Today, I had many telephone conversations with investors of Veris Gold (VG, Financial). I wanted to share some of the thoughts. As many of you know the latest Q was a total disaster and no one can argue with this. What I am learning from these conversations is that people are simply worn out to maximum. One guy literally said that he was even thinking about committing suicide. I am not making this up. He was heavily invested in the miners and Veris gold was a big position. Sometime in 2011, he invested his parents money and the account went from $700,000 to $200,000. In other words, he lost half a million dollars of his parents money. They worked for this money all their lives. I hope you guys from Veris are reading this post because your failures have real impact on people’s lives.
You could very easily criticize this guy for investing his parents’ money the way he did, but at this point it doesn’t help the situation. He already did it. He realizes that he should have only invested his own money, but what ever happened already happened.
I am bringing up this story because (1) it is true, and (2) we forget who it behind the buy and sell decisions. Right now, it is really hard to find anyone still bullish on this company. Everybody was counting so much on the third quarter to be decent. It is understandable because the production was hitting record levels. We finally turned the corner. Well, not really. The company disappointed again. Maybe the management should change its name from Veris Gold to Failure Gold.
Anyway, is there any hope left?
Let’s take a step back. In 2009, the company was shut down and produced no gold. Since then production increased because a lot of money has been put into fixing the plant and several mines were put into production. It started with Smith Mine, then SSX, and then Starvation. Each time a new mine was put into production, fixed costs were spread over the number of gold ounces produced and this reduced cash costs per ounce. Yes, this was volatile but cash costs came down.
By Q3 2012, cash costs came down so much that the company became cash flow positive. This was a huge milestone. And this was only with Smith and SSX. Back then, I was talking about how great it will be when Starvation Canyon is put into production because if with Smith and SSX, they are already achieving profits, it will be bonanza with Starvation. All the production from Starvation will flow straight to the bottom line.
However, there was one problem. The price of gold collapsed since then. So even though, after all the hard work, the cash costs did not come down fast enough to offset the decline in the price of gold. If the price of gold stayed at $1,600 per ounce, then the entire turnaround be complete by now. Even this disastrous quarter that we just had would have been good. In other words, even after record gold production, the company cannot be profitable because the price of gold is too low. The math does not work when their costs are at $1,150 but the price of gold is at $1,270. The margin is too small to cover all the obligations.
So you can yell and cry all you want. You can tell the management that they are total idiots, but nothing will change. The price of gold is too low and the company has no control over it. The only thing that they can control is their costs. They have to lower them to combat the low gold price. How can they do that? Well, how did they do this in the past? They increased production. This is why it is extremely important that they bring Saval 4 into the mix and bring Smith back up to 1,200 tpd. When this happens, cash costs will go down. But if the price of gold goes down by more than the cost, then we will be at square one again.
Then, the next thing that is an absolute must is refinancing this damn DB loan. Now people are getting really angry why it is taking so long. I am getting angry too. But think about it. You are the loan officer of another bank or financial institution. You are at the negotiating table and the numbers work, but while you are sitting there, the price of gold drop by $30 in 5 minutes. Are you going to continue with the loan? Of course not. Everybody is freak out by what is going on so they can’t get the deal done because the volatility in the price of gold is insane. Then, you have everybody talking about how the price of gold is going to $1,000 which makes the negotiations even harder. These lenders are also reading the same articles that are predicting $1,000 gold. This is why it is so difficult to refinance but I believe they will eventually get it done and until it happens, there will be more dilution.
Here is what I want to leave you with. If the price of gold was $1,600, would Veris Gold be in a different financial situation? Yes, because they successfully took the company from no production to current production of 15,000 ounces of gold per month. So they must know a little bit about mining. They cannot be total idiots. To combat the current price of gold, more work has to be done, and yes, we shareholders have to pay for it. And yes, they will mess up more. And yes, this will cost us more dilution. And yes, we will continue calling them incompetent. But when the price of gold turns the other way, it will not be because the current management turned the company around. It will be because we are genius investors. We will ignore what go us here.
You could very easily criticize this guy for investing his parents’ money the way he did, but at this point it doesn’t help the situation. He already did it. He realizes that he should have only invested his own money, but what ever happened already happened.
I am bringing up this story because (1) it is true, and (2) we forget who it behind the buy and sell decisions. Right now, it is really hard to find anyone still bullish on this company. Everybody was counting so much on the third quarter to be decent. It is understandable because the production was hitting record levels. We finally turned the corner. Well, not really. The company disappointed again. Maybe the management should change its name from Veris Gold to Failure Gold.
Anyway, is there any hope left?
Let’s take a step back. In 2009, the company was shut down and produced no gold. Since then production increased because a lot of money has been put into fixing the plant and several mines were put into production. It started with Smith Mine, then SSX, and then Starvation. Each time a new mine was put into production, fixed costs were spread over the number of gold ounces produced and this reduced cash costs per ounce. Yes, this was volatile but cash costs came down.
By Q3 2012, cash costs came down so much that the company became cash flow positive. This was a huge milestone. And this was only with Smith and SSX. Back then, I was talking about how great it will be when Starvation Canyon is put into production because if with Smith and SSX, they are already achieving profits, it will be bonanza with Starvation. All the production from Starvation will flow straight to the bottom line.
However, there was one problem. The price of gold collapsed since then. So even though, after all the hard work, the cash costs did not come down fast enough to offset the decline in the price of gold. If the price of gold stayed at $1,600 per ounce, then the entire turnaround be complete by now. Even this disastrous quarter that we just had would have been good. In other words, even after record gold production, the company cannot be profitable because the price of gold is too low. The math does not work when their costs are at $1,150 but the price of gold is at $1,270. The margin is too small to cover all the obligations.
So you can yell and cry all you want. You can tell the management that they are total idiots, but nothing will change. The price of gold is too low and the company has no control over it. The only thing that they can control is their costs. They have to lower them to combat the low gold price. How can they do that? Well, how did they do this in the past? They increased production. This is why it is extremely important that they bring Saval 4 into the mix and bring Smith back up to 1,200 tpd. When this happens, cash costs will go down. But if the price of gold goes down by more than the cost, then we will be at square one again.
Then, the next thing that is an absolute must is refinancing this damn DB loan. Now people are getting really angry why it is taking so long. I am getting angry too. But think about it. You are the loan officer of another bank or financial institution. You are at the negotiating table and the numbers work, but while you are sitting there, the price of gold drop by $30 in 5 minutes. Are you going to continue with the loan? Of course not. Everybody is freak out by what is going on so they can’t get the deal done because the volatility in the price of gold is insane. Then, you have everybody talking about how the price of gold is going to $1,000 which makes the negotiations even harder. These lenders are also reading the same articles that are predicting $1,000 gold. This is why it is so difficult to refinance but I believe they will eventually get it done and until it happens, there will be more dilution.
Here is what I want to leave you with. If the price of gold was $1,600, would Veris Gold be in a different financial situation? Yes, because they successfully took the company from no production to current production of 15,000 ounces of gold per month. So they must know a little bit about mining. They cannot be total idiots. To combat the current price of gold, more work has to be done, and yes, we shareholders have to pay for it. And yes, they will mess up more. And yes, this will cost us more dilution. And yes, we will continue calling them incompetent. But when the price of gold turns the other way, it will not be because the current management turned the company around. It will be because we are genius investors. We will ignore what go us here.
