Look across the universe of equities these days and it's hard to find a stock sector more thoroughly hated by investors than precious metals mining companies.
They are supposed to act as leveraged investments on the price of the precious metals. However, on average, the sector has underperformed the price action in gold in silver over the past several years. In fact, many miners have been absolute widowmakers.
On top of that, as the stock market has powered to new highs over recent months, many miners and mining indexes have sunk to multi-year lows.
What gives?
This week, Chris talks with mining analyst John Doody of GoldStockAnalyst.com. They discuss the reasons why the mining sector has performed so poorly to-date (poor management, poor cost accounting, an over-focus on expansion vs. ROI) and whether investors can expect more of the same – or are there better days ahead?
John is of the mind that the industry is becoming better focused on the right priorities and could well return to it's historic performance versus the underlying metals. But whether it does or not, he remains convinced that there are individual well-run companies that offer exceptional returns for those that do the homework necessary to identify them. History has shown that good mining stocks can generate dizzying returns to investors – the challenge is finding these needles inside the much larger haystack of ventures that won't pay off.
John advises looking for those companies that:
- Are proven producers or are very near commencing production (avoid unproven exploration plays)
- Have big existing cash flows or are projected to grow their cash flows quickly in the next few years
- Compare favorably to their peer group on the following ratios:
- market cap/ounce in reserves
- market cap/cash flow
- net margin
- Do not dilute their share base (this has been a huge problem in past years)
- Report an "all-in cash-cost" in their accounting. $900 or less is desired.
In short, John sees the industry as oversold and expects both a general recovery from here, and a major upside for well-managed miners. For those with the fortitude and discretionary risk capital (consider investing in mining stocks to be like going to the casino), there are some great bargains to be had at today's low prices.
Click the play button below to listen to Chris' interview with John Doody (30m:28s):
by oliveoilguy