Stuck In The Miners

Crash Davis was a perennial minor leaguer. So was Rocky Nelson. Are you "stuck in the miners", too? If so, maybe there's hope...the proverbial "light at the end of the tunnel".

Well, it's been about six months since we last took a look at the miners. And what a lousy six months it has been. Back on January 9, I wrote this: http://www.tfmetalsreport.com/blog/4424/miner-case-depression. If you think that old Turd is all bull, all the time, you should definitely go back and read it. I concluded that very downbeat post with this:

"So, what's the point of all this? Why even jack around with these damn things? Just buy physical metal, take delivery and forget about it. And don't tell me about your IRA. There are plenty of companies out there that can help you to buy bullion within that thing, too.
Stack, stack, stack and BTFD. Your only winning move."

Back then, the HUI was at 424. Now it's 224. Holy moly! Man, woman and child!! That's terrible!!! Down almost 50% in six months. Simply brutal. But I see a light at the end of the tunnel. Is it potential salvation and safety or is it simply the lamp on the helmet of this poor bastard as he staggers near death?

Personally, I'm getting my hopes up, leaning toward "salvation and safety". There may still be a little ways to go to the downside but, if history is any guide, we may finally be closing in on some buying opportunities.

First, a disclaimer: Stack, stack, stack and BTFD is still your only winning move. However, I know that most folks remain in the "system" (against even Santa's wishes) and they are looking to make some fiat-based trading profits. It is those people for whom this post is intended.

Additionally, some believe that the miners will turn when the inevitable M&A hunting season begins. I think it's the other way around. The miners are going to have to bottom and turn before any mergers and acquisitions get going. Why? If you're Goldcorp or Randgold, for example, you'd love to buy some new assets at these depressed prices but there are two problems:

1. You're very reluctant to issue new shares at these levels so you don't want to buy something using your own equity as a currency.
2. You're also reluctant to burn precious cash when your margins are being squeezed so severely by the downturn in price.

However, once price turns and you begin to feel more comfortable about your near-term profitability, the idea of buying up the assets of a good company which simply ran out of cash looks pretty appealing. So, there is some opportunity to buy depressed junior and exploration companies on the hopes that they'll survive or be bought out...but...there's probably an equal opportunity (and a more conservative trade) in buying some of the big miners, which will see strong earnings growth if they can acquire some companies and new assets "on the cheap".

One more thing before we get started, it's also time to consider one of the more traditional methods of equity valuation..."book value". This term is a theoretical number that is meant to indicate the breakup value or sum total of a company's assets that shareholders might see in the event of liquidation. Here's the definition from Investopedia: http://www.investopedia.com/terms/b/bookvalue.asp

Book value is the accounting value of a firm. It has two main uses:
1. It is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated.
2. By being compared to the company's market value, the book value can indicate whether a stock is under- or overpriced.
3. In personal finance, the book value of an investment is the price paid for a security or debt investment. When a stock is sold, the selling price less the book value is the capital gain (or loss) from the investment.

Because share prices have fallen so ridiculously far from their highs, I thought it would be helpful to include book value on each chart. I found the book value for each company at Finviz but, in the time I took this morning, I couldn't verify each number through a different source. Therefore, do your own homework. Do not simply rely upon what you see below.

Let's start with the pathetic, disgusting and painful-to-behold HUI. As mentioned above, it's down from 425 back in January, 500 in late 2012 and 600 in late 2011. OUCH! Now at 225, it looks to be near a bottom. As you can see on the chart below, the HUI dropped below 200 in November and December of 2008 before rallying. It also bottomed below 200 in 2004 and 2005. If the HUI falls another 10% to 200, would we be marking a bottom again? Maybe? Probably? I guess it depends upon whether or not you think the world is ending soon. If another Global Financial Collapse starts this autumn, all bets are off. If it doesn't, then a 200 HUI looks and quacks like a bottom.

In no particular order, here are four larger-cap stocks that look to be closing in on price levels where they start to look interesting.

And here are updates on six of the juniors that we have followed from time to time. Note that most are trading well below their book value, which potentially makes them attractive takeover candidates. The only one which isn't is TRX, which trades at a premium because investors are betting upon the expertise of Jim Sinclair (which is a good idea) and the potential of mining in Tanzania. All six are closing in on attractive valuations for anyone wishing to nibble and cost-average.

OK, that's all that I have time for today. If you would like to me to post a chart of some other, specific issues, just make a note of it in the comments and I'll try to accommodate as many as I can through the day. Again, please do all of your own research before acquiring any of these shares and expect plenty of volatility before the trend changes back to the upside. However...IF you pick the right companies...and IF the global financial system remains at least somewhat "normal"...there is great fiat-multiplying potential in some of these shares. Good luck!

TF