With spot prices for gold at record highs, investors might expect precious metals mining company stocks to also trade at record highs.
By and large, this is not the case.
The shares of mining companies represented in the HUI Gold BUGS Index are still more than 40% below their 2011 highs, despite the fact that they have increased significantly in value this year due to the rapidly rising gold and silver prices.
There are a number of reasons why most mining stocks have lagged the metals. First, mining is a tough business that is fraught with risk. Even if the value of a mine’s final product increases, the cost of extracting it can rise even faster.
At times when market prices for metals fall below a mining company’s total costs, it may decide to sell at a loss. It would be impractical for a mine to lay off all its workers and leave its expensive equipment sitting idle while it waits for market conditions to improve.
But in times when their product is undervalued, precious metal mining companies have another option.
If the CEOs of companies that have “gold” (or silver) in their name really believe in their product – money itself – why don’t they keep some of it on their books as reserve assets instead of immediately converting it into dollars regardless of the current exchange rate?
Gold is considered a Tier 1 asset in the banking system by the Bank for International Settlements. This means that it is recognized globally as a high-quality capital reserve asset.
Central bankers around the world agree. Despite refusing to convert their fiat currencies into gold, central banks have been accumulating the monetary metal at a breathtaking pace in recent years.
But with few exceptions, large corporations – including major gold and silver producers – have not succeeded in strengthening their finances through solid cash resources.
SilverCrest Metals sets a good exampleOne company that actually does this is Canada-based SilverCrest Metals. Under the leadership of President Christopher Ritchie, SilverCrest has added about $30 million worth of gold and silver bullion to its balance sheet, representing nearly 30% of its assets.
Thanks to a fantastic producing mine, SilverCrest started building up its precious metal reserves over a year ago after paying off all of its debt. With the nominal price of gold up 30% in the last year, this strategy already looks like a pretty genius move.
Numerous other listed companies regularly carry out share buybacks.
CEOs who believe in the strength of their company are happy when the company buys back its own stock at times when it is trading at a discount. Stock buybacks often serve shareholders far better than holding cash at a loss, issuing taxable dividends, or deploying capital in riskier projects.
Last year, Berkshire Hathaway, run by legendary value investor Warren Buffett, bought back $9.2 billion worth of its own stock. Buffett is cooking the shit out of himself.
Unfortunately, this is not the case for typical leaders in the mining industry.
Gold holdings can cushion the ups and downs of a companyThe leading mining companies missed golden opportunities to buy back their own product when it was still ridiculously cheap and keep it on their balance sheets, instead shortsightedly choosing to sell it for a relatively low dollar amount that they thought would look better in their quarterly reports.
Throughout its history, the mining industry as a whole has been such a poor steward of investor capital that it has earned a bad reputation on Wall Street. Negative sentiment toward the industry has, in turn, contributed to underperforming share prices.
Of course, given the recent record price of over $2,500 an ounce, industry executives might conclude that now would not be a good time to make such a move.
Given the current momentum and the multitude of bullish factors driving the price of gold, we doubt this will come to pass.
But even if they believe that the market price of the yellow metal is currently too high, at least in nominal terms, what excuse do they have for not keeping its much cheaper counterpart, silver?
Even at $30 per ounce, silver is still well below its previous all-time high of just under $50. Silver is undervalued in many ways – especially when you consider that industrial demand could exceed supply.
By taking concrete actions that demonstrate belief in their product, the leading companies in the gold and silver mining industry can break the cycle of underperformance of their stocks.
