John Wolstencroft and Dominic Frisby on investing in mining stocks

Subscribe to our newsletter at http://www.goldmoney.com/goldresearch. In this video podcast private investor Dr John Wolstencroft and Dominic Frisby, of the GoldMoney Foundation, talk about investing in gold mining companies. Wolstencroft explains the “18 Stages To Mining Ruin” in which he shows how a junior mining company can quickly go from a P/E ratio of 1 to a P/E ratio of 100.

Wolstencroft talks about how two mining companies he invested in with very similar stories showed completely different developments with one company turning out to be an absolute success story, while the other one went bust. He points out that the junior mining sector is a very difficult place to invest money and also illustrates the risks of leverage. In a fictitious and slightly humorous sample calculation, he shows how a mining company can go from a P/E ratio of 1 to a P/E ratio of 100 in just 18 simple steps. Such steps include warrants, fund raising, higher than expected costs, options and taxes.

Wolstencroft talks about how two mining companies he invested in with very similar stories showed completely different developments with one company turning out to be an absolute success story, while the other one went bust. He points out that the junior mining sector is a very difficult place to invest money and also illustrates the risks of leverage.

As an investor Wolstencroft presently sees value in the senior miners. Junior miners can be an interesting play with high rewards, however they shouldn’t be bought for retirement accounts.

This video podcast was recorded on March 1 2012.

The information contained in this podcast is an expression of opinion and does not constitute investment advice this is the gold money foundation podcast with Dominick frisbee keeping you up to date with expert opinion on precious metals and the markets now I’m sitting with a great friend of

Mine a fellow mining investor and he appeared on the show a couple of months ago and the title of his show was a mining cynic speaks he is of course John wisdom Croft John hello welcome to show how you doing I’m very good thank you and today we’re going to be discussing

How a mining company which apparently looks like it’s on a p/e of one can quickly take itself onto a p/e of a hundred so I suppose them before we go through the process of how a mining company d values itself I should say that John you’ve been investing in

Junior mining companies for what 12 or 13 years probably since the round 2002 2003 and I imagine that you’ve made good money on some and lost good money on others yes unfortunately I’ve made more than I’ve lost but history could have been different yeah absolutely and the I

Think what happens to anyone who invests in these companies is it initially when you first get into it you just think these are amazingly exciting companies and I’m going to earn a fortune but over time and you do become cynical I think that’s true and I think the industry

Itself has to take some responsibility for the initial enthusiasm that new investors sometimes exhibit because these companies do need to raise money and they do need to promote their story they’re not saying well this is a company if you want to invest in us fair enough if you don’t we don’t really care

We’re just here to sort of spread a bit of investor information around they actually actively need to support the share price and get investors into the company and so they tell very convincing stories with very large numbers and often people will try and sell the company on the basis for example of the

Value of the gold in the ground which can even for a small junior worth a few million dollars could easily be hundreds of millions if not billions of dollars and of course the gold in the ground is also known as dirt it’s getting it out and getting it out and mining it’s in

Turning into real tangible metal that is what minor should be absolutely bill reed is fond of saying not all ounces are created equal absolutely yes and sometimes the these small companies just have the strength they have fantastic assets but if you have an asset that needs two billion for example to get

Into production it’s way beyond the capability of any small company to raise that sort of money and therefore in their hands those assets aren’t actually worth very much unless a major will come along and do a deal and majors often don’t come along and do deals and and

Often it’s very very rare that they do come along a duty yeah so no of course we with sort of selective memory we remember all the companies that did do deals and not all the ones that still are sitting on assets ten years later waiting for the phone call rot from from

A real or a bhp to say yes we’d like we’d like to buy into your asset that is actually quite a rare occurrence and is becoming more rare i think as companies go for larger and larger minds and a lot of these sort of smaller deposits

There’s no real option except to go into into production which I suppose is what we’re thinking about talking about today’s how would I how would a junior company seemingly on a fantastic valuation get into production of what does evaluation look like 1224 months later okay before we we go through this

Self-destructive process the self destructive cycle of mining do you want to give a bit bit bit of background about your to the too big yes the reason why I sort of like telling this story is it’s sort of absolutely true because I’ve made I’ve made many sort of large

Calls on individual companies in the past ten years or so but my biggest ever call was in a company called silver Corp and in fact I think Kathy funk who was the president of silver court might have been on your first ever show back in two thousand so that second or third yeah

And she was absolutely brilliant and what a brilliant salesman and what a thorough thinker and everything else yes and that company did very very well and now I’d met Cathy probably a year or two before before that show when she was the president of what she was what she was

Actually at the time that he did the show but she was the president of silver Corp it was a junior company assets in China with an amazing story that was too good to be true they had fun degrades they had contractors that would build adits which a horizontal trot

Tunnels into the side of a mountain they dig those out for free as long as they could keep the waste material because the silver grades and lead and zinc was so high when they were doing exploratory tunneling that the contractors didn’t want paying they just come along do everything for free extremely high

Grades they did a 43-101 and proved up several million ounces of silver very low capex to get into production it was a fantastic story of course then it was in China and nobody believed her when she went round to tell these stories but then about two years later a lot of it

Had actually come true so a stock that was trading at one dollar 22 150 rapidly rose to around twenty dollars as this story materialized and the main reason why I invested in this stock is it really did seem to be on a forward p/e

Of one that is if you look at the market capitalization of the company which if I remember was around 50 million dollars a year later when they were in production it would would appear to be throwing off miners love this throwing off term throwing off cash yeah or 50 million

Dollars a year 15 million dollar market capitalization 50 billion million dollars here in cash flow fantastic p of 1 what a bargain well I invested in it the stock did rise dramatically I put a quarter of my net net worth in to this one company which in hindsight was a

Ridiculously foolhardy thing to do but it paid off and I was very very pleased that he paid off and obviously since then that money that came out of silver Corp after tax which was a significant amount in those days with days of forty percent tax went into other companies

And I’ve done well on those but after silver Corp I was looking for my next big story yeah and I found another company south china resources listed on aim that seemed to be almost an analog of silver Corp they were mining for molybdenum not silver letters Inc but

There were so many features in common with silver Corp in the sense they had contractors working for free as long as they keep the waist they’d build tunnels into the side of the mountain it was very narrow vein but extremely high-grade an almost pure lithium a sulfide very

Low capex to get into production just a few million dollars they thought they could get into production in a year that the story there were so many parallels and I remember posting on a bulletin board 12 parallels between silver Corp and south china resources and so the amount of money I’d originally invested

In South China resources before it eight nine ten bag whatever is so cool yeah sorry silver Corp I put into South China resources and all seemed to be going well for a few months and then the news release is stopped and it seemed to be getting a bit suspicious about why

Directors weren’t releasing news and it then turned out that yes the were these veins but the work wasn’t enough off of the malignant sulfide to turn it into a viable mine and the stock went from 7p to something about 27 p and I think I probably sold my last shirt as I’ve got

Five thousand left I saw my last shares of one or 2p and so that was a big loss for me and now that was also on a p @ forward p/e of one so here we have two stories both apparently on a forward price-earnings ratio of 11 did very well

One basically went bust as it happens neither would have ever been on a p/e of one even if all that good news jam tomorrow had actually materialized for reasons that will go into and sometimes i sort of i’m sort of maybe you know lying in the bath at night and i think

Goodness gracious if I’d invested in south china resources first rather than silver corp I’d have put a quarter of my net worth into a company that went bust and I would probably have given up a walked away and I’d have my portfolio in any unit trust now yeah isn’t that

Interesting and I think there are plenty of people who did put their money into the equivalent of south china resources before they had their silver corp who now never want to touch junior exploration junior resource stocks of any kind and that’s why you have this awful kind of goo goo

Boom-bust cycle if you like in in the in the junior resource sector I think that’s right i think the investors that you meet at investor meetings or when there are management presentations they’re the ones that have survived so to speak or had the good hits and the

Ones that don’t tend not to turn up anymore because either they’ve become very disillusioned all they’ve run out of capital or or both and as an aside i did actually no i mean think how much money got lost last year and think i might only got lost in 2008 but not not

Just it not just in the big crashes i remember in current member 2006 perhaps or maybe 2007 before before will be considered to be doing sort of great financial crisis someone I knew investing in oil stocks in junior oil stocks and he made half a million pounds

In around five months spread betting on oil stocks he was leveraged three two one but as the prices went up he’d put all that profit back into getting more and more exposure into oil stocks a321 leverage he probably had one and a half million positive exposure half a million

Pounds essentially have profit on a 3 2 1 leverage ratio and then all stocks corrected that we go through Corrections very severely very dramatically gold yesterday down five percent is not a shock if you’ve been around here in this market for 10 years and you read the

Financial Times you read King boil news the next day and you know the wisest people say well this is what this market is like in the market tix up slowly and then drops dramatically and then tix up slowly and drops dramatically it’s happened time and time and time again

Correctional stocks that one and a half million exposure fell by third so you’re half a million capital disappeared and so the person I knew went from being an employee working as a software engineer to retiring in January to retiring in May with half a million of capital and

By December he’d lost all that money and he was back working as a software engineer I know exactly who that was anyway there we got a nice guy as well yes very novel mistaken for policeman he was we’ve gone on the tube and people would always think he was a policeman

Although he never was anyway um so let’s let’s go through this cycle of yes how am i this is how a mining company goes from our junior mining company goes from a potential p of 1 to appear 100 right so here we go you’re reading a bulletin

Board one day and somebody says i found this fantastic company there’s a hundred million shares out and it’s going to be producing a hundred thousand ounces a year at a cash cost of five hundred dollars an ounce and let’s assume to make the math simple gold is fifteen

Hundred dollars so it’s going to be making a thousand dollars profit announced a hundred thousand ounces times a thousand dollars is a hundred million dollars so we have 100 million shares out 100 million dollars profit let’s say the share price is currently one dollar a share one pound a show

Doesn’t really matter i’ll use dollars because there are many more companies on the canadian exchanges that the name which is perhaps another issue to talk about and therefore 100 million dollar market cap hundred million dollar profit p of one pile in philly boots fantastic story this this is what i did with

Silver corp this is a story at silver corp and this is what i did it’s all looking very good for it for it for a few weeks and then the people have piled in sudden they start hearing about somebody needs to need to raise some capital to build this mind they’ve done

The feasibility study and it’s all all there and everything they can go into production but they actually need to raise two hundred million dollars to build this mind and people say oh don’t worry most of that will be dead well of course most of it it will be dead but

They’ll still have to raise maybe a third in capital under the third to two-thirds ratio or thirty seventy these are these are pretty good ratios when you’re trying to go into production that the banks that are financing often want to see a capital raised as well and so

The market gets whispers of a need to raise capital and so the show price starts drifting back people are selling out in order to I in a bit later the share price falls to sixty-six cents is formed by a third not uncommon at all we probably all

Remember shantou gold last year that did one of these financings and half in value in a few months so falling by a third isn’t particularly terrible drop these are very volatile stocks and then I have to raise 66 million dollars sixty-six cents that’s another hundred million shares they have to raise bad

News we’ve now got 200 million shares out but everything else has stayed the same so okay then on a pier 11 p of two still pretty good it’s an tastic some companies are a P of 20 but what we also forgot was there were some warrants when this when this capital raise occurred

Very commonly in Canada also in the UK creaser will chrysler resources some people call it did some fundraisings in the last few years and they issued warrants and it turns out as well as the 66 million shares there were 33 million warrants 66 million fundraising there were 33 million warrants also issued

Yeah and the company needs some working capital before they go into production because the money they’re raising is the money to actually build the mine and between now and starting the mind builders all sorts of stuff they have to do and they’re doing some more drilling and proving up some more resources that

33 million sort of goes pretty quickly so we now got to gin 33 million shares out everything else stayed the same so it’s a p/e of 2.33 and then they start building the mind everything’s going absolutely fantastically and then it suddenly turns out that the mind is

Going to cost a little bit more to build than everyone anticipated and even though bankable feasibility studies have the name banker bullet a lot of people use the word bankable very very commonly they don’t actually end up costing what what it says in that massive document ends up costing more because

Historically there’s been very high price inflation in the industry yeah how well the price goes up oil price goes up the price of zinc and steel and other things go up and it turns out they need to raise another run 33 million dollars which isn’t much of an overrun on a 200

Million dollar mine one mine to go into production on budget so there we go another 33 million dollars but the market is really getting quite pessimistic now and it’s fallen to fifty cents a share so that’s another 66 million shares that have to be issued and now we have 300 million shares in

Issue everything else stayed the same it’s all looking good this is definitely the last fundraising before we go into production it’s a P of three but who cares about that because mine is Ron p25 we all know that we’ll talk more about that later and then someone downloads a

Presentation from the website and there’s something about this twenty five percent free carry on the mine owned by the government now this happens a lot it happens much more than people really realize it might not be the government it might be a minority partner but often

In the small print you will find a company saying we’re going to produce so many thousand ounces we actually produce those ounces but we don’t own all those ounces where the producer but we’re not the owner all of them auxus was a famous example from the very early days it did

Very well went from about 10 p 2 70 p is probably about a penny now unfortunately and ox has only had half the mine they had to build everything and take all the risk and lonely around fifty percent of the mine so it’s not one hundred thousand ounces actually seventy-five

Thousand ounces because the government gets a quarter don’t worry about that 300 million shares out 75,000 ounce this is a peer for it’s still pretty good Maya’s run p of 20 and then you look into the small print even more and it turns out the government has also got a

Two percent net smelter or the two percent royalty on the mile it smells two percent royalty on the mine and there’s some bloke with a beard and glasses somewhere that found a mine in the first place sold it for a pittance years ago and he’s got two percent as

Well he’s got a two percent royalty on the mine and that means instead of getting $1,500 when we sell the gold Rowan again to get fourteen hundred and forty because the government’s taking a couple of percent it on this original bearded prospector is getting a couple of percent perspectives out beers

I should have just said perspective then is superfluous information so it’s still looking pretty good we’ve got 300 million shares out 75,000 houses only a few percent of this royalty but that makes the PE 4.26 and then somebody reads the report the annual report and it turns out some of the directors have

Got some options from years ago that no one thought they’d ever be sort of exercising but now it seems like we’re going to production turns out there’s another 30 million options they can exercise and cause all the money that comes from that exercise go straight into working capital requirements and so

This is actually 330 million shares out and not 300 million shares so the P is risen from point2 to 4.6 and then we come to the dirty little secret of the mining industry which is sustaining capex it’s very very rare in any presentation for a mining director to

Say our cash costs of this and our sustaining capex is that now sustaining capex is what you need to do on a capital basis to keep the mine running year in year out the initial capex is what you need to do to get into production so you might do some pre

Stripping to get rid of all the dirt on top you might build some tunnels or whatever but then once you’re in production need to build some more tunnels you need to do some more stripping and everyone everyone has sustaining capex and I was once talking to what is currently a darling listed on

A man and in Australia that has very very low cash cause I was talking to the one of the directors of this company and that they were claiming they can they can get goal down to the gown for about two hundred dollars and I said oh fantastic amazing margins what’s your

Sustaining capex he said oh I think we can do everything else for another two hundred dollars now I don’t say oh that company is because it was an offhand remark and I didn’t get it from lead from the accounts but that two hundred dollar cash costs could double could go

To four hundred dollars because all the extra things they need to do to keep that mind running year in year out let’s say we’ve got 150 dollar sustaining capex here so instead of us spending five hundred dollars to get an ounce out to the ground but now

She’s spending 650 330 million shares an issue everything else stays the same pe 5.5 still a fantastic bargain all the bulletin boards are saying now of course mine is a depleting asset we’ve got to think about exploration and drilling this is only a small company it’s only

Doing a hundred thousand ounces a year and I think it’s fair to say that four million dollars a year in exploration of Greenfield targets around the mine site and maybe 44 million dollars of infill drilling or drilling close to the pit or whatever they’ve got that extension that

There’s been no that that that on strike extension they’ve always been talking about four million plus 4 million for exploration and drilling but those are not big big numbers for a small minor as an example a petropavlovsk last year I think spent 80 million dollars it is a

1.5 billion dollar company but they spent 80 billion 80 million dollars on exploration to prove up new assets yeah I mean I once said this to Bill Reid who I’ve already quoted you know bill readers built six or seven mines in your life and you know Goro is one of the

Stories gold resort corporations what are the stories that did actually do well you’re not going to say more or less although he came in over budget but one of the things you ask bill is you say what’s your exploration budget he says I have no budget for exploration it

Costs as much as he caught it costs yet he won’t he won’t put a cap on it because he knows how important it is but very importantly when he first presented his company he said we’re going to mine make money a third is going to go on tax

The third is going to go on to exploration development and a third coming back to the shareholders and by and large he’s keeping to that promise yes it’s very very rare that any mining executive talks about returning anything anything to the shareholders at all anyway we need to do some drilling

Unless another eight million dollars a year so the profits were sort of around 60 million dollars before which 330 million shares out at a dollar their dollar by in price that was a pier five because we’re spending 88 million dollars the p’s now sort of six and a

Half and of course we’ve got to run the office this all these costs we’re talking about these are the costs in the field yeah getting stuff out of graves in the city there’s the office in the city there’s all those and there’s the Nomad all those advisors

Does the people on the French’s hotels lunches three million dollars a year and if you can do about three million dollars of you you’re a very astute and careful spender of money so we’re putting in three million dollars a year for GNA so that brings the PE down to

Seven and then we just before we go into production we get some bad news that it’s not going to be a hundred-thousand-dollar a hundred thousand aussi of mine well it will be in a few years time but there’s actually a ramp-up period and of course the directors have been talking about a

Hundred thousand ounces year because that’s what it will be doing in a few years but actually is going to be 67 hours and sixty seven thousand ounces here ten percent off for the first year i read a presentation last year that looked at all the bankable feasibility

Studies over a period of two or three years and what they were predicting and what they actually mind and the the rain the variance was from minus fifty percent that’s mining half of what the bankable feasibility study which might run into hundreds of pages that two plus

A hundred percent so it’s no by no means bad news yeah but often the there is a ramp up or it doesn’t quite work out are the only certainty in in this business is you’re not actually going to mine what you expect you’ll either mind more your mind less yeah and sometimes miners

Will will even that out by having stockpiles and blending and grades and things like that so there is this ramp ramp up but the bankable feasibility gave us a sort of false sense of security and it’s going to be ten percent less than 67,000 hours a year so

I PE is actually am actually moved up now 2229 I’m sure it is still pretty good value because all these course all the gold miners are on P of twenties who still half the price of everything else but no one needs to double its itself is a double it’s a double that’s that’s

That’s what that’s what they’re bitter that’s what the direct will be tell you in the bar after his presentation when he’s had a bit too much to drink and he doesn’t think anyone’s going to remember who it’s a double but of course if we mine less our fixed costs are going to

Increase because we’re not lining a hundred thousand now remaining ninety thousand r 88,000 a mine as huge amounts of fish running a mill is a fixed cost putting stuff through the mill a Norseman gold is a famous example of this on the a market they could put twice as much

Stuff through their mill and that their costs would barely rise at all that cash cost would actually have because of putting twice as much root or in throughput half as much true you in cash cost double yeah so in fact the cash costs have risen from seven fifty to

Eighty 65 now we went from 500 to 650 on the sustaining capex and we’ve also got a bit of cost inflation which which sort of shocked people about ten percent cost inflation is not dramatic happens every year and now we’re actually mining less material than we thought because of this

Ramp up so our costs are now up to a 65 anyway p of 12 maybe it’s not a Duggar but is still definitely upside here and now we come to the biggest mistake that maybe I’m being generous by calling it a mistake we’ve not been talking about PA

We’ve been talking about cash flow PE is something different because the earnings of a company is the cash flow minus things like debt servicing or minus tax lots of other things depreciation so when people say this company is on a pier of one or P of five very often they

Just look at the operational cash flow of the mine which is how much that mine is throwing off and say well that’s the profits for the whole company but of course has taxed to pay and that they’ve maybe got taken debt on it we remember we raised 200 million for this we’ve got

100 130 million dead that we’ve got to service and that’s going to going to reduce our our income every year we’re actually already down to around 30 million dollars a year of revenue from our original hundred million and the number of shares has gone up from from a

Hundred million to 330 million we’re on a p/e of 12 and now we’re getting to an area that we’re suddenly every extra cost really magnifies this p/e ratio instead of going from say five to six there’s a bit of cost inflation of six to eight because we’re doing a ramp up

When we include say ten million dollars a year of debt repayment and ten million dollars a year of intro the 30 million dollars our mind is generating suddenly 20 million dollars of that is disappearing to pay the the people to whom we owe money so that 30 million dollars is suddenly dropping by

20 and from a PE or cash flow multiple of 12 we go up to 40 just like that just by taking to account debt repayments and a lot of companies have a lot of debt and companies need to raise debt because they want to minimize dilution of their

Share capital so dat does make sense but it does affect very dramatically the actual profits that a company can generate so we’ve gone from 27 million of free cash being thrown off after we’ve paid the debt off and after we’ve service the debt we’re down to seven

Million it’s not very much at all and then the government comes along and says oh gold going up we’re doing the royalty I’d roll up royalty high-glitz says just one percent so our royalties go up a little bit and that makes the PE takes another million dollars a year off our

Owning so we’re down to six and a half million dollars now and then the mine goes into production and the directors feel very smug and self-satisfied and we’ve put this mine into production yes we’ve been there for 17 years doing this and we’re going to give ourselves a huge

Pay hike and they decide to give themselves another one on a half million dollars a year five directors in a few hundred thousand dollars each a lot of aim directors get paid hundreds of thousands of dollars anyway so that takes another one and a half million dollars over the cash flow generating

Sir only got five million free cash coming out to the company now and it also turns out some more options were slipped in to to tie some key management in to stop them leaving during this critical process of building the mine yeah and there’s another 20 million

Options that are being exercised and we wouldn’t have been able to replace absolutely so there’s a few more shares out we’re making we’re only making five million dollars a year now on a p/e of 65 when there’s a 20 million more shares out or on a P of 69 and then we’ve got

Tax and of course if you make profits 5 million doesn’t matter what you make you pay tax now this may be slightly unfair from going from a p/e of 69 to appear of 107 which is what the sort of Excel spreadsheet we’ve been talking through would show because often does tax

Holidays or low tax rates to encourage the initial investment but in the long term it will make 5 million dollars will probably be paying about third thirty five percent say intact would you would it wouldn’t it be corporation taxes what twenty-two percent or something in the

UK but different kinds of decay rates so it’s pretty common in lots of developing countries we’re not talking about a minor even if the companies listed here they would pay tax and they would pay yes because the company listed on aim would be if they’ve structured a

Properly to be a company listed on a name which has a owns a company I stood in BVI for example which then owns the company listed in got a company domiciled in Ghana yeah and I go on a company makes the money pays tax in Ghana and the money off repatriated so

You’ll be paying around thirty to forty percent tax and that brings your profits down 45 million to 3.2 million so we’ve got 350 million shares out we’re making 3.2 million dollars a year if the share price was still add a dollar yeah you’d

Be on a p / of around a hundred now of course the share price won’t be a dollar and i think bob hoy mentioned in it in an interview with you that often explorers to produce as they go from around four dollars to one dollar yeah

And that would bring this p/e ratio down from 107 to 25 which is possibly about the right sort of ratio that you might have had in the recent past and of course all the way through this everyone’s been saying you know the big producers our own piece of 20 so this is

A bargain but they’re not anymore Barrick is on p of around 10 and the cash flow generation Barrett puts on a cash flow multiple of around five or six now barrack has cash costs of around 350 including sustaining capex 450 whatever people thought about barrack in the past

Is not a not a fantastic growth company but it’s a genuine relatively low debt relatively high margin gold mining company happens to be the biggest mining company gold mining company in the world and it’s on P of around 10 with a cash flow multiple of five so if you’re

Thinking of investing in one of these juniors is got to be better value than barrack and when you include all this dilution this is this company isn’t going to be on Iran a value of a dollar or even fifty cents or even 25 cents is going to

Be lower than that in order to compensate for the execution yes and the small smaller company risk so there we go from it from a peeve want one to a hundred now there are a few extra points to make as we’ve gone through this yeah of course if gold goes up then everyone

Forgets about all these terrible dilutions and directors options and salary hikes and royalty increases and tax and things like that if gold goes up from say fifteen hundred dollars to eighteen hundred dollars we’re back on a P of 12 because we’ve expanded our margin and this is saved a huge number

Of the juniors in real years they have actually materially underperformed in terms of corporate activity yeah I’ve had to dilute they’ve overrun budgets that costs of increase they’re not mining what they said but they’ve been saved by the gold price and the gold price often introduces huge leverage

Into these smaller companies from 1500 to 1800 is a p/e of from a hundred back down to 12 which is maybe a reasonable PE but of course it works the other way when these mind when when the gold price drops by three hundred dollars we are

Not making money in there and they and they basically go bust all these all these junior mining companies junior produces late-stage development plays you know that $1,500 marking goal that 1500 which I kind of think might be the floor in gold that’s but that’s the real kind of divine into whether these

Companies sink or swim for a lot of them it all depends what the what the cash costs are and this is why the market I think justifiably gives a lot of the credence to very low cash costs because if you have cash casas a thousand which

A lot of the Australian minus ya know there’s Bob tonnage runs yeah sort of low-grade Bob tonnage very high which is a sector that’s been really doing really badly yet the Australian minus yeah haven’t really gone anywhere for it for a few years the Aussie dollar is very

Strong they’re so sensitive to the gold price that they’re just living on the edge of the whole time and that’s why you can find a minor with cash costs two or three hundred it’s obviously a fantasy to think they’ll be throwing off fifteen hundred dollars profit because when you bring everything

Else they’ll be throwing or 500 yeah throwing off 500 is better than throwing off or zero yeah so low cash cost does actually mean a lot but then Barrick cash costs in the three 300 low 400 range if you find a minor with low cash course is not as though it’s the only

One in the world a big-ass gold mine in their world that’s very low cash costs so how do you what do you you know as an investor what you do you buy barrick do you do still speculating juniors I mean I know you play the junior game less

Than you used to a lot less yes I think there’s value in the seniors at the moment you can also investing in gold if you believe gold is going to rise maybe putting some some option value on on some of the miners is quite possible that there’s a whole group of miners if

Gold goes from say 1802 2100 they won’t really be making much more money because they’ve got very high or very low cash course agnelli so then just making another ten percent while some of those high cost Australian miners will be quadrupling profits yeah and save it

Goes as well and yeah and then there may be a little bubble in those but I think the thing to remember is these are or plays they’re not it’s not retirement money we’re actually playing you’re making a call on the gold price you’re investing in a particular sort of junior

Minor there’s very leveraged to the gold price tour is very low cash costs or whatever depending on your risk profile or is going to double production because when you go through when you go through this process you’ve got to think how much more dilution is there how much

Sovereign risk is you know the government going to increase taxes or is it go i’m going to steal the mine I’ve cost or the GNA costs going to increase are they going to suddenly double or quadruple exploration and drilling costs is this a really long lifeline in which

Case maybe they don’t need to do so much exploration drilling or is it only the last four years in which case they’re actually be spending a huge amount of money to find that next not mine it’s in four years time they’re going to go

Under so I think you have to look at all the parameters that can cause this p/e ratio this cash flow ratio to fall from one to a hundred year and look at your investment to think how is it going to be affected by these and what is my macro call and

Therefore where does this sort of fit they might in my approach to risk and what I think the world at large will be doing and what returns this minor will be doing those scenarios well I think John what you said it gives us a big explanation as to why why so many

Companies in this sector are such dogs and indeed why the sector in general is so depressed in relative terms well I think perhaps there are enough people around now who’ve been through several mini cycles yeah maybe we’re still in a commodities bull but we’ve seen the pull

Backs and we’ve seen the sensitivity to an annual pullback say three or four hundred dollars in the gold price and what they can actually do to a lot of these smaller miners and the fact that they don’t have strong balance sheets even very exposed to the availability of

Debt and if that if debt isn’t available then they have to dilute and when they dilute the valuations become become crazy I mean just as an example taking this mine this fictitious mine we’ve been talking about let’s say they went out to sell this mine now producing say

A hundred thousand ounces a year making 30 million cash flow 40 million cash flow them I only got 150 to 200 million for it but they spent 200 million building here and that means that that junior before it actually started building the mine which is what I

Alluded to in the previous chat we had it was worthless because they spent 200 million building something that was worth 165 yeah now a house a house developer wouldn’t do that if they said i can buy this plot of land and build a house and it’s going to cost me a

Million and but i can buy a house for 750 I just won’t bother entering the house building market yes there’s no margin in it and I think that’s maybe another way of looking at these companies is look at what they’ll be worth when everything’s rosie and they’re in production we multiply that

Cash flow by four and be a bit pessimistic and all the things that go wrong because most of them do go wrong and and just look how much die Lucien how much equity they have to raise and that’s another bench more that you can use to develop to value of mine

And but I think just one more common we have actually been grossly unfair to most junior miners out there because to be realistic most of them don’t even get to the first stage of what we’ve been talking about most of them never get to that bankable feasibility study it’s all

Jam tomorrow promises tomorrow they never get to the stage where they have to raise capital to build a mine because they never managed to delineate an economic resource so what we’ve been talking about in a way are the elite the junior mining industry those that actually get to that magical yeah a

Bankable feasibility study that’s the top 10% the bottom ninety percent get nowhere and end up being lifestyle companies perhaps for a few of the directors who continually dilute continually raise money but of course there are people that play that game that take the private placements take

The warrants wait for a bit of a bubble sell the shares keep the warrant you know that they’re all all this space there are games to be played in all this space but maybe is a somewhat seasoned investor now and I’d like to think of myself as an investor rather than a game

Player possibly you’ve got to accept that they are games and if you’re going to invest for capital growth and yield and some certainty for your sip of your retirement this junior market is a very very dicey place where you can make lots of money but also lose lots of money

Well very good on that note John thank you very much you have to turn this into a presentation because it’s absolutely brilliant and and can you give me the spreadsheet or a kind of write-up and I’ll yeah I’ll catch it to them to the interview so that people can have a look

At it I’ll do it I’ll do a short writer maybe as a presentation to go through these I think it’s the 18 stages of ruin from from you know fantastic riches to being perhaps the most overvalued gold miner in their market I think I might

Call it I might call it I might do to show that the 18 stages of junior my ruin and there are no problem yes very good and John if that do you want to give out an email address or anything if people want to find you or would you rather remain

I’d rather remain anonymous I mean I do go to all the sort of presentations in London I’m sure with people want to find me they’ll be able to hopefully no executives of junior mining comments very good well John Rushton Croft has been a real pleasure and thank you very

Much thank you subscribe to the gold money newsletter at www.moodys.com to receive e-mail updates on new articles videos and itunes podcasts from our gold research section you