Mining Stocks – Disasters ALWAYS Happen!

by FI Fighter on August 3, 2017

in Precious Metals, Precious Metals Updates

In the world of mining stocks, disasters happen all the time! Even for the best companies, it’s very tough to be able to successfully navigate the business for any prolonged period of time without having something really bad happen.

Mining is an extremely challenging (horrible) business to be involved in, especially if you’re trying to consistently make money.

I seriously understand why so many retail investors want to avoid this sector like the plague…

Today, this happened.

And this.

A wise investor once told me the following about investing in the mining sector:

Fuck ups happen all the time that destroy shareholder value. There are landmines everywhere in this sector, so you have to be a cynic. If you get a sense that trouble is brewing, don’t ask too many questions and just try and get the hell out ASAP.

In other words, it’s much better to err on the side of caution, when in doubt!

Just last month, I closed out my position in Endeavour Silver (EXK), and I explained why in this Seeking Alpha article.

Read the comments section and you’ll find many investors who not only disagreed with my cautionary stance, but took what I had to say rather personally (at least that’s how it came across to me)…

With that said, when the company released the following bad news this morning for Q2:

Financial

  • EBITDA(2) decreased 64% to $3.7 million
  • Cash flow from operations before working capital changes decreased 53% to $4.4 million
  • Mine operating cash flow before taxes(1) decreased 49% to $8.8 million
  • Revenue decreased 27% to $32.7 million
  • Cash costs(2) increased 56% to $8.36 per oz silver payable (net of gold credits)
  • All-in sustaining costs (AISC)(2) increased 94% to $20.46 per oz silver payable (net of gold credits)

Operations

  • Silver production decreased 26% to 1,143,788 oz
  • Gold production decreased 17% to 13,058 oz
  • Silver oz sold down 34% to 988,821 oz
  • Gold oz sold down 20% to 12,294 oz

 

Let’s just say I wasn’t too surprised that the stock got slaughtered…

 

Look, at the end of the day, the bottom line here is to try and make money; that’s the main reason why we are even dabbling in the mining space in the first place. To me, it makes no sense to get so attached to any particular company or stock where we choose to ignore any and all warning signs that start to surface!

 

Never fall in love with an investment or asset class!

 

If you look hard enough, you’ll find flaws with anything! And as investors, that’s exactly what we need to be doing! I’m as big a fan as any of “buying the dips” and “loading up when there’s blood in the streets”, but there’s a time and place for that type of strategy… You don’t just buy recklessly all day and night long if the underlying fundamentals of a company are deteriorating, or leave lots of questions marks that need to be addressed.

Further, it is entirely possible to be simultaneously a bull and a bear, contrary to popular belief. In the case of silver, I’m as bullish on the physical metal now as I’ve been all year. However, as it pertains to EXK, I seriously think there are way more attractive silver alternatives out there, so even with today’s huge selloff, I don’t have any interest in buying any shares.

I’m bullish on silver but bearish on EXK…

Fancy that.

For the record, I have nothing against Endeavour Silver and I hope they can right the ship and get their operations back in gear! I have no agenda or reason to bash the company at all…

Anyway, mining stocks are beyond volatile and again there are landmines everywhere that we need to keep our eyes out for.

Once upon a time, I owned the following stocks in my portfolio:

  • Endeavour Silver (EXK)
  • Tahoe Resources (TAHO)
  • Red Eagle Mining (R.TO)
  • Perseus Mining (PRU.TO)

When those stories started to change (remember this game is very dynamic and the narrative is quick to alter itself everyday!) and when I looked at things from a risk vs. reward perspective and no longer saw any appeal with owning those companies, I abandoned ship.

Sell first, ask questions later.

Here is a 1 year performance chart for: EXK, TAHO, R.TO, and PRU.TO.

Each one of those stocks has cratered by more than -50% over the last year!

Look, I’ll be straight up and the very first person to admit to you that I got really lucky being able to sell out of those stocks before the SHTF.

It wasn’t skill on my part… but the one thing that I ALWAYS try and remember to do is look at things from a risk vs. reward angle…

I refuse to fall in love with any of these crappy mining stocks (I’m a hater), which are nothing more than ticking time bombs as far as I’m concerned.

But thankfully because I was never enamored with these investments (that I know will never love me back), I was able to dodge a few bullets and protect my overall portfolio.

That’s not to say I haven’t been burned badly before, because most certainly I have!

Particularly with Cordoba Minerals (CDB.V), which blindsided me when the company announced a restructuring of their joint-venture deal with High Power Exploration (a Robert Friedland company).

CDB.V is off -57% in just the last six months!

A total train wreck which has really hurt my portfolio returns!

The Game of Rocks ain’t easy at all!

 

And you can’t win em all…

 

But you don’t want to get absolutely annihilated in the process if you can help it either…

 

Be skeptical, ALWAYS!

 

Everyone LOVES an upramper and you’ll never win any friends in this space being a skeptic/cynic/hater, but are you investing in mining stocks to be popular or to make money?

 

If the mining sector wasn’t so damn cheap and undervalued relative to basically every other asset class out there, quite frankly, there’s nothing I would like more than to cash out, walk away, and never look back… until the sector inevitably blows itself up again sometime down the road (as sure a thing as any) and I can get a chance to pick up the pieces again (like in late 2015/early 2016) for pennies on the dollar.

 

It ain’t easy… so question everything.

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{ 6 comments… read them below or add one }

1 VinNo Gravatar August 4, 2017 at 4:42 am

Well said mate.. Well said.. I wish I would’ve listened to you earlier on. Even though I wasn’t criticizing you on Seeking Alpha 😉 I luckily sold my shares – at a handsome loss – at 3.40, and bought back some Cordoba at a bargain.

Reply

2 FI FighterNo Gravatar August 4, 2017 at 7:51 am

Vin,

No worries, and I’m quite ok with taking criticism, I’m wrong most of the time anyway. I just didn’t understand some folks comments and how they came to certain conclusions, defending the glass as being half full when it clearly wasn’t.

This game is extremely tough and we all take our hits, that’s a given and unavoidable… However, whenever the market foreshadows bad news and we have reason to have doubt, it’s worth considering the other side of the coin… Mining companies will always try to paint a rosy picture and tell us everything is spendid… We have to do our own thinking and analysis to find flaws in their arguments.

Cordoba has had issues too, but I like it better than a lot of these silver names at these prices. Silver producing is a terrible, unprofitable business for most companies at these low silver prices. That’s just the truth of the matter.

Cheers!

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3 Midwestern LandlordNo Gravatar August 4, 2017 at 9:53 am

Jay,

Regarding your commodity portfolio, how much time do you have to study, analyze, etc each week to ensure that you are properly educated on the trends, etc in the industry? To you it is probably not work, I assume you enjoy it to some degree. But I think that is part of the rub for some potential investors that don’t understand the sector well. While I certainly see that the sector is ripe with opportunity due to valuations, it is not something that I want to be focused on every day so I choose not to play the game at this time. I am more of a buy and hold investor which suits real estate investing better.

You made a point in one your recent articles that real estate investors tend to stay focused on that sector when other opportunities exist. I agree with that but don’t necessarily see that strategy as bad. Unless of course they continue to buy real estate at hyper inflated values which is very risky. Albeit, some opportunity may be missed out on. But for me personally, real estate has provided early FI and continues to do so. It solved, and continues to solve my primary goal. As Andrew Carnegie said, “put all your eggs in one basket, and watch that basket”.

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4 FI FighterNo Gravatar August 4, 2017 at 11:16 am

Midwestern Landlord,

Yeah, it’s certainly not easy and I do put in a fair share of time (a few hours each week) towards researching and reading up the latest news on these companies. Over time, I’m really learning how tough this game is to play and get right… The ideal scenario of “Buy and Hold” really does not apply in the mining sector unless you are buying the highest quality royalty and streaming businesses such as Franco-Nevada, which own a diversified mix of assets and can consistently generate free cash flow on a regular basis, rain or shine.

I realize most retail investors are busy people and don’t have the time and energy to devote to studying and following up all the time, which is why this sector is not suitable for everyone… Even those who do actively partake, blow ups still happen far too frequently and it’s impossible not to experience a position blowing itself up if you play this game long enough. It just comes with the territory and that’s why I always use the baseball analogy. You just want to bat 0.300 and when you hit, you want to hit big enough where your wins can amortize your losers and you still walk away with a healthy profit.

In regards to “all you eggs in one basket”, I do love that investment approach with the caveat being you have to buy at attractive prices/valuations. Real estate is my favorite asset class by far, I just hate today’s prices. Further, real estate is cyclical, and I don’t care what the Fed says or does, I refuse to believe that anything can only go straight up for perpetuity.

I’m just trying to bide my time here, but real estate and dividend growth stocks are the perfect instruments for Buy and Hold Forever.

But like with all investing, everything has a price. Right now, mining is cheap, but yes, most definitely fraught with risks!

Cheers!

Reply

5 alNo Gravatar August 8, 2017 at 3:30 am

“Look, at the end of the day, the bottom line here is to try and make money; that’s the main reason why we are even dabbling in the mining space in the first place. To me, it makes no sense to get so attached to any particular company or stock where we choose to ignore any and all warning signs that start to surface! Never fall in love with an investment or asset class! I refuse to fall in love with any of these crappy mining stocks (I’m a hater), which are nothing more than ticking time bombs as far as I’m concerned. “

your approach to ride the EV “craze” through the ore suppliers is good and solid. Just don’t forget to get out of this EV wave on time. I read recently a non-English written article posted in a magazine that has a good historical track record when it comes to seeing “ahead” and being “in the room” where under table deals are made.

To cut a long story short (to stay in the theme of your blog), car makers are all falling over themselves to put hybrids and pure EV models out asap at price at or far below production cost, because they are slowly getting slaughtered by those “overall car park sold” govmint CO2 emission caps and huge penalties per sold car applied, when getting above them global car park emission caps.

They are in a pickle. Their game out of the penalty box ? Sell damn hybrids and pure EV’s at a loss, to the tune of 100 000’s per year, even if they don’t really make sense in CO2 reduction levels right now, when taking into account the total car energy life cycle, and from what energy resource mix current electricity is produced. Start this in 2018 till 2021 with solid mass manipulation techniques through all sorts of media, to sell as much as you can in a short time. They have then themselves a few million EV cars out there in a couple of years, thus then being safely out of the red govmint zone for a long time, while the Fed and Co also can say with a straight face that they did manage to reduce overall car CO2 emissions.

To then see car makers increase EV and hybrid car prices to a profitable level, while hoping in the meantime to have decreased EV car battery pack prices to a low enough level to really become interesting for them too (it is now not interesting at all for them all, including Tesla).

As far as the article stated, after 2021 a lot of new buyers will be faced with much higher EV or hybrid car prices when wandering into the dealership room, including for Tesla. The car makers have made a backroom deal together, because they want to recoup their mammoth retooling capex EV car investments, and the only way is to increase selling prices while reducing car battery pack price down the road, once they are out of their penalty box. They all want to start to make money on those EV systems, since that is what big brother forces them to sell right now.

As such I would advise you to continue your sound current ore miner strategy, but lighten up by 2021 at latest, you are clearly doing right when I see how your portfolio bottom line is steadily increasing in value over time.

I myself are not doing what you do, but I plan to get into Cameco down the road, once Uranium prices are stopping their downfall trend. I watch the long term U235 ore price chart once a month, and once it gets back up, I will pick the Nr 1 already producing and proven profitable uranium producer located in a safe jurisdiction, and I think this is Cameco.

Next Energy may be sitting on a huge play, but developing a new mammoth mine takes years, cost a fortune, and in the meantime, they will only burn money and cover it all by issuing new warrants that will seriously dilute current share ownership (like Tesla is doing with their EV cars).

That being said, Kazakhstan is also a huge U235 producer, that is located right next to the largest future user of Uranium (China), so maybe Cameco’s stock price increase won’t be as mammoth as I expect.

For that reason I will limit my involvement in that particular stock to an acceptable single digit % of my current portfoolio, basically speculating like you do, but not trading in and out on a regular basis. I simply will trying to buy relatively low, set a relatively large trailing stop loss in place on a GTC basis, to then hope to be stopped out much higher in an automatic way, once the uranium boom petter out, which certainly will happen (if we ever get back to a boom, which is apparently not the case right now, given the U235 ore price downtrend that isn’t yet over).

Good luck, jay.

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6 alexNo Gravatar August 28, 2017 at 3:40 pm

Just a beginner here and learning…for any Canadians here ….would you please recommend one or two brokerages that would trade penny stocks and markets like the Australian.
Thank you appreciate your feedback.

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