Mining Stocks – My Current Favorite Ideas (October 11, 2016)

by FI Fighter on October 10, 2016

in Lithium, Lithium Updates, Precious Metals, Precious Metals Updates, Uranium, Uranium Updates

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Let’s not mince words about it — Mining stocks across the board are currently residing in the trash can right now… For a sector that was so HOT in recent months, it must come as somewhat a surprise to many of the bulls to be finding out that shares of some of their favorite companies are now trading down over -30%.

Hey, mining is a volatile and risky business, what do you want me to say? Well, what I should emphasize is this — If you were contemplating purchasing some shares when these stocks were peaking not too long ago, as a buyer, wouldn’t your interest be far greater now that the merchandise is trading at a much lower price?

Maybe… Maybe not…

Funny how human psychology works, isn’t it?

We instinctively prefer to buy high and sell low…

For the life of me, I’ll never understand it… which is why I do my absolute best to operate counter to my emotions (not always easy to do but you still gotta try)…

Anyway, I’m not going to go out of my way to call a bottom here, but here are some ideas that I am digging right now…

  • Critical Elements (CRE.V/CRECF)
  • First Majestic Silver (AG)
  • Kirkland Lake Gold (KLG.TO/KGILF) or Newmarket Gold (NMI.TO/NMKTF)
  • Energy Fuels (UUUU)

See for yourself just how beat up these stocks are over the last month alone!

cre-v_ag_klg-to_nmi-to_uuuu_chart

Critical Elements

CRE.V/CRECF is my favorite idea in lithium right now because the current valuation is an absolute joke (relative to its peers and potential NPV of its lithium/tantalum project).

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First Majestic Silver

AG is one of the more “pure” silver plays among producers out there… At the current share price, no, I don’t think the stock is cheap or undervalued relative to its peers…

From Alexco Resource.

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From Alexco Resource.

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Taking the time to “deep dive” into the numbers is always a prudent thing to do before investing, but let’s be real here — I talk to enough gold/silver/lithium investors to know that not everyone has the time or interest to do this…

Hey, that’s perfectly fine… People are busy, I can totally appreciate that fact. So, if you want the “easy answer”, here’s the next best thing to do (and I do it too) — If you want to compare valuations, pick out the company you’re particularly interested in researching, and go to a competitor’s website… In this example, if I want to know how “overvalued” or “undervalued” AG shares are, I’ll use the latest Corporate Presentation slides from Alexco Resource (AXU) to help illustrate the picture for me…

When it comes to AG, really, you can shop around basically anywhere else, and you’ll arrive at the same conclusion — Shares aren’t cheap relative to its peers.

From Endeavour Silver.

screen-shot-2016-10-11-at-6-58-46-am

Please note — First Majestic Silver, AG, is referenced in the above slide under its TSX-listed symbol, FR.TO.

So, why is AG on my buy list?

The stock has come off over -50% since peaking at $19.15/share, just a few months ago… I realize that short-term price action shouldn’t mean much, but in this case, it kind of does… AG is a “go-to” name in the mining space, particularly among silver investors, so I would imagine that if silver turns the corner and heads north again, AG will outperform… It’s a highly leveraged stock to the spot price of silver, perhaps more so than most… and this unfortunately (or fortunately) works in both the down and up direction!

And I’m sure the most recent short article published by Kerrisdale Capital didn’t help matters any…

AG is backed by CEO Keith Neumeyer, perhaps the most visible and well known of all mining executives out there… Love him or hate him, the man does have a strong reputation of knowing how to run a mining company, and in turn build shareholder value. Further, if push comes to shove, there certainly is peace of mind that comes with knowing that the company you’re backing has the ability to raise capital (and promote the hell out of the stock) like nobody else’s business… AG is best in class, which partially explains the valuation premium it gets to its peers…

With the most drastic haircut its received this month, I would say AG is now trading at a much more “fair” valuation, and it’s cheap enough around $8.20/share for me to get plenty interested in buying. If the silver bull can ever get back on track, AG will be a huge winner, no doubt.

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Kirkland Lake Gold / Newmarket Gold

I’m lumping KLG.TO/KGILF and NMI.TO/NMKTF together because they are more or less the same stock now… In case you weren’t aware, Kirkland Lake Gold made the announcement to merge with Newmarket Gold this past September.

Once the deal is complete, existing Newmarket Gold shareholders will receive 0.475 shares of KLG.TO/KGILF for every share of NMI.TO/NMKTF that they own.

In terms or arbitrage? There once was one… but that window has more or less been shut down… So, it doesn’t really matter which company you go with at this point, you’ll most likely be paying roughly the same price as the other option…

But since I know most readers on this blog are like me and super frugal, it’s best to punch in the numbers into a calculator prior to purchasing to ensure you are indeed going with the cheaper of the two options, as prices fluctuate every trading session…

When the dust is settled, we will be looking at a ~500k oz/year gold producer that will have premiere assets under its belts, all operating in safe, first world jurisdictions… That’s why I like this company so much… Right now, I think shares of both companies are being smashed because investors were not initially too pleased with the merger… On the surface, there does not appear to be many synergies between the two names to justify a combination…

I would agree with that assessment… Kirkland Lake owns gold assets in Canada while Newmarket operates in Australia…

But it’s worth noting that Kirkland Lake Chairman Eric Sprott holds a substantial amount of shares in both companies and was probably a strong advocate of the two mid-tier producers tying the knot… If you trust Admiral Sprott’s judgment (and he certainly has the track record), then perhaps this transaction will ultimately prove to be a good deal for all parties involved…

We’ll see…

Nevertheless, I’m a fan of opportunity, so if the market wants to whack these shares by -30% in the course of a month, whatever distaste that I had for the merger before have quickly vanished into thin air…

When it comes to investing, see how price can solve most problems?

Similar to my thoughts on AG, I don’t feel like shares of KGI.TO/KGILF or NMI.TO/NMKTF are drastically undervalued relative to its peers, but this is another high quality name that should do very well in a rising gold bull market.

When you can snatch up the best names in the sector after sharp declines, it’s usually a good thing…

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Energy Fuels

Man, uranium sure is hated right now… and UUUU in particular.

I jumped in last month, buying up a small tranche, and as usual, I was indeed too early to the party and ended up “catching falling knives”…

Hey, it happens…

Like I alway say — You can’t catch market tops and bottoms… You just wanna be in the right ballpark, approximately…

UUUU just keeps on heading lower, it seems…

So, if I thought shares were cheap at $1.61/share, well, obviously, I like the UUUU idea even more now, at essentially all-time lows, trading at $1.44/share

No one knows where the bottom is, but dude, how much cheaper can it get? This uranium producer (who operates the only licensed mill in the US) is starting to trade like a grassroots junior exploration company…

But it’s times like these that I’m glad I’m employing the “buy a small tranche” strategy, as opposed to rushing in and backing up the truck all at once…

Yes, things could get far worse in uranium land… And every substantial correction will only provide an even better opportunity for investors to get in at.

When will the sector turn?

I have no idea but most producers (unhedged) are selling their yellowcake for below the cost of production (at the most recent spot price of $22.50/lb), so that should be a most telling sign that these hard times can’t last forever…

That is, unless uranium goes obsolete, in which case, all bets are off… But that seems unlikely.

screen-shot-2016-10-11-at-8-41-25-am

Summary

The recent pullback in the mining sector has presented some compelling opportunities for patient investors who have been holding out for better deals to emerge.

Well, here are some of my current favorites — CRE.V/CRECF, AG, KLG.TO/KGILF, NMI.TO/NMKTF, and UUUU.

Please note, with this update, I’m only sticking with advanced-stage development stories and proven producers… I have a separate list of junior exploration companies I like, but I’m not sharing them in this post.

Could prices go lower still?

Your guess is as a good as mine…

But for anyone who felt like they might have missed the train for good, well, here’s your chance to snatch up a few parcels of some of the better names in the sector for a way better price than just a month ago!

But somehow I seriously doubt that there are as many buyers lining up out the door today as opposed to when these stocks were shattering new 52-week highs…

 

Gotta love human psychology, right?

 

Happy Hunting!

 

P.S. What’s the deal with the lobster roll? Well, this was another one of my favorite ideas during my stay in Osaka! 

 

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{ 18 comments… read them below or add one }

1 WilsonNo Gravatar October 10, 2016 at 8:14 pm

Love your content. Thank you so much!

Reply

2 FI FighterNo Gravatar October 11, 2016 at 10:36 pm

Wilson,

Thanks, I appreciate the kind words!

Cheers!

Reply

3 SGNo Gravatar October 11, 2016 at 5:43 am

Black Friday Sales in October. 🙂

Reply

4 FI FighterNo Gravatar October 11, 2016 at 10:36 pm

SG,

Most definitely, we’ve got a sale going on right now! 🙂

Take care!

Reply

5 BobNo Gravatar October 11, 2016 at 6:20 am

Ooh I’m definitely eyeing Critical Elements, but I don’t want to pay the fee to trade over the phone (in USA using Scottrade, it costs $32), it’s not worth it at my lower levels of capital.

UUUU is one I was interested in at $1.51, it’s getting harder to resist. But I feel Uranium is still going to keep going down for a while longer. I might be able to enter at an ever lower price point. The timeline for actually divesting from the Uranium industry is still many years away I think.

Where can I educated on the silver market? Silver is even more volatile than gold but I don’t have a very informed opinion on it.

Reply

6 FI FighterNo Gravatar October 11, 2016 at 11:13 pm
7 ScottNo Gravatar October 11, 2016 at 9:05 am

Really enjoy reading your blog. I imagine UUUU will be even more attractive in early December due to tax loss selling. A lot of the U’s seem to pop nicely in January after the selling is over. I am long term bullish on this sector. I still remember the good ol’ days back in the mid 2000’s. My best stock (Laramide Resources) went from .75 to over $15. Not that past is prologue, but if you have the stomach for volatility, the gains in the coming years could be spectacular.

Reply

8 FI FighterNo Gravatar October 11, 2016 at 11:11 pm

Scott,

Thanks for stopping by and I’m glad you are enjoying the blog!

Good point on tax loss selling which could have a huge impact on even more pronounced selling… Although I can’t imagine why anyone would want to sell at these firesale prices??? But then again, I thought the same way last year with gold/silver stocks.

Uranium is a very volatile sector… It’s only worth playing in times like now when we are indeed operating in the Depths of Despair.

Happy Hunting!

Reply

9 SriniNo Gravatar October 11, 2016 at 9:57 am

Hi Jay,

I already have good position in Kirkland and Newmarket. Didn’t see the merger coming but I will hold on to merged company. I think nmi didn’t get the valuation it deserved and may be the expectation is that post merger, it should get re-rated which is a straight win for nmi .

First majestic is a must to buy. I am also considering to rotate Pretium to FM.

I finally started buying bear creak but Axu seems more attractive. I am looking to add both on weakness.

Cheers
Srini

Reply

10 FI FighterNo Gravatar October 11, 2016 at 11:10 pm

Srini,

Looks like we have the same taste in mining stocks 😉

Agreed, AG looks attractive at these levels. I like the idea of rotating out of Pretium, as that’s something I did myself since I have some concerns with how their initial production will go (never know for sure with nuggety gold that’s difficult to accurately model).

Kirkland/Newmarket is now looking like a best in class mid-tier producer, so I’m holding on to my Newmarket shares and will probably add some more before the merger.

Bear Creek is a good one, and so is Alexco… Alexco probably is the better deal at the moment, but investors will do very well with either stock. Bear Creek for size and Alexco for high grade… Gotta love that 1-2 combination, right?

All the best!

Reply

11 NickNo Gravatar October 11, 2016 at 1:24 pm

Hi what are some of the resources you used while you were starting your research on the mining sector last year?

Reply

12 FI FighterNo Gravatar October 11, 2016 at 11:02 pm

Nick,

Here’s a good start:

CEO.CA
HotCopper
Stockhouse

Even Seeking Alpha has good articles on mining stocks and some very knowledgable authors to get you started.

Hope that helps!

Reply

13 KPNo Gravatar October 11, 2016 at 6:08 pm

Hi Fi Fighter. I just recently discovered your blog and I really enjoy it! I am a bit of a newbie, but I’m trying to overcome the psychology that has hurt me in the past.

Regarding uranium, have you done much research on Uranium Energy Corp (UEC)? I know that Marin Katusa has spoken highly of them in the past, but I don’t know if he’s pumping or not. Any thoughts?

Reply

14 FI FighterNo Gravatar October 11, 2016 at 11:05 pm

KP,

Thanks for stopping by!

In regards to UEC, it’s another good option to play uranium, but quite honestly, there really aren’t that many choices to choose from… The uranium sector is extremely small, relative to other sectors such as gold.

My own preference is to invest in UUUU b/c the company has more resources in the ground, more production centers, and the ability to crank up production to a greater capacity once prices start to rebound. Further, UUUU is trading at a discount to UEC right now, in terms of market cap.

With UEC, they are unhedged, so one could argue they could conceivably provide more upside leverage… UUUU sells a good amount of uranium through pre-negotiated contracts, but they have greatly reduced production these last few years to conserve their product (who wants to sell at a market bottom). So, both companies should do very well when the tide turns.

Cheers!

Reply

15 JoeNo Gravatar October 11, 2016 at 9:59 pm

Where’s the lobster roll from?

Reply

16 FI FighterNo Gravatar October 11, 2016 at 11:00 pm

Joe,

The lobster roll was from Osaka… The lobster itself was imported from Maine (or so I was told)…

Cheers!

Reply

17 PonNo Gravatar October 17, 2016 at 6:33 pm

I’ve initiated my position today on UUUU as well. Today marks the new 52 week low.

With other energy sources priced so low, it’s hard to tell when uranium demand to go back up. My only concern is whether UUUU can wait until that day.

Reply

18 FI FighterNo Gravatar October 20, 2016 at 2:36 pm

Pon,

Good luck! You got in at a better price than perhaps anyone else I know! 😉

Take care!

Reply

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