Hands down, my passion for protecting readers is my most valuable asset. Through thick and thin, I have been writing free missives for nearly a decade. Moreover, I “put my money where my mouth is”; as essentially my entire liquid net worth is in the form of PHYSICAL gold and silver – the bulk of it stored at Miles Franklin’s Brink’s vault in Montreal, Quebec.
Having spent 16 years as a Wall Street trader and analyst, I left in 2005 forever; and subsequently, made it my life’s goal to expose the fraud and conflict of interest I experienced first-hand. Sadly, what I witnessed then doesn’t hold a candle to what is going on now; and frankly, the Wall Street I lived and breathed no longer exists. Research, investment banking, and sales trading are largely dinosaur businesses today; replaced by risk-free “profits” generated from derivatives creation, high frequency trading, government-supported carry trades, FASB-sanctioned accounting fraud, and – of course – the unlawful utilization of insider information.
Fortunately, I picked up a thing or two in my 16 years on Wall Street; not to mention, five years working in investor relations for mining companies. As for my CFA designation, I challenge you to find one in a thousand investment professionals that survived the rigors of this extremely competitive test series. In other words, I have an above average knowledge of fundamental financial analysis – and four Institutional Investor “All-America Research Team” plaques to prove it. Regarding said hardware, I am proud to say my research in the oilfield service, equipment, and drilling sector from 1996-2005 proved invaluable to investors; as have my Precious Metals prognostications since 2002.
Utilizing such skills, I recently predicted gold and silver production could decline by 15%-25% in the next three to five years. In fact, Eric Sprott just predicted a nearly 5% gold production decline in 2013 alone; which if so, would be shocking even to me – as gold was as high as $1,700/oz. in January. In other words, the industry retrenchment since April’s “ALTERNATIVE CURRENCIES DESTRUCTION” has been so severe it is already yielding material production declines. Of course, NO ONE is more aware of how dire the mining industry’s financial condition is than me; and thus, it really shouldn’t surprise me that it couldn’t handle such ridiculous prices for more than a few weeks. Likely, more than 25% of the entire junior mining industry has been bankrupted in the past 12 months; and if PM prices remain this low, I’d bet closer to three-quarters of it will be gone a year from now. Historically, juniors have made the bulk of new discoveries; and thus, the industry’s capex lifeline has been slashed and burned. Cash balances are nearly ZERO, investment capital is NON-EXISTENT, and even M&A activity has DIED.
As for the handful of PM producers, most are no longer profitable. Meanwhile, South African miners have been crippled by worker strikes and electricity shortages; while industry-wide, miners are dealing with a host of political, environmental, capex, opex, and taxation challenges that show no signs of abating. In a nutshell, a “perfect storm” of factors – pushing an ENTIRE INDUSTRY to the brink of bankruptcy.
Fortunately, our “shadow world” of Precious Metals TRUTH includes a small group of talented analysts demonstrating the proof of such assertions; starting with none other than “ADMIRAL SPROTT himself. As to the numbers behind mining itself, NO ONE is more proficient than Steve St. Angelo of the SRS Rocco Report. Last year, he projected gold and “break-even” cost to be more than $1,300/oz.; and for silver, closer to $30/oz. And this year, he has been 100% vindicated; as thus, far miners have reported massive operating losses and more than $21 billion of write-offs – atop $50 billion of write-offs last year. Sadly, the worst is yet to come – as I expect the “upcoming 3Q mining earnings catastrophe” to make the 2Q horrors look like a “walk in the park.”
According to Steve St. Angelo, the top 12 primary silver miners generated a healthy profit margin in the first quarter – based on a realized silver price of nearly $30/oz. However, as his projected marginal cost of production of roughly $26/oz. was breached, second quarter earnings were a full-blown disaster.
These 12 companies – which by far have the industry’s most favorable cost structures – reported a cumulative $544 million of losses, including nearly $100 million from operations alone. The average realized price of $22.63/oz., was way too low to support viable mining operations – let alone, to sustain exploration budgets; which is why not only did the losses pile up, but development decisions were delayed and previously profitable mining operations mothballed. Heck, one of the aforementioned 12 miners – Pan American Silver – recently announced it would hedge a significant portion of future production; presumably, to protect itself from bankruptcy. Even more incredible – attesting to just how clueless mining executives are generally; it then turned tail and reversed the hedges when investors all but revolted! Ask yourself this; are these the type of people you want to trust with your hard-earned money?
Thus far in the third quarter, average gold and silver prices have been $1,330/oz. and $21.45/oz., respectively – compared to $1,427/oz. and $23.35/oz., respectively, in the second quarter. In other words, average gold and silver prices – before the discounts miners endure throughout the supply chain – have sequentially declined 7%-8%. Consequently, not only will losses in an industry with extremely high degree of operating leverage be magnified, but the terrifying prospect of reserve and resource write-downs looms like Damocles’ sword. Moreover, balance sheets of even the MAJORS could become endangered; particularly the world’s largest gold miner, Barrick Gold.
Despite how PROPAGANDA operations like the World Gold Council report industry fundamentals, we are already seeing significant supply constraints – atop soaring industry demand. I expect the third quarter ‘mining earnings catastrophe’ to highlight the widening gap between the REALITY of an industry on the verge of collapse, and the MIRAGE of the unsustainable PAPER prices orchestrated by the most aggressive Cartel naked shorting scheme yet. In other words, whether or not PM demand soars now or later on, prices simply cannot fall much further – lest PHYSICAL supply will implode, yielding widespread product shortages.