Adrian Day – Gold Mining Stocks Has Anything Changed
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Adrian discusses the gold mining sector, and he notes that only two gold stocks have outperformed gold itself in recent years. This underperformance is one of the reasons why many investors are not particularly interested in the sector. There are many inherent problems in mining, and poor management decisions exacerbate this.
Some of the problems with mining companies include resource depletion, fewer discoveries, higher costs, unexpected losses, debt, government regulation, and low prices. There is twenty year period where the market moves from peak discovery to peak production. Grades are declining at mines worldwide and new mines have lower grades than existing mines. High-grading of mines is often done to maintain cash-flow, but it amounts to stealing from the future.
Costs have risen considerably in the past few years in spite of lower oil prices and a strong U.S. dollar. Gold prices have also risen and yet mining companies are still not producing profits.
Adrian says mining companies have overpaid for marginal assets in the good times. They seem to forget that precious metals are a long-term cyclical market. As a result, there are often massive write-offs.
Exploration companies have a hard time finding high-quality assets. It’s very much like looking for a needle-in-a-haystack. Another problem is they don’t generate cash-flow instead to raise cash they usually dilute their stocks and suppress their share prices. Many don’t even spend on actual exploration it often all goes to the management.
In spite of all of this Adrian feels that we are poised for one hundred percent moves in gold stocks in the not too distant future and if one chooses carefully possibly much more.