If we have seen a bottom in 10-year benchmark yields, and are in the midst of a new secular bull-tre...
Mining for Value with Goldcorp and Newmont
08/02/2013 10:00 am EST
Despite the decline in the price of gold, Jack Adamo, editor of Insiders Plus, remains bullish on the metal's prospects and sees unrecognized long-term value for select gold mining stocks.
Steven Halpern: We're here today with Jack Adamo, editor of Insiders Plus. How are you doing, Jack?
Jack Adamo: I'm fine, Steven, just fine. How are you?
Steven Halpern: Very good. You've been publishing since 1996 and outperforming the market over that time. Could you tell us a little about your newsletter?
Jack Adamo: Insiders Plus started out actually as Inside Track in 1996, but when I went independent I changed the name. We don't emphasize the insider transactions as much as we used to, because so many of them now are just public relations.
Ever since the advent of the internet, companies have been publicizing insider transactions and trying to get people to buy their stock, and have been particularly doing it when the company was in trouble, so in some ways it's a misleading indicator, but we still follow it, and we have our own, you know, subtle ways of finding out what's for real and what's not for real, but it's not as big a part of our work as it used to be.
Steven Halpern: One area you're currently focused on is miners, particularly the gold mining, miners. What's your outlook for this sector?
Jack Adamo: In the short term there are so many factors that are extrinsic to the real fundamentals, such as all of the tax constraints, nonsense going on in India, and there's quite a bit of evidence that prices have been manipulated, for lack of a less pejorative term, by the traders.
If you read the Commitments of Traders reports, you can see that when you get a big change in the futures position, of course that's going to affect the price in the short term, but to the longer term figuring, I'll figure at least three quarters out, you know, a year to three years. I think the outlook's very positive.
The entire world, all the central banks, are just printing money like crazy, and of course I mean printing money figuratively. But you can't create wealth just by printing money.
So, at some point, that's going to have to show up in the value of money. And hard assets are going to appreciate. I think financial assets based on currencies are probably going to depreciate, and gold is a very valuable and portable hard asset.
Steven Halpern: In your recent commentary, you pointed out that some of the mining stocks have seen large impairment losses, which have been hurting their earnings over the short term. Could you explain what this means and how this impacts the miners?
Jack Adamo: Sure, Steven. Well, it's probably going to be all of them, anyone that hasn't announced an impairment will soon have to do it.
Basically there's two different sets of accounting rules, I'm not going to get too technical here, but GAAP, which is American General Accepted Accounting Principles, and IFRS, which is the international standard which I know less about, but they handle it a little bit differently.
In any case, when an asset loses value for any reason, you have to show that on your balance sheet and it has to show up in your earnings statement for the quarter, so these gold mines now were bought, and were paid for, assuming a certain rate of return.
And now, because the price of gold has dropped so much, some of these mines, ones that were bought at higher prices, may face a situation where they're not going to be able to recoup all of what they expected to, or what they paid.
That has to be recognized as an impairment in accounting, and that reduces the value on the balance sheet, and it also reduces earnings in the period in which that deduction is recognized.
Steven Halpern: But now, when those impairment losses come into play, that doesn't account for the fact that the value of those assets might go up in the future. But that's something you look at.
Jack Adamo: That's correct. I mean, in most industries when an asset gets impaired, it's impaired for good. It's not going to come back up in value, but in mining, the value of these mines now has dropped because the price of gold, or silver, or whatever, has dropped so much.
However, the value of those mines will increase again if the price of gold goes back up again, which, you know, we believe it will-otherwise we wouldn't be invested in it.
So, what happens is, right now they're going to recognize an impairment loss. Later on they can't write back up the value of the asset, if later on, you know, the price of gold goes back up.
But they do recognize a gain in their income in a future period, if they determine that that value goes back up, and that they can recognize a gain, up to the amount of the impairment that they recognized before.
In other words, the amount that they wrote off in income, they can recoup in income. But they can't recoup it on their balance sheet. I don't know if I'm getting too technical there, but...
Steven Halpern: No, that's very helpful. One of the stocks you hold is Goldcorp (GG), in your model portfolio. What's your outlook for Goldcorp?
Jack Adamo: I can't give any outlook in terms of price appreciation; at this point there's no visibility. But I like Goldcorp a lot. It's got good assets, and it's got very good management. If you ignore the impairments, which again, I think will be eventually overcome, it actually made a little bit of a profit this last quarter.
But one of the things that is really excellent about Goldcorp is, it's using the most conservative price assumptions in all of its forecasting. Right now the forecasts of most of the miners have been assumed to be in the $1400 to $1500 range, some as high as $1700, which is pretty aggressive accounting, as far as I'm concerned.
But Goldcorp is using a $1350 on average gold price for 2013, and that's about $25 more than it is at the spot price today, and you know, the technical analysts are generally putting a short-to-intermediate-term trading range on gold from $1300 to $1370 per ounce.
So Goldcorp is by far the most conservative in the use of their assumptions about the gold price, and, of course, that is also good for their future earnings based on this.
If they're basing their projections on a $1350 gold price and the gold price actually turns out to be $1550 for the year, then obviously their profits are going to be higher, whereas a lot of the companies are assuming a higher gold price, $1400, $1500, $1600, their profits are probably going to be disappointing if that price doesn't reach fruition during the year.
Steven Halpern: Finally, another recommendation of yours is Newmont Mining (NEM), and you said that during this recent period the company is getting lean and mean. What's your outlook there?
Jack Adamo: I can't judge the performance over the near term, but I can say that I really like the steps the company is making. I don't want to call it aggressive, that's not fair. Not conservative enough-I'm mincing words here-not conservative enough for the gold price that's $1500 an ounce. I think that estimate is in danger.
But that said, Newmont is really taking its cost cutting seriously. It's cut about a third of its overhead in its home office. It's doing that in its regional offices. It's really taking the axe to it.
It has not, so far, mentioned anything about cost cutting at the mines themselves, which is good, at least for now. It says that they're going to keep production, but they're really being aggressive in cutting costs in their non-operational cost centers.
So, I think what happens here is that not only it prevents them from having a loss in the short term, but in the long term as the price of gold goes back to what we think it should be. That's going to make their profit margins much higher. You'll see a nice rebound in profit margins with the lower overhead.
Steven Halpern: Well, thank you very much for sharing the time with us today.
Jack Adamo: Well, thanks Steve for your interview. It was good talking to you and you had very intelligent questions.
Steven Halpern: Thank you.
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