The Case for Precious Metals Mining Stocks
I am not a stock picker… I gave that up some time ago. My investment worldview these days is to actively time the market for macro plays that make sense to me, using baskets of stocks, or even ETF’s. Holding PM’s has made sense to me for some time, and the fundamentals behind them become stronger every day, though watching the recent price action in the metals, and especially in the mining stocks, would lead one to think otherwise. The mining stocks are a beaten down sector.. unloved… left for dead. The HUI Gold Bugs index of miners is bouncing around near a two year low, the sector left in the dust by most every other type of stock. Some might say investing now in Gold and Silver miners is akin to catching falling knives.. and they might be right.. for a while longer at least. Take a look at the UNG chart if you don’t believe that knives can just keep falling and falling. But… and this is a big But… there is going to come a time when more folks.. more investors.. more hedge funds.. realize that QE has gone worldwide (Looks like Japan may be next in the daisy chain; http://globaleconomicanalysis.blogspot.c…) and that real inflation.. the kind that gamed Gov’t statistics can no longer deny.. will be coming. The PM asset class will come back in favor.. what is old will become new again!
So if you did want to speculate with some of your money on stocks…. which ones should you buy now? Which ones are so out of favor it leaves you a little sick to your stomach to push the “buy” order key on your brokerage account screen? Which ones represent not what has been hot.. but where the puck is going to? I think you know where my speculative dollars are going.
I am not going to reiterate the case for manipulation.. .it is real, and it is the basis of my belief that Gold, and especially Silver, are underpriced at present. If you believe that Gold and Silver are underpriced now, and have strong fundamentals that should continue to drive them higher in the future, then the miners are a way to get more leverage behind your convictions, without doing it through paper entities like AGQ. To illustrate the opportunity, I would like to compare/contrast a few miners with a few stocks that are REIT darlings… both groups offer dividend yield, which is a big plus these days.
Commercial Real Estate darlings;
Stock Market cap ($) P/E EPS Div ($) Div yield (%)
SPG 44.1 B 42.6 3.48 3.80 2.50 %
BXP 15.3 B 55.6 1.86 2.20 2.10 %
VNO 15.3 B 25.6 3.23 2.76 3.30 %
High Yielding Miners;
GFI 9.2 B 10.3 1.23 0.61 4.80 %
AU 12.9 B 10.3 3.24 1.06 3.10 %
IAG 4.8 B 5.9 2.14 0.25 2.00 %
So.. let’s look at these small baskets and think about them (noting that I am talking my book and that I own some IAG). The first thing you note is the rich PE’s of the commercial real estate stocks… that means you are paying more to get each dollar of earnings. For reference, the historical average price/earnings ratio of Dow stocks is 15.5, and the Dow overall was running to the high side at 17.8 as of early March 2012. So, relatively speaking… the REITs are priced with an expectation of continued growth, whereas the miners are priced, from the vantage point of PE.. like some kind of big old boring utility that is not going to grow it’s earnings. The second thing we can look at is the dividends themselves…. and what is amazing to me is that the little basket of miners throws off more cash. Would you rather have a 10 year bond throwing off 1.97% interest, or a basket of miners throwing off something like 3%? Which investment do you think will provide better protection of your capital five years from now? Ten years from now? Finally, we can look at the sustainability of the dividends themselves… and this is where the really dramatic contrast lies. Two of the three CRE stocks payout more on a yearly basis than they earn…. Div is higher than EPS. Think about this… where is the money coming from the pay the dividend? I know that REITs play some funny game with their cash flow on an accounting basis… but to me, that is just yet another GAAP-legitimized ponzi scheme. The miners pay out very sustainable fractions of their earnings as dividends… very simple math here.
So… what is going on here? Why would such an “efficient” and liquid marketplace like the US stock market allow such inequities to exist? I can speculate : ) CRE is to the banks as the banks are to the FED… the FED cannot.. will not, let the (TBTF) banks die. REITS live and die by their ability to serially refinance their debts. the banks cannot let the REITS die.. otherwise the banks die, along with all that debt, with them. Low interest rates, and willing banks, have been manna for the REITS. The forward looking bull case for REITS, especially those with a retail or other CRE focus, is that the economy recovers. If you believe this will happen.. I recommend you invest in SPG and own a piece of your local shopping mall.
If though you think PM’s might continue to rise in value.. though the ride may be bumpy… I would make the case that the miners are very near a bottom. I would also make the case that the least speculative of the miners are the ones that have dividend payouts and PE ratios that make them look like old fashioned value stock plays.. which is exactly what they are. There are always risks… and we need to keep them in focus… MIners could be nationalized (as SagerXX has pointed out recently), rising energy costs could take a bite out of earnings… or a natural or mine safety disaster could crimp the earnings of one or more companies. That being said, I still think that investing today in a small basket of good miners will bring stunning returns over the next few years.
I invite your constructive criticism of the case for mining stocks…
James Turk agrees…..
“We’re making history here. Gold stocks have never been this undervalued before. We’ve had a 12 year bull market in gold, but we’ve also had a 15 year bear market in the mining shares that began with the Bre-X collapse.
It’s very rare in market history to see an outlier like this. This is an extraordinary event. Years from now we are going to look back and shake our heads in disbelief at how undervalued gold stocks were in 2012.
This 15 year downtrend and historic low has effectively destroyed the morale of virtually the entire gold mining investment community. Psychologically, this has also had a tremendous dampening effect on the morale of those watching the gold bullion market.”