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UPDATE; WHY JUNIOR
GOLD MINERS ARE STILL THE PLACE TO BE ... |
March 8 2006 - UPDATE from WebPennys.com; A couple months ago I wrote a small blurb on why I felt the Junior Gold miners were the best place to be invested... the main part of my thesis was the fact that large cap. Gold companies were starting to come under pressure in regards to replacing their in-ground Gold reserves which they were quickly depleting... well, as an update to that thesis, I offer the following update....
On March 2/06 Newmont Mining (the largest Gold mining company in the world) reported a drop in yearly Gold production/sales (see: Graphic RR1)... selling 8.6 million ounces of Gold in 2005, compared to 8.8 million ounces sold in 2004 ... Graphic RR1:
Newmont's 2005 Gold production lower than 2004 production...
HOWEVER, the news just gets worse for Newmont Mining (see: Graphic RR2), because also on March 2/06, Newmont continues to say that it expects it's Gold production/sales to continue to decline even further in 2006, and decline further again in 2007... Graphic RR2:
Newmont's 2006 Gold production forecasted to be lower than 2005
production,
And there seems to be something strange about Newmont's method of accounting for Gold reserve replacement; if you carefully read the next Newmont graphic (see: Graphic: RR3)... you'll see Newmont states that they managed to replace their 8.6 million ounces of Gold sold in 2005 with 9.4 million ounces of Gold during the same period.... HOWEVER, when you read it closely, you see that NEWMONT SAYS IT ONLY REPLACED 6.8 MILLION OUNCES FROM THE DRILL BIT.... AND THEY ACTUALLY ENDED UP ADDING AN ADDITIONAL 2.6 MILLION OUNCES VIA HIGHER GOLD PRICE ACCOUNTING (which sounds like some sort of ACCOUNTING GIMMICK TO ME, because all I care about as an Investor is; how many physical ounces were actually added to reserves) ... Graphic RR3:
Of 9.4 Million ounces added to Newmont's Gold reserves in 2005, only
With Newmont having declining Gold production/sales, they face the real problem/risk of declining revenue going into the future if Gold prices stay flat.... and as a result, the company will find it increasingly difficult to attract long-term investors (see: Graphic: RR4) .... in fact, the Analysts downgrades are already starting to increase, citing production & reserve growth problems... Graphic RR4:
Analyst Downgrades Newmont citing little production/reserves growth...
Graphic RR5:
Newmont Mining Downgrades...
So... while we are already seeing Newmont's stock sell-off, the opposite of Newmont Mining is, Goldcorp. During approx. the same time, Goldcorp has managed to almost triple their Gold Reserves, which ensures themselves strong future revenue growth even if Gold prices stay flat ... Graphic RR6:
Goldcorp nearly triples it Gold reserves...
Because of the strong revenue & reserves growth Goldcorp has achieved, the market has rewarded Goldcorp stock for delivering strong growth & reserve replacement... while at the same time Newmont's stock diverges to the downside ...
The recent sell-off in Newmonts stock from just over $62 per share to just under $50 per share has cost Newmont Mining a loss of approx. $8 Billion in market capitalization in just the past month and a half alone... a pretty big loss considering if Newmont had used even just $1 Billion of it's stock a few months ago to start acquiring Junior Miners with strong Gold reserves, they might have been able to prevent the recent $8 Billion loss in Capitalization... because, with even just $1 Billion in stock acquisitions, Newmont could have added between 5 - 10 quality Gold exploration companies to it's portfolio/reserves... but then again, W.T.F. do I know, I don't make $16 million a year like the President of Newmont Mining. TO FIX NEWMONT'S PROBLEM: It's pretty reasonable to assume that THE ONLY SURE WAY NEWMONT CAN REASONABLY GUARANTEE REVENUE GROWTH (and increase the appeal of their shares) IS BY CONTINUALLY INCREASINGLY THEIR YEARLY GOLD PRODUCTION.... AND THE ONLY WAY NEWMONT CAN DO THAT IS BY INCREASING THE AMOUNT OF GOLD IN RESERVE BY AN AMOUNT GREATER THAN WHAT THEY PRODUCE/SELL EACH YEAR... however, as I indicated in one of my recent blurbs, RESERVE REPLACE FOR THE LARGE CAP. GOLD COMPANIES IS BECOMING INCREASINGLY VERY DIFFICULT FOR A NUMBER OF REASONS.... SO, BECAUSE LARGE GOLD COMPANIES LIKE NEWMONT, who have to each replace multi-million ounces of Gold each year.... have actually become so big during the past decade, they simply cannot easily find 9 million, 9.5 million, 10 million or 11 million ounces of Gold per year to reliably grow the revenue of their business (don't forget that Newmont has to compete with companies like Barrick Gold, Ashanti, and others every year in their hunts for reserve replacements) ... and then combine this with the fact that the biggest Gold Producing country in the world, South Africa, has been on a yearly Gold production decline for over 20 years... combine that with the fact that other Gold producing countries have also recently entered into production decline trends .... Graphic RR8:
World Gold Production... note the recent broad decline...
In addition to Goldcorp, another company that clearly understands the importance of Gold reserve replacement for future growth are the people who run US Gold Corp. ... who just recently made an unsolicited offer for the purchase of 4 Nevada Gold Exploration companies ...
Graphic RR9: US Gold Corp.
swallowing up Gold Exploration companies to grow reserve base...
And as you can see from comparing US Gold Corp's stock performance to Newmont Mining... you could call Newmont Mining's stock "dead weight" in comparison ... Graphic RR10: Newmont Mining vs. US Gold Corp. stock performance...
Hopefully thru this commentary (and
the previous related one) I've been able to relay the importance of
the "Reserve Replacement" quagmire facing the large cap. Gold companies
to you... and how this will increasingly
affect the Junior Gold Mining sector... because the growing problem of
"Reserve Replacement" will take years to solve, and given the trend of
declining world-wide Gold production (see
Graphic RR8 above), the world may
have reached the point where the world-wide Gold supply is to thin to meet
world-wide demand, resulting in the "Reserve
Replacement" problem simply not being fixable... particularly as growing
demand from China, India, and the Middle-East continue to intensify the
situation. |
