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 [Music] I'm Charlotte Mloud with the Investing News Network and here today with me is Don Hansen. He is a private investor who has been investing in gold and silver stocks for the last 21 years. Don, thank you so much for joining me again. Great to see you. Oh, thank you, Charlotte. I'm delighted to be here again. This is fun. Really happy to have you back. And just to add some context for people who are out there watching, we were following up on an interview we did about a month ago at this point where

you shared some of your due diligence tactics for gold and silver stocks. So, we have you back to talk about some additional research that you've done in the time since then. I think it's going to be really educational for our audience. To recap, I'm going to leave the link to the first interview in the video description, but I thought we could begin by having you go through some of the common terms that you explained to us before. So, those are things like market cap, all in sustaining costs, and gross margin. So,

let's begin there. Okay. Sure. The market capitalization or market cap is basically the uh shares outstanding for a given company times the current share price. Um the all in sustaining costs is a number that's readily accessible on the uh corporate presentations on the websites of all the mining companies. It's very standard to provide that and it is all the costs of production to produce uh gold with the exception of GNA and uh corporate tax. Of course, GNA is uh general administrative things like

uh uh interest expense uh officer salaries uh legal accounting etc. So, but the all this is anticost number is readily available and um going further to get a more exact profits number. It takes a lot more work and it's not nearly as easy and and the uh all the cost number uh gives me the gross margin. So, I'll I'll get to that one. The gross margin is basically the difference between u the revenue which is the uh uh cost of gold the price of gold times the amount produced subtracted from the all in sustained

cost times the amount produced and uh so that's where you get the the gross margin. Uh so those are the terms and those ones we'll be talking about uh when I go through the the data. Okay. Thank you for going through that. I think that's going to be really helpful for everyone to understand what we're going to be talking about over the next half an hour or so. So, as I was mentioning, since we had our last discussion, you've done a whole bunch more additional analysis. And one thing

that you've been looking at is market cap gross margin data in the real world. So, I believe what you've done is a comparison to S&P 500's price to earnings ratio. So, if you could go into that and tell us what you found there. Okay. Um, one of the things that I was interested in was the relationship between the market cap and the gross margin because that's really u a uh price earnings multiple except I'm not going into the earnings because I would have to include GNA and corporate tax

and that's a lot more work and um and besides that what I've learned is that generally the uh GNA and the corporate tax consumes about half of the gross margin and I've known that for that varies of course according to over time if the uh gross margin gets extremely large the GNA isn't going to grow proportional with it although the corporate tax would of course so um the work that I did then I I looked at uh 12 uh gold miners I I I changed this list a little bit from the last time a month

ago and I I deleted one that was uh really low and and obviously something wrong with that company and I added pneumont which I hadn't been in the list before which is the world's largest gold miner and uh and in and and analyzing the market cap to gross margin for that group uh the uh they numbers varied uh all the way from say about six up to 12 is the ratio. Okay. And uh the the better companies were in the around in the 12 number. Uh the interesting thing is that the average of those 12

companies was about eight and uh it was actually 8.3 but uh eight is good enough for round numbers. I'm not looking for great precision in this. But then I said, okay, if the gross margin is about double the uh earnings, which is what's used in the uh S&P 500 whenever when they calculate a a price earnings ratio, it's the price of the shares uh divided by the earnings per share. And uh and so I figured well then that means that the uh denominator will be uh half as much because the uh

gross margin if it's eight well then you're going to have a number that's half of that. So that would mean that the uh price earnings if that was applied to the gold miners would be about 16. Right? Okay. So then I looked up on the internet the uh price history for the S&P 500's price earnings ratio and and and this was just dumb luck. Okay, but the reality was that over the last 100 years, the average price earnings ratio for the S&P 500 was 16. the same number that I got from my

calculation using the market cap to gross margin. That was just luck. The other thing I would point out, however, is that when you looked at that history of the price earnings ratio for the last 10 years, the general stock, the S&P was nowhere near 16. It was way above it. So, it actually tilted the average uh a bit, okay, over that. I mean, it's still not an enormous amount, but it would have been maybe was 15 or something like that. But the other thing I thought about was, well, you that's really an

exceptional situation. And then I thought about that and I said, well, you know, that shouldn't be too surprising because during that 15-year period, we had historically low interest rates. And so what happened was that and all the quantitative easing, all the money printing that went on. Okay. So what the big corporations did was they borrowed a huge amount of money for almost nothing less than 1% or 1% and bought back their stock with it. And that's why the price part of price earnings ratio went

through the moon and that's what we've observed. and and I also seen data that indicated that the amount of sty stock buyback money was about 35 or 40% of the total money that went into the stock market during that time. So the the the rich obviously got rich much richer and that's why but I thought that was an interesting side note of of of that but it it verified that my price market cap to gross margin numbers was in the right kind of ballpark. It just showed that the gold miners now are not being valued

anywhere near what the other companies on the S&P are because their price earnings is much much higher than 16. So it it tells us that uh if the gold miners really get hot that that number is going to get a lot larger down the road. So anyway, that's what I thought of that. Well, that is really interesting and I think that will be of of great interest to a lot of investors in there who are looking at the gold and silver stocks. So, you know, we mentioned that we last spoke about a month ago and in that space of a month,

we have seen gold and silver prices really on the move. And one of the other things I know you've been looking at is how gold and silver prices when they're higher affect the gold and silver stocks. And I think that people might believe that they understand that on a basic level like of course if gold and silver prices go higher stocks ideally will go higher but you've really broken it down into percentages very deep look at that. So we'll bring up the chart that you've put together but I wondered

if you could start by just talking us through some of those numbers that you've uncovered there. Yes absolutely. Well, I uh it was a few weeks ago that I was looking at uh the gold price and seeing that it had made a substantial move up uh around 10%. And uh so I that was on April 13th. So I said, you know what? I'm going to choose this period from February 23rd to April 12th as a period to study the relationship between the gold price and the market value of the gold miners. And so that's what I

did. And so in fact the uh increase in that period for the gold price was 10.4% and for the silver price it was 19.4%. And that by the way is a relatively typical pattern that when the gold price was up 10% the silver up 20 and and vice versa. And uh so I thought that was was was interesting in itself. And then when I looked at the various companies I could see that um the best companies were between 25 and 30% up. Uh and there was a few lagards. But the more interesting part that occurred to me was

I also looked at the price history of the GDX, which is the uh gold miners ETF that includes 20 or 25 gold miners, even a few silver miners. And that uh basically rescued me from actually doing the research on 20 on 10 or 15 more because they had it aggregated and that one was up 28%. So I thought, okay, what we're what we're learning here then is that the leverage to the to the gold price is between two and a half and three and and for the better companies, it's over three and for the not so better, it's

it's less. But of course, you would expect that. And um so I thought that was a fascinating uh look at at how that working. I think it's really interesting. And one of the other things that you brought out in your research is the difference between how much the producers move, the major producers and then the developers and the explorers. So maybe that's a nuance that we can also look into. Yeah. Um before we go that I wanted to mention one other thing that I did run this same issue. Um, I I I noticed in my looking

at the price history of gold that there was a a substantial decline of the gold price in 2022. And most people might not have realized this, but we actually had a many bare market in gold in in uh in 2022. In fact, the uh the gold price from March to October of 2022 went down 19%. A big drop. And the price of silver went down 38%. Again, the 2:1 and the E and the GDX went down 50%. Again, the 2 and a half to one leverage. and and so again I so what that told me is that the methodology that I'm using

is working both in the up and the down and and so that that was reassuring to me that this is looking right. Another thing that occurred to me that I should mention is I think that one of the reasons why those numbers are consistent up and down and all that is because that there's a reference point for the market. Over the last two years, the average gold price has been $1,800. Pretty con it goes up and down obviously, especially last year. And so that's a good reference point. I think when we would be much much lower than

1,800 or much higher, the these ratios might not be make me look as smart as they do now, but they look really uh really good in terms of being able to see that those uh relationships between the gold price and the share prices and so on is consistent both up and down in the in the recent past. And uh yeah, and then there was another piece that I I looked at that was also related to this because I really started getting into this and and I looked at the um history of the gold price between April of 2022 and April of 2023. And I

thought that was very curious because it turned out that the increase in the gold price was 4.7%. But the increase in the in the in the miners was actually negative instead of being up like 12 or 15 by what I'd seen with the other things. I'm thinking in other words, these things don't always quite apply if other stuff is going on. And because you would have assumed that the uh market caps share prices would go up 12 to 15% if the gold price went up 4.7. No, it didn't happen that way. But then I began to look at

that and I'm saying, "Well, wait a minute. There was something else going on here." And I wanted to bring this up to point out that people should think about this. And that is that I assume $1,200 an ounce all the sustaining cost as of right now. Well, that made some sense because things were stable and I wasn't using a longer time frame. Okay. But if you looked at 2022, you would see that in 2021, the price of oil was around $60 an a barrel. In 2022, it was up as high as 120. And then in

2023, now it's down to 80. So what we saw is we there's a lot of inflation, right? And and for gold mining, the two largest cost areas are energy and labor. And so there was obviously an inflation there. So that the all- insustained cost wasn't $1,200 all the way along. In fact, it was probably quite a bit lower. And if you used say back if that time uh 1,50 as an all in sustaining cost then it went up to 1,200 then that would account for the difference because then in fact the gross margin was shrinking

you see because the cost was going up from 1050 to 1200 and so I think that's a good part of it but the other thing is when you see periods where there's a lot of turmoil then the numbers start to get a little muddy and and are is and but right now we're in somewhat of a plateau. So it's they're easier to actually feel that your calculations make some sense. So anyway, I wanted to to share that uh with the your viewers. Well, that's great. I think that's really interesting and it does show, you

know, you can use your systems to figure out all these different things that you've been looking at, but when something comes up that doesn't haven't make sense as you think it should, you've got to go back and figure out what other external factors there might be to look at. Really interesting because you were in my calculations, I'm assuming that uh that was true. Another tidbit about gross margin that I should mention is that it's easy enough for any of you to calculate gross margin and and

uh and see what's going on with it. For the u earlier study that I did, we used $1,200 as on as a data cost. And then I said, well, $1,800 was about the beginning uh in February and then and uh 2,000 in April. So the gross margin went from $600 to $800. Well, that's a $2,200 increase on 600. That's 33%. And if you remember earlier, what we saw was that in fact the gross margin went up with the uh share price or I should say the share price went up with the gross margin because that's one that drove the

other. So that was interesting too I thought and I didn't do it in detailed calculation of gross margins on all the companies but I felt that that was a good enough approximation that it told me but yes investors actually are valuing companies based on the profits you know surprise surprise surprise surprise great and okay and because you mentioned profits I want to go back to that question on how we see the gold producer ers move in a higher gold and silver price environment versus those explorers and developers who are

not producing they are out there developing a mine or they're exploring for metal. Well, of course, when the gold price goes up for the producers, then their profits go up and so you have something to compare to the change in the profits to the change in the share price which we just talked about. Well, the re the explorers and developers don't have any profits. So, there's nothing there's nothing to relate to. So all they've got is uh supposedly a whole lot of metal in the ground and and

there's probably some relationship to the uh amount and grade of the metal they've got in the ground, but it actually over time that does not seem to move the price of the explorers and developers very much. it much more is impacted by the quantity and grade of the drill results that tells people well yeah maybe they've got a lot more than they do. Um but uh other than that or and a lot of it if it has to do in terms of the explorers particularly to do with uh promotion I mean there are some companies who

spend a lot of their money basically promoting and and that's not surprising because in the last couple years there's been an explosion of new explorers because now we're in a beginning of bull market so there's hundreds of them out there and and and that's another factor. So it's it's very competitive. They're all competing for the investor's dollar and for explorers most of the investors in them after the original founding and whatever it comes from retail and they

have to in order to get that they have to promote and so they get them named on newsletters writers to promote them and brokerages and and go to trade shows and on and on and on. But um so yeah it's it's a very complicated uh issue as far as the explorers and developers. But of course the further you get towards ex uh production and the developers then you begin to see some more influence on the gold price because investors can uh estimate well gee if this company actually gets into production and it's

preliminary economic assessment uh that indicates which is the first engineering study that they actually do to give some idea then an investor can kind of ballpark what that profitability might be and so that gives them some indication to investors. Well, this is kind of where it ought to be kind of. But it's again, there's so many things that have to happen before that's uh really a solid uh issue. And and we can talk about some of the issues that explorers deal with. I made a list

actually of all the things and all the questions that investors need to get answers to that they don't have to get answers to if they invest in producers. And if you want me to, I could go through that. Yeah, I think that we should because you know another concept that we talked about last time was that expected value and as you were writing to me just recently you've looked into that further and and taken into account things that you have to consider when you are looking at these smaller companies like

dilution. You don't have to think about that so much with the larger companies. So yeah let's take a look at what you have got to say here. And you know, and this is a somewhat recent revelation for me because over the years I've I've tended to get excited about exploration stories as everybody does. You know, it's a the uh the promise of of big ridges and whatever. And as I'm honest with myself, I realize, you know, I haven't made any money investing in explorers in 20 years because of all the

issues that tend to come up. But I'll I'll I'll go through them. The first one of course is is dilution over time. I mean the explorers take many years to go from first drilling holes in the ground and to where they actually produce gold or silver. Um some of them a very long time. Um I invested in one in 2010 that is now starting to produce this year. I mean I've lost money on that one. I actually bought into it fairly late now just because they might actually make a few bucks when it gets into production.

But this is the kind of problem. But see, they got stuck where they started just before the long bare market and that and and that's the problem with explorers is that the the bull markets don't last forever. And so if they don't get into production before the bull market ends, then then the then the investing money dries up and they're either going to go broke or they're going to have to uh be uh financed by something, usually a mountain of dilution. And so the dilution is always

there because they have no revenue. And so they're going to have to keep drilling and have to keep doing engineering studies on and on and on and all that takes money. and and and again there's a lot of competition out there for the investor dollars. So the explorers are very problematic in terms of how soon they can do what they want to do and and all that. Okay. Then there's another one which is and this is a very big deal that most investors don't think about at this stage and that

is we've just started a bull market in gold and silver I believe but we went through a long bare market. What happened during that long bare market is that all the producers laid off their geologists and mining engineer to cut costs. What do those people do? They either retired or found another way to make a living. So now all of a sudden you have all these new explorers and and and nobody who has experience. So a lot of these companies that are telling you these great stories, they're being told by people who've never done

it before. And she had to be really really wary of that because a lot of those jobs all those people they went away because there was no work for seven or eight years. So what are they going to do? So that's another real challenge in terms of investing. So that in terms of that you investor looking at the exploration picture and saying well okay do you have anybody on this staff who's actually done this before in this area and looked at this kind of deposit which is all very important and frequently

very specific needed to be in order to know they knew something. Although then the other one that that always comes up is what is the attitude of the locals where you're going to do go prospectively build a mine. Sometimes the explorers go in and they don't make peace with the First Nations. If it's Canada or or or in other countries uh in South America, that's a big deal in Chile and Peru particularly. Uh and um so another issue that you want to make sure that they have company has actually got that

handled otherwise that they spend a much money and it it's worthless. Oh, let's see. Oh, another one. infrastructure availability. Are there roads to the place? Is there power? Is there water? I mean, there's some of these great stories that end up back in the Northwest Territories where you have to fly in everything. I mean, I don't I don't buy those because it's too expensive. They even have to fly in the employees. So, you know, you you need to know the issue in terms of

where this is located in the maybe a good country, but if it's off in the middle of nowhere, that's all cost related and you end up with a lot of issues there. Oh, let's see. Oh, labor availability. You know, one of the reasons why if I'm going to buy an explorer, and I have owned some, but what I'd like is one where they're exploring for to create a new mine in an area where there are already mining companies operating. So, there's several advantage to that. One is you frequently

find more gold where people have already found gold. The other thing is there's a potential acquiry there. and and if it's close enough to that big company whose deposit is dwindling and they buy your new company, they don't have to build a new processing facility. They just transport it over to the existing one. So, they're a lot more likely to buy your company because it's worth a lot more to them than anybody else. So, I find those very interesting. So I I have one in Alaska and two in Nevada that are

the one explorations that I'd like because the the company is good and it's located right close to other gold producers. So I figure they're not going to have a problem in terms of finding somebody who wants to buy it if they don't develop it. And most of the time that's what happens with explorers because exploring has one uh kind of expertise and mining is a different one. And so exploration stories that tell you, yeah, well, you know, if nobody buys it, we'll put it into production.

Uh-uh. That because you got to have a whole new set of people. The mining engineers who know how to build mines and get them into production. Very different skill set. And and it's rare than an exploration company actually has both in their uh management. particularly because if you're just doing exploring, you don't want to pay somebody a mining engineer to build a mine when you're not going to build a mine for a couple years. So you you that comes later, but again then there's a

shortage of those people. So the uh management of the exploration company say and tell you, "Oh yeah, well no problem. We can get that." Uh-uh. They're not out there. They all got laid off and you in the previous 10 years. So anyway, those are just some of the issues that are existing when you invest in explorers. Those are those are really good to bring up and I think some of them are definitely things that investors might not typically think of. So really good to go over. I wonder if we can talk

about how all this research that you're doing is impacting your investing strategies. So how are you preparing as we head into hopefully this bull run? Well, uh, for myself, uh, as I've indicated, I'm tending to, uh, have fewer explorers and developers to be more selective. And, uh, and and I would advise, uh, investors who don't have a lot of time or accounting or engineering expertise to not get into the explore developers too much because it takes a lot of research if you're going to avoid the

bad ones. And there's a lot of not so good ones out there. It's very few explorers who actually end up becoming successful. Not very many. So you you need to have some I say both the time and uh some skills in order to feel like you can make those choices and separate the wheat from the chaff so to speak. It's not that easy as I mentioned the list of things there. So uh there's that. The other thing that I've been doing recently is to uh shift more into silver because I believe that as as you've

noted earlier when we talked about the change in the gold price that the silver price was always also double either on the upside or the downside right well the silver's been on the in the doldrums for quite some time but it is now starting to move and when it moves it tends to move more than gold just like what we saw and so I I think the gold and silver ratio tells me that uh at 80 which is high uh that it's going to come down. Over the last 50 or 60 years uh the gold silver ratio has varied between

40 and 100 and now it's about 80. In 2011 it was down to 33 for a short while. So it it just shows you what happens in bull markets. It goes up and it goes down. And uh so I'm saying that the uh the you know if this is indeed a bull market that we were in which I think we are then silver's going to do better than gold. And that's what happened in the earlier decade uh that I when I was first investing and I was almost totally in silver and I made lots of money. So I'm uh I've decided to get

back into that again. But I'm not going whole hog. I think the idea is for me about a half and half uh gold mining and silver mining because if we have a serious recession and the economy tanks and it tanks badly, silver will do badly because it's both an industrial metal and a monetary metal, but it's significantly industrial and so it's going to be impacted very poorly. So gold will do better or less bad than silver if we have that downturn. If we get back into inflationary code mode,

then silver will do better than gold. But gold will do better do well either way because it does only poorly when everything's fine. If if things are going sideways, up and down, then people seek the safety of gold. So I would always want to hold and retain gold. And the gold bon I own, I will never sell. I want my children and grandchildren to have that. And whereas silver I would I would trade. Does that give you a idea of what I'm thinking? Yeah, it does give me a pretty good idea, I think, of

what you're doing right now. We've we've gone through a lot of concepts here today, but I want to ask if there's anything that we missed because you're out there doing so much research, paying attention to a lot of things. Are there any other points that you would want investors to know about in terms of what you've been looking at? Uh no, I think we've covered most everything. I think the uh the thing I would encourage people to do is to do some of the kinds of calculations that

I'm discussing for themselves so that it helps them to get an idea. It's always useful to quantify things and so that you're not going by emotion or making guesses. And so if anything, I would that what I've done is not rocket science and and people can do that. The information is readily available. Uh go to the websites of all of the mining companies that you're interested in. There they all have now good websites. When I started this 20 years ago, it didn't have that. Uh there was no uh

uniform uh uh practice of of giving all-in sustaining costs. That's relatively new over the last 12 years or so. So that was is very helpful. So you can calculate gross margins and all those things. And there's just a lot of good information on on the websites. In fact, one of the ways I tend to grade a company is if the website's good. If it's if it's poorly done, it's hard to understand, if there's mistakes, then and I of course being a numbers guy, I look at all those things and say, "Wait

a minute. Page one said said one thing and page 10 said something else, you know, and so your IR people are not paying attention. That's not a good sign. But so anyway, the websites are easy to read and and I encourage people to take advantage of that because there really is a lot of information available to the ordinary investor like me and and and most of the folks out there. I think this is a great message to end on. I like the point that you can do this. It's not rocket science. As you

said, people can go out there, do the calculations, make their own conclusions. I think that's a a really good point for us to close on. So, thank you. Thank you so much for coming by to speak again about what you're seeing with the gold and silver stocks. I will encourage everyone who wants to know more about your calculations to go back and watch that first interview which I'll leave the link again in the video description. But thank you so much, Don. I think it was great to go over these

things with you. Wonderful. Thank you. I really enjoyed it. That's great. And once again, I'm Charlotte Mloud with the Investing News Network and this is Don Hansen. [Music]