she grinds deeper. The ore sample
is trapped in the center of the bit as she goes lower. External
sludge remains outside the drill bit and is pumped up and out,
then discarded. The good stuff you want is tucked safely inside
the drill bit. The actual process is much more complicated, but
you get the idea. The core sample is carefully tagged and labeled
to match it up with its exact location on the geological survey
maps. The core is placed in special storage tubes or compartments
and VERY carefully guarded for two reasons; to protect the integrity
of the sample and keep competitors and "spies" from
knowing just what you may have found. Oh yes, exploratory drilling
often takes many years, maybe a decade or more for a large ore
body before everything can be fully analyzed to determine if
it's going to ever be profitable to rip the metal from the earth.
Cash ponied up from stockholders via IPO's and private placements,
venture capitalists, banking concerns, etc. is being burned throughout
this very long process. Roughly 97% of all discoveries never
graduate from an exploratory dream to a producing mine; they
succumb to infant mortality even though tens of millions of your
dollars were spent in a heroic but futile attempt to save her
life.
.
- After honeycombing
the earth around the property through drilling we have a good
idea about the distribution of the ore. The more holes you drill,
the more it costs and the longer it takes, but the better the
picture of just what you have found. We will likely know roughly
where veins and mineralization pockets start and stop, which
way they run and how deep they go. Some drill holes may show
good yields while others show little or no gold in that "plug." It is VERY important that the drill
intersects the ore pocket at right angles to its "run"
or "lay" in the earth so the thickness of the seam
can be accurately determined. Drilling at any other angle may
lead to HUGE errors in the calculations about just how much golden
pay dirt is actually present. These HUGE errors can lead to the
completely erroneous assumption that there is much more gold
present than in reality. If these dubious results are published
too early and lead to massive buying of the stock, you will have
a NASTY surprise later in the drill regimen as these pockets
are more clearly defined with subsequent drilling. The area is
then divided into "zones of occurrence" typically to
classify them as low grade or high grade regions. This is kind
of arbitrary and relative. An ore body with many "low"
grade zones can be profitably mined if the gold is close to the
surface, easy to get to and the mineralization is amenable to
simple mechanical and chemical separation of the gold from everything
else we don't want. By the same token, a mine with easy to get
high grades can die early. All the cream is scooped up when the
gold price per ounce is low; it's the only portion of the ore
reserves than can be extracted profitably when gold prices are
low. This will kill the mine. They will have to replace their
reserves through new discovery (outrageously expensive and hard
to do), junior acquisitions (very expensive) or mergers with
rivals to survive. Otherwise, they die. Cash flow or dividends
from that stock are GONE long before you wanted them to end.
The stock price may plummet; you won't even realize a much sought
after capital-gain profit through stock price appreciation.
.
- What is all
this mumbo-jumbo about proven, probable and inferred reserves
or measured, indicated and inferred resources? This is one of
the most significant bits of information when considering if
any resource mining company WILL EVER BE PROFITABLE. Important
caveat: All jurisdictions do not define these terms equally.
In the United States the SEC prefers one set of definitions that
must be adhered to when quoting ore discoveries in press releases,
prospectuses, quarterly reports, etc. Canada has another set
of standard definitions, which are different from those of Australia/New
Zealand, which are very much different than the rest of the world.
The definitions have VERY specific legal import and interpretation
relative to risk disclosure and fraud. The reported accuracy
of the "ore richness" terms often becomes the central
point of any nasty post-bankruptcy litigation. All slices of
"truth" in reporting are not created equal. It is very
difficult for even an experienced geologist to make relative
comparisons between mines in different parts of the world using
the data that is reported. For example, in Canada these are the
standard terms and their meanings:
1. The term
"Resource" is used for exploratory and prospecting
ventures that are not yet producing or even close to producing.
This is for the "dirty pile of rock" that looks promising.
That's it; nothing else is really known, so we call it a "resource." Resources are classified as measured,
indicated, or inferred. If it is unknown, it has to be identified
as unknown. Combinations of all these categories are permitted.
Definitions:
- Measured: The thickness, grade
(in grams of gold per ton of host rock), distribution and extent
of the deposit is "fully" known, or at least with great
statistical confidence. Where the ore starts and stops in every
direction should be "known." Many, many drill holes
and assays are completed and analyzed. Relative concentrations
of gold ore to host rock and overburden are "known."
.
- Indicated: Only a "few"
drill core samples and assays of those cores may be completed
and sufficient to calculate tonnage and grade. Inferred projection
of the "goodies in the ground" at a measurable distance
away from the drill holes is permissible with limitations. It
is very expensive to drill every few feet, so you have to make
reasonable assumptions about what is hidden between the drill
holes; it may be a bonanza, it may be nothing.
.
- Inferred: Usually only crude,
high level ground survey or statistical "sampling"
of the area has been performed. Not enough actual testing has
been performed. "Gee, it kind of looks like that outcropping
way over there has some gold in it too; it looks like it starts
here and continues all the way."
2. The term
"Reserve" is used only for mines that are actually
producing or very near that point. Much more is known about the
richness, depth and expanse of the ore body. Drilling is complete
and assays have been verified. Reserves are classified as proven,
probable or possible.
- Proven: The actual entire
ore reserves are stated explicitly in terms of the mineable tons.
The chemical and metallurgical properties of the mineralization
are very well known and documented. The mining method is clearly
identified and optimized. The estimate of the "mine life"
before resources are exhausted is extrapolated. All of the supporting
infrastructure, ancillary requirements and capital costs are
identified and indexed to expected price and "net profit"
per ounce. This is the most important category and should always
be carefully analyzed when picking a potential stock for inclusion
in your portfolio. Almost everything else is a "sales pitch." You've been warned.
.
- Probable: Only the mineable
ore grades and tonnage are stated. The vein thickness is known
and the way the gold ore lies in the ground is also known fairly
well. Where mineralization starts and stops is reasonably estimated.
This is often estimated from following industry accepted and
permissible "ethical" procedures after drill results.
.
- Possible: This is a big estimate
of how much gold might be here; it is sometimes referred to as
"potential" How many of us know people that never lived
up to their "potential" for one reason or another?
Same thing here. It may be no more than some geo-pseudo-scientific
guess based on little more than review of earth mapping satellite
imagery or surface surveys.
3. The ore
can migrate from one category to another over time as the deposit
is better measured and understood after more drilling and extraction
is completed. Any given "zone of occurrence" can have
only one classification at any given time. Lodes can turn out
to be either richer or leaner than initially "guesstimated." It is NEVER an exact science, errors
are inevitable. A simple decimal point higher or lower in any
mathematical measurement can be the difference between profit
and failure.
- Dirt and rock
are heavy. Well, duh! Moving tons and tons of earth or overburden
to eventually get a few grams of gold is common. One ounce of
gold is about 31.1 grams. 10-20 tons or more, often much more,
of earth will have to be completely processed to yield this final
ounce. If it requires about 250 bucks of "all in cost effort"
to perform this metallurgical magic and the metal was sold into
the open market for 450 bucks, this only yields 200 bucks "profit." Be careful when you forget this by
thinking "gee, a million ounces of proven reserves; this
bad boy is worth 450 million." She's not. She may
be "worth" far less than 200 million.
.
- Machinery
to dig, drill and transport ore is expensive and often leased
during the early years of a start up. They have to finance the
payments of expensive machinery forever or burn start-up capital
(provided by YOU via the "initial offering") at a rate
that would even scare Bill Gates. The first hundred thousand
ounces produced often have to be sold before the cash flow every
common-stock investor is seeking even begins to materialize.
The bankers, creditors and major financers always get paid first.
Big machines require big energy. Big hauling trucks use up lots
of diesel, diesel which is going up with the price of oil due
to an ever more worthless dollar and explosive Asian demand.
Ore crushing machines require lots of energy; often electricity.
Getting electricity from the nearest generator all the way to
the mine processing facility requires ground clearing, transmission
wire and tower installation, and substation power step-down facilities
which are all extremely expensive. Electricity generated from
non-hydroelectric sources is also rising rapidly in cost. Even
coal-fired boiler/steam turbine power plants are paying more
for coal because China is sucking up every last briquette. Labor-wage
inflation cost push has not hit the US, yet, but it is a problem
where the local currency is strengthening relative to the nasty
little US dollar, which is everywhere. (Isn't it amazing that
penalties show up everywhere, everyday and in every form because
of the worthlessness of the dollar?). Mines get fewer units of
local currency in exchange for the gold they sell in declining
value US dollars, even though the gold price is rising in those
same dollars. They have to pay locals for supplies and labor
in this harder to come by (relative to the dollar, that is) national
currency. These are only some of the reasons for a drop in profitability
in many mining operations even though the market price of gold
is increasing.
.
- With all of
the countless rules, laws, increasing environmental regulations
(with stiff penalties and production delays for infractions)
and ever growing national tax/royalty levies, I believe exploratory
mining operations will decline in many parts of the industrialized
west in the future. I expect many of the Yukos-type problems
that occurred with Russian oil oligarchs to spill over into every
other natural resource in the "rising from the ashes"
golden Phoenix we call the reborn Soviet Union. I personally
avoid operations completely or largely dependent on the "continuation
of democratic rule of law and protection of free-market business
interests" in locales where this is becoming an ever more
naïve assumption. Ignore these geopolitical shifts to your
own peril. In the third world, on the spot, impromptu inspections
by the local mining chief, who is of course, the village mayor's
brother-in-law, always seem to find something that is a no-no.
Shakedowns and protection money payments are common in many smaller
operations. So is claim jumping by squatters who are merely a
nuisance. I wouldn't want to pay the same guy every month several
thousand dollars to go away. Third world mine security officials
are often more "creative." They might pay him
the first time. The second time he will accidentally fall into
an abandoned mineshaft.
.
- In US territory,
the EPA is merciless. If you have submitted a mining plan that
is approved for say, three cyanide leaching pads and well, you
have four, that can be a $100,000 math error, not counting the
down time for the facility if something more egregious is found.
And oh, that cyanide stuff is very nasty. Cyanide is very inexpensive
to buy, but very expensive to use because of all the process
control and clean up costs after its use. Newmont currently has
a lot of problems in Indonesia; prison sentences for high ranking
in-country corporate officials are being considered. Even if
it's just a sophisticated shakedown it will directly impact their
bottom line. Newmont can handle it and recover; many explorers
or juniors couldn't. Cyanide is both a dream come true in gold
extraction as well as your worst nightmare. It's heinously toxic
to people, plants and possums. Like most things in nature, we
have to take the bitter with the sweet. Remember we used the
term "sulphide" mineralization in our first bullet?
One of the reasons that "sulphide" ores are economically
(profitably) mined even with relatively small concentrations
of gold is that the gold that is present is easily removed in
a simple chemical reaction between gold and cyanide. In a typical
leaching pit, crushed rock is piled high on clay pads with plastic
liners. The rock is sprayed with a liquid sodium cyanide solution
until it is thoroughly wet. As the liquid snakes it way to the
bottom of the pile, it combines with the fine particles of gold
very easily (in many cases up to about 97% of the gold is collected),
rapidly forming a "mechanical mixture" of auriferous
sodium cyanide. This mixture is heavier than the surrounding
rock; under the force of gravity (gravimetric separation), the
gold rich compound migrates to the bottom of the pile much like
the way that water sinks below oil in such a mixture. Or that
nasty stuff in the bottom of the salad dressing bottle. The bottom
of the pile is now rich in gold; a layer of the pile can be removed
and processed for the gold or the pile may be resprayed to repeat
the process. The gold is separated from the cyanide in the next
step. A tablespoon of the toxic spray liquor can kill the biggest
of humans. This stuff has destroyed many waterways, wildlife,
animal grazing ranges, lakes/streams full of fish, underground
aquifers and bird feeding/migration routes as it spilled into
the surrounding environment. The U.S. and most highly developed
countries require the companies to build expensive specialized
containment vessels with concrete and other materials inside
earthen berms to keep this stuff from leaking out of the leach
pits. All of the extra precautions required when using cyanide
in the recovery technique are very expensive. Fines and shutdowns
if this stuff gets out can literally bankrupt the mine. In their
defense, mining companies always claim that under direct sunlight,
the cyanide in the area is decomposed into its "basic"
elements through this "photo-kinetic" process. But
the resulting elemental sodium is still toxic to many living
things, especially fish and water creatures. One of the worst
cases on record occurred in February 2000 at the Aurul Gold Mine
near Baia Mare in Romania. Hundreds of tons of poison cyanide
leaching liquid eventually found its way indirectly into the
not-so-blue Danube and Tisza rivers. It destroyed 150+ tones
of fish, decimated the local fishing industry and contaminated
drinking water for many miles of waterway. Even though there
is still plenty of gold in Dracula's backyard, the toxic leftovers
will be present for years to come. European officials declared
this the worst industrial disaster since Chernobyl in 1986. Note:
mines don't all necessarily use cyanide in the gold recovery
process. But most still do, and will for the foreseeable future.
It isn't necessary in all cases. New extraction technology avoiding
cyanide does exist and is being refined; but it is not yet as
cost effective for big, low grade deposits. I am "big"
on achieving a sensible balance of safety and respect of natural
beauty during resource extraction. These things are tragic for
everyone, including the investor.
.
- Since no mine
lasts forever, the costs and procedures required to close the
mine, clean up the mess and walk away must be considered before
the first shovel full is processed. Many regions require expensive
remediation plans to restore the area to something resembling
the natural beauty before the lust for gold turned it upside
down. It is very expensive in the US and most of the developed
west, especially if the mine is large and the mining technique
was especially destructive to the environment. In fact the EPA,
Bureau of Mines, Department Of The Interior, etc. will not even
sign off on any plan that doesn't do an adequate job of apologizing
and making amends to Mother Nature when all of her wealth has
been pilfered. This "put everything back where you found
it" legal and moral requirement is extremely expensive and
will divert a significant portion of the net shareholder return.
Of course, this is of less importance in some regions of the
third world that are desperate for jobs and revenue associated
with producing mines.
.
- A mining venture
has most of all of the same costs and problems with making a
decent profit as any other modern non-mining business. Attracting
and keeping intelligent, hard- working personnel is a problem.
With the long doldrums in most metal (especially tin, gold, silver,
copper, and aluminum) prices through the 80's and 90's, fewer
young people were even interested in obtaining a mining engineering
or useful related degree. Everybody wanted to go to a top-tier
business school and become an investment banker or stock jockey
that might finance or sell mining stocks (in between big blocks
of internet gee-wizardry trash). Nobody wanted to do the dirty,
dangerous work to make it happen in the first place. Now the
good part about this is that gold and silver mining output has
declined and will decline (net-net) for years to come. Once the
real, gluttonous feeding frenzy in precious metals gets underway
(we are still in the appetizer stage), the few companies that
are producing profitably will be more than glad they did whatever
was necessary to survive. So will the savvy investors who bought
carefully researched and cautiously acquired juniors, explorers
and producers and held them tightly during the dips in the mother
of all roller coaster rides that is coming. Some derivative flavored
hedging to deliver "new" metal into the marketplace
at "old" prices was necessary and prudent to survive
during the lean years. Clearly many producers overdid it; this
excess and profligate behavior will be catastrophic for many
and we won't know until it is too late. I believe we will attend
the funerals "tomorrow" of several of the well known
names that look perfectly healthy today.
So, how do
we distill all of the foregoing blather into a few generic "tips?"
1. Look for
the names of well known, respected successful geologists and
consultants in the press releases, offering prospectuses, 10K
filings, quarterly reports, etc.
2. Avoid the
regions of the world where political and social unrest, as well
as dubious law-enforcement, confiscatory royalty mindsets, minority
empowerment attempts to right 100 years of past exploitation
in one week, nationalization "rumors" and self-defeating
taxation schemes are becoming the modus operandi. Remember, a
rumor is a rumor until it's officially denied by authorities.
THEN YOU KNOW IT IS THE TRUTH. Do not be deceived by thinking:
"Gee, these folks want all of that foreign investment capital
to flow into their country. They won't do inane things that will
scare away the cash they desperately need to expand their industry
and grow their economic base." I say, in Mogambo-Speak:
HAHAHAHAHAH! For the short list of places that are in my OPINION,
slightly less risky (and not in any particular risk order), try:
A. Canada
B. Australia
C. New Zealand
D. Papua New Guinea
E. United States
F. Tanzania
G. Thailand
H. Vietnam
I. Myanmar
J. Romania
K. Mongolia
L. Brazil
3. Wait until
a comprehensive drill program is COMPLETED before loading up
on the stock. Of course the stock will cost more at this point
than if you bought it totally "blind," 20 minutes before two scruffy prospectors sped
back to town in their rusty pick-em-up-truck screaming EUREKA
from one end of the village to the other. Make sure the explorer
drilled enough holes carefully to truly gauge the scope of the
ore body. Make sure diamond drill core samples have been independently
audited/assayed by at least two respected assay houses and compared
to a controlled, locked up reference if there are any disputes
about the "richness" in grams per ton, etc. I am sure
there is a "Son Of Bre-X" out there somewhere, lurking
in the pink sheets. We won't know until after it is too late
to recover our capital. Every mania (and IT WILL BE A DOOZY)
brings the charlatans and thieves to a heady froth. This chapter
in our eternal gold story will be no different.
4. If you want
to play with mining stocks, as a very crude rule of thumb and
not financial advice, you, in my opinion, should keep a portfolio
of about 10 stocks. With any less, your risks would be too large.
Never buy just one, even Newmont. Don't try to handle more than
10; you can't keep up with all the details if you have a life
outside the fine print of the WSJ. TALK TO YOUR OWN FINANCIAL
ADVISOR; I AM NOT YOURS. A strategy that has served ME well (don't
know about you, so again, this is not advice) is to pick the
10 this way: Throw Newmont (NEM) in at the top of your
list. At the bottom, pick one of the sub $1.00 per share puppies
that has found great ore bodies, has survived infant mortality,
and is going to be actually producing good quantities of metal
within a year or two at most. I like New Guinea Gold (NGG
on Vancouver) here. DISCLOSURE
NOTE: I LIKE HER AND OWN MANY THOUSANDS OF HER SHARES. She is one of my long
shots with blue sky potential, but anything can happen to her.
I won't warn you before I buy more of her or dump her. But since
she didn't cost me very much, I will not toss her out easily.
If she vaporizes, my life won't change. If she goes to the moon,
you will never see another article written by me. What's
that I hearsome of you are praying for her to go up now.? I also
like Tan Range Exploration (TNX on Toronto) here too as
another long shot because of their integrity, board of director
savvy and massive potential. I don't own her yet. I may next
year. I may not. Next, into your stocking stuff Kinross Gold
Corp (KGC) in the middle of the pack. She is hard to beat
as a mid-level player. I own her. If you like silver also (or
better than gold, as some of you clearly do) toss in Hecla
(HL) or Coeur d'Alene (CDE). Now it's your turn to have
some fun. Do your own due-diligence type homework and pick the
remaining five or six. Choose carefully only after reading EVERYTHING
PUBLISHED YOU CAN FIND ABOUT YOUR PROSPECT. Diversify geographically
throughout some of the suggested areas listed in number 2 above.
Call the investor relations office and chat with them about anything
you don't understand in the published literature. Visit the place
if you can on your next vacation. It's a blast. Yes, it will
be expensive, but the most fun you can have with your prospecting
boots on if you really enjoy the mining stock casino.
5. The hardest
part is NOT the BUYING of the stock, it is ALWAYS the SELLING.
Greed and fear kill everyone. No exceptions. You must decide
what you want from any given stock before you reach those bony
fingers for the phone or the mouse button. If you have made a
good profit either from dividends, if any, or through simple
price appreciation, SELL ALL OR PART OF YOUR HOLDINGS when her
price is strong and her volumes are decent and take money off
the table. If the trend for gold overall or that specific stock
is still strong, you can buy her again and repeat the process.
With the upcoming volatility it may be difficult and you could
leave some money on the table, but so what? Many fools watch
real profit vaporize because they don't get while the gettin'
is good. Cut losers quickly from the stable before growing losses
make you emotionally determined to hold her until she comes back.
Don't confuse tech fund liquidation of huge blocks of your little
darlings, cartel cabal malfeasance, price manipulations or negative
newsletter "top-picker" sentiments with a real dog
that isn't doing well compared to other shares, who are in marked
contrast, prospering in the same negative environment. Now, ignore
this rule with the sub buck a share long shots. If you bought
them in intelligent quantities, you don't care if they go to
nothing. You only bought them instead of a lottery ticket, which
will usually be a better bet. Even the best stock pickers get
massacred now and then. I have had my head ripped from my shoulders
on many occasions. All metal stocks are volatile and as you well
know do CRAZY things like lead bullion when they should lag and
vice versa. I HAVE NO CRYSTAL BALL. BUT IF I MAKE MONEY ON HER
BY SELLING TODAY, I DON'T NEED ONE. I am taking it off the table.
What is a decent return for me may not be enough juice for you.
I have no way of knowing. It's a free country, do whatever you
want; it's your money.
Conclusion
If all of this
is just too much for you, simply buy low premium, well known/popular
gold and silver bullion coins from a reputable dealer, tuck them
away safely and be patient. With gross exaggeration, of course,
about a billion things need to go exactly right to ever make
a predictable, consistent profit from a mining stock. With finished
coins, everything that needed to happen HAS happened. Think about
it. With real bullion coins in your hands, the only thing needed
now to make a respectable profit is that somebody, somewhere
wants the gold more than the paper dollars they exchanged. And
currently, about 3 billion people on the planet do. Wake up now
or sleep forever. Get on board with stocks or coins; the Auric-Polar
Express is leaving the station.
Trust Governments
For Nothing. Trust God For Everything. Trust Gold Somewhere In
Between.
Happy holidays
to all. Be well and prosper. May 2005 find you content in all
things.
J. Kent Willis
email: jkentw2@aol.com
December 22, 2004
AGAPI Financial
J. Kent
Willis is a Financial Advisor, Licensed General Securities Representative
and the President of AGAPI Financial, LLC. He specializes in
tangible assets, biblical faith-based investing seminars and
balanced life strategies. He has traded gold and silver since
the mid 1970's and resides in Kentucky. He can be reached at
jkentw2@aol.com. This work may be
reprinted and distributed freely to all hard money, "gold-bug"
and related websites provided credit is given to the author and
the website from which it was originally posted.
________________
321gold Inc
|
