By: Mark Mahaffey
October 16, 2013
If gold prices stay at the current levels for a prolonged period of time, do not be surprised if gold production falls much closer to zero. From an investor’s perspective it is a treacherous minefield. Of course, there are companies who really do have high grade ore reserves who can really claim to mine at $800/ ounce but these are very rare, maybe less than 5% of the 2000 quoted companies. The Northern Miner writes that out of their survey of 1400 Toronto listed firms, 721 currently have less than $200k cash in the treasury.
While the big caps that make up the GDX index are unlikely to go out of business in the short term and may offer some trading opportunities for a bounce here, the very nature of this desperate business remains. Huge capital is required a long time before there is even the sniff of future cash flow. All companies can go to zero but mining companies get there much faster than most. Strangely it might well be the demise of 1000 mining companies over the next year that is the most bullish reason for the survivors.
If gold production really does fall off a cliff, the standard laws of supply and demand should be a huge positive factor for the price of gold. The sentiment in the gold market is horrendous led by the media and the price action. It is down 25% on the year. If you were looking for an asset class with a high margin of safety, (production cost) that was universally hated with no speculative long positions for a long term value portfolio allocation, you could do a lot worse than gold bullion at $1250 ounce.”
“In the resource business where the price of gold changes by the second, there is always the possibility that in the future the price will rise above the production price and so there is an inherent call option in the stock price. Unfortunately this has to be offset by the carrying cost of the asset. If it’s in your back garden, carrying cost is pretty minimal. If you are having to pay even skeleton salaries, keep up permitting, ownership rights, pay listing fees etc., then these carrying costs will eat in to the call option value pretty quickly.”
To read Mark Mahaffey’s article in full, visit: HindeCapital.com