Gold Mining: The Wait Goes On

The Flying Frisby

Not so much a Sunday morning thought piece today as an update on all the gold mining plays. It’s darkest before dawn and all that. I’m actually feeling pretty optimistic.

Don’t forget, if you are interested in mining, I am doing one of my lectures with funny bits about the history of mining at the Edinburgh Fringe this year. As always, I shall be delivering it at Panmure House, where Adam Smith wrote Wealth of Nations. It’s at 2pm most afternoons. You can get tickets here.

Onwards …

---

Even in today’s digital age, investors still love a gold mining story.

If I put out some exciting copy about a new gold mining venture and the fortunes you could make, I can almost guarantee that hundreds of people will upgrade their subscription. The problem is gold mining is a terrible business. For every thousand or more prospects, probably just one will actually become a profitable, producing mine. The space is littered with failure, fraud, and the smouldering remains of investors' portfolios, burnt by the sector.

My problem is, I probably know more about gold mining than I do any other sector. I’ve got better contacts, better insights. But it’s a horrible, horrible business, and I have taken to avoiding writing about it because there are just too many failures.

This letter was launched on the back of a company called Moneta Gold (ME.TO), proud owner of the largest undeveloped deposit in North America. I thought this was about as low-risk a mining recommendation as you would ever see. Millions of ounces. A safe jurisdiction. Extremely cheap relative to its peers. I was sure it would be bought by a major looking to replenish ounces. Within a month of me writing about it, it was up more than 50%. Everything was rosy.

The stock has been declining ever since. Now I’m down more than 50%.

I’ve even avoided talking about it because I’m so cross about it, which is a terrible approach to an investment. The value is even more compelling now, by the way.

The next company I wrote up, Minera Alamos (MAI.V), looked like another safe bet. A super-competent management team with a proven track record. Three mines, all about to go into production. All simple heap leach mining processes. A jurisdiction with a rich mining history. It was so obviously going to get a market re-rating, from development play to mid-tier, 100,000+ ounce per year producer.

What happened? It got its first mine producing, with a few hiccups because of bad weather and a water shortage, but it’s producing. The cash flow from that would fund the second mine. Guess what? It can’t get a permit for its second mine. It was supposed to be a formality. The documents were submitted a year ago last April. Barely anything is getting permitted in Mexico. There’s a two-year backlog. Nobody wanted to greenlight anything for fear of incurring the wrath of the President, Mexico’s answer to Jeremy Corbyn.

It won’t last forever. It never does. But investors don’t want to wait. Who can blame them? Mining is too slow as it is. The stock has sold off.

A similar problem hit another mining company I really like, Fortitude Gold (OTC:FTCO). It can’t get a permit to expand one of its existing mines, and so progress there ground to a halt. It’s still paying a handsome dividend for its current production, but unless it gets permitted soon, it can’t expand, and there won’t be enough production to maintain the dividend. The stock has sold off 30%.

And then there’s Condor Gold (CNR.L/COG.TO). Here we have a mine that is “shovel ready” and good to go. Two and half million ounces at an average grade of 3-4 g/t - i.e., very mineable. There’s a $1 billion company sitting right next door that needs ore for its mill, a mill that is only operating at something like 20% of capacity. “Fill the mill,” its investors are screaming. It’s such an obvious buyer of Condor, one of those rare “value-accretive” deals, to use the language of LinkedIn, by which everyone wins. Condor’s management, with whom I normally have ongoing dialogue, suddenly stopped replying to my messages. “We can’t talk,” was all I got. Again, I was sure the company was about to be taken out. Six months later, the company is sitting there with its lipstick on, trying to look seductive to a next-door neighbour that doesn’t look interested.

God, this sector is frustrating.

I know what’s going to happen. I’ll abandon ship, and then every single one of these companies will suddenly work. Gold mining more generally will suddenly take off—a flight, by the way, that is long overdue—and I’ll have lost my seat on the plane. So we keep on holding. And waiting.

I wish the gold miners had been like Microstrategy (MSTR) or Novavax (NVAX), which tripled and quadrupled within weeks of my writing about them. No such luck. And wishing, for all the good feeling it can create—that’s why we do it at birthdays—is not the most proven investment strategy.

In any case, subscribers are due a catch-up on the gold miners, and so that is the purpose of today’s missive.

We’ll start with gold itself and where I see that going over the next few months.

Read more