Looking at the Golden Minerals (AUMN) chart since September 13, you would think that their mine had caved in or someone had stolen all the cash they had in the bank. What has actually happened, however, is they raised $37M by issuing 19% more shares at $5.75, with investors buying those shares hand-over-fist, in a single day, as a great bargain. In my previous article I explained why the issuance of extra shares at $5.75 does not imply that the fair value of the stock has to drop to $5.75. In fact, such an issuance might actually increase the fair value of the stock, if it increases the expected future cashflow for the company (which it did in the case of AUMN, as the newly raised cash will allow them to perform the production expansion to 850 tpd throughput and beyond in 2013).
The company filed a 10-Q report (quarterly earnings) on November 9, so maybe some horrible news was hidden in that report, which was anticipated by the market? I looked through it carefully and couldn’t find any bad news there. In fact, the company stated that they raised an extra $2M by selling some non-essential exploration properties, for which they did not have any development plans and which most of the investors have not even heard of. No production delays were announced — they are still planning to achieve the 850 tpd throughput in 2Q 2013 and then spend the whole 3rd quarter producing at that rate. No cost increases were announced either. In fact, the company stated:
Assuming metals prices of $30.00 per ounce of silver and $1,500 per ounce of gold during the fourth quarter 2012 the Company expects to generate a negative gross margin, which the Company defines as revenue from the sale of metals less costs applicable to the sale of metals (exclusive of depreciation), of approximately $1.0 million during the quarter.
In the previous 10-Q form they wrote that a $4/oz increase in the price of silver (from $25/oz) and a $250/oz increase in the price of gold (from $1500/oz) will, combined, increase their gross margin by $2M over the 3rd and the 4th quarter (with most of the increase coming in 4Q because of its higher production). Thus, at the current silver and gold prices, the company might actually generate a positive gross margin in 4Q, which will keep increasing in the future quarters. What’s not to like about it?
It is a total mystery to me why AUMN’s stock got thrashed since September 13, while the junior gold mining ETF (GDXJ) is only down slightly over that time frame. If anyone can find a fundamental (not technical) reason for what went wrong with AUMN’s business since September 13, please comment below.
I’ve been looking at the junior mining space for a number of years now, and I’ve seen many examples when some stocks get “forgotten” for several months. After that, they always catch up to where they are supposed to be. For example, the mining sector bottomed on May 16 and over the next two weeks GDXJ rose 10%. AUMN, however, went down 10% between May 16 and May 31. If you weren’t watching AUMN back then, you can probably imagine how it felt for those who were long AUMN — it felt like AUMN was a worthless stock that just kept going down even when the whole sector is moving up! It feels just about the same now, right?
Well, after that, in 4 days, AUMN went up 60%. Who is to say the same thing will not happen soon? There is a saying: “Good things happen to cheap stocks.” AUMN is unreasonably cheap now. Actually, after the November 9 drop it went beyond unreasonable. So if you have patience to wait for a few months, then you should be able to make good money by going long AUMN now, since stocks do not stay unreasonably cheap for a long time.
Fundamentally, Obama’s re-election gives a green light for the precious metals to rally to new highs, since unlike Romney, Obama did not even mention that his policies are intended to balance the US budget. Continued budget deficits will keep increasing the Debt/GDP ratio in the US, which will keep pushing gold and silver up. This is the main factor in play here — all else is noise in the long term.
