Miners vs Metals

With all the talk of commodities like oil and nickel shooting up, precious metals, kings of the commodities, are heating up. Why bother holding the physical when you can just buy shares in a miner? Mining is a very resource intensive business, energy generation, transportation and construction are all major input costs, not to mention labor. While miners have unlimited potential costs, the metal itself has never gone bankrupt.

When inflation ramps up, it hits precious metals miners just like it hits anyone else. Most mines are in remote locations, all of the minerals and resources in urban areas couldn’t compete with the value of the land in terms of residential house prices - certainly not in Australian capital cities. Just getting processed ore out to ports takes a lot of fuel. These energy costs are now up about 50% over a year ago. Oil has come back in the last week, but costs are still elevated. Regular Australians filling up at the bowser have been feeling the crunch, miners are no different. It wasn’t long ago you couldn’t imagine it going beyond $1 a liter!

As commodity prices rise in general, unless the specific commodity the mining company is mining is increasing to the same or a higher rate, the margins will get squeezed.

The good news is that Gold and Silver are at cyclical lows compared to the broader commodity basket:

One hopes that precious metals miners can ride out this period of inflation of commodities in general sans the precious ones, but it is important to never lose sight of the fact that miners are fallible. Costs can blow out, permits can be denied and they are ultimately at the mercy of the spot prices of the commodities that they mine. In contrast, precious metals that you hold have no counterparty or extraneous event risk. Gold and Silver are stores of value beyond balance sheets, currencies and even civilisations.