The opening rant from IKN351, out yesterday.
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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 (ITH.to) and its Livengood project
in Great White North, Exeter Resources (XRC.to) 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.”
