by Kenneth J. Gerbino
3 May 2005
The above reasons are the harsh realities of the gold mining and precious metal mining industry. The good news is that the junior sector has many quality companies with cash in the bank, good management and excellent resource rich projects. Despite the ups and downs the good companies will do well.
Investors should have a diversified portfolio of majors, mid-tiers and some of the quality advanced exploration and developmental companies. With the juniors, one has to be patient and know that if your company really has the “goods” in the ground and the extraction of those metals can be accomplished economically then patience is what will get you through the frustrating times.
The gold and precious metal investment story is solid. Fourth quarter gold consumption was up 8.6%, while mine supply was only up 1.3%. If one includes producer de-hedging then mine supply was down 12.6%.
It appears that there are some new and major players in the gold market. It would be nice if some of them were central banks. The clue to this assumption is that in September of last year Comex gold net speculative positions was at about 6 million ounces and gold was $400. One month ago Comex net speculative positions were only 2.3 million ounces and the gold price was over $425. This to me is a red flag and may be signaling new large physical buyers are present or have been in the last few months.
The fundamental story for gold and silver is a good one, but you as an investor must protect yourself against as many things as possible that could go wrong in the junior sector- and that means understanding that a lot of companies have either risky projects or minerals that are so deep in the ground or so low grade that all the ounces don’t really amount to much real value.
We follow about 250 large and small companies very closely but only own what we consider the best 25 of the large, mid-tier, and junior sector. Many stocks we review are overvalued and many are over promoted and risky. There will be a fair share of selected buy-outs in the next few years but only for the companies with outstanding and very advanced projects that are permitted and close to construction starts. The CEO’s of the major and mid-tier companies that I regularly talk to are all looking for acquisitions.
The Bank of Montreal Nesbitt Burns sponsors an excellent annual institutional mining conference and it is usually one of the 7-8 mining conferences I attend each year. This recent meeting was an upbeat affair with the CEO’s from over 120 companies presenting technical and financial information on their activities and projects. An important message from the major mining companies was that warehouse supplies of many basic metals are at decade lows and demand from customers is not letting up. They see supply squeezes for the next 2-3 years.
I think it is a good idea to have some exposure to other metals (copper, zinc, nickel, lead, chromium, aluminum). Many base metal companies sell for only 5-8 times cash flow because they are considered cyclical in nature. Gold and silver producers that produce some base metals also sell for lower cash flow multiples than just pure precious metal producers.
I expect this “cyclical” concept to change and for the valuations of companies that may produce gold with copper or silver with zinc to be revalued upwards and for the pure base metal producers to be re-valued upwards also. The reason is that with just 2-3% growth in Asia and India (current growth rates are 8-9%) a steady demand for resources will create a more sustained and structural market for these metals. A steady demand for the long-term and massive infrastructure projects in Asia and India would change the “cyclical” aspect of base metal production. Infrastructure projects are usually not cyclical since they have State backing and many times just keep rolling along despite poor economic conditions. The projects in the U.S during the great depression and many projects in Asia during the Asian meltdown are good examples. Any change from the “cyclical” concept for metals would be reflected in higher cash flow multiples and higher stock prices for mining companies. Tight supplies also will help stock values.
The Commodity Research Bureau Index (CRB) has just hit a 24-year high because of four mega-trends. China, India, past excessive money creation and excessive debt. The CRB Index is a precursor to higher inflation rates and higher gold prices. This will be very positive for the entire spectrum of mining stocks.
One should be positioned to take advantage of these mega-trends. The resource sector and especially the mining companies should be a solid investment theme in the years ahead but stock selection is going to very important so do your homework.
Kenneth J. Gerbino
Kenneth J. Gerbino
9595 Wilshire Boulevard
Beverly Hills, CA 90212
Phone: (310) 550-6304
Fax: (310) 550-0814
Kenneth J. Gerbino & Company
9595 Wilshire Boulevard, Suite 303
Beverly Hills, California 90212
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