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Adrian Day – Gold Mining Stocks Has Anything Changed

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 the 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.

Talking Points From This Weeks Episode
• Management of many companies has been quite poor.
• Most companies do not report their all-in-sustained costs of running a mining business.
• Dilution of shares through issuance is a reason why stock prices are flat.
• Mines are fixed assets that can’t be moved, unlike factories.

Adrian Day is Chairman and Chief Executive Officer of Adrian Day Asset Management. He is considered a pioneer in promoting the benefits of global investing. A native of London, after graduating with honors from the London School of Economics, Mr. Day spent many years as a financial investment writer, where he gained a large following for his expertise in searching out unusual investment opportunities around the world. He has also authored two books on the subject of global investing: International Investment Opportunities: How and Where to Invest Overseas Successfully and Investing Without Borders.

His latest book, widely praised by readers, is Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks (Wiley, 2010).

Mr. Day is a recognized authority in both global and resource investing. He is frequently interviewed by the press, domestically and abroad. He is a popular speaker and frequently invited to lecture at financial conferences and seminars around the world.