Hello Bobby,
Go for high cost producers that have adequate cash and working capital - they have the most leverage on a gold price rise in terms of marginal gains in profitability, and therefore in Net Present Value (NPV) of the net cash flow, from a small rise in gold price. Highly profitable producers, i.e. low cost operators, realize only small marginal gain in NPV, hence little increase in valuation. Like life, there is a list of exceptions, the chief one being that, because all metal shares behave like options on the underlying metal, the option premium expands as the metal price lifts off the bottom. Thus, the profitable, low cost producers' shares exhibit a larger increase in price than would be dictated by strictly just the rise in NPV as higher gold price.
Why not the junior exploration companies? Bad time afoot for juniors. Most scheme to discover a promising deposit and spin it out to a major.
1st problem is juniors can't raise public equity money today - many (most?) are going to close up shop soon if they can't finance. Even if they could, current stock prices are so low that gross dilution will result so they would have to discover a big deposit just to keep share price level.
2nd problem is that many cash-strapped juniors are seeking to sell properties and the huge supply has sunk asking prices for properties. Hence, juniors can't finance through vending off properties. The supply of properties means cash-rich companies can pick off just the cream and there's no panic on part of cash endowed companies to JV properties with juniors.
The above 1 & 2 mean most junior's are poor buys and the public knows it. Hence, 3rd problem - most speculators are trying to liquidate so any decent sniff of a drilling success meets with selling. We in industry today find that the best way to sink our stock is to put out favourable news!!
4th problem - the scams, frauds and self dealings have jaded the speculative public. For a while the public figured that if a letter writer were being paid off to tout a stock, it was ok - jump on the stock because the letter writer would be pushing it up. Unfortunately, the basis for moving stocks - major influx of public buying - has evaporated so the stories have to be real. IMHO (mining securities analyst for 30+ years, geologist & financial analyst) most letter writers aren't qualified, don't know how to value an exploration company. Most wouldn't know a scarn from a scam. Public is fast losing confidence in letter writers so they can't move stocks anymore.
Back to basics - production and cash flow.
RH |
