Alternatives To Mining Stocks

So mining an ounce of gold now costs in the region of $1,391, according to a report from Kitco. That figure represents about 47% increase (using figures from Barrick Gold and Goldcorp - two of the biggest mining companies in the world) from the cost of mining an ounce of gold in 2012. In addition, falling price of Gold is another challenge faced by gold miners. If what I understand in economics matters when talking about mining, when cost of production is on the rise, price should also be on the rise, which hasn't quite been the case for gold production this year.

Although, the price of gold is gradually recouping, the fact that its current price (about $1,391 as of the time of writing) is far from where it was at the start of the year (somewhere close to $1,700) tells you that the problem is far from solved. In addition, the fact that Gold is currently trading close to its estimated cost of mining threatens Gold miners' profit margin a great deal. Dropping profits are always a concern as they mean ineffective operation.

We'll briefly look into the financial figures of the aforementioned miners - Barrick Gold (ABX) and Goldcorp (GG) - to understand just what I'm talking about. Barrick Gold reported a loss of about $8.56 billion for the second quarter of 2013. The company blamed the loss on the decreases in long-term metal price assumptions facilitated by the sharp fall in spot prices in the second quarter. Goldcorp also reported a loss of about $1.93 billion for the second quarter. Reading through the company's statement, I was able to deduce that the "sharp decline" in prices of commodities, as both company put it, is also a contributory factor to the loss. These two scenarios go a long way to tell you just how massive an effect the plummeting prices of commodities is having on miners' profit. This will never be well accepted by investors and as such, the panicky investors are justified for their actions.

The Alternative
I'm not trying to say this is the end of gold investing or mining at large; it's far from it. As a matter of fact, I believe the industry will soon recoup and become very attractive again. However, this occurrence takes us (mostly investors) back to the drawing board. We've identified rising cost of production and decline in prices of commodities as the major issues at the moment. But I've got this question for you; why spend so much money mining fresh precious metals when a huge amount of already mined metals lie beneath our waters and lesser amount of cash is needed to find and recover them? Commercial explorers say that hundreds of billions of dollars in lost treasure lie beneath the world's oceans and, relatively, little effort has been made to recover them.

Odyssey Marine Exploration's (OMEX) recovery of the silver in the SSGairsoppa shipwreck is the latest in the world of treasure hunting. As of the time of writing, the 1.8 million ounces of silver that were recovered from that shipwreck is equivalent to $43.2 million (at about $24 per ounce). The company said it spent about $9.5 million and $15.2 million on operations and research during the second quarter and the first six months of 2013 respectively. If we assume that all of the cost of operations and research for the first six months went into the recovery of the 1.8 million ounces of silver that were recovered (I'm sure there were other operations), we have it that it costs about $8.44 to recover each ounce of the silver in SS Gairsoppa. This represents value when you compare it to the amount it costs to mine one ounce of silver in today's market - somewhere in the region of $20.

OMEX is a good and proven option when talking about treasure hunting, but for the reasons I'll discuss below, I'm placing my bet on Sea Treasure Recovery Corp (JABA). I'd like to point out here that OMEX is involved in deep-water shipwreck exploration, which is more costly and comes with higher risk. Perhaps OMEX's cost of operation wouldn't have been that high if we're talking about shallow water recovery, which would have, invariably, lowered the cost of recovery per ounce, hence representing greater value. This is where Sea Treasure has some advantage over OMEX. The company specializes in shallow water recovery (majorly in the Florida Keys). Florida Keys is believed to be one of the most treasure-laden waters in the world. Look up the history of the fleet of Spanish Galleons that sunk off Florida Keys and you'd understand what I'm talking about.

The fact that Sea Treasure is focusing on shallow waters and particularly on Florida reduces the risk associated in the business since as much money won't be invested in it as it would in the case of deep-water recovery. In addition, Sea Treasure's strategy increases the chances of having a high recovery per dive ratio. Those are the reasons I see Sea Treasure as a good alternative in this, seemingly, burst of the mining bubble period. Here are the advantages again in case you missed them above. First, you have a chance of investing in 'modified' gold and silver companies that boast of lowers cost of production. Second, if you're an environmental conscious being, you have a chance of investing in 'miners' (treasure hunters) that go about their job without causing much (if any) harm to the environment. However, it's good to point out that Sea Treasure has no track record of perfoming successful recoveries basically because it's a new company. I only brought it up here because of the beauty of exploring shallow waters like the Florida Keys. Besides, every great company started from from near zero. And with this company's model, investors could start reaping good returns in the near future. Finally, let me say that this article isn't aimed at instigating you to sell off your mining stocks for treasure hunters; it's just to show you how you can diversify your passion for investing in precious metals wisely.