The Case for Gold Mining Stocks

by Kenneth J. Gerbino

24 April, 2008

 

 

 

This is one of the few sectors on Wall Street that currently allows investors exceptional growth and exceptional intrinsic value... regardless of the price of gold.

 

GROWTH: Gold mining stocks can increase profits substantially with no increase in the price of gold. If the price of gold does go up, then the profits fall right to the bottom line.

 

Mining companies, by putting more mines into production, allow themselves higher revenues, profits and cash flow when the new mines go on line. Like a hamburger chain with 50 stores, by opening up another 25 stores it is irrelevant whether the price of hamburgers goes up or not for the chain to make more money.

 

Expansion also takes place when mining companies renovate and upgrade existing mines and increase production. Freeport Copper & Gold went from 140,000 ounces of production to 2,300,000 ounces of production from the Ertsberg/Grasberg deposit, through renovations and upgrades.

 

VALUE: From a value standpoint, a mining company having gold reserves in the proven and probable category is like having money in the bank.

 

Reserves of working mines are usually understated and most mining companies have properties which have been drilled and tested and contain a large gold resource but have not yet been formally announced as viable properties. This represents hidden value, not reflected on the balance sheet.

 

Mining companies also own and lease vast tracks of potential mining land where gold has already been discovered but where no advanced developmental work has been performed. As the gold price goes higher or even stay stagnant, many of these properties have a good probability of eventually becoming producing mines. These properties are also not carried on the balance sheet at their intrinsic value.

 

GOLD DEMAND: In the last five years, jewelry fabrication alone has outstripped world mine supply by approximately 500 metric tonnes per year (16 million ounces yearly). Jewelry demand has risen from 1,150 metric tonnes per year in 1984 to 3,400 tonnes in 2002, substantially more than current world mine production.

 

The precious metal mining industry is in a strong growth mode due to two factors: 1) World population growth and continuing globalization, and 2) 2.5 billion Asians and Indians rapidly entering the industrial age and consuming  more gold.

 

GOLD IS REAL VALUE: Throughout all of history, the integrity and trust in gold as a means of exchange, a store of value and a monetary asset has always endured, therefore, a portfolio of gold mining stocks is also a hedge and an insurance policy. A gold mining stock portfolio has a solid investment thesis resting upon the supply/demand fundamentals for gold jewelry and other gold fabrication. Jewelry demand alone, exceeds current mine supply by a wide margin. In the Far East, new-found prosperity with the fall of Communism and the freeing up of markets has allowed over 50% of the world's population to begin to acquire gold jewelry, both as savings and adornment.

 

CONCLUSION:

 

Gold mining stocks offer growth and value.

Jewelry demand alone cannot be met by mine production.

Asian demand should increase substantially in the future, as gold ownership is a cultural reality.

Gold mining companies with above average growth offer investors a unique opportunity at this time.

 

​

Kenneth J. Gerbino

 

 

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