August 6, 2007
These are difficult times for the mining investor, particularly those involved
in precious metals shares. The great problem is that while quotes on gold,
silver and platinum have held relatively steady since their peaks in early 2006,
the entire cost structure of exploration, permitting, construction, promotion
and production continues to rise sharply.
Wages for qualified geologists, mining engineers, metallurgists and project
managers are rising rapidly - if you can find them.
Fuel and transportation expenses are sharply higher.
Expenditures for permitting, environmental studies, resource estimates and
feasibility studies are escalating rapidly.
The combination of steady prices and rapidly rising expenditures is beginning to
bite, putting real pressure on the budgets of a host of juniors and is making it
necessary for them to go to the finance markets much more frequently than might
have occurred just 18 months ago - and this represents the re-birth of a massive
problem the industry experienced during the two decades from 1982-2002, that is
the abandonment of quality projects because company after company reached the
end of their money-raising prospects.
One cannot help but wonder if the growing instability in world financial
markets, initially attributed to the collapse of the subprime mortgage market
but now spreading rapidly, will dry up some sources of cash or credit and will
not eventually impact the financing efforts of the mining industry.
What we do know for sure is that the overall market for mining shares has hit
something of a brick wall for the past 18 months, as is clearly shown on the
5-year “XAU” (Philadelphia Gold Share Index) chart. After enjoying robust times
for three years, the average has simply marked time for the past
year-and-a-half. It is our opinion that it will take a powerful move above $700
in gold for the sector to get a true ‘wake-up’ call.
Lest anyone doubt the power of the subprime collapse to wreck havoc, one look at
the chart of American Home Mortgages stock should set those doubts to rest.
After years of profitable growth - and great returns to shareholders - the
mortgage lender’s stock began to wobble in 2006, drifting sideways below its
peak of 40. Suddenly, the stock crashed to 20, held firm for a few trading
sessions - and then gave way completely. As of this morning, the stock trades at
44 cents - a 99 percent wipeout.
Trading in company shares has been suspended by the New York Stock Exchange and
the company just announced it was filing for bankruptcy protection.
There is no doubt this crisis in both housing and mortgage markets has the
potential to intensify and expand. One question metals investors might ask is,
“Why have these growing concerns not yet driven the price of gold - presumably a
hedge against panic - higher?
Today’s trading has seen sharp moves up and down - but little in the way of a
sustained trading direction. It will be most interesting to see the final
numbers.
