September 14, 2016
Gold Mining Companies; Cash Balance Danger, it isn't over yet for corporations.
I have been investing in the gold markets for nearly nine years now. I rode the late 2008 boom with some shares of the majors while learning the ins and outs of this market. In fact, I was so much invested, I was seeing some very disconcerting large red numbers all over my brokerage accounts in 2013, 2014, and 2015.
Fortunately, I do know when I am right. I doubled down on gold miners in 2014, and even more so in 2015. Actually, it was not a double, it was more like a sexvigintuple (26 times) unleveraged addition to what I had originally invested to catch these all time lows.
Ferengi rules of acquisition should be mandatory reading in homeschooling curriculum. Number nine, "Opportunity plus instinct equals profit."
The 2016 January bump to undervalued gold miners also confirmed the old wall street adage, "buy low, sell high". These miners are really moving lately. Portfolio concentration will probably be another article in the future.
But anywho, I promised more on liquidity and must deliver.
I am extremely concerned about the cash holdings of mining companies, and any company publically traded for that matter.
As it stands, when the miners dig up gold and silver they immediately monetize the production, trading gold and silver for dollars. That isn't the problem, that is the business. My issue is when they take this cash and invest it in "low risk" sovereign debt to inch out a few decimals of interest on that hard earned cash.
I recently had an exchange with Pan American Silver during their quarterly webcast expressing my concern.
Start at 43:08 to hear my question.
In the case of Pan American Silver, 90 percent of their cash balances are priced in U.S. Dollars. I didn't get a number on the bond portfolio for them.
This brief exchange confirmed my fears that they consider the government bond more safe than holding a fraction of their production in a vault.
Take a moment to think about that. They preferred to hold government bonds rather than gold or silver, even though many of these companies have outlooks for gold and silver substantially appreciating against the U.S. dollar. Even liquid cash and debt elimination took a back seat to sovereign bonds.
The miners are one bond market shock away from some major balance sheet problems. Even with a bond, exiting a position does require you to have a buyer, a fact that seems to be taken for granted these days.
That being said, we can't expect any executives to move cash around how I would want. Proactive management of cash positions and preservation of purchasing power would just raise eyebrows over at JPMorgan investment bank. And in the end, if this does all go sour the executives won't get punished if all publically traded firms take hits on their bond balance sheets at the same time.
So what is the lesson here? Invest in companies with favorable debt and cash management policies. I sold Pan American the following week after that webcast.
Stay liquid my friends.