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A major headache - and a golden opportunity

Commentaries & Views

This morning, one quarter of the entire human population of our planet is reportedly on lockdown. As per yesterday’s article on a possible global economic depression, this comes at a huge human cost and I’m sure it will leave permanent scars. I started warning this could happen last January.

What I didn’t think through—and should have—is the strong impact this is already having on mining companies large and small around the world.

Well, I did think about the impact, in terms of reduced demand for industrial minerals. My warnings on that front were spot on.

But I didn’t think, back in January, or even in February, that governments around the world would be shutting down economies wholesale. I expected hot spots like Wuhan to be isolated. I didn’t imagine that a country like India would—or even could—order its entire population to stay home.

Once it did become clear that businesses where people work in close quarters, like underground mines, would be shut down (by order, or by management’s prudence), I did start warning subscribers about companies that could be impacted.

I have to admit, however, that this was a late realization, and I regret my lack of foresight.

That said, with a new whack of closures announced every day now, I think some folks are coming to incorrect conclusions.

So, I have a few thoughts to add:

  • It’s important to be clear that there are mines shutting down all around the world—including gold mines. Whether they should or should not, it’s happening. This will cause many earnings misses. Yes, miners are benefitting from lower energy costs, thanks to the falling out between OPEC and Russia, but that doesn’t really help if production is completely halted. The situation is likely to cause many producers to have dismal Q2s, even if gold goes through the roof at the same time. This it turn makes it likely that gold and silver stocks—at least for producers—will underperform the metals themselves in the near term.

  • I think it’s a mistake to think that the major producers will be those least impacted. The more places a company operates, the more likely they are to have a mine that gets shut down by the government, if not by the company itself if there’s a local outbreak. Newmont alone has already announced shutting down four big mines. And then there’s the suppliers, support contractors, and many other parts to this complex moving machine that are subject to lockdown as well. Even assuming the very quickest passing of the outbreak, this period going to be a huge headache for producers—probably for at least a couple months. A single-asset producer operating in an area that gets passed over could deliver in spades while its larger brethren suffer large operating losses.

  • In a whimsical twist of fate, junior exploration companies are less vulnerable to locked down economies than producers. Explorers generally have no revenue to be interrupted, and most work sporadically in seasons anyway. Waiting a few weeks or months is normal for explorers. So, strange is it may seem, cashed up juniors that can keep pushing ahead may be our best bets for gaining leverage to higher gold prices in the near term.

  • Royalty companies, usually the safest mining stocks, are at risk. Remember: royalty companies don’t have to get their hands dirty with actually mining anything, but their revenue does suffer if the mines they have royalties on do shut down. So, as with producers, I can see some terrific opportunities in this space—but I’m in no hurry to buy in advance of a possible massacre. This applies to my current plans to average down.

  • PPSS plays are vulnerable too. I hate to say it, as much as I love PPSS plays, but mine-builders are miners too, and they may be subject to shutdowns. Fortunately, they’re less vulnerable than producers because they are not expected to make money while construction is underway. Also, while delays are usually bad for PPSS share prices, if it happens due to a global pandemic and the company has plenty of cash, Mr. Market may be more forgiving. If he isn’t, that could make for a great buying opportunity.

  • Key Point: These closures will pass.

As I’ve been writing in the last few editions of my free service, the Speculator’s Digest, my general guidance since this started has been to “go to cash and wait for the smash.”

However, I had been planning to buy gold and silver stocks as soon as I thought the bottom was in—or they got so stupid cheap as to be irresistible.

I’m now disinclined to buy producers, royalty plays, or PPSS plays until the lockdowns are done.

And as for producers, specifically, I’ll be looking for bargains to buy when they report disappointing earnings. I can easily see Mr. Market overreacting to a company having a bad quarter. I’d see that as a great opportunity—if I were convinced that the company is now up and running and poised to make the best of higher metals prices. That’s because I do think gold and silver will keep going up for years after the outbreak scare has passed.

I might even buy some major producers, which are not normally my type of speculation, if they get cheap enough.

But until the shutdowns are done and paid for, the only stocks I’d consider buying are those of cashed up exploration plays that are hitting steady home runs. I’ve got several on my Shopping List.

This brings me to another mistake I think some resource speculators are about to make. There’s a conventional view that when a new gold bull market that grabs the attention of general investors, it’s the major producers that see share price gains first. This later trickles down to mid-tier producers, and then eventually to junior explorers.

This trickle-down gains theory is not what we saw after the crash of 2008.

As soon as gold had clearly bottomed and was heading north again, in December of 2008, the best gold and silver stocks started rising by leaps and bounds as well. That very much included the best exploration stocks. If anything, the gains were greater and faster than those of the larger companies.

Of course, most of the dreck languished until irrational exuberance returned to the sector. You have to be good at picking the best stocks to be an effective bottom fisher. Due diligence matters. (To see what I’m looking to buy, please subscribe to The Independent Speculator.)

Key Point: I think it’s a mistake to exit great gold and silver stocks now.

And I think it’d be an even bigger mistake to refrain from buying the best junior stocks if a greater market meltdown ahead gives us a chance to do so at stupid cheap prices in the weeks ahead.

I can’t promise that 2020 will give us the same historic opportunities to profit that 2008 did.

I can say that, based on the fundamentals and trends visibly in motion today, I expect even greater opportunities.

And I’m investing my own money accordingly.

That’s my take,

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.