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Rick Rule Agrees!

One Sunday I wrote a post describing why I am remaining bullish of gold mining shares.  Nervously, I have stuck by my premise that many factors are aligning in favor of the gold mining stocks, and I have added to my position in the last two days.  Tuesday was nerve wracking, and there were a few hours where I wasn’t sure if the market would ever stop falling, but I tried to look past the immediate carnage and capitalize on some of the opportunities I saw.

To that end I bought new positions in Brigus Gold, Aurizon Mines, and added to my position in Atna Resources.  I now own a basket of mid-tier producers.  I hold them nervously, but I still firmly believe that the factors I laid out on Sunday.

Today I found out I am not the only one.  Rick Rule did an excellent interview with James Pulplava on September 28th where he laid out the bullish case for gold mining shares.  He stated a lot of the same reasons that I outlined myself.  On top of these though, he added a few more catalysts that should contribute to a favorable revaluation of gold mining shares over the medium term.

  1. The project net asset values and existing project cash flows are being evaluated and valued off of much lower gold prices.  Most project pre-economic assessments are being done at $1100/oz gold, and many done over the past couple years were done at even lower prices.  As the brokerage community becomes comfortable with a higher gold price, these numbers should rise, as should the share price
  2. Senior gold producers are finally beginning to generate significant amounts of free cash flow.  Rule says that they expect the gold mining sector to generate more free cash flow this year than they have in the last 5 years combined.  Many of the small and mid-tier producers trade at discounts to the seniors, so it is reasonable to expect that senior producers will begin to take some of them over.

Rule elaborated on the first point.  He went on to say that at Sprott they had actually done the analysis on 5 non-producers  with pre-economic studies but not with feasibility studies out to see whether you could take the companies private and achieve an acceptable level of return from them.  They looked at the effects of hedging a portion of production up front with the takeover to help pay off the capital expenditures associated with building the mind.

I couldn’t help but think that one of the companies Rule likely evaluated was Lydian International.  Lydian fits the description of a company with a deposit that has a pre-economic assessment complete.  Rule has talked about Lydian before, calling them an excellent take-over candidate.   And my own analysis on Lydian showed an upside to the stock of $6/share at $1300/oz gold.  At $1600/oz gold the value of Lydian is literally multiples of the current stock price.

I also couldn’t help but think that if Sprott is performing this kind of analysis, it must be considering some sort of actions along these lines.

Rule said that of the 5 companies he evaluated there were 3 that passed the criteria.  Some other companies that I could see being include in that evaluation are Trelawney, Spanish Mountain Gold, and Geologix.

All companies I will have to keep an eye on.

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One Comment Post a comment
  1. Liverless, agree that there is tremendous value in miners and love the picks, BRD in particular.

    For what its worth, I think Energold Drilling (EGD) and Sandstorm Gold (SSL) are two names that in my opinion are currently mouthwateringly attractive and that you should take a hard look at. For a variety of reasons I think they offer a lower risk/superior way to get leverage to gold in this environment – at least relative to a basket of miners approach.

    As far as specific miners, a few that I would add to your list (and personally own) include Gran Colombia Gold Corp. (GCM), Primero Mining (PPP), Yukon Nevada Gold (YNG), and Goldgroup Mining (GGA).

    October 8, 2011

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