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Do not feed the animals (from IKN351)

The opening rant from IKN351, out yesterday.


Do not feed the animals (part 24)

Rock the hard jams, treat it like a seminar
Teach the bourgeois, and rock the boulevard
Some say I'm negative but they're not positive
But what I got to give? The media says this.

Don’t believe the hype, Public Enemy, 1988

Last week, on the insistence of a few people, I read the note “It’s time to buy uneconomic gold companies”, by Cejay Kim and published by Palisade Research on January 27th (1) then picked up by a whole bunch of rebound sites (e.g. Mining dot com here (2)). Its argument is a simple one, that you (and I) should get out there and buy shares in (junior mining exploration) companies that have uneconomic gold assets as flagship projects, with names mentioned including Chesapeake (CKG.v) with its Metates project in Mexico, International Tower Hill ( and its Livengood project in Great White North, Exeter Resources ( and its Caspiche project in Chile. We’re also offered a list of thirty big gold mine projects and their resource count that comes to over a billion ounces of gold. We’re told it’s a good idea because of their “optionality” on the metal and that if gold goes higher, these beaten down stocks will go a LOT higher, with the classic “ten bagger” phrase used by its keen and thrusting author for your delectation and reading pleasure. Yes indeed, the article annoyed me immensely on several levels:

It’s pure BS: There’s a reason why these so-called “gold assets” are priced at pennies to the dollar, they’re not economic now and the vast majority will never be economic ever, not ever, never, nunca, jamais, keine freakin’ chance. We’re offered a list with “one billion ounces of gold” and invited to ask how much a billion ounces of gold is worth. We’re given CKG.v at Metates as an example and told it’s not a project that can be financed“...despite having an in-situ value of C$31 billion” (they underlined the big dollar number, not me). Allow me to answer the question: A billion ounces of uneconomic gold is worth zero dollars and zero cents because if it costs more to get out the ground than you can sell it for, it’s worthless. But hey let’s up the ante because according to USA’s oceanic people NOAA, there are around 20 million tonnes of gold in the world’s seawater (3). In old money, that’s 643 billion ounces (yeah, with a B). Not only that, but about twenty seconds on Google will show you that people have spent time working out successful methods for extracting that gold (4).* But despite there being oodles and oodles of ounces of gold, out there, identified and available, they’re all worth nothing.

And be clear, just because they’re uneconomic now it doesn’t mean a sudden rise in gold makes them economic. If there’s one lesson you should take from the boom/bust era for the exploration mining sector, it’s that one. What the PM sector is crying out for isn’t big projects or high grade projects or low grade projects or cheap projects or expensive projects, it’s economic projects. A sudden spike in gold can outrun underlying costs on a temporary basis (we saw that in 2010) but by the time things such as build decisions are made the cost creep will be there in a whole bunch of things, from rebar to geologists to drilling contracts to the price of NaCN, not forgetting of course forex of other currencies against the dollar (gold is money, but you think gold goes up in US Dollar terms and other monies don’t, Mr. Goldbug?). And also remember that just because Metates (for one example of these never-gonna-happen projects) suddenly gets into a zone where it’s theoretically economic, there’s still a whole bunch of better projects waiting to be bought, developed and built. The way it works isn’t on an individual project level, it’s more like a sports league table and the best teams, the best projects, are the ones with the most points. Those are the projects and companies that are going to get bought first, long before the mid-table mediocrities or the moose-pasture relegation candidates find people sniffing around. Put another way, marginal projects stay marginal, even when the nominal economics make them theoretically possible during the possibility of a short window when gold price outruns underlying price inflation. That’s what the last few years should have taught us all. Or put yet another way, do you seriously believe Caspiche (XRC) gets built before Curraghinalt (DNA)? If not, why are you buying Caspiche with money you could dedicate to Curraghinalt?

It’s written by BS merchants. The whole mining commentary world is something forced upon me, not something I enjoy and as time has gone on I find myself reading less and less of the guff and nonsense that pretends to be sound advice, because it’s often anything but that. It normally takes prompts from third parties to get me to read “expert anal ysis” these days, such as the way this Cejay Kim article got to my eyes. But even among the mediocrity of the mining parasite world a special place in hell awaits the two-faced toerags at Palisade.

Cejay Kim is a product of the Casey Research school of copywriter bullshit, he knows exactly how to market to the mouth-breather end of the investor world, hit the greed button, sequins and dollar signs suddenly appearing before their eyes.

Palisade has two main arms and a couple of offshoots, such as the weird “Palisade Radio” thing, basically a podcast by any other name that also appears on Youtube. But the main parts are Palisade Global, which is an investment firm that provides solutions to companies in return for fees and Palisade Research, which is purportedly sellside-only. Ask Palisade about their set-up and they’ll tell you sophistic nonsense such as how Palisade Research offers investment ideas without paid motivation, while Palisade Global offers paid-for services.

Which means that our friend Cejay Kim can decide to put on his “Palisade Research” cap and pretend to offer conflict-free opinions while all the time he’s really employed by a company that takes cash from mining companies in order to promote them to you. If the combo of a person who learned his trade at Casey Research, is paid by mining companies who give his promotion company money for services, then pretends to write independently and without conflicts isn’t a very large red flag to you I still have that bridge for sale, just outside Brooklyn NY, viewings on request.

It spread to the point where I started to field questions. With the coverage it got, I found that not only was I told to go and read it by people, like me, were scoffing at the idea but also by people who were at least beginning to buy into the investment theory. Out of the blue late last week came a smattering of mails from certain people who, without citing the piece, floated the idea of buying these “out the money gold options” as a plausible investment theory. This annoys me because that means there’s not just a smattering but a whole bunch of people who have failed to learn the lessons, the hard jams, that Mr. Market has offered us these last few years. Hope is not a viable investment thesis. If you want to invest in the gold mining sector because you think gold’s going to appreciate I respect your opinion, but if you want to buy into the awful Livengood project (to name just one of many) because you know gold’s going to U$5,000/oz because Doug Casey’s “When Money Dies” theory isn’t dead like a Norwegian Blue parrot but just restin’...well it’s time to take a good hard look at yourself in the mirror and ask yourself why you’re not as rich as Croesus yet after all that effort you put in over the last ten years.

But here’s the thing that bugs me the most. My real gripe about all this “optionality” thing is the question of wealth creation. I got into financial analysis a long time before I stumbled backwards into the mining sector, but since that accidental turn in my life (lucky or otherwise, the jury is out) the mining world has been a never-ending source of fascination for me. That’s for many reasons, but one of them is how you can have decent, upstanding people who work for the good of all in the same sector, the same boat, hell even in the same room as utter parasitical scumbags, complete sociopaths and dregs of society whose only ambition is to take money away from you.

Mining is a fascinating sector of industry because it has done and will continue to do a great deal of good for mankind. It contains the essence of entrepreneurship by which the brain of man can apply itself to something as common as hard rock and, if done right, create real tangible wealth from the process for that brain and for those around it. There may be equals to it (e.g. agriculture) but there is nothing more positively capitalist than the process of mining. I get accused of being a pinko lefty from time to time and I know my politics are social (lower case S) in flavour, but scratch the vote preferences away and I’m as strong a supporter of capitalism as you’ll ever find. When done right, its capacity to create wealth has been the single strongest driving force behind human development since at least The Renaissance (arguments to further back in history accepted), we should be proud of our small parts in this process.

But capitalism isn’t good or evil, merely a conduit for our own psyches. Pecunia no olet (money has no smell) said the Romans. Buying into this uneconomic gold projects argument doesn’t create any wealth at all. If you buy CKG at 50 and it goes to 80 you win 30, good for you, but that 30 hasn’t suddenly appeared from nowhere, stocks unlike economies are a zero sum game. On discussing this “It’s time to buy uneconomic gold companies” article with a couple of industry professionals, one of them hit the nail on the head by saying, “These guys pushing this strategy... are the same pundits that turn right around and bash the industry for not making any money, no retained earnings and buying shit assets”, and that’s exactly right.

Hey, all you disgruntled investors who are now waving your pitchforks at the TSX Venture exchange people, giving it the rowdy shout at the VRIC “Townhall Meeting”, let’s have the person there without sin casting the first stone. I’m not talking to the Venture Exchange, I’m talking to you, Venture Exchange investor. You want a “clean” exchange, you want to “get rid of the scams”, you want “the zombie companies” to die? Well stop feeding them! Enough is enough, turn your back on these crud projects inside crud companies run by crud managers for the benefit of their cruddy lifestyles. 

Do Not Feed The Animals.

If you want to get rid of the moose pasture peddlers, stop buying their stocks and stop giving the slightest credence to people like the ones working out of Palisade who’ll give you what they frame as independent advice while accepting their thinly disguised bribes from people inside worthless companies looking to sell you more paper. Fool me once, shame on you. Fool me twice, shame on me. Fool me 25 times, get a “valued client” special V.I.P. invitation to the PDAC lunch and a Christmas card from your broker every year, without fail.

Yes for sure a stock market that works and creates true wealth is a stock market that sponsors companies with real projects and lets the others die, so the TSXV has to get its house in order as well. But moaning at a townhall meeting isn’t going to do a jot of good if your eyes are still lighting up after reading two-faced BS merchants and their carefully crafted and lawyer-approved greed-gland material.

*According to this (5), which I haven’t checked and I’m not going to either, gold is the least of your economic concerns when it comes to seawater: 

If you could extract gold to get just 2.5 ounces you would also get...7.3 ounces of lead, 7.3 ounces gallium, 36.5 ounces of mercury, 48 ounces of chromium, 68 ounces of silver, 13.6 pounds of copper, 13.6 pounds of tin, 15 .2 pounds of aluminum, 15.2 pounds of titanium, 28.8 pounds of Vanadium, 50.1 pounds of uranium, 51.6 pounds of iron, 100 pounds of Nickel, 152 pounds Molybdenum, 1.29 Tons of lithium, 22 Tons of silicon, 34 tons of boron, 121 tons of nitrogen, 212 Tons of Carbon, 2977 Tons of Potassium, 3121 Tons of calcium, 6865 tons of sulfur, 9796 Tons of magnesium.”