Wednesday, September 21, 2011

Gold and Silver Mining Stocks in 2011—Wondering Why They are Underperforming?

Record gold and silver prices have outpaced by a wide margin the share performance of the producers of them.  The constraints on precious metal pricing according to this article focuses on costs of building and operating a mine.  What is important in the following article is the recognition that we (the market) are in a transitional phase from stage 2 to stage 3 - so now it's all about earnings.  I wonder what will happen to those just on the cusp of going into production - hmmmm....

'Seeking Alpha' Article by David Urban (edited for key points):

Miners' Many Hurdles Keep A Lid On Gold And Silver Stocks

Investors in gold and silver mining stocks in 2011 have been left wondering why they are underperforming, despite record gold prices and margins.

There are a number of factors which have helped to constrain stock prices this year.

Building a mine is a time-intensive and expensive process that takes years to complete. One has to deal with drill results, 43-101 estimates, pre-feasibility studies, feasibility studies, and the permitting processes, which include environmental surveys and community discussions over issues such as waste water management, power acquisition, and the use of hazardous chemicals. All of this takes years before the first equipment is ordered and the construction process begins.

Once construction starts, a whole new set of issues pops up, from obtaining building materials and mining equipment to getting it on site on time and on budget. The pressure then builds to deliver the mine on budget and on time. This is no easy feat when the location may not be accessible 12 months of the year because of weather or poor regional infrastructure.

Finally, when the mine is built and operational, there are issues with equipment that can range anywhere from obtaining tires for mine trucks to problems with the mill or lower than expected recovery of ore grades.


Mining is a difficult and time-intensive job, and execution is the key. So far this year problems at mines are causing solid management teams consternation as they miss estimates. Investors wondering why their mining stocks are lagging may want to check to see how management is executing on their 2011 forecasts. We are coming close to the end of the third quarter, and people will be wondering if forecasts will be revised come the end of the second quarter.

This is not to say that the management of mining companies is not of high quality, as many issues are out of their hands and specific to the locations in which they operate.

We are in a period where we are transitioning from stage two to stage three of this bull market for gold. In this transitional phase, the market is looking for the companies to deliver on guidance, and those that deliver on said guidance will be rewarded with higher stock prices.

What should a small investor be looking for in a mining stock? Managements that are delivering in these uncertain times, effectively managing risks and successfully hedging their cost structure while delivering on production and cost guidelines.

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