Hey gents… and ladies if any are here.  I’ve been visiting the site daily and there are some really great trading ideas in real time.  I’ve seen many things for which I didn’t even think to look.  Like some of you, I’ve been trying to position myself for the bottom of the precious metals mining cycle, because frankly, I think that one of the biggest fortunes ever will be made in PM mining shares.  The main reason that I think this is the following:

  1. Many mining issues have their costs are under control and many companies will not repeat the sins of the last cycle (growth in ounces at any cost).  For example, Newmont Mining pulls in an extra $300 mln in Free Cash Flow for every 100$ rise in the gold price.  This means that at $1500 gold, they DOUBLE their FCF and that isn’t taking into account where copper is at the time.  At $1100 gold they are already doing over a billion in FCF with a FCF yield of roughly 12 percent… and they are doing this while building Merian in Suriname.  To put things in perspective, IBM is one of the cheapest large cap stocks in the market with a P/E multiple of 9.  IBM is more expensive on a similar metric of FCF yield of 10 percent.
  2. Even if gold just stabilizes, these companies are going to eventually reach a point where there are no more impairments, ridiculous levels of depletion per ounce sold, and various other whacky line items.  Impairments show up in EPS but not in cash flow which is what needs to be followed.  This is where a company like Randgold (GOLD) excels.  They don’t take any impairments and never will until gold is under $1000.  They consistently report positive real EPS and the market rewards them for it to the tune of giving them nearly a $6 bln mkt cap and a 30 PE multiple.  To put things in perspective, a company like Goldcorp has less than twice the mkt cap of Randgold and only 2.5x the Enterprise Value because Randgold has zero debt.  BUT, and this is a big BUT… Randgold isn’t really mining gold for any cheaper than GG.  Goldcorp’s cash costs are even lower but Goldcorp loses money on the headline EPS due to impairments, abnormally high depreciation, and a write down in the value of deferred income taxes which is basically another term for book value of an acquisition in a foreign currency (in GG’s case).  There will come a point in time when this doesn’t happen and that is when the gold price stabilizes and they stop having to impair the assets.  Goldcorp actually earned 19c per share in the current quarter at 1100 gold using my adjustments.  Eventually there won’t be any adjustments and the headline number will be in fact, 19c and 19c times 4 = 76c which gives it a 15 PE at 12.  This is just one example and the other names will have even lower PE multiples and value investors will see this.  According to my calculations, Randgold is twice as expensive as Goldcorp and roughly 4-6 times expensive as Newmont.  This will change.

 

As for a bit more about me… I majored in Finance, worked at a hedge fund after college and then ran partner capital as a prop trader from 2004-2009 at 2 large prop only firms in NYC. I’m not in the business anymore but I have been picking apart the PM miners with a fine tooth comb over the last 6 months and am interested in providing my thoughts on the their financials and how I see the action.  I also love the charts and the stories they tell.  You guys are very good here.