December 17, 2010
You Can’t Argue With Stupid
December 23, 2010

Gold Rush Reality

This summer, I found myself in the small town of Ross, where the largest gold nugget in New Zealand was discovered.  I went to the famous stream where it was found, felt a stroke of good luck and rented a pan and shovel. Almost immediately, I saw little flakes of gold. I couldn’t believe my luck. Within 20 minutes, I found a little clunker the size of a lima bean. I raced over to where my girlfriend was panning to show it to her. Instead, I slipped on a wet rock, skinned my knee and fell into the frigid stream. The nugget was lost forever. I didn’t even keep enough gold flakes to cover the $5 I spent renting the pan—thus ended another unprofitable mining investment. Then again, gold mining isn’t really a business. For the most part, it’s a way for some friends to goof off and play with heavy machinery. Anyone who tells you otherwise is a liar. For this reason, I was intrigued to learn that the Discovery Channel has a new reality show called Gold Rush Alaska.

I’ve watched a few episodes now. It’s intoxicating. You have the crazy old geologist who’s convinced he knows where the gold is. He uses his backhoe to dig holes all over the mining camp. You have the foreman who doesn’t have a clue how to motivate or coordinate his people. You have the engineer who spends most of his time correcting his prior mistakes. You have the moody employee who’s always about to quit. In general, you have a half dozen grown men who have no capital, no plan and big dreams. It reminds me so much of real mining, right down to the subtext—where will we get more money from so that we can get to the next phase and finally make some money?

During the most recent episode, they couldn’t get the shaker table to work. It was costing them $1,000 a day while they messed with it. Finally, out of desperation, they called in a professional and paid for his expenses. This isn’t too different from real mining, except everything is bigger. In real mining, you lose tens of thousands a day and the problems cannot be fixed with just a blowtorch. When your ball mill breaks, you might be down for two months and it might cost you millions in lost revenue plus millions more to fix it.

After more than a month of watching this, no one has found any gold. They don’t even know where to look for the gold. The good news is that they are convinced that they have the best geologist, the best mining engineer and the best deposit. Heck, all they’re missing is a world class IR guy and a few newsletters that have been paid nickel stock to promote the thing. Silly amateurs! Don’t they realize that mining has nothing to do with actually producing gold? It’s about promoting a dream and selling out your cheap stock. That’s where the real money is. I hope they have a good shell to roll this scheme into. Discovery Channel already did an amazing promote.

After watching this show, I have further increased my resolve not to invest in these penny stock mining plays. They aren’t businesses. They’re just money pits. How many of these things ever earn their cost of capital? Don’t be sucked into the morass. There are a few good companies and a few capable CEOs, but for the most part you don’t want to play in this game. The only winners are the stock promoters.

Many of these stocks have gone straight up in the past year. There are hot sectors. Anyone want rare earth metals? What about lithium or uranium? Just remember, these are speculative trading toys—take profits along the way. Never think you know what you’re doing just because you made some money recently. As an investor, think of them like burning matches. Eventually, they all go “poof, and it’s gone.” I don’t care how many pounds of uranium someone claims to own. Until they build and operate the mine for a few years, it’s not a business. Only when you hit steady state production, do you even have something to analyze.

Kudos to the Discovery Channel—they’ve encapsulated the experience of junior mining—a half dozen likeable guys who are down on their luck and hoping to strike it rich. You just want them to succeed—maybe you’d even give them the $50,000 they need to get into “production.” No gold, no clue, no way out. That’s mining for you. The only quibble I have is that they’re operating a mine in pristine wilderness next to a stream—you can’t have a mining operation without an environmentalist trying to shut you down. Where are the greens? It isn’t a mining project until you’ve sunk millions into it and then lost your water discharge permit. Then again, maybe that is still to come—I’m only four episodes in. I can’t wait until next week when something else breaks and they’re still just one episode away from making a profit.

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