IS IT DIFFERENT THIS TIME AROUND?
YES! The Bull Market in Gold and Silver Stocks of the 2000s will OUT-PERFORM MANY TIMES OVER the Bull Market of in the 1966 to 1982 period.

LEVERAGE
Why do shares in Gold and Silver mining and exploration companies increase more dramatically than the increase in the Gold and Silver price?

QUESTION
During a bull market, why does the price of shares in Gold and Silver mining and exploration companies increase far more dramatically than the increase in the Gold and Silver price? Let’s face it - if they don’t have increasing leverage, there’s no other reason to invest in them.

Mining and exploration companies are highly leveraged to take full advantage of the increasing price of the underlying commodity. We consider this to be “GOOD” Investment Leverage.

There are two principle reasons for this:
1.       Increasing operating profits
2.       Increasing value of in-ground reserves

INCREASING OPERATING PROFITS
Between January 2009 and April 2010, the Silver price increased from $11.00 to $18.50 per ounce. Let’s look at the potential increasing profitability of a Silver mining company during this time.

-          JANUARY 2009
Silver bullion is trading at $11.00 per ounce. Our Silver mining company is mining Silver at a cost of $10.00 and is selling at $11.00 per ounce; the miner has a cash return of $1.00 per ounce and with only minor profit. In late January and February 2009, the Silver price has moved up and increases steadily all year.

-          APRIL 2010:
Silver bullion is now trading at $18.50 per ounce, a tidy INCREASE OF +65% in a little over 18 months. Our Silver mining company is still mining Silver at a cost of $11.00, only THIS TIME he is selling at $18.50 per ounce. He now has a cash return of $7.50 per ounce. Our company that was only just profitable in January 2009 is now enjoying a VERY HEALTHY increase in operating profits +650% in JUST 18 months.

-          TO SUMMARIZE
Increasing bullion prices provide leveraged increases in operating profits for the miner. Naturally, dramatically improving operating profits greatly effects the share prices in most cases.

THE FATAL FLOOR
If we look at the world’s Gold and Silver miners, the lion’s share of them are listed on the Canadian and USA stock exchanges from all over the world on multiple continents. If they’re not listed on those exchanges, I would suggest they are highly risky operations. On both exchanges there are approximately around 400 Gold miners and approximately 100 Silver miners. Yet only a very small percentage of them actually derive their income from Gold or Silver itself. The reason is that the majority derive their actual income from their main mining operations of base metals such as Copper, Zinc, Tin and many others. Therefore, if Gold or Silver prices rise, it has a limited effect on their share price because their main operating income and profit is not derived from Gold or Silver but instead from the base metals of their main mining operations!

WHY DO WE DO IT?
The only reason to invest into Gold and Silver miners is for increased leverage to the underlying metal in which they mine and derive their main income from. If the above is not adhered to, there simply is no reason to buy into Gold and Silver miners. Discovering this information literally takes 1,000s of hours to do the actual research for each one of the companies to game increases into the underlying commodities of Gold and Silver.

SOME THOUGHTS
1.       Discovering this information literally takes 1,000s of hours unless you leverage other’s research, as in a managed fund
2.       Don’t be moved by the emotional reaction of the crowd. Stay with the underlying fundamentals, or you will lose big in the long term.
3.       Take note of the FATAL FLOOR above; it’s important. AFE’s funds have this in consideration.
4.       Patience is a virtue, so don’t be fooled into giving up on value. Too many have done so already being gripped with fear during the stock market “sell off” in August 2008.

Until next time,
Simon Heapes