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Entrepreneur58 (40.48)

Gold Stocks - Where Are The Profits?

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November 23, 2009 – Comments (8)

I look at the balance sheets of the gold mining companies and I have to just scratch my head.  Where are all the profits?   Gold is up 9 years in a row, right?  So how come you have paid in capital of billions and billions and retained earnings of little or nothing?  This is for gold stock after gold stock.  I can't find many that look anything like a legitimate business which earns a profit from operations.  They are great at selling shares to the public, but when it comes to making money digging yellow metal out of the ground, there is little or nothing to show those shareholders.   If someone can find a pure gold mining stock that has more retained earnings on the balance sheet than paid in capital, I would love to see it.  This whole industry just stinks by any reasonable measure of business success other than share price, and if they don't have retained earnings after nine good years in a row, what will happen when they get the inevitable bad years?   I find it ironic that people supposedly buy gold stocks for safety and they load their portfolios with these junky time bombs. 

8 Comments – Post Your Own

#1) On November 23, 2009 at 5:41 PM, caterpillar10 wrote:

Production $250/oz. sale @ $1000 is a profitable business GENERALLY - specifically you get labor problems, construction delays/cost over runs on new sites & site upgrades, wars & revolutions, accidents, overly HEDGED contracts on future production (this is a biggie w/many of them), depletions..ect.ect., happens to the best of them, which is why you want 50 companies instead of 1 or 2. Best for me has always been GDX.....it will often rise ahead of the commodity itself and will stall out & correct more slowly - I'm older and slower myself so I need the xtra window.....this and DZZ for when you feel a correction coming is the the best way IMO to make $ in gold and get a good nite's sleep once in a while.

As for your question - it's a good one - I don't really know the answer. AEM was strong until it encountered many of the above all at once - ouch:). For now EGO is 'so far so good'.  

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#2) On November 23, 2009 at 7:04 PM, Entrepreneur58 (40.48) wrote:

Cat10 -  That $250 is just the cost of digging it out of the ground and processing.  It doesn't include the cost of finding the gold, purchasing the rights to mine the gold, and all the development costs to get the mine up and running.  I don't see any retained earnings on the GDX balance sheet from 06/09 and it doesn't look like they pay much in dividends, so you can't really make a case that has been a profitable company.

I once took a tour of the Yankee Fork gold dredge in Idaho.  This thing ran up and down the river valley a hundred years ago  trying to dig up placer gold.  After several years of hard work, the company that operated the dredge barely broke even.  Some things never change.

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#3) On November 23, 2009 at 7:11 PM, XMFSinchiruna (28.01) wrote:

The answers are all there for you within my articles from the past 2 years.

The profits will flow heartily once gold revalues from its presently disconnected price position.

You see, for all the fuss made over gold's advance from the worst levels of the last correction to today's new record, the fact is that relative to the fundamental developments that accumulated during the manipulated technical correction in gold (coinciding with a manipulated and ill-informed dollar rally), gold remains tremendously disjointed from an adequate reflefction of the fiscal state of the western world.

A lot of gold's strength in recent days and weeks is reflective of an investment community that is just now finally educating itself with respect to the implications of this fiscal, monetary, and de-leveraging crisis.

So, getting back to the lack of profits from miners thus far, this is reflective of that price weakness. Gold has hovered closer to the cost-of-production because the manipulators had their way with gold. Anyone who dismisses this interpretation as overly conspiratorial simply needs to review the evidence more objectively. Without a trace (except on the TOCOM), the bullion banks like Goldman Sachs have exchanged what amount to market-making alternating short and long positions on the futures market for gold. I have reviewed corresponding evidence with respect to silver as well. Stay with me ... I'm about to close the gap ...

What's happening at the moment is that big money has stepped in more firmly long, and the bullion banks are losing their grasp of the market control. Short positions are getting busted by the relentless climb in this breakout, and new buyers like the central banks and massive hedge funds are pouring into gold with a conviction that they didn't have before. No longer dominated by split-nanosecond, computer-driven trading managed by black box algorithms, the big money is now investing long gold (and soonafter silver).

And so, we have more than a breakout. It's rather a shifting tide ... a new chapter in the multi-year bull market for gold and silver. I had been anticipating a pullback before we hit these numbers, but at this stage I am starting to appreciate the potential to extend some distance further before retracing.

A decoupling in the degree of daily correlation between gold and silver and the movements in the USDX will only accelerate from here. When some of what investors seek is shelter from all forms of fiat currency irrespective of their source, you get, again, a tidal shift in the bull market. This is what many hedge fund managers are stating as their rationales ... we have reached that stage. This means the dollar can even slow or cease its descent relative to other currencies for a while just as gold and silver could conceivably continue higher.

All the comparisons made between this precious metals bull market and the 1980 spike simply cease from this point forward. Although we have not yet taken out even that inevitable inflation-adjusted high from the 1980 top, we have entered completely untested waters in the history of global finance... a potential revaluation of gold against all fiat currencies. The scale of the global derivatives market and the degree of global exposure to impaired USD holdings will bring the impacts of the crisis to bear on all currencies. This is why China is PO'd, and their cautionary rhetoric speaks volumes for those familiar with Sino-American relations.

The other aspect of what I'm saying here, which I beg Fools to consider, is the extent to which equity markets could be in for a tidal shift of their own once the reality of our still-in-crisis financial situation sets in with the market as a whole. Over the long haul I see inflation helping to bolster equity markets in the face of mounting headwinds, but at some point I believe there will be another re-pricing event along the lines of what we saw in 2008. How do I know this?... because nothing has been fixed. History suggests that de-leveraging events have a way of running their course regardless of interventions. The well-connected, very wealthy set know this, which is why the big money is moving into gold. As I always take care to point out, I derive no pleasure whatsoever from delivering such a negative outlook for the equities markets or the USD, but I can not change what I perceive.

Thank you all as always for hearing my opinion, sharing your own, and keeping this great community apace with a rapidly shifting investment landscape.

C

 

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#4) On November 23, 2009 at 7:21 PM, XMFSinchiruna (28.01) wrote:

Entrepreneur58, please forgive me for reposting the above response to my blog as a separate post. I wanted the discussion to reach readers through my Twitter feed. I referred back to this post at the outset.

As a P.S., and getting back to your question, I submit that the shares of miners more than reflected that earnings weakness, which is partly to thank for the strength of the present surge in the mining stocks. Consider the cases of Yamana under $4 per share, or SLW at $2.51!Thye profits are poised to come in the present chapter of the gold and silver bull, and those that miss exposure to the miners will smack their own heads next year and the year after.

Thanks for prompting the discussion!

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#5) On November 23, 2009 at 7:57 PM, UltraContrarian (31.50) wrote:

Entrepreneur58 (94.88) wrote: "If someone can find a pure gold mining stock that has more retained earnings on the balance sheet than paid in capital, I would love to see it."

AUY.

I agree with you that gold mining is basically a bad business model, and it will take a significant rise in gold prices for miner valuations to make sense.

Sorry if this is a double post, having problems.

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#6) On November 23, 2009 at 9:09 PM, Entrepreneur58 (40.48) wrote:

Ultra - AUY does not win the prize.  Shareholder equity of $6,000 million, retained earnings of $559 million.  So, since this company has been public, they have earned less than 10% on the stockholder paid in capital.  That doesn't count any dividends paid, but most miners are not too generous with the dividends.

Sinchiruna - There was a famous movie line "SHOW ME THE MONEY".  If the gold miners can do well in the future, they should be cranking out the cash.  I don't like to buy a story, I like to buy a return on my investment.  Actually, I do believe gold will go much higher, so the mining stocks will probably continue to work their way up the ladder.  At some point, though, like any stock, they are going to have to show the market the money or face the consequences. 

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#7) On November 23, 2009 at 10:04 PM, UltraContrarian (31.50) wrote:

Oh, you're right.  I was comparing retained earnings to "additional paid in capital", not total equity.  They are one of the few with positive retained earnings at least.

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#8) On November 24, 2009 at 1:50 PM, caterpillar10 wrote:

I don't see any retained earnings on the GDX balance sheet from 06/09 and it doesn't look like they pay much in dividends, so you can't really make a case that has been a profitable company.

There was no such case attempted. Again you are right. It's an ETF, by the way. What I referred to was trading on price action wherein my bank has no problem accepting the profits therefrom:) Great point on the dredging operation - I like that - it is truly emblematic of the problem of gold mining fundamentals, a subject in which I have always needed to suspend my adherence to when dealing with gold.

For buy and hold purposes I much prefer coal which a blind dog can find and you can basically go after with bulldozers, conveyors, and rail cars.

This from a guy who spend 2 years (a looong time ago:) cruising the Mexican Sierras trading mangos and avocados with family mines for 'lima beans' of home smelted GOOOLD. I traded joints w/truckers for the produce. Not 1 of those 'beans' made it back to the states. I spent it aaaalll! in the mercados. I would trade all my coal shares and all the rest to get those 2 years back (are you listening Satan!) and then die in peace w/o a fight.

That's what keeps the gold story going - a dream - a chimera of future pricing. Romance. Adventure. Madness. Owning the mine? Simply out of the question - even for trading purposes I mostly prefer way out of the money LEAPS......   

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