The Silence of the Precious Metals Miners

Recently, we hosted Andy Hoffman of Miles Franklin on a live call. I mean "we" literally because I polled the community before the Q&A, so that we could focus on your questions. 

We covered a wide of range of subject matter. Rather than dumping the entire interview into one transcript, I decided that breaking out the individual questions and answers might be more efficient for consumption. However the full interview is here

In time, most investors and some informed observers find themselves contemplating the collective silence of the precious metals mining sector.

Indeed, it is as if they’ve been forced (with the rare exception) to keep quiet about the forces that wreak havoc on the price of their primary product. 

Not surprisingly, the overall health of the sector has fallen mightily. 

With prices manipulated at or below the cost of production, how do you characterize the overall mindset of the mining sector and leadership? Are they slaves to finance? Could they ever rise up as a collective force against all of this, or is that ... ?

Andy: If they were ever going to raise up as a collective force, they should've done it back when their finances were much better. It's like the poor people now, the 99%. There's nothing you could do to raise your standard of living when you're hopelessly in debt, and right now, the mining sector, not only their balance sheets have been decimated by years, and I'm not just talking about precious metal. I'm talking about all mining, pretty much all commodity producers. Now we're talking about farmers, we're talking about anyone in the business of producing commodities, but particularly precious metal miners because they're the only ones who have had a cartel that had to purposefully push the price down, as you said, to not just ... 

People mention the cost of production. It's not just the marginal cost of production that matters, of which pretty much every mine, except for the best mines on the planet are below the price, are below it now. It's the long-term cost of sustainability, which means miners need an enough money to explore for and develop new resources to replace the old ones. Since we haven't had any discoveries, any. I'm saying it with a capital A-N-Y. We haven't had any material discoveries in 15, 20 years, and now the miners are cutting expenditures, they have big debts, they haven't been spending money. We are guaranteed to have already passed peak gold and silver this year. I expect dramatic declines in the coming years, particularly in silver because in silver, half of all the silver is byproduct of copper, lead, and zinc mines, and copper, lead, and zinc prices are collapsing and probably will continue to collapse, in my opinion, to below the levels of 2008 because there's so much oversupply out there.

As for the CEO's, most of the CEO's out there are either geologists, who really have no understanding of finances, or they are finance people who have no understanding of the mining business. Because the business has been so decimated for so many years, they haven't been able to develop talent, either on the administrative side or on the technical side, which you badly need in a business which, like oil, you picked all the low hanging fruit. You need really complex engineers and geologists out there that don't exist anymore, and any ones that were that smart went to other industries, like oil. Maybe they'll come back now from oil, but they're petroleum engineers. They're not geologic engineers from mining.

As far as the industry, there's nothing they could do about it right now. Right now, they are ... I see a bunch of these companies. They're so desperate, they'll say yeah we badly missed our earnings estimates. We lost tons and tons of money, but the good news is, we're going to meet our production estimates. No, that's not good news. It's not good news to produce more of something that loses you money, but that's the mindset, the Wall Street mindset, and I don't think ... Until prices dramatically change, and again, people talk about if the prices go up, they'll go right up with it. No, they need significant increases so that they make profit, so that they can start investing in the business again. I think they're really in a trapped mode right now, waiting for prices to dramatically increase.

See below for the entire interview…

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