Precious Metals Are Dirt Cheap

by FI Fighter on November 27, 2015

in Precious Metals

dirt - 1

I’ve alluded to in previous posts and comments that I strongly believe that precious metals (and to a larger degree the corresponding mining stocks) are dirt cheap right now. When a sector is broken, there are usually some telltale signs of it. In this article, I will go over some reasons as to why I feel that a bottom is near imminent.

Less Than Cash

When a sector is hated, it is REALLY hated. Junior exploration, which is the heart of future GROWTH in the mining world is so unloved right now that a great number of companies are currently trading for LESS than cash in the bank.

Prior to First Mining Finance’s (FFMGF/FF.V) most recent acquisition of Goldrush Resources (GOD.V), Goldrush was trading at the following levels:

From Yahoo Finance:

Screen Shot 2015-11-24 at 7.07.11 AM

An Enterprise Value (EV) of -C$299,850.

Screen Shot 2015-11-24 at 7.07.20 AM

Goldrush Resources has C$3.65 million in the bank and the market cap was trading most recently at C$2.51 million.

No wonder First Mining Finance was eager to complete another deal!

Next, we have another junior exploration company called Independence Gold (IGO.V).

From Yahoo Finance:

Screen Shot 2015-11-27 at 7.34.10 AM

Another company with a NEGATIVE Enterprise Value, -C$4.43 million.

Screen Shot 2015-11-27 at 7.34.18 AM

Cash in the bank of C$7.28 million and a market cap of C$2.63 million.

Doesn’t make a lot of sense, right?

With junior exploration companies, typically many of them also carry no debt because they are still out drilling and looking for a mineral resource, as opposed to being in the stages of developing a gold mine (which is extremely capital intensive). These exploration companies raise capital by issuing shares… Also, since they are NOT yet in production, they don’t have many salaries or wages to pay… They can also stop drilling at any time…

Outside of holding costs, these companies really shouldn’t be bleeding too much on a given month… Certainly, the burn rate shouldn’t be so excessive that it warrants a NEGATIVE Enterprise Value… This type of valuation would imply that the land package and all the holes drilled up to date (even if there is a preliminary mineral resource in place) are worth LESS THAN NOTHING!

But in a broken market, this type of stuff does tend to happen… So, I’m documenting this because someday we will look back and laugh about it…

As it pertains to both companies, I don’t have any interest in them, I merely picked them out to use as an example… GOD.V, for instance, has risen 67% since the First Mining Finance acquisition announcement was made public…

In the case of IGO.V, many other investors/speculators are clamoring for Kaminak Gold (KAM.V) to takeover this company since they are both operating in the Yukon Territory.

And if you can “pick up free money” in the process, why not?!?

Deep Value

Moving on to a company I do own, let’s take a look at Pilot Gold (PLG.TO).

From Yahoo Finance:

Screen Shot 2015-11-27 at 7.52.30 AM

Screen Shot 2015-11-27 at 7.52.34 AM

PLG.TO isn’t as hated as the other two stocks by the market, but it isn’t very far off either (it’s been slaughtered this month). Although Pilot does trade at a POSITIVE Enterprise Value of C$19.56 million, they sure aren’t getting a lot of credit for their 3 major projects (Halilaga, TV Tower, Kinsley Mountain).

For instance, with Halilaga, it’s a joint-venture with Teck Resources, and Pilot has a 40% ownership stake. Based on the most recent 2015 PEA, the Net Present Value (NPV at 7% Discount Rate) of the project is $474 million (after-tax).

From Pilot Gold:

Screen Shot 2015-11-27 at 7.56.06 AM

40% stake would value Pilot’s portion of Halilaga at $189.6 million… But again, the EV of the ENTIRE COMPANY is ONLY C$19.56 million ($14.64 million)

Even with commodities being smacked around left and right, this type of market valuation defies all logic…

Halilaga Project = $189.6 million
Entire Company = $14.64 million

Not only can a speculator buy the Halilaga project at a substantial discount, but you can get Kinsley Mountain, TV Tower (their consensus best prospect), a bunch of other projects in the portfolio, and management for FREE!

FREE is tough for me to say no to… even if the latest drill results from Kinsley Mountain were less than awe-inspiring…

And to be quite clear, Pilot is NOT the only company trading at these deep discounts… These deals are a dime a dozen right now in this most broken sector…

Strong Demand

If you want to add insult to injury, check out this most recent article.

From SRSrocco:

Screen Shot 2015-11-27 at 8.03.20 AM

Almost everyday, I’m finding articles to illustrate the great demand for precious metals (due to the obscene low prices!)…

It’s out with the old and in with the new. Earlier today, Nov. 24, the United States Mint announced that it would stop producing 2015 American Eagle silver bullion coins by Dec. 11 and that it would begin taking orders for the first 2016-dated issues on Jan. 11.

2015 American Silver Eagles will claim an annual sales record. That should happen by early next week, even as the U.S. Mint limits their sales.

The bureau has rationed sales of bullion American Silver Eagles for most of this year as demand has exceeded supply. The U.S. Mint has the production capability to produce many more of the one-one, .999 fine silver coins but, like other world mints, it cannot always acquire enough silver planchets.

 

So, demand for precious metals is robust… and the spot price keeps falling, day by day… Funny, gold is down another $12/oz this morning (now trading below $1,060/oz!) and silver can barely hold the $14/oz level…

 

What other market can you turn to and find this type of disconnect where prices go lower as demand soars?!?

Patience, Patience, Patience

But regardless of what I may think, I need to come to grips with reality and accept the fact that “it is what it is”. In that sense, I need to be patient with things and realize that just because prices are low today, it doesn’t mean that they can’t go even lower…

And that’s the struggle everyone of us has to figure out for themselves…

It’s no secret to ANYONE that commodities are dirt cheap right now…

 

“How much lower can we go?”

 

That’s the million dollar question…

 

Don’t you just love bear markets? Even when the merchandise is already heavily discounted, we can’t help but want to sit on the sidelines, as we wait for prices to go lower still… This type of psychology is the complete opposite of a bull market, where we instead chase the market up to new heights…

I’m a real estate investor at heart, so to me it’s no different than:

  • In a bear market — When you can buy cash flowing townhouses in the SF Bay Area for less than $200,000, you don’t want it b/c they are a dime-a-dozen… and because no one else is willing to touch it…
  • In a bull market — When you can’t find ANY cash flowing rental properties but your agent has a pocket listing for a slightly-below-market townhouse for $800,000 that is still cash flow NEGATIVE, you MUST OWN IT because you are tired of competing with other investors and losing all the time…

I’ve never claimed to have the answers (or a crystal ball), but my own preference has been to get well positioned now for the next (inevitable) upcycle… Because when this coiled spring gets released, it’s gonna be extremely violent to the upside!

But that’s just my own personality… Your style may be drastically different…

Granted, I may be 1, 2, 3, or even 5 years too early… Time will tell. But with many of these stocks down over 90% from their previous highs, I really have no problem jumping into the fire right now…

But with an impending rate hike (that may never actually happen), tax-loss selling, and a bunch of other headwinds against the precious metals, I’ve decided to withhold a good chunk of capital until after the next FOMC meeting and FED announcement…

Further, I accept the fact that these depressed prices could easily drag on for another year and throughout the entirety of 2016 in the face of a strengthening USD (my other current favorite investment)… When in doubt, dollar cost average (DCA) on the way down… I plan on buying in tranches and periodically adding to my positions throughout 2016…

However, because today IS BLACK FRIDAY, I may make a small purchase in the spirt of the holiday shopping season.

 

Hey! I’m just doing my part to stimulate this economy! 🙂

 

Happy Hunting!

{ 8 comments… read them below or add one }

1 No Nonsense LandlordNo Gravatar November 27, 2015 at 1:14 pm

I would wait for the beginning of the run-up. If it is years, you will still have the cash or the other mainstream investments and dividends in the meantime.

I would also stay away from penny stocks. There are too many that go broke. And be careful of liquidity. If they do not trade $1M shares a day, it could be trouble to get out. Especially if you own more shares that the daily volume.

At least you have plenty of years ahead of you to re-coup.

Reply

2 FI FighterNo Gravatar November 27, 2015 at 2:16 pm

Eric,

No one knows when the run up will occur.. At a near market bottom, it’s anyone’s guess, but short-term thinking is it will always keep going lower b/c our immediate experiences are so negative… Just like at the top of bull markets, everyone only thinks prices will keep going higher… until they stop doing so.

I also wouldn’t lump all “penny stocks” as the same… It’s dangerous to stereotype and assume that they all behave the same way… The entire TSX-V is essentially penny stocks and they are NOT all junk!

There are lots of wonderful companies with real assets backed by solid management teams out there… The key is to get educated in any industry/sector you are thinking about investing in.

Again, I think we are looking at bargains here… These stocks are trading at absurd valuations… This “gamble” will work out in the long run… To suggest that commodities will never have their day in the sun again is basically to assume that the world is coming to an end… These are commodities we are talking about here, not a high-risk speculation on some new tech start up that may or may not gain mass adoption.

Take care!

Reply

3 Financial SamuraiNo Gravatar November 27, 2015 at 2:00 pm

Trading below book/cash generally signals bankruptcy ahead. You could make a good pop of confidence comes back. Just be careful of liquidity and the wide bid ask spread as mentioned above.

Where is the source of your cash coming from? And have you gone back to work?

I’m thinking of jumping back in the work fire for 2016!

Reply

4 FI FighterNo Gravatar November 27, 2015 at 2:20 pm

Sam,

The entire sector is trading below book value right now… I doubt all miners are gonna go bust…

There are lots of high quality “penny stocks” within the lot… Yes, most are junk, but to assume that they all can’t catch bids or have no real value/assets is a gross generalization…

I realize the sector is extremely hated, but I think far too many assumptions are made about it without proper deep diving.

Another sign we are near a bottom! 🙂

Take care!

Reply

5 DriesNo Gravatar November 29, 2015 at 6:57 am

How do you feel about BHP Billiton (BBL/BBP)? As you most likely know, it is the largest miner in the world, hasn’t traded this low in 10 years and is still making billions in annual profits.

Reply

6 FI FighterNo Gravatar November 29, 2015 at 8:03 am

Dries,

BHP Billiton looks very cheap at these levels. I would consider it regardless of the fact that they may cut their dividend in the upcoming months. With that said, my own strategy is to remain a little more patient with base metals, oil, uranium, etc. There is excess supply out there right now that will probably take a few years to clear out… The recent shutdown of some large zinc/copper mines is a good start towards that.

For base metals, my preferred method for gaining exposure was to start buying shares of Ivanhoe Mines, a junior developer. Robert Friedland is arguably the best mining entrepreneur on the planet (with the track record to back it up) and with his luck, he’ll probably put Kamoa (the best undeveloped copper mine in the world) into production just as we start our recovery in commodity prices… In a deflation for resources, it may be “better” to go with a developer since low prices won’t impact them any… Regardless if we were in a bull or bear market, their CAPEX has already been defined and they will be using the next few years to develop their mines.

I prefer precious metals right now since they participate in the fear trade, which we may need at some point… Also, I think their own bear market is just a tad longer in the tooth so a recovery should start sooner…

But we’ll see!

Cheers!

Reply

7 ReepekgNo Gravatar November 29, 2015 at 9:35 am

Hey FiFighter,

What do you think of VGPMX?

Reply

8 FI FighterNo Gravatar November 29, 2015 at 10:13 am

Reepekg,

I’m not a fan of that holding… They also hold diamonds, and many of the companies are HIGH QUALITY but not cheap (e.g. Randgold, Agnico Eagle, etc.)

Nevsun is great, but it’s copper and that’s their largest holding as well…

If I was going to use an ETF, I think GDX and GDXJ would be better than VGPMX.

But personally, I’m building my own ETF comprised of my favorite junior companies.

Cheers!

Reply

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