Junior Gold Miners Versus The Big Producers

As we see the in-flux of “born again” gold-bugs among mainstream market commentators, there has also been a commensurate increase in articles about the gold miners. Many “experts” who only a couple of years ago were shunning gold as a “barbarous relic” now feel qualified to “recommend” individual gold miners to their readers.

To the credit of a few of these individuals, they have done their “homework”, and offer credible analysis and insight on the companies they cover. However, the majority of such pundits haven't learned the various quirks of this sector which make it different from all other commodity-producers. They engage in simplistic balance-sheet analysis which leaves investors dangerously uninformed about factors which have tremendous significance in the current and future performance of these companies.

In particular, we have numerous analysts touting the large gold-producers to their readers and clients, despite the consistent failure by most of these companies to deliver good “returns” to shareholders. Meanwhile, the smaller producers – the “junior miners” - have provided investors with many spectacular success-stories, with the best clearly still to come.

The leading “voice” when it comes to warning investors of the potential pit-falls of the larger mining companies is Jim Sinclair. He has told investors on countless occasions that many of these companies were carrying dangerous/destructive “gold derivatives” on their balance sheets – courtesy of the big-banks.

These derivatives were either incorporated into their operations as merely “hedges” against the gold-price or were a necessary condition in order to obtain financing for large, capital projects – such as the construction of a new mine. We’ve seen the results of these “deals with the devil” show up on the bottom-line of these mining giants: the complete inability to “leverage” the price of gold – either in terms of their own profitably or in returns to shareholders.

The table above shows five of the “brand names” among the small group of “senior” gold producers. Their stock performance over the past three years has been nothing short of dismal. While the price of gold has increased from $700/oz to $1200/oz over that period of time (roughly a 70% increase), these chronic under-achievers have (on average) only produced half that rate of return for shareholders – rather than “leveraging” the gold price, as all commodity-producers (should) do naturally.

Critics will argue that it’s misleading (and unfair) to include Yamana Gold in this three-year comparison, as they had completed a major take-over in 2007 – which led to a massive dilution of the share structure. Certainly, I could have come up with a better-performing choice than Yamana Gold. However, I wanted to include it in this analysis, as it illustrates two of the major problems facing the large gold-producers: the difficulty in trying to generate production growth and the need for these “gold miners” to add more and more base metals mining to their operations.