Precious Metals – Some Quick Thoughts Regarding Mining Stocks (November 17, 2016)

by FI Fighter on November 16, 2016

in Precious Metals Updates

axu_gqc-v_ssp-v_org-v_swa-v_aan-v_chart

I should start by saying that markets are extremely fluid and dynamic… Things are constantly changing all the time, and right now we are entering a very interesting inflection point post-election where many asset classes are bouncing around and experiencing extreme volatility.

By and large, as an investor/speculator, I like to take the medium/long-term view because trying to figure out how to navigate through the short-term “madness” can be an extremely tough and challenging thing to do… even for the pros.

I’m just a retail investor, so I’m well aware of my own weaknesses and limitations… I am very cognizant of the fact that if I try to get too caught up in the short-term “noise”, I’ll likely cause myself more harm than anything else…

In the last post, I mentioned that there was currently a massacre going on in the precious metals mining stocks and that I was super excited again to be able to score high quality merchandise selling off for firesale prices… Quite honestly, the amount of fear, anxiety, and overall feeling of uneasiness that I felt from my last shopping spree was very reminiscent of all the bad feelings that I experienced last fall, and earlier this year…

It sort of felt like deja vu…

Perhaps we still haven’t reached a state of “final capitulation” (i.e. January 19) just yet, but the mood across the entire precious metals complex is incredibly somber right now…

People are scared shitless… which is usually my cue to start paying attention… and to start buying.

To buy into fear (without fear) is one of the most difficult things to do as an investor/speculator!

Although I have been doing my best to decouple my actions from my emotions, let’s be real here, I’m no different from anyone else, and seeing my entire portfolio down -10%, -20%, -30% (and more in some individual holdings), in just a week’s time, is certainly both frustrating and disheartening…

So, as much as I’m having “the time of my life” picking up shares of these miners at firesale prices, I must also keep in mind that I’ve got to pace myself, because when the trend ain’t yo friend, things typically can go from bad to worse…

Right now, the US Dollar Index (DXY) is surging and has reached a high point not last seen unless we go all the way back to April 2003 (when I was a high school senior, heh!)…

From Reuters.

reuters-dollar-2003

Just look at the breathtaking move upward since post-election…

screen-shot-2016-11-17-at-7-44-02-am

Again, because I prefer to take the medium/long-term view, I don’t fixate too much on charts, and/or technical analysis… But with that said, I still believe that it is extremely important to be open-minded to all sorts of possibilities, especially when there’s something in the markets telling you that a strong move is taking place, or has an extremely high probability of taking place…

The DXY is looking so fierce right now, sitting at above 100… If we break through this “resistance”, we could be looking at a pronounced run up into uncharted, blue sky territories…

And as someone who is heavily invested in precious metals mining stocks, that won’t be pretty… A strong USD probably won’t be good for gold and silver prices… Certainly, precious metals CAN rise in tandem with a strengthening USD (which is the cleanest fiat currency shirt in the hamper), but I wouldn’t count on it since I think the markets are so heavily driven by sentiment alone…

Please note: From Wikipedia.

The US Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners’ currencies.

It is a weighted geometric mean of the dollar’s value relative to other select currencies:

  • Euro (EUR), 57.6% weight

  • Japanese yen (JPY) 13.6% weight

  • Pound sterling (GBP), 11.9% weight

  • Canadian dollar (CAD), 9.1% weight

  • Swedish krona (SEK), 4.2% weight

  • Swiss franc (CHF) 3.6% weight

Besides the US Dollar Index (DXY), I’m also keeping a close eye on the US 10-Year Bond Yield.

screen-shot-2016-11-17-at-7-44-15-am

Similar to the case of a stronger USD, rising bond yields typically aren’t good for gold (well, I guess unless you also have rapid inflation going on concurrently, which we don’t right now b/c there ain’t no money velocity… yet)! Gold needs low, near-ZERO, ZERO, or NEGATIVE real rates to really shine… The lower the better… In the immediate-term, if all we’ve got going for us are nominal rates going up…

Anyway, someone has been dumping a lot of treasuries!

And with market expectations of a December Fed rate hike now sitting at over 90% probability, we might have yet another catalyst to hurt gold and silver even more in the short-term…

From Investing.com.

fed-rate-hike-december-2016

Sure, one could argue that a December rate hike might already be priced in, since we’ve got so much optimism going on at the moment, but hey, my own belief is that you just never really know for certain with these things!

Anyone who thinks that they’ve got the markets all figured out is either a multi-billionaire or a complete liar!

Perhaps, like last year, we’ll see the spot price of gold bottoming out in December, and we’ll kick off 2017 with the next leg up in precious metals?!?

Or, the euphoria surrounding President Trump’s inauguration and new fiscal policies will have investors/speculators partying like it’s 1999 again, and thus bullish sentiment regarding economic growth and prosperity will reach unprecedented new heights (so why on earth would you want to own useless pet rocks?)!?!

Who really facking knows?!?

The only thing that I can do for myself is to try and come up with a strategy (strategies) to cover my bases for whatever does happen next…

As it pertains to precious metals mining stocks, I posted this on CEO.CA, but I will share it here for all you readers.

ceo-ca-thoughts

I’ve said it before, and I’ll say it again — Markets are unpredictable…

With that said, here’s a really good video worth watching…

Jordan, over at The Daily Gold, looks at things from a technical analysis point-of-view, and sees possibly $1,050/oz gold coming…

Jordan is a guy I respect a lot, and he really knows his stuff, so I would encourage anyone reading this to check out the video above…

Whether you agree or disagree, I think it’s still worthwhile to consider both sides of the coin…

During periods of immense uncertainty, I think it’s prudent to check your ego at the door and to take a somewhat cautious, “wait and see” approach…

Sure, I’ve been buying up a lot of mining shares as of late, but as I outlined above, I’m trying to keep my mind open to all possibilities at the moment…

Could gold and silver re-test the 2015 lows in the upcoming months ahead?

Absolutely!

For precious metals investors, the trend ain’t yo friend right now… So, no matter how enthusiastic I am about the deep value opportunity that can be found across the spectrum of gold and silver stocks, as I outlined in this article, there are just way too many signs and indicators suggesting a further move to the downside for me to ignore entirely…

Also worth noting is a strategy I like to employ when investing/speculating in mining stocks — When you’re in profits, it’s NEVER a bad idea to start trimming some positions, booking gains, and reducing your cost basis significantly! Mining stocks are insanely volatile, so what goes up usually comes crashing back down again, and vice versa…

Just as an example, I got into a stock like B2Gold (BTG) late last year, and bought up quite a bit more shares in early 2016… When I see firesales, I like to “back up the truck” and buy with conviction… With that said, when gold started to go vertical earlier this year, I began trimming some of my BTG position, and went from owning 30,000 shares to my current allocation of 16,500 shares. In the process, I reduced my cost basis from $1.00/share all the way down to $0.038/share… That’s right, I’m essentially “free carried” on my BTG position now… I’ve now only got ~$633 of “skin the game” with that stock, but it still makes up a good portion of my portfolio, with a 5.62% weighing, and current market value of ~$41,000.

 

Another important point I need to share at this time — Right now, I’m in complete agreement with Nick (MiningBookGuy), and feel like if I’m going to attempt to play the precious metals mining stocks moving forward, my own preference will be to stick to the most prospective developers and explorers… NOT the producers!

 

Risks are currently very high, and quite frankly, I have ZERO interest in buying up any producers at this stage…

Personally, I feel that there is a misguided belief out there amongst retail investors that going with a proven senior/mid-tier producer is somehow “less risky” than riding with the “penny stocks”, which is basically just a derogatory term the uninformed use to stigmatize and generalize the entire universe of juniors (the good, the bad, and the ugly)…

Just check out the following chart as proof as to what I’m talking about…

dgc-to_chart

Detour Gold (DGC.TO/DRGDF), is a premiere mid-tier gold producer, but even so, the stock is down -45.9% over the last 3 months…

screen-shot-2016-11-17-at-8-41-25-am

I’m not trying to single out Detour Gold (it is one of the better mid-tiers out there!), per se, but the most recent price action just cements my point about mid-tiers not necessarily being less risky than earlier stage junior developers/explorers…

With mid-tiers, you’re dealing with companies that are currently in production… So sure, you’ve got a steady flow of revenue coming in each quarter, but just because you’re cash flow positive and reporting earnings, it doesn’t mean that things can’t (or won’t) go wrong either…

In the case of Detour Gold, they will miss on guidance (2016), and as is typical, when you do that, The Street can be pretty ruthless with you…

From Detour Gold.

detour-2016

Further, the company has revised its outlook to the downside for 2017 as well…

From Detour Gold.

2017 Preliminary Outlook

Preliminary gold production for 2017 is estimated to be between 540,000 and 590,000 ounces, reflecting a reduction of 40,000 ounces from the current life of mine (“LOM”) and assuming approximately 10,000 ounces (using the mid-point of the guidance) for downside risk. Approximately 30,000 ounces of the reduction from LOM plan is attributable to face position (mainly due to slower development progress around the Campbell pit in 2016) and 10,000 ounces due to a slightly lower assumption for recovery and slightly higher assumption for dilution.

Paul Martin, President and CEO, added, “We are disappointed with the outcome of the preliminary guidance for 2017 as a result of the lower projected gold production and increase in costs. However, the value of this quality, long-life asset should not be diminished by virtue of this outcome. Despite lower cash flow based on the preliminary guidance, we remain confident in re-financing the balance of our convertible notes which is targeted to be below US$300 million at maturity in November 2017.”

 

Also, in the event that gold does see another massive leg down and we do somehow get back to a spot price around $1,050/oz, many of these producers will struggle mightily… No, I’m not referring to Detour Gold in particular, but any company out there that would be uneconomical or just barely scraping by at those low prices, will have trouble just trying to keep the lights on…

So, if we reach a state where a producer is only barely cash flow positive (or even NEGATIVE), and they’ve got a ton of bills to pay: debt service, OPEX — large staff and labor, taxes, royalties, exploration programs (e.g. joint venture pre-commitments), etc., and not to mention Wall Street breathing heavily down the neck, it can indeed be a very treacherous/precarious place to be…

And since many of these seniors/mid-tiers have gotten bid up so much this year, the drop from these elevated heights can get ugly real fast…

I mean, even with the most recent -45.9% decline in share price, Detour Gold still has a market cap of over C$3.3 billion!

If we were to try and compare apples-to-mangos, let’s take a look at how DGC.TO stacks up against some of my favorite developers/explorers at this exact moment in time.

screen-shot-2016-11-17-at-8-40-21-am

There’s still plenty of size left for the market to chop up DGC.TO some (a lot) more…

With that said, if gold does hit $1,050/oz (or even trend lower!), it’s ONLY AFTER that time will I start looking to pick up the “best of the best” mid-tiers… It’s ONLY AFTER the mid-tiers have been shredded will I go hunting for the lowest-cost producers who I’m confident can survive in even the most brutal of market conditions…

And if the above “doomsday” scenario never unfolds?

 

It’s all good.. I just won’t end up picking up any more mid-tiers…

 

On the flipside, when you’re dealing with developers/explorers, for the most part, these companies have minimal (or ZERO) debt to deal with, they have lean operations, and their burn rates are minuscule, by comparison to the producers… Should the spot price of gold come under attack, these companies can more or less “close up shop”, and wait for Happy Days to return again before resuming activities…

From Bear Creek Mining (January 27, 2016).

bear-creek-cost-cutting

Producers can’t really do the same because it’s so costly and a pain in the ass to put an operating mine on care and maintenance… In many instances, for producers, it actually makes more sense to bleed cash for a few/many months, as opposed to shutting down production and earning ZERO revenue, while at the same time having to deal with things like having to pay out employee severance packages…

Further, the junior developers/explorers are trading at such low market caps already, that eventually you’ll reach a plateau point where the share prices really can’t decline that much further… See, at least the consolation prize with a severe downtrend is this — ZERO is your absolute floor! If a developer/explorer has even a half-decent project under their belt, it’s almost 100% certain that the company won’t trade at ZERO!

For example, an early-stage explorer like Aton Resources (AAN.V/ANLBF) has a current market cap/EV of ~C$8.47 million

screen-shot-2016-11-17-at-11-59-42-am

Sure, in a market sell-off event, I could see valuations possibly getting slashed by 1/2… But beyond that?

I just seriously don’t see that happening…

At sub C$4.0 million, Aton Resources would be essentially trading at a market cap equivalent to their cash position… Yes, in late 2015 I did observe a few instances where some of these mining stocks sported a NEGATIVE enterprise value, but I really can’t fathom us entering that stage of insanity again (I do believe the late 2015/early 2016 window was one of those extremely rare “once in a blue moon/every few decades” type of buying opportunities)…

 

If it were to happen, though, I would be shocked beyond belief…

 

With developers/explorers, the only real fear to be concerned with is dilution… If a junior company runs short on cash, they will need to raise funds via placements, which means issuing out more shares… Ideally, you would hope that whatever management team is in place would be shrewd enough to plan ahead and keep a healthy enough cash balance on hand so that the company NEVER has to do financings at the bottom of the cycle when the share price is at its nadir… But like I said, these things can be hard to time, anticipate, and predict for anyone…

Lastly, when it comes to developer/explorers (explorers in particular), more times than not the drill bit does the bulk of the talking… In other words, even if the entire precious metals sector were to sell off but a junior “strikes gold” and makes an important (e.g. massive, high-grade, hugely economical, etc.) discovery in the process, the stock should still experience a significant re-rating, regardless…

Just check out how Reservoir Minerals (RMC.V) did during the duration of the last bear market in commodities (2011-2016).

screen-shot-2016-11-17-at-2-57-29-pm

RMC.V was able to deliver shareholders a staggering 1,438% return (from November 18, 2011 to June 24, 2016), by the time all was said and done and the company was taken out by Nevsun Resources (NSU) to the tune of $365 million.

From Nevsun Resources.

nevsun-acquisition

In contrast, during this same period of time, the majority of precious metals mining stocks (e.g. seniors, mid-tiers, developers, explorers, etc.) were all blowing up and crashing on the order of -70%, -80%, -90%, or worse…

The Market Vectors Junior Gold Miners ETF (GDXJ), on market close September 18, 2015, down -84.4% in a span of 5 years.

Screen Shot 2015-09-20 at 8.43.04 AM

 

It pays to discover… No joke!

 

In any case, if you’re an investor/speculator looking to get into some of these names, it would be in your best interest to do your own due diligence and research to try and pick out the best companies who are sufficiently funded to last awhile (and make good progress to create REAL shareholder value) before needing to go back to the till again…

 

Anyway, just sharing some thoughts with you all…

 

Obviously, I don’t have all the answers, and I’m very much a work-in-progress, trying to figure things out as we go…

 

Happy Hunting!

{ 8 comments… read them below or add one }

1 JCNo Gravatar November 16, 2016 at 8:48 pm

Some great info, been learning a lot from your recent posts. Thanks for spittin the knowledge.

Reply

2 FI FighterNo Gravatar November 29, 2016 at 1:23 am

JC,

You’re welcome! Thanks for reading and taking the time to comment!

Best wishes!

Reply

3 HristoNo Gravatar November 17, 2016 at 12:05 am

Hi Jay,

As of now, I consider all these forces that push the gold price down as temoporary phenomena. Yes, it looks like there is an optimism around Trump election and improved economic statistics. However, Trump is a pure populist and populism has never ever worked. As concerns accelerated growth and other economic measures, just look what is happening in the industrial sector or car sales. In my view, that is really temporary and problems in the economy are so many that there is no way all this to end well.

To me mining explorers and developers are also the better choice, especially those that have projects with high AISC. In the environment of falling gold prices, their projects reach unsistainable levels faster and the market quckly reflect it in the share price.

In that context, do you have some list with all mining stocks traded on NYSE and TSE. I have been searching for something like that without a success. Or in other way – how do you look for new investments?

Regards,
Hristo

Reply

4 FI FighterNo Gravatar November 29, 2016 at 1:26 am

Hristo,

Great points there, and I agree that all this volatility is just short-term “noise” if you will… The markets are still adjusting to the ramifications of the election and kind of just moving all over the place, looking to find an equilibrium…

I’m with you there and focused on the explorers and developers at this point in time… Right now, I also see a ton of value in some of those names.

In regards to individual selections, you can go over my portfolio and most of the names I like, I already own… On the TSX-V, I like companies like: Sarama Resources, Orca Gold, Sandspring Resources, GoldQuest Mining, etc…

As for the TSX, that’s a bit trickier since usually the companies on there are more mature and larger market caps… Off the top of my head, I do like Teranga Gold right now, although that’s more a producer than explorer/developer… Same with Red Eagle Mining… I do own Balmoral Resources which is a pure explorer in Quebec.

Hope that helps!

Reply

5 HristoNo Gravatar November 30, 2016 at 5:01 am

Hi Jay,

Thanks for the reply.

I am very well familiar with your portfolio :). However, I was more interested in case you have found a database or a comprehensive list of gold/silver mining stocks. In this case, I can check one by one and select those that are most suitable to me.

I have one list but it consists of the big gold producers and at the moment I am not looking for such kind of companies. At the same time, I have to search the small developers and explorers one by one.

Reply

6 mikeNo Gravatar November 17, 2016 at 10:11 am

what do you think about NUGT? Is it a good vehicle to play raising gold prices?

Reply

7 Tom VNo Gravatar November 22, 2016 at 1:29 pm

Hi all,
This is all excellent commentary. I agree that the lottery ticket money is going to be made on the explorers and juniors, the question is how to have access to insider info as well as quality research. I subscribe to mining stock journal at investment research dynamics. I’m building capital to deploy on the junior plays.

Regarding NUGT… Buyer beware. This is a 3x leveraged fund that utilizes options to get the results, therefore over time the underlying assets will decay. It is meant for short term directional plays ONLY. The junior miner equivalent is JNUG, and the inverse funds are DUST and JDST, if you are trying to hedge your longs, or playing the leveraged bearish direction.

I have not had much luck hedging with these due to their extreme volatility and the difficulty in timing these markets.

Moderator: you should also watch the USD-JPY, because unfortunately this is the number one correlated trade that moves the metals price. The more you research this, the more you will find that the it is the paper trade dynamics that move this market, and not the underlying physical fundamentals.

We shall endure!

Reply

8 FI FighterNo Gravatar November 29, 2016 at 1:29 am

Tom,

Thanks for the comment! I agree with your thoughts on the leveraged ETFs (NUGT, JNUG, DUST, JDST), they are time-decaying vehicles and suited for short-term trades, not long-term buy and holds… Holding those for any length of time is just asking for trouble…

Also, great points on USDJPY, which has been used as a carry trade for awhile now… The direction of that trend tends to shape where the overall stock market and metals prices are moving… Also worth watching are the bond yields and DXY, which I already pointed out above.

Best wishes!

Reply

Leave a Comment

 

{ 1 trackback }

Previous post:

Next post:

Copyright © 2012 FI Fighter