This gold correction which began in September 2011 has been brutal for mining stock investors. Anyone who has bought the dip during this correction has constantly watched mining shares go lower, until May. Now we appear to have seen the bottom in the HUI hold. Sure, we could see a new low below 250, but it looks like June will be the month for a breakout.
The mining shares have been obliterated during this 21 month correction, just like what happened in 2008. The fall in the HUI (628 to 249 = 60%) was nearly the same as the crash in 2008 (450 to 169 = 62%). I don't know if the low is in, but I think we will know by the end of June.
I've allocated most of my cash and bought a lot of shares during this correction. If we do get a new low, I have a particular stock identified to buy the final dip. But if we don't get a new low, I will be satisfied with the shares I have purchased. If you have not bought many mining shares, perhaps now is the time. We are either bouncing on the bottom or getting very close. I can't imagine the HUI going much lower than 225. (628 - 225 = 63%). If it were to reach 200, that would be the mother of all corrections.
Remember, this is a correction in the middle of a gold bull market. The bounce is going to be fast and furious. The potential for gains is huge. When gold prices reach $3,000, a company like Pretium Resources will have all-in costs around $1200. That means they will have free cash flow of around $1,800 per oz. At 450,000 oz of production that is $800,000 million is free cash flow in a single year. At 10x cash flow that is a $8 billion market cap. That is just one example, but I could do this all day. The cash flow is going to be huge for many companies.
Let's do one more for fun. First Majestic Silver will produce around 16 million oz in 2015. Their all-in cash costs should be around $16. If silver prices are at $100, that gives them free cash flow of 16 x $84 = $1.3 billion! At 10x cashflow, that gives First Majestic a potential $10 billion market cap.
Is 10x cash flow too optimistic? Not according to history. In the early 1980s, during the last splurge in gold prices, many strong companies were trading at 20x cash flow.