Are Gold Miners a Buy?

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The Daily Reckoning | Saturday, July 14, 2012 Bullish on gold miners...but with one very large qualification, Readers weigh-in on patriotism...and expatriation, Plus, all this week’s reckonings archived for your peacenik enjoyment... --------------------------------------------------------------- Cowboys Wanted: Bag 83.33% a Month for the Next 6 Months Hey cowboy — are you man enough to swipe 83% gains per month with stock options? If so, the next play comes out tonight. You’d better hurry, though, because you have to act before 5PM on Sunday. Here’s the complete scoop. Joel Bowman, checking in today from Paris, France... Joel Bowman We mentioned it in passing earlier this week. “The most dynamic and hands-down easiest way to invest in gold (and other precious metals),” we said. A bold statement, to be sure. One we aim to back up Monday. (Watch this space...) But before then, here’s Mr. Mayer with more on the Midas Metal... [The following column originally appeared on Tuesday, July 10, 2012] The Daily Reckoning Presents Gold Miners are Cheap, Cheap, Cheap! Chris Mayer Gold mining shares deserve their own discussion. I am bullish on gold without qualification. I am also bullish on gold miners...but with one very large qualification: they must produce positive cash flow. I think the bull market in gold is intact. And I think gold prices will make highs within a year. However, gold stocks have done poorly. Few have been spared. Like the other mining companies, they suffer from the same affliction: an eager willingness to take whatever cash they generate and dump it right back into the ground. So even though the four largest listed gold miners — Goldcorp, Barrick, Newmont and Newcrest — generated $47.5 billion in operating cash flows in the last decade, they spent $62.5 billion in new mines, acquisitions and other capital expenditures. The big four have made no money in one of the greatest gold bull markets on record. In fact, they’ve lost money. How did they make up this deficit? They sold more shares to the ever-gullible public — always a sucker for a good story about buried treasure. The number of shares outstanding rose 117% in the decade. I’ve railed before about the management of gold miners. And I’ve tried to find gold miners in which the management teams do intelligent things. But it is hard. Even when you think you have found a team that says all the right things and looks as if it can do it, it does stuff that makes you scratch your head. Aurizon Mines (Symbol: AZK. Price $4.43), for instance, is a wonderful miner. It generates plenty of cash. It has nearly $200 million in cash in the bank and no debt. But where is the payoff for shareholders? There is no dividend, no share buyback. Despite record revenues and cash margins, AZK’s cash balance is actually 7% lower than a year ago — again, because they put it all back in the ground. The share price is down almost 10% year over year. And this has been one of the better-performing mining stocks! It’s very frustrating... Still, price-to-cash-flow multiples have fallen to generational lows. During the last two decades, the XAU Index of gold mining stocks traded, on average, for 14 times cash flow. Today, the XAU is selling for less than 7 times cash flow, which is very close to its all-time low. So with smaller miners that produce cash flow, you have the chance of a good bounce to something closer to historical norms. The best case is a buyout by one of those free-spending bigger gold companies. Regards, Chris Mayer for The Daily Reckoning Editor’s Note: Much like Chris, we’re still bullish on gold. And while mining stocks may be a good way to speculate on the Midas metal, there is still no substitute for the physical stuff — both as a store of wealth and as security against declining paper currencies. Here’s where it gets interesting... We just discovered the most dynamic and hands-down easiest way to invest in gold (and other precious metals). We realize that’s a bold statement. But we wouldn’t make the claim unless we believed we could back it up. And back it up, we shall. Unfortunately, we can’t reveal too much right now. But rest assured, in 2 short days you will have all the info you need. Sorry to be so cryptic, but this is a very sensitive (and potentially very lucrative) offer, and we need to tread carefully. Keep watching this space for more details, but in the meantime, plan to be watching your inbox at 9AM on Monday, July 16th. The “Lost” Gold Bible Congress Never Wanted Anyone To See “Locked away” for almost 3 decades. Kept virtually secret...until now. You’ll soon discover why all the secrecy surrounds this book...and why it would be to your great benefit to read this book now. You’ll also see why I’m doing everything in my power to get this book into your hands for FREE by following one simple step Click here to read more. ALSO THIS WEEK in The Daily Reckoning... Seven Reasons to Sell Stocks Short By Dan Amoss Jacobus, Pennsylvania With all that’s going on, would you believe the market, as measured by the S&P 500 index, is only 4% off its high? Some folks interpret this fact as investors “shrugging off” bad developments, looking ahead to some unseen, glorious future that none of us individually can imagine. But the “wisdom of crowds” is overrated. I see an epidemic of denial — denial at a level last seen near the 2007 market peak, when central bank policy was thought to be propping up stock prices. That denial didn’t end well. Like a Lead Zeppelin By Eric Fry Laguna Beach, California The German government, a AAA-borrower, is more likely to default than Viacom, a “near junk” borrower. At least, that’s what the credit default swap (CDS) market is saying. The CDS market may be wrong, of course, but it probably isn’t crazy. The AAA German government is bearing a very heavy burden these days, thanks to its financially challenged Eurozone companions. As a result of this burden — both immediate and prospective — the cost of insuring a 5- year German bond against default is higher than the cost of insuring a 5-year Viacom bond against a default. Democracy Reaches Its Limit By Douglas French Government finance at all levels seems to be unraveling. The city of Stockton, California declared bankruptcy. North Las Vegas, Nevada would be in the same boat if the state of Nevada allowed for it. Michigan’s state government has taken over the management of four cities, and the state’s largest city — Detroit — has a $200 million deficit and has made a deal with the governor for the state to have a hand in fixing the city’s financial problems. In Praise of Parallel Institutions By Wendy McElroy One of the key advantages of a parallel institution is that its creators and users need not even be aware of how the institution benefits freedom. The founders of FedEx wanted to make a profit; customers use the service because it is inexpensive, convenient, and efficient. The government agency is marginalized not because the hearts and souls of people have been converted toward privatization or freedom but simply because the market offers them a better alternative. Nevertheless, the political end result is the same. Another Faux Fix By Bill Bonner Waterford, Ireland The latest fix in Europe is already coming un-fixed. Which is, like, so obvious and so expected that we hesitate to mention it. But we bring it up to make a larger point: economists are morons. Yes, dear reader, we realize that we are beating a dead horse. We all know economists are morons. And we all know they’re no less moronic since the last time we said so. But today we will beat this horse some more. If You Own Any of These Gold or Silver Stocks*... Then you may be eligible to instantly collect a cash payment of $784, $1,324, or $2,345 — without having to sell your shares. (*List also includes technology stocks, retail stocks, and more. For a complete list of all 3,097 participating stocks, see this report.) The Weekly Endnote... And now, it’s over to a few readers for some thoughts, on blind patriotism...and active expatriation... First up, Reckoner Daryl L. writes... Your comments from The Daily Reckoning of July 10th were a simple message about war. I have always been amazed at how easy men will give their lives for a cause, idea, perceived wrong or just doing what our leaders tell us to do. I am from the Vietnam generation and did not go into the service. Upon graduation from college in 1971 my father, who was a lawyer got my draft induction postponed indefinitely. Many of my friends did go to Vietnam and all of them came back a different person. There are times I wish I could have had that experience to know what they went through. I have a very hard time understanding war and your words on war and peace were reassuring. Thank you for your investment advice and also the message of peace. Next, Reckoner Winston S. writes... Thank you for putting into proper words war thoughts I have had since I actually started to think for myself...which took a number of years to do. I feel so ashamed to be associated with an aggressor country no better than Hitler’s or Napoleon’s. When in a discussion of limiting Iran or some other country in nuclear bomb building, (that always turns into an argument) I always mention that we are the only people to use the bomb as you said. As I look at this perpetual war in the Middle East I am reminded of 1984 and it’s “war is peace, freedom is slavery and ignorance is strength.” Of course, not everyone agreed with our peacenik screed. Many did not. Here’s Reckoner Robert M. ... Although I generally enjoy your columns, I feel you are generally off point today. Are you grieving that a lot of civilians were killed because we used the atomic bomb on Hiroshima and Nagasaki? That is a result or outcome of war. Similarly, a large number of Japanese civilians also were killed when we firebombed Tokyo. But what is your point here? We brought the war to an end with an effective but deadly action. In war there will always be civilian casualties. Think about the casualties and destruction from Bremen and Dresden. I guess I missed your point today. DR: Mr. Mumummad Ali will now answer your question. Mr. Ali? “I ain’t got no quarrel with them Viet Cong... No Viet Cong ever called me nigger.” What we think Mr. Ali is saying here is, if we’re looking for true enemies to freedom, maybe we ought to look a little closer at home...like at the people selling us war...and once imprisoning those who opted for peace. And finally, Reckoner Bob M. writes in from “up north” with regards to our latest Group Research Project: Expatriation Experiences... I couldn’t help but notice your article on the expatriates. Very interesting. Here’s my experience below. While I was a green card-carrying permanent resident with my United States citizenship application filled in and ready to file, I was fired as an ordained minister. I took my Canadian wife and two American-born children back to Canada and started over. I kicked around the idea of transplanting somewhere else in the US but hindsight is 20/20. With the employment situation not good, jobs becoming more scarce and an economy that has refused to restart despite the multiple doses of adrenalin to the heart, I couldn’t conceivably come up with good ideas to stay. We loved it there, we have so many that are ‘near and dear’ there but we likely wouldn’t have survived like we have. Today I make almost twice as much money in an economy that went from red-hot in 2007 to cool in 2008 and warming a bit now from 2010 to 2012. My wife and I own our first home and are able to tuck some money away for retirement and our kids’ education. None of this was even remotely possible while we were in the US prior to 2008. I can only guess that we’d be shipwrecked and have to claw our way onto the shores of stability if we had stayed in the US. We are sad that we had to leave a place we loved and people we loved even more but are glad to have done the right thing for our family. --- Do you have an expat experience to share with your Fellow Reckoners? Have you skipped Dodge...or are you considering doing so? As always, we welcome your thoughts. Email them to the address below and... ..enjoy your weekend. Cheers, Joel Bowman Managing Editor The Daily Reckoning ---------------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Another Faux Fix The Worldwide Debt Culture More Credit to “Contain the Depression” Are the Markets Wrong on Norway? Fed Disappoints, and Risk Assets Get Sold Aussie Dollar Rallies Overnight But What About Kiwi? 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