There are three things the majority of investors fail to understand with regards to gold stocks. The first is gold is NOT THE hedge against inflation and thus gold stocks not even better hedges. The second is with higher gold prices, NOT ALL gold stocks go up exponentially. The third is the evergreen that all gold stocks are heavily undervalued by the stupid market and great buying opportunities. I am going to take these beliefs apart. My Premium PLUS members receive on top my best gold stock idea after I have already had a golden hand with my silver pick (for all my members). If you read until the end, I have a small gift for you.

Summary and key takeaways from today’s Weekly
– I am cleaning up with certain deeply rooted misbeliefs and wrongly understood theses about gold and gold mining stocks.
– Most miners indeed deserve to be discounted as they’ve failed to deliver operationally.
– There are well-run companies with their stocks reflecting strong execution – my Premium PLUS members receive my best gold mining stock idea

I don’t like making sensations where there are no such, but this could be one of my most important weeklies so far – I sincerely hope it will open the eyes of those investors who are willing to listen. Gold and gold stocks are a toxic playing field with a quasi-religious cult surrounding it, almost on par with ETF worshippers and stock picking haters.

But please, do me a favor: Be open-minded and never lose this attitude. Always question everything.

We are here to invest and make money, plain and simple. That’s how I am treating it.

–––

This is somewhat of a matter of the heart for me.

Everyone knows there are crash gurus brainwashing lots of people to stay away from stocks, effectively robbing them of attractive returns. They are making the case for precious metals and enriching themselves through airing time or selling gold coins but also fear-spreading books or courses.

When stocks, then please only gold stocks, because they will even go up exponentially, as they often argue.

The thing is, I have been a victim of this one-sided propaganda myself.

If you read my first welcome emails after you’ve subscribed to my free newsletter, you will know my story where I not only wasted my time listening to such garbage, but I have also sunk not little money as a student in gold stocks while the broader markets continued to climb higher and higher.

Seeing the positive, it was a costly lesson for me.

What provokes me to write this weekly is the ongoing aggressive push to invest in gold stocks because they are said to be dramatically undervalued – especially as the price of gold itself has rushed higher. 

This can only be a matter of time and the “stupid” market does not recognize this.

But let me tell you something: No, most of the gold mining stocks are garbage and deserve to be where they are. Especially, many (not all) of the big names everyone knows and talks about. This does not mean that they won’t rise at some point – but it takes more than just higher gold prices. They are also not known to be outperformers, quite to the contrary.

In this weekly, I am going to explain to everyone willing to be open-minded why this industry is so tough, why most mining stocks are notorious destroyers of shareholder value, plus what metrics to look at. I am also going to show that indeed there are stocks of badly run companies which are not able to follow the spot price of gold, while others with great execution and tailwinds see their stocks near or at all-time highs.

Have you heard anyone discussing this?

Personally, I do only hear “buy Barrick (ISIN: CA0679011084, Ticker: GOLD) or Newmont (ISIN: US6516391066, Ticker: NEM), ‘cause they’re undervalued to gold”.

The truth is rather, they are truly garbage-investments.

For long, I had the ambitious goal to dig out a golden idea where I’m seeing the mix of:

• great management execution
• high skin in the game
• a safe Tier 1 jurisdiction
• organic growth
• strong cash flow generation, not just hopes and promises
• low production costs and long-life reserves
• operational tailwinds underlined by certain metrics
• as well as the option for a lucrative bid (as mining is a sector with high acquisition activity, so it makes more sense to own a potential target)

The result is my latest idea for my Premium PLUS members – I just sent it out.

After I have had a golden hand with my silver idea (it has beaten its peers and spot silver clearly), I am confident that this pick will be shining, too, if not even brighter.

The average total return of my best stock ideas is ahead of the S&P500 and the iShares MSCI World. With my risks-first approach (paired with high upside), I am able to find stocks with great returns.

Join me and my members on our journey to beat the markets!

^{both as per 08 May 2024 market close – since August 2022}

If you struggle to find high-quality stock ideas, let me inspire you. As a Premium or Premium PLUS Member, you receive my exclusive research reports with my best and market-beating stock ideas.

What you’re not told about gold mining stocks – but should be

With this weekly, I do not want to discredit anybody. This is not my style and I clearly prefer to let numbers and results speak.

There will inevitably be times where I am wrong, too. And this is good, because we all can learn from such experiences. But regarding this topic, I already took my lessons learned. I want to share my knowledge-gains.

Maybe some of my readers who are active on Twitter, have seen such posts or charts.

You can stumble upon them almost every day and this for months already.

Actually, I can remember such “buy gold” messages for as long as I am investing in stocks. I have never heard the opposite from those messengers.

Somehow, gold is a protection against everything and always undervalued.

Of course, gold will only rise and never fall.

When it falls and the brainwashing-campaign does not work out, it is some sort of evil market manipulation at work, conspiring against them.

Investing is about making money, not spinning strange theories and stories.

It does not matter who’s the author, as the message is always the same – gold stocks are a gigantic bargain, only the market does not want to acknowledge. And ideally, you should be going for the big names as they are experienced, diversified businesses with lots of reserves in the ground.

Isn’t it strange that most gold mining stocks are not even able to keep pace with the spot price of gold, not to mention beating it clearly?

In other commodities sectors like for example oil, many of those stocks, including the big names, have made – under cyclical fluctuations – new highs over time.

At least, this is the case for household names like Exxon Mobil (ISIN: US30231G1022, Ticker: XOM), Chevron (ISIN: US1667641005, Ticker: CVX), Shell (ISIN: GB00BP6MXD84, Ticker: SHEL) or TotalEnergies (ISIN: FR0000120271, Ticker: TTE).

In the gold sector, this is NOT the case.

Aren’t they telling us that gold mining stocks are gold on steroids or levered bets on gold or the like?

Without losing too much words and as pictures are telling more than thousand words could do (note: “GOLD” is not gold, but Barrick Gold, while “XAUUSD” is spot gold):

By the way, this also applies for silver miners as I‘ve shown in this weekly (see here).

As lots of clever people and self-declared pundits often advocate to go for the big names to play a theme or sector, I have chosen Newmont, Barrick Gold as well as Agnico-Eagle Mines (ISIN: CA0084741085, Ticker: AEM) for a reason and put them against the price of gold over the last five years.

Five years should be enough of a timeframe to form a judgement (though I am looking at longer time frames below when dealing with numbers).

All three – the industry’s three biggest producers – have dramatically underperformed spot gold! Their dividends don’t close this gap.

As Agnico-Eagle is definitely way less often mentioned than Newmont and Barrick: AEM hasn’t even done that bad operationally, as we’ll see below. However, Newmont’s and Barrick’s stocks haven’t advanced even half of what spot gold did!

I know that production costs in this industry have risen quite a lot, but the truth is that most gold mining stocks simply don’t deliver. You can see by the posts and comments that many people do not understand why these claimed safe bets haven’t made a move while gold has risen sharply to new all-time highs.

It must be really unnerving to see this:

Forget also any nonsense of market manipulation or so.

Some time ago, I’ve already written about Barrick Gold and why it deserves to be where it is – a darling of many that excels only in disappointing its shareholders (see here).

The bitter truth is:

Most (gold) mining stocks are notorious destroyers of shareholder value.

Before I go further, a few words about this crisis- and inflation-protection nonsense:

From 1980 to 2000, gold has continuously fallen from its peak at 850 USD to about 250 USD, while inflation was apparently there (see second row of screenshots). The second screenshot shows the gold price in inflation adjusted terms in today’s dollars, so effectively gold lost 80% or so in purchasing power.

Also, you can see that during recessions (greyed areas) – when gold is supposed to safe the portfolios – it failed. If they claim that it worked during the depression in the 1930s, please don’t forget that gold was money then, though at a fixed exchange rate. By holding cash, you would have also been a winner, because assets deflated while cash / gold gained in purchasing power.

This does not work anymore as gold today is an asset.

A thesis has to work all the time, not only sometimes when it fits into a certain narrative or story.

If you want to expand on that, check out for yourself when gold truly rose sharply. It was in times of political crises or uncertainty and / or when the financial system was stress-tested with public confidence being shaken. During the 1980s and 1990s, public confidence was rising after the disastrous and highly inflationary 1970s.

Ask people who lived through those times. Which decade had which sentiment? Where did people experience falling, where rising confidence in the future?

I am skipping this, as this weekly has become long enough to fill half a month with content.

Also regarding inflation, you should not forget that inflation increases production costs for the miners. It’s by no means an over-simplified and one-dimensional equation where inflation hikes profits for the miners exponentially.

Energy, wages, explosives, transports? Will they all stay low for the miners?

And with this it is even more paramount than in many other sectors to do real stock picking and NOT buying ETFs to spread the bets. In fact, you’re increasing your risks not to perform as most mining stocks are not delivering operationally while the biggest drags names have often the highest weightings in such vehicles.

Or how do you explain the well-known Van Eck ETF to underperform dramatically over spot gold and not having seen a new high for years (decades)? Gold is up more than 2x since its former highs in 2008 and 2011.

Is this what you expect from an investment? Oil stocks, despite oil having had its all-time high in 2008, look quite different.

The gap would have been even wider, if not for the royalties companies. Wheaton Precious Metals (ISIN: CA9628791027, Ticker: WPM) for example returned almost 160% over the last five years, pulling up the average.

If you don’t want to go all-in on just one name, then it’s okay to buy two or three names. But only those who have the strongest operations and management teams.

This requires research and due diligence!

When analyzing mining stocks, not just gold, but in general, I am checking factors like:

• the jurisdictional profile – where are the mines?
• management execution and skin in the game
• organic growth vs. necessity to do M&A
• dilution of shareholders
• the balance sheet, ideally debt-free
• Reserve life and resources that could potentially be converted to reserves
• production costs on an AISC basis (all-in sustaining costs)
• growth capex
• free cash flow before and after growth (so-called “all-in costs”, but barely any company discloses them, so it’s just the assessment whether FCF ist strong after all investments)
• also, I prefer less complex companies

For example, why are jurisdictions so important?

Maybe you’ve heard of:

• the trouble in Panama regarding the gigantic copper mine of First Quantum Minerals (ISIN: CA3359341052, Ticker: FM)
• more recently Barrick’s mine in Mali
• or Centerra Gold‘s (ISIN: CA1520061021, Ticker: CG) gold mine having been seized by the government in Kyrgyzstan?

When it comes to mining, I like safety in a risky industry. This includes efficient operations and subdued geopolitical risks.

It’s definitely a better bet to have mines in so-called Tier-1 jurisdictions which for me first and foremost are the USA, Canada and Australia. Not every country outside of these is automatically a not-safe place, but there are certain risks involved with this.

At least I haven’t heard of a big mine having been closed or seized by the government in any of the Tier-1 places.

I prefer to keep this risk low.

Other factors like low production costs (see my weekly here) and long reserve life are almost self-explanatory, so I wanted to touch directly on the failed hopes that rest especially on Barrick and Newmont.

There are several concrete reasons why exactly these two biggest names haven’t created any torque, but only wheel spin in the mud.

So, let’s look at the development of production and reserves for Barrick, Newmont and Agnico over the years.

You can directly see that Barrick has been effectively shrinking already in absolute numbers over the last decade:

	Barrick Gold	Newmont	Agnico-Eagle
gold reserves in 2013	104 mn. oz	88.4 mn. oz	16.9 mn. oz
gold reserves in 2023	77 mn. oz	136 mn. oz	53.8 mn. oz
difference in gold reserves	–26%	+53%	+218%
gold production in 2013	7.2 mn. oz	5.1 mn. oz	1.1 mn. oz
gold production in 2023	4.1 mn. oz	5.5 mn. oz	3.4 mn. oz
difference in gold production	–43%	+8%	+209%

The stock market rewards growth, not shrinkage or pseudo-religious beliefs.

So why shall the stock of Barrick be higher than it was a decade or more ago? In fact, Barrick’s stock is trading lower compared to where it has been already more than 30 years ago.

This is not a coincidence!

Newmont did slightly better, though it hasn’t been a home-run, either. Nothing over 30 years. It was able to at least grow a bit its production and even meaningfully increased its reserve base.

Agnico on the other hand upped both categories strongly, more than trippling each.

^{source: Seeking Alpha}

So fine, so good.

But there’s a thing all these headline-experts never mention.

You need to understand that you as a shareholder need to look at per share metrics.

You have to gain nothing when a company minimally increases its sales or even cash flow, but share count doubles. This is key, because commodities in general and mining specifically, are very capital intensive. These companies need to do frequent acquisitions to replenish their reserves when they become big.

And they can’t do it purely with cash generated from operations – they need to use their own stock as an acquisition currency, especially when the market environment is not favorable for them.

Make no mistake, there are also cases where companies miserably fail to hold enough liquidity, being forced at the bottom of the cycle to do a capital raise, just to stay alive.

Higher share counts are more the norm than an exception.

Going deeper, I did some calculations.

Now, let’s look at the development of production and reserves per share for Barrick, Newmont and Agnico over the years:

	Barrick Gold	Newmont	Agnico-Eagle
share count in 2013	1.02 bn.	0.5 bn.	0.17 bn.
share count in 2023	1.75 bn.	1.15 bn.	0.5 bn.
difference share count	+71.5%	+130%	+194%
gold reserves per share in 2013	0.1	0.18	0.09
gold reserves per share in 2023	0.04	0.12	0.11
difference gold reserves per share	–60%	–33%	+22%
gold production per share in 2013	0.007	0.01	0.0064
gold production per share in 2023	0.002	0.004	0.0068
difference gold production per share	–71%	–60%	+6%

With these numbers, there shouldn’t be any doubt why Barrick is by far the worst performer. Not only have they shrank in total numbers, but the picture is even more bleak on per share metrics.

Newmont was okay in total figures, but due to their hefty dilution which was way more brutal than Barrick’s, per share numbers are also bad.

These two deserve it to be down, because they have shown bad capital management with maximal dilution of shareholders.

Not so Agnico which despite the biggest dilution in this group managed to meaningfully grow in total numbers, but also effetely on per share metrics.

Dilution is not automatically bad – it depends on what the company is doing with it.

Though a bumpy ride, the trend for Agnico is clear, despite not having made a new high. Let’s call it a half-way acceptable performance.

Out of this trio, Agnico is by far my favorite.

But it didn’t make it to my next research report. Why? Although they are really good long-term, this is already reflected in the valuation. With earnings and free cash flow per share multiples of somewhere in the ballpark of 20x, lots of growth is priced in.

Agnico likely deserves a quality premium as it indeed is a pure-play Tier-1 pick.

At the right price, this could be a sound pick for not too demanding investors.

But organic growth is weak. The company needs to do lots of acquisitions. One of the most prominent and successful ones was the of Canadian low-cost producer Kirkland Lake Gold, a company I liked pretty much (and was shareholder of).

But the whole package does not convince me.

Production costs is another topic. While Agnico is currently producing for less than 1,200 USD on an AISC basis and thus slightly below the industry’s average (and with a very decent margin to the current gold price), there are companies with way lower production costs and also less complexity, allowing for organic growth.

Take for example Lundin Gold (ISIN: CA5503711080, Ticker: LUG), which has AISC of around 800 USD only. That’s a third below Agnico’s, giving them a gigantic margin of about 1,500 USD currently per ounce. Self-explanatory, this company is generating tons of free cash flow. The balance sheet is also okay, after they repaid much of their debt.

But it is a one-mine producer in Ecuador – a world class mine by any standards, but it is just one mine in Ecuador.

While there are voices for both – Ecuador being safe and it not being safe – I wanted not to engage in this risk, though I am watching this company. As is has no development of a second mine and as it said during conference calls, it is likely Lunding Gold will go shopping.

The Lundin family behind it, has a history of having created tremendous shareholder value, as my colleague Oliver has shown on Twitter (thanks!).

For those who are willing to take on higher risks, this could be an idea. But it is also not an organic growth story.

Here you can see that’s Lundin Gold’s stock is doing quite well, unlike the retail crowd’s favorites:

Then we also could think about Northern Star Resources (ISIN: AU000000NST8, Ticker: NST), a 16 bn. AUD (~11 bn. USD) juggernaut from Australia with excellent operational results, growth prospects, a clean balance sheet and even dividends and share buybacks.

But here, my gut feeling also says “no”, due to the rather high valuation, likely due to its quality. And another issue I have is that Northern Star has quite lots of hedges at way lower gold prices which are holding them back.

When investing in gold, I want the full potential, not driving around with a pulled handbrake.

The stock is unlike Barrick or Newmont a monster-performer:

After having checked many, many miners, I finally stumbled upon a company with a really great profile:

• only active in a Tier-1 jurisdiction
• clean balance sheet
• brutally low production costs, way below the industry’s average
• generting strong free cash flow with strong margins
• a significant growth catalyst
• high skin in the game of the management
• minimal dilution so far and unlikely that more occurs at current gold prices
• a decent valuation, even undervaluation (as I will show), despite the stock being not far from its highs

For reference: My silver pick for all my members, Silvercrest Metals (ISIN: CA8283631015, Ticker: SILV), has been a huge success story so far with the stock being up by 71% and showing everything it could the red lights since I published my report in early September 2023.

Even all taken together, spot silver, the S&P 500 and silver mining peers haven’t come close to the performance of Silvercrest.

I am convinced my gold mining pick could achieve a similar, if not better result.

My Premium PLUS members have already received my latest research report with my golden idea. If you need some inspiration about my work and as a thank you for reading until the end, you can download my research report about Silvercrest for free by clicking on the cover of my report below.

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Conclusion

I am cleaning up with certain deeply rooted misbeliefs and wrongly understood theses about gold and gold mining stocks.

Most miners indeed deserve to be discounted as they’ve failed to deliver operationally.

There are well-run companies with their stocks reflecting strong execution – my Premium PLUS members receive my best gold mining stock idea

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