Portfolio Update: Building My Positions (December 18, 2015)

by FI Fighter on December 19, 2015

in Precious Metals Updates

Screen Shot 2015-12-19 at 1.46.12 PM

When it comes to trying to anticipate how the markets will react to any Fed announcements, I’m starting to learn that it’s probably best to just do… nothing.

Literally, seconds upon hearing the verdict of an “all systems go”, the markets shot up, only to spike back down, only to go back up again as we closed out the Wednesday trading session… But by the end of the week, the markets decided to recommence selling again, with the Dow Jones dropping over 600 points in a span of two days…

Good thing I’m not really much of a trader, or I might have a serious headache right now…

In any case, I used some of the volatility to make some additional moves this past week that I didn’t get a chance to document until now.

In particular:

  • Sold 7,100 shares of McEwen Mining (MUX) @ $0.95/share (+872.53)
  • Purchased 4,000 shares of Newmarket Gold (NMI.TO) @ C$1.38/share
  • Purchased 1,400 shares of Eldorado Gold (EGO) @ $2.90/share
  • Purchased 30,000 shares of Red Eagle Mining (RD.V) @ C$0.262/share (some shares filled at C$0.255 and others at C$0.260; C$0.262 is total cost basis including commissions/fees)

MUX Trade

I closed out my MUX position for no other reason than the fact that I was up close to 15%. As I’ve mentioned before in these portfolio updates, I have no problem selling out of any individual holdings when they rise and I’m in profits.

It doesn’t mean I think any less of the companies I’m selling…

Do I still like MUX?

Absolutely.

I just prefer owning it (and buying more shares) closer to my initial cost basis of $0.82/share, as opposed to $0.95/share

Mining stocks are inherently volatile, and sometimes the daily movements are erratic and really make no sense at all… So, I have no qualms with taking some gains off the table, from time to time. After all, these stocks don’t pay a dividend (most companies anyway), so I have to occasionally trade them to generate my own form of active income.

Otherwise, I’d be holding “dead money” as many critics like to point out… 🙁

This past Monday, when the entire sector was down, I looked at my spreadsheet… and saw that MUX was up over 1%. On some occasions, such bifurcation is justified, whereas other times, I really can’t seem to make any sense of it…

When I’m analyzing the stocks, a common question I ask myself is this:

Would I prefer to keep owning Stock X while it is up, and take the risk of it falling off again?

Or,

Would I prefer to trade Stock X (at a time of strength) for Stock Y (at a time of weakness) and also lock in some gains?

I guess it really depends on each individual situation, so I can’t generalize for all cases… but in the grand scheme of things, gold is gold… Honestly, despite any nuances and subtleties that distinguish Company X from Company Y, ultimately, these stocks are all reliant on the spot price of gold and will track it, more or less…

So, I’m not too picky… especially when it comes to the proven mid-tier producers. Just stick to quality and it should work out…

This time around, I decided that I would rather sell MUX, realize the $872 gains, and use the proceeds to buy NMI.TO, which is another idea I really like that was down on the day…

Certainly, there will be times when my trades don’t work out… and other times that they do… but I’m not going to stress out too much about it; my own strategy is to load up heavily on extremely bloody days so that I have the luxury of trimming off some positions on any mini-rallies.

EGO Purchase

Moving on, I also added some more shares of EGO. This is a large mid-tier producer that I like (pretty clean balance sheet and low cash costs).

Here are some highlights:

From Eldorado Gold:

EGO

EGO_2

However, Eldorado does operate in some riskier jurisdictions (Greece, Turkey, China). As usual, there are no free lunches… you’ll find pros/cons for every gold mining stock out there. But when EGO stock dips below $3.00/share, I get interested. Similar to IAMGOLD (IAG), I wouldn’t peg EGO as one of my favorite ideas, but it’s a stock I’m comfortable with owning, and one I wouldn’t mind trading on strength.

The Sleeper Pick

The last stock that I added is perhaps the one that I am most excited about! RD.V is my sleeper pick of the year for 2016! Up to date, Red Eagle has literally flown under the radar of everyone, but it’s a stock that I think is primed to break out in 2016.

The company is currently developing their Santa Rosa project in Colombia, and they should be in production sometime in Q3 or Q4 of 2016. Provided all goes smoothly, I think a re-rating of the stock is in order, since it currently only trades at a C$44 million market cap (enterprise value of C$35 million).

The Feasibility Study shows great economics (32% after-tax IRR at $1,100/oz gold:

From Red Eagle Mining:

Screen Shot 2015-12-19 at 2.21.57 PM

Red Eagle, in comparison to other development projects:

Screen Shot 2015-12-19 at 2.22.23 PM

Initially, Red Eagle aims to produce 40,000 to 50,000 gold ounces annually (initial life-of-mine estimate of 8 years). This might NOT sound like a lot of gold, but if the numbers work, the numbers work! Cash costs are estimated to be only $596/oz, All-In-Sustaining-Costs (AISC) of $763/oz, and initial CAPEX is a very palatable C$74 million (fully funded).

With the Colombian peso having been absolutely obliterated this year (like most other currencies around the globe compared to USD), the economics of this project should only stand to benefit, as many expenses are denominated in the local currency…

Screen Shot 2015-12-19 at 2.32.53 PM

1 USD = 3,328.5 COP

The Feasibility Study assumed:

1 USD = 1,900 COP

Further, the initial resource only accounts for 1/2 of one shear zone at the San Ramon deposit, drilled to a depth of 200 m. The resource is still open at depth, on strike to the east, and other parallel shear zones. Red Eagle’s Santa Rosa land package extends over 300 km². This historic mining district was host to artisanal mines, many of which are relatively under-explored using modern mining techniques, with only the near-surface oxide ounces having been mined in the past. Needless to say, there is plenty of room for further expansion and exploration.

What’s the biggest risk?

Colombia, of course…

Red Eagle is aiming to become the first modern Colombian gold mine to enter production in decades; they’ve got all the permits they need in hand, but it looks like until they are in full-swing production, the markets will remain in a state of “show me”.

With that said, the Santa Rosa project is far enough along where it is sufficiently de-risked for my own taste… I can’t say the same for Buritica (another Colombian gold project), which prevents me from loading up on shares of Continental Gold (CNL.TO) at this time, regardless of how massive and high-grade their deposits may be…

Granted, an on-going development story like Red Eagle will never be a “slam dunk” or sure-fire bet (proven mid-tier gold producers are less risky, in comparison), but I’m willing to jump in at this point because I do feel like a re-rating is in store for 2016.

I’m trying to gain entry before that happens…

If I compare Red Eagle with some other advanced-stage projects such as Roxgold (ROG.V) and True Gold (TGM.V), I can easily see how the current valuation of Red Eagle has much more room to run up.

In addition, Red Eagle management has gone on record to say that they want to become a leading mid-tier gold producer that eventually returns value to shareholders in the form of a dividend.

Are we looking at the next B2Gold (BTG)?

Maybe…

I’m willing to roll the dice here…

 

Hopefully, I’ll be able to add another 20,000 shares at, or around these levels before RD.V takes off for good….

 

Happy Hunting!

 

Photo Credit: Red Eagle Mining

{ 11 comments… read them below or add one }

1 JNo Gravatar December 19, 2015 at 7:41 pm

Being you like to cost average down untill the turn around in gold/commodity’s develops, have you considered selling future puts on positions that you currently own. The idea, as I’m sure you already know, is to either gain premium and enjoy a positive move for current stocks owned which could be considered a win. Or, know of your future cost basis and have a predetermined acceptable “put” that you would like to own more shares of the company at a cheaper discounted price rate, and even add in a covered call to offset any continued weakness.
I’m just curious if you had contemplated this strategy or if it doesn’t fit your overall goals and strategy?
As always, I have enjoyed your post and continue to follow along.

On a personal note, I have sold down most holding in last 1-2 months and sitting with cash (70%). I do plan on entering more commodity and miners but currently have been practicing patience as I had no real idea of direction with the fed so decided to wait out this year’s fed and tax sales. On personal thoughts, an inflationary rate raise should do well for gold but haven’t decided if there’s a timeline to best follow from history as 0 rates seems to be something of an anomolie. Hope not to much of a ramble.

Thanks again.

Reply

2 FI FighterNo Gravatar December 19, 2015 at 10:50 pm

J,

Thanks for the comment! In general, I’m a huge fan of selling cash secured puts, particularly as a strategy to buy into dividend growth stocks. As it pertains to mining shares, I never really thought about it, to be honest…

In general, I think it’s easy to define a trading range for more reliable stocks like your typical large cap blue chip… With the miners, they swing so violently in both directions, that I’m wondering if it might be a better strategy to just “take what the market gives you”. For instance, in my head I might think a certain stock looks cheap at $2.00/share… But I’ll wake up the next morning and it will have dropped to $1.70/share… If so, I’ll just buy it there and possibly trade out of it on any significant rebounds… The key is staying liquid.

For now, I’ve seen enough ups and downs where I’m starting to define my own arbitrary buy/sell windows… So far, everything that I have sold has come crashing back down to even lower prices than my original cost basis…

If any particular stock runs away, I’m content with that since my portfolio is well sized for my goals.

I love the idea of going big on cash right now… I’ve got a large cash position myself, and have been mostly in cash for the duration of this year.

All the best!

Reply

3 Financial SamuraiNo Gravatar December 19, 2015 at 8:29 pm

What is you Overall update right now? You highlighted an update earlier. How much cash do you have and plan to deploy?

S

Reply

4 FI FighterNo Gravatar December 19, 2015 at 10:53 pm

Sam,

Not much has changed on the cash front. I’ve been at over $120k for awhile now… I load up on miners with any spare change, cash flow, and savings…

In terms of the portfolio, I would probably cap it at $300k all-in, but we’ll see… Right now, I’m doubtful it even gets that high before I say “enough”.

Cheers!

Reply

5 Midwestern LandlordNo Gravatar December 20, 2015 at 10:10 am

I like your strategy of selling out of positions when you get a nice profit and buying more shares and cost averaging when the price goes down. In that way, you are letting all of the volatility be your friend. And just like your article on “Not all haircuts are the same”, worst case scenario you are holding positions that have already been beaten down and should have nice upside over time.

In general, stock market investing is not for me. I just don’t like the idea of having very little control over a stock moving up or down based upon many factors that either I do not understand or have very little control over. It is also something that I would not want to manage on a daily basis. Just my personal preference. There are certainly people that have done very well. Said that, I still go back to the question of how many people retire early off of stock market investing?

Reply

6 FI FighterNo Gravatar December 20, 2015 at 10:36 am

Midwestern Landlord,

I feel very much the same way — I prefer the control and sensibility of real estate which is tough to find in stocks. With these companies, you are putting your trust in management and other people to deliver on their promises.

Having said that, I do have to draw the line somewhere — At this juncture, I would prefer to invest in a sector (like precious metals stocks) that have been beaten up by 80% to 90%+ as opposed to buying expensive real estate that is eclipsing new highs each and every month…

I love leveraged real estate as a vehicle to get really wealthy… I just refuse to go down that path at the top of a market expansion cycle that is now about to enter Year 8 (let’s wait and see if the Fed can muster another rate hike in 2016 before we declare tightening).

To retire early off of stocks, you really need to bet big and hit a home run… The slow and steady index/dividend approach won’t get you there in less than 10 years (unless you make an insane salary and can contribute massive amounts of capital).

Mining stocks do create millionaires, but you’ve got to time it right. If you start buying at the top or even the mean, you will get massacred. In perhaps no other sector will you find such potential outsized returns. The sector only booms and busts and it always overshoots in both directions… But again, timing is absolutely critical here… I jumped in after the sector fell of by 80% to 90%, and right now I’m still down 15%…

Still, I can’t think of a better “lottery ticket” alternative that’s currently available at this time where the fundamental question is “when” not “if”.

I’ve got to like those odds!

Cheers!

Reply

7 Midwestern LandlordNo Gravatar December 20, 2015 at 12:14 pm

I agree. Particularly where you live, real estate prices do not make sense anymore. Plus you have a relatively large amount of dry powder to work with so you are deploying it in a way that makes sense given current opportunities. You have the best of both worlds really. You already own a fair amount of real estate which should be stable and add substantial wealth in the long run. Plus you are deploying capital with the hopes of maximizing returns. And it is not grocery money so if it does not go perfectly you will be just fine.

Reply

8 mikeNo Gravatar December 20, 2015 at 11:35 am

“Fed rate-hike worries have created an opportunity to buy gold miners at a discount. The market is rightly concerned about the impact of higher rates and investor demand for gold, but a narrow focus on investor demand overstates its importance to gold’s long-term outlook.

Over the next decade it will be jewelry demand, not investor demand, that drives the gold market. Led by China and India, we expect jewelry demand to account for two thirds of gold demand by 2020 and that assumes a deceleration in jewelry demand growth for those two countries. We expect ETF and central bank purchases will account for only 5% of the market by that time.

Gold supply growth must accelerate, but mine projects and development would be insufficient to meet demand. To avert a shortfall, we estimate an additional 200 tons of annual mine supply would be required by 2020, equivalent to about 5% of global mine production.

A prospective supply shortfall is bullish for gold prices, but significant mine cost deflation diminishes the upside. We forecast the gold price of $1,300 per ounce on a nominal basis by 2020 or roughly $1,160 in constant 2015 dollars.

Gold miners are cheap; equity market valuations appear to reflect expectations of sub-$1,000 real gold prices in the long run, well below our long-term forecast.”

Kristoffer Inton (morningstar).

Reply

9 FI FighterNo Gravatar December 20, 2015 at 11:51 am

Mike,

Thanks for the quote and insights.

Demand coming from the East (China, India, Russia) is definitely worth monitoring closely.

In regards to investor demand, and overall demand, these miners are so beat up right now that you really don’t even need a raging bull market for shares to climb up substantially…

Although the goldbugs like to dream about $5,000/oz gold, in reality, if gold can just get back to say $1,500/oz (and cash costs don’t go up in lockstep), the trade will work out… And at some point, I would have to believe that the big money will start to land in natural resources (in search of value), a most decimated sector.

Right now, the current deflation in oil/energy prices and the strength of the USD is actually helping out miners quite a bit, and some companies are profitable at even $1,000/oz gold… So, survival is still possible, and speculators can err on the side of caution by investing in the lowest cost producers with the cleanest balance sheets.

In terms of supply, that will absolutely become a problem in the medium to long-term. Exploration has grinded to a halt and very few new discoveries are being made these days. Coupled with mine shutdowns, it’ll only be a matter of time (say 5 years, maybe) before demand far outstrips supply.

Projecting metal prices out into 2020 seems like a waste of time in my view since I don’t think most anyone can even accurately predict where prices will be by the end of 2016…

Buy low and sell high… that’s about the only thing I know for certain.

Best wishes!

Reply

10 JWNo Gravatar December 21, 2015 at 1:29 pm

Sorry to here you sold MUX at $0.95.

I assumed McEwen was bound to begin making Moves to relieve the NYSE possible Delisting. I have been adding to my Poston in the mid $0.90’s.
I’ve followed US Gold / Mcewen Mining for over a Decade and making Gains on Rob McEwen ‘s Surprise Moves. Hopefully the News today 12-21-15 MCEWEN MINING BUYS AFGAN-KOBEH PROPERTY IN EUREKA COUNTY, NEVADA increasing the Property around Gold Bar, keeps my Gains Theroy on the intact.

Reply

11 BeSmartRichNo Gravatar December 24, 2015 at 9:12 am

What do you think about ORV? Very small player currently being traded at 10-15% of its book value. It has very minimal debt and has been generating positive free cash flow for years but seems punished more than before.

Reply

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