John Doody: The Falling Knife of Mining Stocks Has Hit the Floor

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):

This is a companion discussion topic for the original entry at https://peakprosperity.com/john-doody-the-falling-knife-of-mining-stocks-has-hit-the-floor/

Great content. I agree that now is the time to put some more money to work in the miners with one caution.  If the broader market reverses dramatically, it could take down miners just like in 2008. 
 I respect the fact that John Doody  takes no money from the mining companies only from subscribers. I just can't cough up $900.00 right now. Can anyone suggest another reliable way to get some good picks in the mining sector? I own SLW, GG, PAAS, and SSRI right now. What's your favorite? 

First off… Thanks Adam and Chris for this interview… I like John's approach and I am very much in sync with the idea that miners are a super opportunity right now. Oliveoil… not sure you have seen this thread that I started in early March… timing pretty close to the bottom for most mining stocks, if we are in fact at a major bottom;
https://peakprosperity.com/discussion/81092/pm-miners-blood-streets-and-catching-falling-knives
I have been posting the following screener of individual miners I like and own (I own all but GORO right now) with the junior and senior miners ETF's added as reference points;
Symbol
Time&Price
Chg&% Chg
Price Paid
Shares
Mkt Value
Yield
P/E
 
GDXJ
Mar 22
17.00
0.12
0.70%

 
GDX
Mar 22
38.16
0.27
0.70%

0.20

 
MUX
Mar 22
2.98
0.04
1.32%

 
SA
Mar 22
13.83
0.14
1.00%

 
TGD
Mar 22
2.93
0.02
0.68%

10.93
 
PPP
Mar 22
6.24
0.05
0.79%

11.56
 
IAG
Mar 22
7.24
0.06
0.84%

3.60
8.13
 
GORO
Mar 22
12.65
0.03
0.24%

5.70
21.08
Overall, this portfolio held up pretty darn well on Friday given the beating that the PM's took… I think because the PM's themselves shook off the beating (a FUBM in Turd parlance).  I see you are more weighted toward Silver miners … I am tending more toward Gold miners because they more undervalued on a quantitative, PE basis.  I do own some RVM… it is a very small Silver miner, very small market cap., and thus pretty speculative… but it is profitable.  I also own a small bit of USGIF.  The bigger positions I hold are above, and I feel very comfortable with these.  It is very important to either use the ETF's, or be diversified across many miners (thus your "top pick" comment kind of scares me)… I got a rude awakening owning GFI last year when South Africa police started shooting the striking miners… you never know when some kind of geopolitical risk is going to bite you in this sector.  Don't put all your eggs in one basket. 
Oliveoil,  I feel the same way about John's newsletter… It's expensive enough that I would have a hard time pulling the trigger on it, even though I have some real money in the sector.  Most likely, if he makes a new call and the market reacts to it (the particular miner jumps for no obvious reason)… I will see this and might just react to it myself… that's just the way I work… I let the market speak to me  : )       Best of luck to all who are trying to catch the knife. 

Thanks…Had not seen the thread…Will do some homework on your list. I'm thinking of focusing on dividend paying miners at this point. John Doody mentioned GORO at 5%+?
Also Looking at ABX.
I have a firm conviction that Gold will eventually go up. Why not get paid to wait?

I like IAG more than GORO… even though GORO div is higher.  I can't stomach ABX after hearing about some of their evil business practices;http://sgtreport.com/2013/03/evil-personified/
NEM is a better choice I think… they have a stated plan to increase div if and when Gold price increases. 
http://www.forbes.com/sites/johndobosz/2013/03/05/metals-weakness-is-golden-time-to-dig-newmont-minings-dividend/

The company first introduced the gold-linked dividend earlier this year, and further refined it last month. The way it works is the higher Newmont sells its gold production for, the more it pays shareholders. For every $100 rise in bullion prices, Newmont bumps its dividend up by $0.20, and by $0.30 a share for every $100 gain if the yellow metal breaches $1 700/oz. If gold goes higher than $2 000/oz, Newmont will pay it shareholders $0.40 a share for every $100 gain in price. link:  http://www.miningweekly.com/article/newmonts-novel-gold-linked-dividend-gets-the-spotlight-2011-10-28
  If Gold really were to hit Sinclair's target of $3500... your payout on NEM, stock appreciation + Div. would be spectacular.  I think I need some.....   

It strikes me that I should probably give more detail on my statement about IAG vs. GORO.  I like IAG better… they are both high div. stocks, but GORO is very high right now at around 5.7%.  
Let's look at the fundamentals;

Stock     market cap     P/E      EPS       Div ($)     Div (%)

IAG          2.73 B          8.1       0.89       0.25        3.6 

GORO     0.67 B          12        0.60       0.72        5.7

 

What jumps out?  To me, what jumps out is that GORO's dividend is more than their earnings per share… how sustainable is that?  IAG's div is very sustainable at less than 30% of earnings.  IAG has farther to run on a valuation basis as well, having a lower P/E.  

Let's be honest… we are not buying the miners for the dividends… .on good days now, the stock will go up in percentage terms twice the dividend rate!  The div. is a stabilizing force in the stock price, and is the icing on the cake so to speak.            

Well, this was better than I could have hoped for as many of my prior
questions were answered.  I also like the way our guys are sharing info

on these topics.  For me, THIS is resilient EDUCATION!  Hope that John Doody

can return soon, with more insights–really excellent.

I have been invested in these two stocks for a while.
 

GORO has been hammered by shorts, a few mismanagement and missing targets but all in all I think they have a very rich vein system with talks of hitting a skarn. They have new guys on the ground for management and I think the next few quarters will show this.

 

MXSG is the one im excited about. Ground floor yet already producing gold and silver with a joint venture and within the next 2 quarters should have their own Julio mine up and running. CEO is owner/operator with alot of skin in the game and seems to be a show and then tell kind of person.

In a slow growth economy, P/E's will have to come down and dividends up.   In the late 2008/ early 2009 crash MTW and Metso were selling for dollars.   David Stockman basically said to run away from the stock market at this time.

It's always useful to provide some perspective days or weeks after an article makes its original appearance…While John Doody has a good track record, that's all in the past and his advice to buy the miners (and continue holding on to them) has been nothing short of disastrous…Since this article appeared, the GDX has fallen another 30%!..Incidentally, there is a long-standing "Head and Shoulders" price target pattern on the GDX, suggesting a fall to USD 15.00 or so, another 45-50% lower from current levels…there really is no support and the GDX should be aggressively sold…as hard as it may be for the true believers to swallow, gold (and by extension the miners) has much further to fall…again, a simple search of most gold websites finds the presence of too many cheerleaders and true believers (like John Doody) who are all attempting to call a bottom…it's way too early for that I am afraid…in these situations, it is important to follow the technicals (yes, there may well be thrilling countertrend bounces…but the miners are "dead money" and will be for a while)…

Picking a bottom (perhaps also known as "buying value") is most definitely very difficult.  Many professionals wait until some sign of a rebound is in place before putting money into a sector.  One simple strategy is waiting for the price to cross the 50 day moving average - to close above it at least for a couple of days in a row.  Another more conservative strategy might be to wait for the 50 day moving average to cross the 200 day moving average.
People like to say "oh those stocks are really oversold."  But as we can see, even professionals have a very difficult time picking the bottom.  Don't be too hard on John Doody.  A friend of mine - very experienced trader - likes to say: "oversold gets oversolder, and then it gets oversoldest.  And then it goes down some more."  Trends go on for longer than you think.  Things start to look bad - and that's when they really drop!

Its safest to wait for the trend to change, and let someone else get "the big reward" for trying to pick the bottom.  Buying when its on the way up (and putting a stop in place in case you are wrong) can save you a lot of stress.  You give away perhaps 20% of the move - but that's ok.  You really only need 80% to do quite well.  And you sleep a lot better in the meantime.