Gold Stocks

By: Fred Sheehan | Wed, Nov 2, 2011
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A compelling argument to steer clear of gold and silver miners is their poor management. "Those companies are run by a bunch of miners. They don't know how to manage a company." Most often this criticism refers to gold miners' seemingly insatiable desire to issue new shares. By issuing new shares, a company reduces the value of shares already in the hands of the public. For instance, a company has issued 10 million shares of common stock. Now, it sells another 10 million shares. The profit-per-share to current shareholders (before the new issue) is cut by one-half.

This argument sometimes stops here. By not looking further, the necessity to raise more capital over the past decade is not addressed. During the 'oughts, the price of gold was too low for many of the miners to continue prospecting - without receiving more funding. To this, the complaint often goes: "If miners weren't such a bunch of miners!, they would have stopped prospecting, and let the price of gold rise to a profitable level."

Long-time shareholders also lament that miners too willingly issue shares. Common stock is only one way to meet accounts payable. The managers of mining companies can, and have, borrowed from banks, from the bond market, and from private investors. They have sold mining rights, and used other means to get money.

The tendency of gold-mining managers to behave like diggers rather than owners is less important today. Thus, the reasons stated above to not own miners is less compelling. "Gold and Silver Stocks" discussed some reasons why this is so.

Several miners have announced they will pay or increase dividend distributions to shareholders. Implicit in this trend is the recent profitability of gold mining.

Many miners are now able to finance their capital expenditures from cash flow. Where this is so, the digger-managers are less likely to act in contradiction to interests of the common shareholders. The Gold Stock Analyst has discussed companies that are now able to meet capital needs from cash: Goldcorp, Yamana, Newmont, and New Gold (funded by Goldcorp) are a few.

Not by any means are all gold and silver miners in this position. Nor should they be. Miners that issue shares in the future should not be summarily dismissed by shareholders. The companies are in different stages of the prospecting-to-production cycle and hold different opinions about internal growth or growth by acquisition. But all in all, gold and silver miners are in a much better financial position than during the Evil 'Oughts. If Simple Ben runs the Fed just awhile longer, $10,000 gold will solve all financing questions.

 


Frederick Sheehan writes a blog at www.aucontrarian.com

 


 

Fred Sheehan

Author: Fred Sheehan

Frederick J. Sheehan Jr.
aucontrarian.com

Frederick J. Sheehan

Frederick J. Sheehan Jr. is an investor, investment advisor, writer, and public speaker. He is currently working on a book about Ben Bernanke.

He is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and co-author, with William A. Fleckenstein, of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve (McGraw-Hill, 2008). He writes regularly for Marc Faber's "The Gloom, Boom & Doom Report."

Sheehan serves as an advisor to investment firms and endowments. He is the former Director of Asset Allocation Services at John Hancock Financial Services where he set investment policy and asset allocation for institutional pension plans. For more than a decade, Sheehan wrote the monthly "Market Outlook" and quarterly "Market Review" for John Hancock clients.

Sheehan earned an MBA from Columbia Business School and a BS from the U.S. Naval Academy. He is a Chartered Financial Analyst.

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