Gold News

The Gold Mining Disconnect

Gold mining specialist reveals how he's playing the gap between gold stocks and the gold price...


THERE HAS been a disconnect between the rising Gold Price and the low valuations of some larger Gold Mining companies. 

In this interview with The Gold Report, Brent Cook – who brings over 25 years of experience as a geologist, consultant and investment advisor to his role as editor of the weekly Exploration Insights newsletter – explains which type of Gold Mining companies he thinks will benefit from this...

The Gold Report: You wrote last summer that "the global macroeconomic picture does not look good," citing high unemployment in the US and Europe that would likely be driven higher by increased taxes and decreased government spending in the face of serious sovereign debt problems. Sounds a little like Groundhog Day. You could say the same thing today. How are you feeling about the global economy now?

Brent Cook: I think we're still sinking. The issues I mentioned last year are still here and, if anything, have gotten worse. Debt problems in Ireland, Portugal, Italy, Greece and Spain have only been compounded. Rating agencies have downgraded them all and the UK is facing systemic economic troubles as well. 

I think the world is beginning to recognize the unthinkable — the US debt situation is not going to improve as rapidly as the government mouthpiece has suggested. It's a slow-moving train wreck globally and most of the people on the train are too busy watching Dancing with the Stars, oblivious to where we are all headed. 

The only thing that has really changed since last year is that the Gold Price is up about $400/oz. (troy ounce). That's not bad. But the fact that the Gold Price is up in virtually any currency is proof that we've got a global problem that's not being fixed and that the massive debt injections haven't done any good at all. 

Last month, Fed Chairman Ben Bernanke basically said he considers gold little more than a quaint tradition. That should scare the hell out of anyone looking out the train window and banking on him to fix things. 

TGR: There was talk recently that Moody's was going to downgrade the US AAA credit rating. Do you think that's just posturing or is that a legitimate concern?

Brent Cook: I suspect it's a bit of both. It's posturing in that they were trying to push the politicians to raise the debt ceiling. But these are legitimate concerns given the serious economic situation we are in. We are spending more than we bring in, or as my ex-boss Rick Rule puts it, "When your outgo exceeds your income, your upkeep becomes your downfall." Well, that about sums up the situation.

TGR: Large mining companies are generally not your forte, but you noticed a disconnect in June between the Gold Price and the mid-cap precious metals producers. You decided to take a position in three mid-cap names in the hope that those companies would close that gap. 

Brent Cook: It was a bit of deviation from what we normally do at Exploration Insights, which is to look for junior companies on the verge of making discoveries or developing discoveries. When the market gets scared, investors are increasingly averse to risk and the juniors get hammered because they can be the riskiest bet out there.

Remember, most of these junior companies don't have anything of value. They've got moose pasture and sage brush somewhere in the world with some sort of geochemical anomaly that they hope will almost magically turn into a big mineral deposit. My fear was that if things continued to deteriorate, the juniors could get whacked pretty good. 

However, mid-tier and larger mining companies have been declining in price despite increasing Gold Prices. A lot of these mid-tier companies are going to be making serious money at $1,500/oz. or $1,600/oz. gold and that is not priced into their shares. 

TGR: How long do you expect the disconnect between the Gold Price and some of those mid-cap producers to continue? 

Brent Cook: The honest answer is that I don't have a clue. I'm not very confident at predicting and timing markets. Nonetheless, the disconnect does exist and these mining companies are going to be making very good money and flowing a lot of cash. We could start to see a new type of investor or institution looking at gold companies as businesses instead of a hedge on the Dollar. We might even see Gold Mining companies begin to pay out real dividends.

The other positive for me about these companies is that for every ounce they produce, they've got to replace it or find a new deposit. They can now afford to pay a fair amount for legitimate high-margin deposits. That takes us back to what I like to look for: exploration projects. 

TGR: Is $1,600/oz. gold translating to a higher Dollar value for those ounces still in the ground?

Brent Cook: It is for the companies that have proven resources with some sort of economic study behind them. Companies with deposits that are 1 gram per ton (g/t) sulfide are being valued very highly. But if the Gold Price drops down to $1,000/oz., those guys are toast. 

Larger development stage companies with an economic study behind them are being valued at the higher Gold Price. I'm more cautious about the companies that are just exploring, or that have large low-grade deposits still sitting out there. Economic deposits are unique; geochemical anomalies are a dime a dozen and ultimately worth about that much. 

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