Precious Metals Are Dirt Cheap

dirt - 1

I’ve alluded to in previous posts and comments that I strongly believe that precious metals (and to a larger degree the corresponding mining stocks) are dirt cheap right now. When a sector is broken, there are usually some telltale signs of it. In this article, I will go over some reasons as to why I feel that a bottom is near imminent.

Less Than Cash

When a sector is hated, it is REALLY hated. Junior exploration, which is the heart of future GROWTH in the mining world is so unloved right now that a great number of companies are currently trading for LESS than cash in the bank.

Prior to First Mining Finance’s (FFMGF/FF.V) most recent acquisition of Goldrush Resources (GOD.V), Goldrush was trading at the following levels:

From Yahoo Finance:

Screen Shot 2015-11-24 at 7.07.11 AM

An Enterprise Value (EV) of -C$299,850.

Screen Shot 2015-11-24 at 7.07.20 AM

Goldrush Resources has C$3.65 million in the bank and the market cap was trading most recently at C$2.51 million.

No wonder First Mining Finance was eager to complete another deal!

Next, we have another junior exploration company called Independence Gold (IGO.V).

From Yahoo Finance:

Screen Shot 2015-11-27 at 7.34.10 AM

Another company with a NEGATIVE Enterprise Value, -C$4.43 million.

Screen Shot 2015-11-27 at 7.34.18 AM

Cash in the bank of C$7.28 million and a market cap of C$2.63 million.

Doesn’t make a lot of sense, right?

With junior exploration companies, typically many of them also carry no debt because they are still out drilling and looking for a mineral resource, as opposed to being in the stages of developing a gold mine (which is extremely capital intensive). These exploration companies raise capital by issuing shares… Also, since they are NOT yet in production, they don’t have many salaries or wages to pay… They can also stop drilling at any time…

Outside of holding costs, these companies really shouldn’t be bleeding too much on a given month… Certainly, the burn rate shouldn’t be so excessive that it warrants a NEGATIVE Enterprise Value… This type of valuation would imply that the land package and all the holes drilled up to date (even if there is a preliminary mineral resource in place) are worth LESS THAN NOTHING!

But in a broken market, this type of stuff does tend to happen… So, I’m documenting this because someday we will look back and laugh about it…

As it pertains to both companies, I don’t have any interest in them, I merely picked them out to use as an example… GOD.V, for instance, has risen 67% since the First Mining Finance acquisition announcement was made public…

In the case of IGO.V, many other investors/speculators are clamoring for Kaminak Gold (KAM.V) to takeover this company since they are both operating in the Yukon Territory.

And if you can “pick up free money” in the process, why not?!?

Deep Value

Moving on to a company I do own, let’s take a look at Pilot Gold (PLG.TO).

From Yahoo Finance:

Screen Shot 2015-11-27 at 7.52.30 AM

Screen Shot 2015-11-27 at 7.52.34 AM

PLG.TO isn’t as hated as the other two stocks by the market, but it isn’t very far off either (it’s been slaughtered this month). Although Pilot does trade at a POSITIVE Enterprise Value of C$19.56 million, they sure aren’t getting a lot of credit for their 3 major projects (Halilaga, TV Tower, Kinsley Mountain).

For instance, with Halilaga, it’s a joint-venture with Teck Resources, and Pilot has a 40% ownership stake. Based on the most recent 2015 PEA, the Net Present Value (NPV at 7% Discount Rate) of the project is $474 million (after-tax).

From Pilot Gold:

Screen Shot 2015-11-27 at 7.56.06 AM

40% stake would value Pilot’s portion of Halilaga at $189.6 million… But again, the EV of the ENTIRE COMPANY is ONLY C$19.56 million ($14.64 million)

Even with commodities being smacked around left and right, this type of market valuation defies all logic…

Halilaga Project = $189.6 million
Entire Company = $14.64 million

Not only can a speculator buy the Halilaga project at a substantial discount, but you can get Kinsley Mountain, TV Tower (their consensus best prospect), a bunch of other projects in the portfolio, and management for FREE!

FREE is tough for me to say no to… even if the latest drill results from Kinsley Mountain were less than awe-inspiring…

And to be quite clear, Pilot is NOT the only company trading at these deep discounts… These deals are a dime a dozen right now in this most broken sector…

Strong Demand

If you want to add insult to injury, check out this most recent article.

From SRSrocco:

Screen Shot 2015-11-27 at 8.03.20 AM

Almost everyday, I’m finding articles to illustrate the great demand for precious metals (due to the obscene low prices!)…

It’s out with the old and in with the new. Earlier today, Nov. 24, the United States Mint announced that it would stop producing 2015 American Eagle silver bullion coins by Dec. 11 and that it would begin taking orders for the first 2016-dated issues on Jan. 11.

2015 American Silver Eagles will claim an annual sales record. That should happen by early next week, even as the U.S. Mint limits their sales.

The bureau has rationed sales of bullion American Silver Eagles for most of this year as demand has exceeded supply. The U.S. Mint has the production capability to produce many more of the one-one, .999 fine silver coins but, like other world mints, it cannot always acquire enough silver planchets.

 

So, demand for precious metals is robust… and the spot price keeps falling, day by day… Funny, gold is down another $12/oz this morning (now trading below $1,060/oz!) and silver can barely hold the $14/oz level…

 

What other market can you turn to and find this type of disconnect where prices go lower as demand soars?!?

Patience, Patience, Patience

But regardless of what I may think, I need to come to grips with reality and accept the fact that “it is what it is”. In that sense, I need to be patient with things and realize that just because prices are low today, it doesn’t mean that they can’t go even lower…

And that’s the struggle everyone of us has to figure out for themselves…

It’s no secret to ANYONE that commodities are dirt cheap right now…

 

“How much lower can we go?”

 

That’s the million dollar question…

 

Don’t you just love bear markets? Even when the merchandise is already heavily discounted, we can’t help but want to sit on the sidelines, as we wait for prices to go lower still… This type of psychology is the complete opposite of a bull market, where we instead chase the market up to new heights…

I’m a real estate investor at heart, so to me it’s no different than:

  • In a bear market — When you can buy cash flowing townhouses in the SF Bay Area for less than $200,000, you don’t want it b/c they are a dime-a-dozen… and because no one else is willing to touch it…
  • In a bull market — When you can’t find ANY cash flowing rental properties but your agent has a pocket listing for a slightly-below-market townhouse for $800,000 that is still cash flow NEGATIVE, you MUST OWN IT because you are tired of competing with other investors and losing all the time…

I’ve never claimed to have the answers (or a crystal ball), but my own preference has been to get well positioned now for the next (inevitable) upcycle… Because when this coiled spring gets released, it’s gonna be extremely violent to the upside!

But that’s just my own personality… Your style may be drastically different…

Granted, I may be 1, 2, 3, or even 5 years too early… Time will tell. But with many of these stocks down over 90% from their previous highs, I really have no problem jumping into the fire right now…

But with an impending rate hike (that may never actually happen), tax-loss selling, and a bunch of other headwinds against the precious metals, I’ve decided to withhold a good chunk of capital until after the next FOMC meeting and FED announcement…

Further, I accept the fact that these depressed prices could easily drag on for another year and throughout the entirety of 2016 in the face of a strengthening USD (my other current favorite investment)… When in doubt, dollar cost average (DCA) on the way down… I plan on buying in tranches and periodically adding to my positions throughout 2016…

However, because today IS BLACK FRIDAY, I may make a small purchase in the spirt of the holiday shopping season.

 

Hey! I’m just doing my part to stimulate this economy! 🙂

 

Happy Hunting!

Print Friendly, PDF & Email
Sharing is Caring:

13
Leave a Reply

avatar
5 Comment authors
Early FI – My Revised Thoughts (Nine Months Later)Precious Metals – Some Quick Thoughts Regarding Mining Stocks (November 17, 2016)When to Sell Gold and Silver Mining Stocks?Setting Goals… What’s That? (July 29, 2016)Rise of the Silver Surfer (April 19, 2016) Recent comment authors
  Subscribe  
newest oldest most voted
Notify of
No Nonsense Landlord
Guest

I would wait for the beginning of the run-up. If it is years, you will still have the cash or the other mainstream investments and dividends in the meantime.

I would also stay away from penny stocks. There are too many that go broke. And be careful of liquidity. If they do not trade $1M shares a day, it could be trouble to get out. Especially if you own more shares that the daily volume.

At least you have plenty of years ahead of you to re-coup.

Financial Samurai
Guest

Trading below book/cash generally signals bankruptcy ahead. You could make a good pop of confidence comes back. Just be careful of liquidity and the wide bid ask spread as mentioned above.

Where is the source of your cash coming from? And have you gone back to work?

I’m thinking of jumping back in the work fire for 2016!

Dries
Guest
Dries

How do you feel about BHP Billiton (BBL/BBP)? As you most likely know, it is the largest miner in the world, hasn’t traded this low in 10 years and is still making billions in annual profits.

Reepekg
Guest
Reepekg

Hey FiFighter,

What do you think of VGPMX?

trackback

[…] When it comes to a bull market in precious metals, these are EXACTLY the type of results investors look for (why else would anyone bother to play in such a “risky” sector?). As I’ve mentioned so many times before in the past, the performance to the downside can be drastic, but typically, so is the outperformance to the upside when the tide finally turns… and it always does, eventually… No asset class moves up or down in a straight line for perpetuity, contrary to what many investors might think. You just have to be patient. Anyone who doesn’t study up on the history of mining stocks usually misses this critical point, and thus refuses to participate in this space, even when the shares are trading at a 95% discount, or for less than cash in the bank. […]

trackback

[…] would be extremely explosive (because the sector had gotten decimated so bad that shares were trading at unprecedented lows). Well, it’s been less than 1 full year since I first got started in that space, and many of […]

trackback

[…] Well, it happened… […]

trackback

[…] trading at a market cap equivalent to their cash position… Yes, in late 2015 I did observe a few instances where some of these mining stocks sported a NEGATIVE enterprise value, but I really can’t see us entering that stage of insanity […]

trackback

[…] best time to buy is when everyone else is sitting on the sidelines too paralyzed to make a move and valuations are trading at/near historic lows. In my experience, the absolute most difficult thing to do when it comes to investing is to buy […]

Close Menu