Wednesday, May 12, 2010
As a resource stock analyst, I use a simple test to evaluate a mining company's management:
If the manager – or the guy promoting the company's stock – is talking, chances are very good he is lying. It's that simple.
You see, there are thousands of mining and exploration companies in the world today. Most of them are simply a hugely embellished story designed to enrich company insiders. Maybe 1 in 3,000 mineralized anomalies turn out to be a real mine... so it's rare for a mining exploration story to live up to its promotional hype.
This is one reason why, when Pierre Lassonde talks, I listen.
Lassonde is one of the good guys in the mining business. He's a successful mining entrepreneur who has enriched not only himself, but his investors as well. In 1982, Lassonde and partner Seymour Schulich founded Franco-Nevada Mining, the first big gold royalty company. Over a 20-year period, Lassonde's company returned 36% per year on an annualized basis.
The huge gold mining company Newmont bought Franco-Nevada and made Lassonde its president in 2002. He filled that post for four years. Lassonde now serves as chairman of the new Franco-Nevada royalty company.
Right now, Lassonde is bullish on big gold mining stocks. He's bullish because after years of struggling to make money, big mining stocks are finally racking up big profit margins.
For the past several years, soaring costs were the Achilles heel of the big gold miners. The price of vital mining ingredients like fuel and infrastructure climbed almost as much as the booming price of gold.
Lassonde notes that mining companies are now getting a handle on costs. If they can continue to hold costs steady, the rising gold price means gold profits will explode... and share prices will follow.
This week, the market confirmed Lassonde's thesis. Shares of huge miners Barrick and Newmont reached 52-week highs yesterday. And for more confirmation, look at the table below. It's a table of operating margins for Barrick and Newmont, plus fellow giant Goldcorp. Operating margins show you how much money the miner makes after paying for fuel, explosives, salaries, etc... Improving margins means more money going to the bottom line.
The table above shows a trend developing. Margins climbed a bit from 2008 to 2009. That's moving in the right direction, but Lassonde recently urged folks to focus on 2010 numbers. We're getting those numbers now, and they look great.
Barrick's operating margin jumped to 41.5% in the first quarter of 2010. Newmont's hit 40.5% in the same time period. Goldcorp jumped to 35%.
Now... of course Lassonde is going to be bullish on gold and gold stocks. It's part of his job. But his observation is turning out to be right on. Margins are growing. And the price of gold is on a tear.
Despite their recent price strength, gold stocks haven't performed all that well. The share prices of the three giants above have moved sideways since 2008. I think the next several years are going to remedy that situation. Margins are increasing. The trend in gold is up. The trend in big gold stocks is turning up as well.
Euro surrenders Monday's gains... falls back below Friday's pre-bailout close.
Huge gold fund GLD hits all-time high on Tuesday... gold holds above $1,200 per ounce.
Gold mining stocks ripping higher... fund GDX up more than 10% in a week while other sectors trade flat.