Erik Wetterling, Founder and Editor of The Hedgeless Horseman website, joins me for a bigger-picture and candid conversation around investor sentiment, disconnects in valuations that we are seeing  across the sector in most of the gold and silver stocks, but especially in the junior PM stocks. 

We dive into how price assumptions used in economic studies and their associated Net Present Values (NPV) are so low and conservative that it is likely doing the industry overall a disservice and not reflecting anywhere close to the modern day reality in the metals prices or current project values. As a result most companies are trading at tiny fractional metrics of where they should be, and much of this stems from a shell-shocked sector trying to use very low 3-year trailing averages in underlying precious metals price assumptions, but it is almost to the point of absurdity when compared to today’s spot prices.

On many corporate presentations, when looking at stale-dated economic studies, or even newer ones that have sensitivities tables, they have base cases still using $1,800 gold and $22 silver, and upside cases that only go up to $2,400 or $2,600 gold… or $24 -$28 silver.  If one is lucky enough to find sensitivity tables that go up to $3,000 gold or $30+ silver, it still doesn’t even present investors with numbers on where the actual spot prices are in either metal at much higher prices. Erik makes the point that most of these presentations “upside cases” should really be their “downside cases.”  

Metals prices have been at $3,200-$3,500 gold and solidly above $30 silver in the $32-$35+ range for many months now, but there are hardly any economic studies that even incorporate prices where they have been for some time, much less legitimate upside cases from here.   We point out that the mining industry doesn’t really need to be optimistic, we just need companies to start being more realistic in where their intrinsic values are at present.  There is no other sector of the market that so deeply discounts its present value, or is stuck looking backwards at prices from 3 years ago, and the mining sector is not playing to it’s strengths today.   If the sector wants to attract generalist investors, then it needs to at least show valuations of projects at the current metals prices in its sensitivity tables and use metals assumptions values that are not so far divorced from todays prices.

When you combine the recovering sector sentiment that is still not believing current metals prices are going stick, with ounces in the ground valuations still often in the $20-$60 range, and takeover premiums that barely move those metrics to over $100 per ounce, when the current producers margins are $1,500-$2,000 per ounce of gold, then it is an environment where we could still see big reratings higher if the metals prices just channeled sideways.  Erik highlighted that even if gold went down to $2,800, the good gold junior developers should  probably still go higher just to catch up to valuations that even factor in those prices.

Click here to follow Erik’s analysis over at The Hedgeless Horseman website