Gold Shares Investments 2013-2016

Posted at 12:01 PM (CST) by & filed under General Editorial.

Dear CIGAs,

The most important final product in any public company lies in the reward to investors for their confidence in management and product. That means that values are translated efficiently into market recognition and therefore shareholder value.

Never before has the gold exploration, development and production industry faced unique challenges in the transmission of value to market price. The exploration, development and production of properties is today but one factor in valuation. Today retail investment interest in all these companies has been dwarfed by investment funds, index funds, option strategies and hedge funds, many of which have, in terms of age, managers that have never experienced the leverage of a gold company to the price of gold as to earnings.

The cost factors of this industry have risen, but are far from changing the industry’s leverage characteristic. As the price of gold rises, lower grade material becomes increasingly economic.

The industry is not without blame for inadvertently nurturing the idea of increased costs as its leading lights seek always to reduce their tax obligation to minimum levels in the country of operation, but also domicile. This of course has an impact on the bottom line profit. It is my observation that major new deposits among the leaders of the industry have plants and equipment that pushed the edge of the envelope in science, and many times good management. Only 43-101 instruments can speak to comparative costs at mine head. The mining of shorter life surface products and smaller pits as cash flow projects are generally on the lowest level of cost.

Hedge funds that speculate from the short side have focused interest on this industry due to its capital intensive nature. The analysts from these funds may have over stated increases in costs due to tax strategies and spending nature with highly accelerated depreciation of the majors. Further to that, the capital costs expended by the majors must take into account that they build facilities that rival a modern city. Highly accelerated depreciation on plant and equipment is a major required part of the tax package that a major seeks in selecting the country of investment.

In my opinion and experience, increased costs of building and operation posses a tendency for overstatement of the cost factors in the early years of such production in any project. That does not have to be so, but is the predominate trend of management in the most well known gold mining companies. The analysts for these new figures making up the new retail demand and short side speculation are also in my opinion misinformed on capital intensity. As a company via its third party consultant to produce 43-101 compliant result that speaks to the project in very specific ways, the ability to obtain financing shifts from share capital to development lending entities, both quasi governmental and commercial.

I must conclude that in time the earning performance of the gold companies will clear up the false assumption so heavily distributed via financial TV and MSM.

Respectfully,
Jim