UPDATE – I forgot to add “how to evaluate” a miner video!!
Note: This is not financial advice. I’m not a financial advisor and I’m wrong 100% of the time. Investments are risky and nothing mentioned here should be considered financial advice. Invest at your own risk.
Before we begin – From what I understand, Mark Twain said “a mine was a hole in the ground with a liar standing next to it”.
How to invest in mining stocks
There are something like 3000-5000 miners out there. Where to start?
Where I’d like to start is where I ran into my first problem. How to evaluate them. You see, as humans, we want to put things into boxes to understand them. Let me start with explaining the below.
For every 3,000 gold and silver projects, only one is turned into a mine. Meaning, a large majority of projects never get turned into mines.
What many people don’t understand is that to be a miner, you do not have to produce money, yet. There are VERY large miners around the world that have tons of projects that have been turned into mines. These mines may have an 8-20 LOM (life of mine). Some miners have projects and are looking for gold. Some have found gold, but are going through the arduous task of turning it into a mine.
From every patch of land until you pull gold or silver out of it, it could be 10-15 YEARS. Read that again. YEARS. This is why I’m so crazy over miners at the moment.
See – 2011 saw record high prices, and then for 8 years, prices receded, a LOT. What happened was these companies needed to stay in business, so they cut their exploration departments. The 8-20 year LOM has taken a LOT of the inventories down of the big miners. And, with very little projects out there that seem to have gold or silver, it could be many years before production is ramped up to meet future demand.
This now creates an opportunity for smaller miners without gold to prospect. If they tend to find a lot of gold, perhaps that investment you made can be a 50-100x. In 2018, Great Bear found a great chunk of land. Today, it’s at 54x. However, it’s still many years away from being built.
So let’s put miners in a few buckets here.
- Early stage exploration. These are high risk, and a majority of these will not pan out. A company might have multiple projects and one can hit, the others can be duds, and they can be rich. These guys are looking for money to drill and find what they think is there. Usually, you are looking for gold or silver where it’s already been found. Maybe in a district. Maybe adjacent to a world-class mine. These can easily go 10x or more.
- Later stage exploration. After many drill holes and potentially several years of drilling, you have found a significant resource. Most of the project has been de-risked. At this stage you might have some documents like a PEA (preliminary economic assessment) to see if it’s cost effective to mine. Meaning, you may have 1 million ounces of gold, but it might be a mile underground. You might be 300 miles from civilization and the cost to pull it out of the ground over 10 years may be $3,000 per ounce. At $1850 gold, this doesn’t make sense to mine. If gold was $10,000 per ounce, it does.
- Developers. These guys are taking the mine to production. How much will it cost to put in roads, build a mill, get permits, do an environmental study? What if it turns out you need to raise $800 million to build a mine and you have $30 million in cash? How do you raise this money?
- Producers – now, here you can have “junior producers” and “senior producers”. This is mostly a difference of market cap. Here’s the main difference. If you have gold at $1600 and a senior producer can pull it out of the ground at $1000 and a junior which has higher costs pulls it out of the ground at $1400, you can see how a senior producer is more profitable. However, in environments where gold may go up a lot – if gold goes to $2200, you can see a senior producer went $1200 profit (2x) where a junior producer now went to $800 profit (4x).
Pierre Lassonde created the Lassonde Curve so you can see where each PROJECT is in the timeline.
Using this, you can see that it’s good to get into projects early, then sell at a peak – then when it is decided they will construct a mine, to get back in then. The further to the right on this sheet, the less risk. The less risk, also means less upside.
Now, there are other things to consider in what miners to buy….
- Who are the jockeys? Have the people running this had great success? Have they done this before? Are they well respected?
- What are the horses? Are they decent projects with volume? Are they cost effective to mine? Is there infrastructure in place, or would a billion dollars need to go into infrastructure to buy? Is it close to another mine where you could truck pay to it?
- What is the jurisdiction? I tend not to put my money in certain jurisdictions. You are mostly safe in Canada, the US, and Australia. But every jurisdiction has its pitfalls. Political unrest. Government seizing a mine. The US and environmental permitting issues. Governments shaking down companies for taxes. Each jurisdiction at the country level has its own pitfalls, then you have to go deeper in to that. For example, Nevada in the US is a great mining jurisdiction, but Alaska just shut down a potential trillion dollar mine before it was ever built due to environmental concerns.
- Share structure and funding. Who are the big backers? Does management have skin in the game? Is share dilution a big issue? For example, if you need to raise $10 million for drilling, how are you paying for it? Issuing more common shares and private placements to dilute me? Share dilution is almost inevitable in some instances. In others, maybe a company takes on debt, exchanges shares for land, sells projects to raise money, or gives streaming deals on future gold/silver to fund projects.
Newsletters/journals – I subscribe to several newsletters that give you tons of insight. Lots of picks on miners. Of those 3,000 or so, the 3 I subscribe to probably deal with about 50-75. And of those three, you see overlap on recommendations. When all 3 recommend, to me it’s much lower risk. It may still be a high risk play, but if 3 people independently came to the same conclusion, for me they have vetted the 4 items above for me. I subscribe to:
- mining stock journal
- gold newsletter
- junior miner junky
Now that you have an idea of who is decent, and where to put your money, now what?
Generally speaking, it is more advisable to invest based on risk tolerance. Meaning, if you are 25 and lose everything in an investment, you have 45 more years before retirement and can rebuild everything. If you are 63 and plan on retiring soon, you need to be more conservative.
For me, MY preference is to have a solid base in BIG producers of gold and silver. Within this though, you can ratchet up your torque by doing deep in the money call options for longer periods out than just buying stocks. Typically, I look for options that cost 1/3 of the current share price and are 6-18 months out, with the strike price as low as possible for the 1/3rd rule. Meaning, if I put $3,000 in to First Majestic, and the share price goes up 1/3, I now have $4,000. However, if I buy long call options and the price goes up 1/3, my options doubled an my money is at $6,000. It is RISKIER than just buying shares, but it’s how you can have torque on major producers.
I then have a few junior producers. These guys have higher leverage to the price of gold/silver.
I have a healthy portion of “pre-producers”, in which a construction decision was made and first pour may be 12-18 months out. This is the stage above towards the end where the red circle is. I was able to get a 3x on PureGold due to this. I think there may still be another 2x-3x with PureGold when they prove out more of their land.
I have a few later stage explorers like Back Rock who are mostly de-risked.
I have a few earlier stage explorers like Labrador and Precipitate Gold who may be 10x if they hit something. I don’t have many of these, but those I do pick are carefully chosen. Most of these I’ve had have done a 2-3x. I sell half the position to get my money back, then invest in another project with those winnings.
So, there you have it. This tells you HOW to invest in miners, not which ones. Right now, a LARGE portion of my portfolio is at GDXJ, SGDM, SILJ to follow the junior gold miners, gold miners (with a lot of M&A targets in SGDM), and silver miners. SILJ is mostly all silver producers now that are primary silver producers. Most LARGE silver producers (SIL) have silver as a byproduct metal, so when silver doubles in price, it won’t necessarily affect their bottom line as much.
The below gives you a good idea of my allocations:
I am positioned like this now because I am waiting for big institutional money to hit the big indexes first. I am going to ride this up 60-80% over 4-6 months – that’s the plan. Sell into the mass move up.
After big money makes it there, money starts trickling down to junior producers in anticipation of M&A targets. From there, it goes to junior miners and explorers. “Big” money cannot invest in a junior explorer with a market cap of $20 million. So – this is where retail money goes when they are crowded out of the big boys.
Right now, the Newmonts of the world are collecting RECORD Free Cash Flows. They recently increased their dividends. Now, they are doing share buy back to increase share prices. The idea here is to attract the big boys for investment. When that happens, they will not only be having record FCF, but then have billions free in cash for acquisitions. In the next 12 months, I expect a LOT of mid-tier companies to be taken over by very few large miners. There just isn’t enough projects to go around and the big companies no longer have exploration budgets. They need to buy juniors with lots of inventory.
UPDATE – how to evaluate a miner. While some of these guys have zero revenue, how to you value them??? This video goes over all kinds of scenarios, from producers to explorers that have a hole in the ground. Take a look. Many of these are well known, but my BIGGEST metric I use is comparing NPV (net present value) to market cap for a junior not producing. This is why I put BIG money in Golden Minerals while shying away from Aurcana. No one knew about Golden Minerals and I was looking through their company presentation. I found that the numbers of NPV to market cap had them looking at a 10x as they were about to become a producer and had several mines. The NPV was like .05 or .1, something stupid. On the other hand, Aurcana was hyped all over the internet and when I did the number, the NPV to mcap was 2-2.5, on a mine that may have problems mining in the winter and had only an 8 year mine life. They are talking a BIG game about the “optionality” with further exploration to take it to a 20 year mine life – but the truth was, the market cap was wayyyyy too high by the time most of us heard of Aurcana and there’s not a lot of meat on that bone to go up.
Lastly…..why is this all a big deal?
Asymmetric play of a silver miner
Well, gold and silver over the last 5,000 years have been money – but in the last 50 years, they are getting harder to find. Silver historically was valued at 15:1 with gold. Today, it is 70:1, and in the last 100 years, averaged 33:1. However, today it is only found in the earth at 8:1.
50 years ago, the cost to mine gold out of the earth was $40. Over the years, it has become more scarce at surface levels and has forced miners deeper underground. This has made costs go up to about $800-$1200 per ounce for existing mines. Many, many mines have yet to be built because they aren’t economically feasible at less than $1600 or $2000 gold, etc.
Likewise, silver has been suppressed by futures contracts the last 40 years and because of this, exploration has gone by the wayside. Almost all silver production today is a byproduct of mining other metals like zinc and lead. Meaning, these miners are seeing silver as something to not throw out and get a few bucks for. The “primary” silver producers are almost extinct, and many of them have to also mine gold just to stay in business.
Over the last decade, there has been a severe degradation in the existing grades of silver being mined and like gold, it’s now hitting a point of criticality where surface silver is going extinct. Where gold had led in prices going much higher, it was a degree of scarcity in the soil. Silver will follow in its path, just because they have to go deeper and deeper to find it.
You may have SOME producers with “high grade silver”, but maybe they produce 5-20 million ounces a year. Global demand is closer to 1 billion ounces. So, as a majority, most silver producers see rising costs to dig deeper, as well as lower grades. To make matters worse, as mentioned above, it takes 10-15 years to bring a mine into production – from start.
Many of these silver miners have put mines in “care and maintenance” because maybe when silver was $50, they could mine these at a cost of $35 per ounce. At $25 per ounce, they shutter these mines until price then can justify re-opening. But, the price has to be consistently there for a period of time. It takes months and millions of dollars to re-open these mines.
Furthermore, 60% of silver production goes to industrial uses. For example, silver is used in band aids, stretchy pants, photography, electronics, solar panels, etc. Almost all gold (97%) ever mined in history is still available in investment and jewelry. Silver has been consumed, and it is nowhere near economical to recycle silver. Silver is used in tiny amounts, so while it is imperative to over 1,000 industrial products, it doesn’t mean you can extract the silver from band aids. Maybe it costs $10 to get the silver out of a band aid, and the value of that silver is $.0002.
Lastly – while there is about 1 ounce of silver used in each car produced today, there’s 2-3 ounces used in each electric vehicle. Those numbers don’t mean a lot until you realize there’s 70 million or so cars produced per year. Mine production of silver is declining each year, and in 2019 mine production was about 800 million ounces. Over the next decade, there will be more pushes towards solar panel, electrification of the grid, and electric vehicles. Furthermore – with increasingly volatile times and the debasement of the dollar, investment demand has skyrocketed in both bullion and ETFs.
This past year, you saw a 350 million ounce shortfall.
So both gold and silver act as money, but silver is also a strategic metal used in over 1,000 products. It’s the best conductor of electricity, and the thought is over the next decade, there may be over 1 billion Africans getting brought into the grid.
While gold is more scarce than silver, there’s about 2 billion ounces in investment and another 4 billion in jewelry. Roughly the same for silver. While silver has been found more plentiful than gold – it is CONSUMED.
Therefore – while there isn’t a ton of gold at $1850 per ounce for sale, as the price of gold goes up, people will part with it. Therefore, supply of gold is a function of its price. Supply of silver is a function of price, but also inventory.
One thing I suspect is we are at a crossroads with silver in that over the next decade, I think we could see the 29x move we saw in silver in the 1970s. that would give us $725 silver by the end of the decade.
You see – if we are going to massive amounts of electric vehicles and the EV in 2030 is $60,000, it only uses 2 ounces of silver. The band aid may use .001 gram of silver. The iphone may only use .5 gram of silver. While many of you scoff at the price of silver going up much, it’s because you have no understanding of its fundamentals. Apple will need that .5 gram (about 1/50th of an ounce) no matter if it’s $25 (about a dollar) or $725 per ounce (about $14.50) because it means zero in respects to the price of the product. Meanwhile, it will be an inflationary decade for commodities, so these price bumps will be passed on to the consumer.
This is a BIG reason why miners are an asymmetric play. Not only do we have the monetary debasement going on, we have a fixed supply that cannot be ramped up easily in the next few years. This doesn’t mean we have no metals. It means we have very little amount of those metals AT THESE PRICES. And, it may take a decade or more to get silver caught up – if it can – to demand. Remember, gold once cost $40 to pull out of the ground, now it’s $1000. Silver is following the exact same path.
If silver is found in the ground at 8:1 to gold, AND gold is going to $10,000 this decade – this puts silver at $1250 per ounce. This is in the zip code of the $725 I’m calling for.
This means, to me, it is NOT unreasonable to see $100 silver inside of 1-3 years with massive inflation to start hitting us “officially” Q3 2021. Those companies like Toyota and Band Aid will see extremely low inventories of silver at these prices and a supply squeeze is on.