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Mining Stocks Vs. Metals
When considering how to invest in precious metals there is the actual purchase of the physical metal such as gold, silver or platinum, or the ability to chose a proxy for the metals such as mining stocks. Only owning physical gold, silver and platinum give the investor a 100% correlation to price movements. While we at Blanchard and Company, Inc. certainly believe that buying the physical metal is the best way to go, we want to provide all the facts to our clients when considering their purchases.
Mining stocks for the most part (there are always exceptions) can be broken out into three groups and all three have their plusses and minuses involved in owning them. They are the conglomerate mining houses, gold and silver mining stocks and junior exploration companies.
Conglomerates
This group is comprised of only a handful of stocks, Rio Tinto, BHP Billiton, AngloAmerican and Xstrata among them. None of these companies have US or Canadian based headquarters. These companies mine everything from copper, zinc and cobalt to gold, silver and platinum. The appeal of these stocks is that they have no one commodity that they depend on to derive all of their value…which is exactly why someone interested specifically in gold and silver exposure should not want to own them. They trade at low price to earnings multiples and are considered safe plays, but the stocks aren't going to move up or down depending on how precious metals prices move.
Junior Exploration Companies
This group numbers in the hundreds because the reality is that very few of them will ever graduate to a mid-tier company or be bought out. These are companies who own undeveloped mining properties with the hopes that they can either partner with an established mining group or have their interests purchased after proving their reserve base. Most are penny stocks that are very thinly traded, so these companies can skyrocket or lose 100% of their value in a very short space of time so be sure you have some nerves of steel or a lot of Pepto Bismol when entering these stocks. They don't track the price of gold and silver as much as they move up and down depending on their ability to sell the projects that they are exploring.
Platinum, Gold and Silver Producers
This group is made up of the large producers such as Newmont, AngloGold Ashanti, Gold Fields, GoldCorp, Freeport McMoRan and a large number of mid-tier producers such as Glamis Gold, Bema Gold, Coeur D'Alene Mines, Stillwater Mining and IAMGold to name a few. These are the stocks which can be the best proxies to precious metal movements. When the precious metals move these stocks move as well. The problem lies in the fact that they are companies and not the metal itself. When things are going well, these stocks are virtual cash cows. Take Freeport McMoRan for example. The company owns the largest gold mine in the world and produces over two million ounces of gold a year. They have paid multiple special dividends to shareholders in the past two years on top of their regular dividend and the stock hit an all time highs after easily topping Wall Street expectations for earnings in the 3 rd Quarter of 2005. But what about in 2004 when the company had a landslide at it's mine and lost the vast bulk of its production? The stock lost nearly 30% of its value in a period of months as the gold price continued its bull run. In the past several months the company has been plagued by bad press and demonstrations at their mine site, both helping to lop off nearly 20% of their stock price in the 1st quarter of 2006.
Gold and silver stocks can suffer any number of problems…accounting irregularities, mineworker strikes, strong local currencies, inflationary costs of raw materials and production hedged at lower prices are just a few. Miners across the globe are battling the high cost of operating their mines which are spiraling out of control. Steel, tires for dump trucks, and oil and gasoline prices are some of the factors which have caused even Newmont, the bellweather of all gold stocks, to miss Wall Street analyst expectations in some of the latest quarters, most recently disappointing “The Street” with their Q4 2005 numbers despite decades high gold prices. South African gold mining companies are running losses in their operations despite high metals prices and have begun shutting in high cost mines and firing workers which is especially poignant with reports having come out in February of 2006 showing that South African production from gold mines is at a near low in the past 80 years.
The point is that with mining stocks it can be a crapshoot. Just because gold and silver are continuing to rise, doesn't mean these companies are making more money. Some are and some aren't. One quarter could be the best quarter reported by these companies in years and that can be followed up by a staggering loss the next.
There is plenty of money to be made yet in the precious metals sector as this bull market continues and Blanchard and Company, Inc. believes that the easiest way to do that is to decrease the number of potential factors affecting your paper investment and own the physical metal.
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