Gold-Silver Ratio and Mining Costs

Easy....the capital structures were not laden with debt. Plus, the CAPX that went into these lower-hanging fruit were much less (see my comment above on debt ratios).

Finally, the cost of extraction were much lower....think about it...labor supply for mining/oil & gas/geological stuff was much less competitive...and energy costs were more or less configured on oil @ $25/bbl. !!!

Actually....not. I work in the financial sector so this is 2nd nature to me, but the truth is you can look at the sector and the individual companies and see that what I am talking about is true.

The companies made a few major mistakes:

1. First, they hedged their gold price rise from 2002 onward. So they didn't realize much of the 6-fold boost to $1,800/oz.
2. Second, instead of 'digesting' previous CAPX, they kept building and buying ("Empire Building") and got burned by overpaying big time. And I am not talking about overpaying by 30-50% but more like 100-300%.
3. They failed to see the huge rise in extraction costs, based on labor, materials, machines, and energy (oil).
4. Unfriendly governments imposing red tape, additional costs, mandates, and sometimes (threats of) expropriation.
5. Way too high debt levels. Not enough free cash flow.

In retrospect, these mistakes look easy enough to have spotted. But not really. If in 2002 you had told most gold mining CEOs that gold was going to go up 6-fold in the next 10 years they probably would have spent even MORE. Most would have figured they'd have stock prices that went up closer to 10-fold if not more.

As Don Adams ("Maxwell Smart") used to say.....missed it by thatmuch.

 

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