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Precious Metals: Has the Tide Finally Turned? (February 23, 2016)

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Anyone who has followed this blog for awhile now knows that I don’t like to get caught up with calling absolute market tops and bottoms. I’ve argued that as investors, we should always be cognizant of where we roughly are in a cycle, but there’s absolutely no way for anyone to know definitively.

So, when assets are cheap, I go into full throttle hyper-accumulation mode. When the merchandise is overpriced, I simply leave it on the store shelf… So far in life, this strategy has served me well.

As it pertains to precious metals, well, I’ve been pounding the table with a screaming “Buy now!” thesis for quite some time now…

Now that sentiment has started to shift, the most common question everyone is asking at this time is, “Is this rally for real?

I don’t know…

But I will say this — The mining sector, perhaps more so than any other, can change on a dime and in a heartbeat. What was previously HATED can become LOVED like no other…

Right now, every last one of my friends has a burning desire to get into the mining trade…

That’s just how markets work.

Anyway, here are my latest thoughts:

Previously, we were operating at the Depths of Despair, so it was in my best interest to focus on “survival” stories… With everyone and their grandma calling for sub $1,000/oz gold, I didn’t want to be caught owning companies with far too much debt (e.g. Barrick Gold; ABX), regardless of how world-class their assets were… In a downmarket, I heavily focused on buying up shares of companies with strong balance sheets and low All-In-Sustaining-Costs (AISC).

Over the last year, I was rapidly building up positions in the following: Lake Shore Gold (LSG), Klondex Mines (KLDX), Teranga Gold (TGZ.TO), Richmont Mines (RIC), etc.

At the time, one of my favorite stories was First Mining Finance (FF.V). I often compared their investing strategy to that of a real estate developer…

Imagine this — The entire real estate market gets whacked and there is a firesale of inventory. Everything is in liquidation and even the best assets are selling for pennies on the dollar… Pretty soon, the market is overrun by distressed sellers, and there are hardly any buyers left… Out of the blue, a new company, led by a world class management team emerges from the dust and offers you, the investor, this type of proposition — We are going to come in and consolidate the industry. We’re going to put folks who are struggling out of their misery and in the process rapidly accumulate up (as much as possible) a portfolio of high quality assets.

This particular management team also has a track record of being twice successful before implementing this exact same type of strategy — “Buy low and sell high”, creating two $1 billion companies in the process.

 

As an investor, to me it was a no brainer to invest…

 

I saw flashbacks of my real estate mentors who bought up a storm in 2009-2013 and retired happily ever after because of that…

 

But like I mentioned earlier in the post, sentiment in the gold sector tends to change rapidly, and when it does, the entire landscape with it…

 

It may sound absurd to say this, but just over 1 month ago, FF.V was one of my favorite investment ideas… Especially as someone who has a background in real estate, you can bet that I totally appreciate the strategy of rapid accumulation when no one else is interested in buying!

However, what you want to do, and what you’re actually able to accomplish are two totally separate things…

No, it’s not that I doubt FF.V has the skills or ability to execute on their plan… Right now, I just don’t think the market is going to allow them that opportunity (and you can’t fight the macro)… With gold piercing through $1,200/oz and support building strong there, I just can’t see how any previously distressed sellers would now be willing to let go of premium assets on the cheap.

Not anymore..

If you were an owner of beachfront real estate and saw prices rapidly climbing back up, would you still be desperate to sell? Would you be eager to accept a low-ball offer?

I don’t believe so…

You would fight tooth and nail for every last penny you could get…

Which is why in a bull market, I’m becoming less and less of a fan of FF.V.

Granted, if the company had 2-3 more years to execute their gameplan, I would be completely on board… But to me, it’s like investing with a real estate developer in the SF Bay Area who says, “We are going to buy up all the best land during this downturn.

At the end of Year 1, let’s say they were successful in securing some plots in Tracy, and Morgan Hill (on the fringes of the “high quality” land; close but no cigar)…

In my mind I would be like, “Ok, that’s pretty good progress! Oh boy, I can’t wait to see what unfolds in Year 2… Maybe they’ll start encroaching into Silicon Valley and be able to win some deals in South San Jose next… and then maybe Santa Clara? Who knows, maybe even Palo Alto will be on the radar if this bear market really drags on! Wouldn’t that be soooooo awesome!”

But if the “bargain basement sale” goes away in Year 2, then what?

The story changes… dramatically.

Obviously, that wonderful fairytale you initially invested in doesn’t sound so appealing anymore, does it?

Don’t get me wrong, I’m not trying to pick on FF.V! They were very successful buying up good assets last year (Coastal Gold, Gold Canyon Resources, PC Gold), but if the most recent acquisition of Clifton Star Resources is a sign of things to come (these assets are nowhere near as good as the previous acquisitions) in the future, I just can’t say that I’m feeling all too good with the prospects for tomorrow…

Funny what a change in sentiment can do, right?

 

On that point, I’d like to address another company, New Gold (NGD). Previously, readers had asked on numerous occasions my thoughts on this mid-tier gold producer. In a $1,000/oz gold environment, my response was always, “I like the company but it’s not one of my favorite ideas. Their projects have high CAPEX, the IRR is not so great, and they have a lot of debt to service. It’s a riskier play in a downmarket.

Again, so much can change so fast…

As we stand now, I would have to do a complete 180 degree turn on that previous stance…

In a rising bull market, NGD would be one of my favorite ideas…

Their flagship project, Rainy River, doesn’t look so hot at $1,000/oz gold, but it’s much, much more prospective at $1,200/oz gold…

If you believe this recent rally is legit, I can’t imagine there are many mid-tiers that would be a better pick than NGD. As mentioned, they have a great management team… but even more than that, the company only invests in projects that are located in first world jurisdictions (USA, British Columbia, Ontario, Mexico, Australia, etc.). Further, the stock is very liquid, so I would imagine that big institutions and funds will be piling into this “safe” mining stock as one of the preferred vehicles to ride the next wave up.

And most importantly, but obviously, that previously concerning debt burden would be much alleviated with rising metal prices.

 

Crazy, crazy how much can change in just a single month…

 

Full Disclosure: I still hold shares of FFMGF. I’ve thought about swapping those for NGD, but have not made that move yet. However, I did get mostly out of dodge (Greece and Turkey both scare me) with Eldorado Gold (EGO), and liquidated about 2/3 of that position, using the proceeds to buy shares of NGD and Richmont Mines (RIC). 

 

So, I previously was a HUGE fan of FF.V. I still like the company, but I think they’re going to start facing an uphill battle to win good deals (if this rally in gold is for real). Meanwhile, a mid-tier like NGD, with a wonderful new project in Rainy River due to go online in 2017, increasing production by over 300,000 oz/year, should outperform on the way up.

 

With gold mining stocks, it’s important keep up with the latest headlines, developments, and most importantly market sentiment. I’ve never looked at these stocks as “Buy and Hold Forever”, but more like “Buy and Monitor Actively”.

 

It’s a lot of work, sometimes, but you know the saying, “Hard work pays off…

 

Hopefully.

 

Fight On!

{ 32 comments… add one }
  • MikeNo Gravatar February 23, 2016, 11:16 am

    Thanks for keeping us updated on your views. I always find them fascinating.

    I bought a few shares of Yamana a few weeks ago…I just wish I backed up the boat like you did :). Just don’t have that risk tolerance.

    • FI FighterNo Gravatar February 23, 2016, 2:02 pm

      Mike,

      Thanks! AUY has done really well this year, congrats on getting in before the big run up.

      Yeah, it takes a lot of conviction to bet big in this space… Definitely the risk is high, but so is the potential reward.

      Cheers!

  • MiningBookGuyNo Gravatar February 23, 2016, 12:14 pm

    Love the contrasting examples of FF.V and NGD! While completely different companies, you’ve got to turn with the market, and I think your reasoning is right on the mark.

    Of course, I’m biased as a long-term holder of NGD. But I’m trying to make the same types of decisions, realizing this past month changes so much! To give a great example of this that I just ‘discovered’ today, check out this solid article on Sandspring Resources in Guyana (SSP.V): https://chat.ceo.ca/@tommy/a-ten-million-ounce-call-option-on-gold

    I read that, then checked out the 1 month chart…and it was a “whoa!” moment. NO WAY that really would have happened a few months ago for this particular stock!
    (*Note – I don’t own SSP.V, just using it as a supporting example to Jay’s great article here)

    MiningBookGuy

    • FI FighterNo Gravatar February 23, 2016, 2:05 pm

      MBG,

      Thanks for sharing that example; it is quite amazing to observe what can happen in the sector when sentiment changes. Suddenly, many “mediocre” projects are looking darn attractive!

      I’m with you on NGD; that’ll be a big winner on the way up. Fortunately, I think there will still be time/opportunities to add in the near future. But I did make a big mistake not considering these type of thoughts, prior to the first turn…

      Live and learn.

      Take care!

  • JonNo Gravatar February 23, 2016, 1:18 pm

    The problem with FMF is that they just issue more equity to make each new acquisition, diluting existing shareholders. It’s a good buy at 32 and sell at 40 though…

    • FI FighterNo Gravatar February 23, 2016, 2:07 pm

      Jon,

      I have no problem with FF.V “diluting” shareholders by issuing shares to purchase assets. As long as you are getting a killer deal, by all means issue as many shares as you want… FF themselves like to call it growth by accretion, not dilution.

      Because if you buy right and sit tight (same with real estate), when the market turns, your assets will get re-rated accordingly… And you can always roll back the shares later if the share structure gets a little too out of hand… No worries there.

      The key is to buy high quality assets because junk in a downmarket is still junk in an upmarket. And I would give the benefit of the doubt to the FF team, they’ve got the track record and know what they are doing.

      But they really need more time to execute their strategy and I’m not sure they are going to have that luxury if this rally is legit.

      Best wishes!

      • JonNo Gravatar February 23, 2016, 2:14 pm

        Shouldn’t the share price have increased at least in line with the gold price? They have apparently bought up deposits at incredibly low prices…shouldn’t they have been re-rated already? Why have they just stagnated? Neumeyer has built 2 billion dollar market cap companies. Why does he have so little skin in the game here?

        • FI FighterNo Gravatar February 23, 2016, 2:19 pm

          I believe it’s due to the recent acquisition of Clifton Star Resources… I don’t see shares moving much until that transaction settles.

          As far as skin in the game:

          https://www.canadianinsider.com/company?menu_tickersearch=FF

          KN is one of the most active and aggressive buyers out there… One thing no one can accuse him of is not putting his money where his mouth is. He was buying stock like every other day during the end of 2015… He has more conviction in his companies than perhaps anyone I’ve ever seen…

          • JonNo Gravatar February 23, 2016, 2:31 pm

            Has more conviction in his companies that anyone you’ve ever seen? Come on… I like your stuff and am with you on the mining, but you are losing credibility here. You made a bad call (so far). Admit it, sack up, and move on. No shame in that.

            He owns 1.6% of FMF, worth c.400k USD. For someone who founded two billon dollar companies that doesnt sound like much. That’s the best you’ve ever seen?

            • FI FighterNo Gravatar February 23, 2016, 2:47 pm

              I posted my thoughts in the article, but even so we are at the beginning stages, at best, of a new bull run. Way too early to declare any victory or defeat!

              FF.V has underperformed, no doubt, but based off of what? A one month timeframe? If you are a shareholder, I can understand your frustration… But I also found it comical to read about b2gold shareholders calling for the CEO to step down when shares were below $0.70…

              It takes patience!!! 🙂

              Not sure what else you expect to see from an insider. This isn’t enough buyin for you? If I was CEO or chairman I would NOT even want to own too many shares of my own company… Way too much exposure into one place, which is why I don’t even keep company stock… And I’m just a small peon.

              Here are more transactions from KN (Nov 2, 3, 4, 5, 6… that looks like conviction to me!):

              http://www.fifighter.com/precious-metals/precious-metals-updates/2015/11/first-mining-finance-update-gold-canyon-resources-arbitrage-november-09-2015/

            • FI FighterNo Gravatar February 23, 2016, 4:43 pm

              Out of curiosity, I tallied up KN purchases from my linked blog post, which only captures Sept – Nov 2015 timeframe.

              Total: C$311,186.50

              I would be amazed if the total value of all his shares was just $400,000

            • FI FighterNo Gravatar February 23, 2016, 4:50 pm

              From CEO.CA in December:

              http://ceo.ca/2015/12/11/insiders-buying-at-first-mining-finance-fission-uranium-and-nexgen-energy/

              First Mining Finance (FF-V) – CEO Keith Neumeyer banked some more shares of his gold-focused mineral bank, buying 47,000 shares yesterday at 32 cents a share. Neumeyer, who also runs First Majestic Silver, has been a voracious buyer of First Mining shares in the public market and now owns 9,484,754 shares – about 3.2% of outstanding shares.

              So, that gives us over C$3.6 million using today’s closing price of C$0.385/share.

              Mystery solved! 🙂

  • Income SurferNo Gravatar February 24, 2016, 3:50 am

    It may have buddy. I had a similar thought about Agricultural commodities last week. Now that BHP has slashed their dividend, I need to dig into that one too. It’s a shame I’m remodeling the house, I’ve got lots of research to do.

    I know I owe you an email. Should get that out today. Have a great week!
    -Bryan

    • FI FighterNo Gravatar February 24, 2016, 10:44 pm

      Bryan,

      Take your time buddy. These investments aren’t going anywhere so take care of the things that really matter in life.

      Looking forward to your email.

      Cheers!

  • ReepekgNo Gravatar February 24, 2016, 11:02 am

    I find your attention span incredibly short. How will your plays have time to deliver real profits if they change month-to-month?

    Nevertheless, I owe you a huge tip of the hat! I finally got into GDX for 1k shares at $16.7. Not exactly $12, but I’m off to a great start up 15% as of writing. We’ll see if this was the right choice a few years from now.

    • FI FighterNo Gravatar February 24, 2016, 10:49 pm

      Reepekg,

      My underlying thesis has NOT changed at all! I still believe 110% in the gold story, and just because I’m reshuffling the deck a bit doesn’t mean that I’ve cashed out my chips and gone home.

      I’ve said all along, gold is most likely a 3-5 year trade… Copper 5+ years. Uranium 5+ years… I’ve got a stake in all those commodities and have no problem waiting that long for the next bull run.

      In the case of FF.V, yes, that’s a stock in particular that I think works MUCH BETTER in a downmarket, not an upmarket… If you think I change my mind quickly, just go back and look at where ALL gold stocks were just 1 month ago… Not to mention overall sentiment from the investing community.

      Suddenly, gold is catching a bid and many investors/speculators are rushing in… I don’t see how I’m doing anything unusual. While I work out the finer details of my portfolio, you have income investors selling out of: KMI, COP, BBL because the story/thesis changed there.

      I don’t know about you, but when I was playing fantasy football, I never stuck with the same exact lineup from Week 1 through to the championship round! You can still take home the prize while making modifications along the way.

      Take care!

  • JonNo Gravatar February 24, 2016, 11:12 am

    Check out Sunridge Gold for a great arb opp similar to the FMF one you blogged about a few months back.

    Also, have you thought about dry bulk shipping at all? These companies (and the BDI) are trading at all time lows, primarily due to structural oversupply that should go away in the next year or two. I’ve just bought some DSX and NMM.

    • FI FighterNo Gravatar February 24, 2016, 10:57 pm

      Jon,

      Thanks, I’ve seen that arb opportunity before. I missed out early, but looks like a pretty good deal, even now… I think I read somewhere that settlement shouldn’t be expected until Sept 2016, so that is a bit aways. If that’s true, I’m not sure if I would want to tie up capital for that long… Not knowing how much further the miners have to run. But I haven’t followed this story too closely, so please correct me if I am mistaken.

      Cheers!

      • JonNo Gravatar February 25, 2016, 8:11 am

        I believe half is paid on closing (probably next week) and half in 6 months.

    • FI FighterNo Gravatar February 24, 2016, 10:58 pm

      Haven’t looked at dry bulk shipping but thanks for the tip.

  • BowmanNo Gravatar February 24, 2016, 12:01 pm

    Very interesting article again, thank you for that. I have tried to diversify my precious metals portfolio so that upsides would be substantial if the tide really turns (investments in companies like B2Gold, Endeavour Silver, Bear Creek Mining…). And on the other hand, part of the portfolio (about 25 percent) consists of more ”defensive” plays (e.g. Silver Wheaton, Franco-Nevada) that would probably not go bankrupt even if the tide doesn’t turn for a while. In addition, 25 percent of the portfolio consists of physical bullions (mainly silver, some gold) ensuring there would be at least some value left after total stock market annihilation. 🙂

    It would be interesting to hear how you (and fellow readers) see my approach.

    • FI FighterNo Gravatar February 24, 2016, 11:00 pm

      Bowman,

      Your strategy sounds very reasonable to me. With miners, I would agree that anything paper is more at risk, so when in doubt, make sure to hold physical bullion… I made sure to take care of that before I got into mining stocks.

      I like all those companies that you mentioned, and you’re right, FNV is probably the cream of the crop in the gold mining space. Can’t beat that name for stability and quality.

      Sounds like a well thought out plan!

      • BowmanNo Gravatar February 25, 2016, 4:16 pm

        FIFighter, thank you for the comments, I appreciate it.

        • FI FighterNo Gravatar March 5, 2016, 1:04 pm

          you bet!

  • JimbojinxNo Gravatar February 25, 2016, 11:52 am

    Today’s report of extended gold findings for Richmond Mines at Island Gold look promising. Any thoughts about possible extension of mine life from what is reported today ?

    • FI FighterNo Gravatar March 5, 2016, 1:07 pm

      Jimbojinx,

      Island Gold definitely looks promising and the extension of mine life at depth is a key reason I decided to buy shares. Further, RIC may be a good target acquisition.

      Clean balance sheet, wonderful share structure and first world jurisdiction make this company one of the better (safer) plays out there.

      Cheers!

  • BeSmartRichNo Gravatar February 25, 2016, 12:18 pm

    Yup. I bought some stocks of a gold company when gold was around $1000 then it shot up by 60% now. I think it would only go up even further probably by 300-500% within a year or two when people start to realize that it was a bargain. I was tempted to capture the gain but did not. That was a fun money anyway. My target selling price for the stock is around book value which means it will have to go up by close to 1000%. We will see 🙂

    • FI FighterNo Gravatar March 5, 2016, 1:08 pm

      BeSmartRich,

      Those are phenomenal gains so congrats to you! Depending on the bull rally, if we get anywhere near $1,900 or $2,000 again, I find it very conceivable that these shares could go up 300% to 500%… For the exploration juniors with world class assets, possibly much higher than that!

      Enjoy the ride!

  • Cardboard CrusaderNo Gravatar March 4, 2016, 11:18 am
    • FI FighterNo Gravatar March 5, 2016, 1:11 pm

      Greg,

      Great update and thanks for stopping by!

      Looks like a huge win for TGM shareholders and from what I’ve gathered, even the EDV crowd isn’t too displeased… TGM has a prospective land package in Burkina and with Karma close to production it looks like a shift in focus back to exploration and Liguidi should happen sooner rather than later.

      Exciting times!

  • Jamespapsdorf@yahooNo Gravatar March 6, 2016, 1:46 pm

    Almaden, AAU, looking good. Anyone else looking ?

    • FI FighterNo Gravatar March 6, 2016, 8:16 pm

      James,

      I like it! Great management team and they are quite creative as well, as evident by their purchase of the mill in Alaska.

      Ixtaca looks very promising with the revised economics. I’m not surprised the stock is up so much in the last month.

      I’m a fan.

      Take care!

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