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Precious Metals: The Final Tranche (February 10, 2016)

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What a wild week in the markets! I didn’t get a chance to update during the week, but here’s a recap of everything that’s happened.

First off, as I mentioned previously, my investing days are just about over… I’ve worked really hard over the last 6 months or so to best position my portfolio for future success. Although there are never any guarantees when it comes to investing, I’ve really done just about everything that I can think of… So, whatever happens from this point on, happens…

No regrets…

With that said, lately, I’ve been somewhat active in the market buying puts (the market has been CLEARLY moving in a downtrend)… Granted, I ONLY do this with gambling money that I can afford to lose… Over the last month or so, many of my bets have paid off, and I’ve made some rather significant gains trading… Rather than just sit on the cash gains (or redeploy recklessly buying more puts), I made the somewhat “rash decision” this past week to siphon profits (realized gains) into more mining stocks…

To be clear, my perspective still remains the same — With my income and cash flow, my primary focus at this time is to continue to build up my cash reserves.

Any little extra that comes in is just gravy…

I made the following purchases BEFORE the massive $50+ gold spike occurred on Thursday, February 11 (call it dumb luck):

  • Purchased 2,000 shares of B2Gold (BTG)
  • Purchased 15,000 shares of Ivanhoe Mines (IVPAF)
  • Purchased 500 shares of Pretium Resources (PVG)
  • Purchased 15,000 shares of Teranga Gold (TGZ.TO)

 

I wasn’t planning on being so active, but when I noticed the spot price of gold dip from about $1,190/oz to $1,180/oz, on Wednesday morning, I had every reason to believe that another “smackdown” in gold was near imminent on the horizon…

But by mid-day, the price had completely recovered and gold was holding firm at $1,190/oz

Hmm, very interesting, I thought…

So, at that exact moment, I tuned in to my mining portfolio, and looked for stocks that were still trading at attractive levels. As noted above, those are the purchases I decided to make.

Well, then Thursday happened, and we are now off to the races…

Yesterday, I received many texts, comments, e-mails from: friends, family, readers, etc. Thank you everyone for all the support, and I’m glad many of you are pumped with the latest rally…  I’m still weeks behind on my e-mails, so please bear with me as I look to get caught up this weekend!

At this time, I’m not going to overreact too much, but it most definitely looks like the tide is starting to turn…

Could gold get smacked back down to $1,050/oz? Well, many pundits on the mainstream media are still standing by their calls of sub $1,000/oz, so it’s obvious that the sentiment towards precious metals is still very negative…

I really don’t care either way… My plan all along was to get well positioned before the masses started to move in… If gold gets whacked again, I will have plenty of ammo sitting on the sidelines to load up BIG!

But objectively speaking, the downward trend looks broken, so I would find it very unlikely that gold would reverse course so dramatically to set lower lows…

Gold didn’t just nudge passed $1,200/oz, it pierced right through it!

Screen Shot 2016-02-13 at 11.16.20 AM

For anyone who follows the mining stocks closely, they have been extremely resilient on days when gold isn’t up, and many stocks are positing double digit gains on days when gold is rising.

Is this the start of a new bull market in gold?

It looks like it, but I still think it’s too early to say for certain at this point…

Here’s a year-to-date (YTD) chart showing the performance of the best Canadian mid-tiers:

Screen Shot 2016-02-13 at 9.25.16 AM

Pretty incredible performance from the likes of:

  • Lake Shore Gold (LSG); up 53.00%
  • Richmont Mines (RIC); up 47.35%
  • Kirkland Lake Gold (KGI.TO); up 40.70%
  • Claude Resources (CRJ.TO); up 48.71%

Pretium Resources (PVG); up 3.77%, is not yet a mid-tier producer, but I will discuss it more in this post, so I plotted its performance for reference.

I still own LSG. I’ve gotten some e-mails from readers asking me about my thoughts on the recent acquisition made by Tahoe Resource (TAHO) to acquire LSG.

Here’s my take:

I’m NOT supportive of the merger at all. I think LSG is one of the best mid-tier plays on the market: highly profitable, strong balance sheet, wonderful jurisdiction, solid management, and great exploration potential.

I’m not a fan of TAHO and one of the main reasons I got into LSG so aggressively was I wanted to own shares of a company that operated solely in a first-world jurisdiction (I’ve already got enough “risky” plays in motion). The “safe play” card is not the case with TAHO (they operate in South America; Escobal Mine is in Guatemala). Further, the terms of the deal look lackluster (especially now with the price of gold soaring) for LSG shareholders…

I’m hopeful that the deal gets voted down by shareholders, or another bid comes in that trumps the TAHO proposal…

For now, I’m still holding my LSG shares…

 

Moving on, here are my biggest regrets/mistakes made as it pertains to gold mining stocks:

  • Did not aggressively load up on some of my best ideas.
  • Didn’t prioritize: “Location, Location, Location” enough. Not even close.
  • Bought high and sold low too often.

 

When it comes to the first bullet point, point blank, I should have bought more shares of: True Gold (TGM.V), Red Eagle Mining (RD.V), and Newmarket Gold (NMI.TO) when I had the chance. Those were some of my best ideas, but instead, I chose to dance around with some of the bigger, more liquid names trading on the NYSE, such as Eldorado Gold (EGO). With the benefit of hindsight, I can now vividly see that the best gains are made with the smaller microcap (essentially) juniors… I mean, you don’t necessarily have to speculate in the pure exploration stories, or early-stage projects (highest reward, most risk), but even the late-stage development companies (TGM.V, RD.V) can still provide tremendous upside (with less risk). Lesson learned.

Recently, I sold off shares of RIC to book short-term profits, and now I feel like a total idiot… Now that LSG may merge with TAHO, I may no longer own any pure Canadian mid-tier plays… One thing I’ve learned since getting into mining stocks is this — The market will pay a HUGE premium for the safest and best jurisdictions (particularly Canada).

Looking back, I should have known better and not only have held onto shares of RIC, but I should have loaded up big on KGI.TO, and/or CRJ.TO last summer, when I first began putting together my mining portfolio.

For sure, KGI.TO… Lesson learned… Just like with real estate, in the end, it’s always about: location, location, location!

Lastly, in the future, regardless of what asset class I decide to purchase, I really need to work on my market timing… I know it’s impossible to time these things perfectly, but I really overpaid on too many occasions (similar to real estate) for these stocks. At times when I had the most conviction, I had limited, or no access to liquid funds… On the other hand, just as luck would have it, I always seemed to have been best positioned to make a move after a massive run up… So, I’ve learned that liquidity is key… Buy in tranches, and never go “all in” all at once… Prices can, and in fact often do go a lot lower than anyone would have ever expected! Another painful lesson learned…

Until next time… I’m going to start easing up on my shorts (puts), and unless I get stupid lucky again, I really can’t see myself adding more mining shares to the portfolio… I’ve got plenty of mining shares already, so I am in no rush to buy more… I arrived at the train station many, many hours ago… If the train wants to start moving, let it rip!

As I’ve said all along — I have no clue how to figure out if a legitimate bull rally is starting or if its another head fake… So, I never bothered to try and figure it out… From the time I started investing in the gold space, I always rationalized that the shares were cheap enough where it didn’t matter if I had to catch falling knives until the tide turned… 

 

I still stand by all that..

 

But if these stocks retract 50% again, well, then all bets are off and I will back up the truck yet again! 🙂

 

At this moment in time, “bargains” are becoming harder to come by, but I still like the following stocks for value (these are my top picks when someone asks me about “what stocks to buy”):

  • B2Gold (BTG)
  • Pretium Resources (PVG)
  • Newmarket Gold (NMI.TO)

BTG is one of my favorite mid-tier producers, and it really looks cheap at these levels, relative to some of its peers, like IAMGOLD (IAG), which has been on FIRE lately! I think the markets are still pricing in the uncertainty regarding any future financing events that may, or may not take place to put the Fekola Mine into production… But if gold keeps rising sharply, this issue becomes much less of a problem with each passing day…

As shown on the chart above, while all the Canadian mid-tiers have exploded upwards in excess of 40%+ gains, PVG (a development stage story) has only moved up 4% YTD. PVG is highly more speculative (and therefore risky), but I would argue that it provides better upside potential and value at this stage of the game, relative to other Canadian companies already in production (KGI.TO, LSG, RIC, CRJ.TO). Of course, until the Brucejack deposit goes into production (or nears it), the market will price in a pretty substantial discount, and justifiably so; I think everyone is now leery of the potential for another “high grade” discovery to go belly up like Rubicon Minerals (RBY). Don’t get me wrong, I think the Pretium management team did everything right to advance the project through to construction, but until the cash register rings, and the production numbers meet/exceed guidance, the market should be skeptical. But unlike RBY, PVG did perform bulk sampling to ease concerns/confirm numbers, and completed a feasibility study. Further, PVG has the backing of some major players (Silver Standard Resources, Liberty Metals and Mining, Orion/Blackstone, etc. Also, Zijin Mining was willing to sink C$81 million into this story, so that’s of course encouraging; you would think that the pros would have done more than their own fair share of due diligence to dot their i’s and cross their t’s… But like I said, it ain’t a slam dunk until it is… For you risk-takers, that could mean a re-rating and lots of upside potential, if things do indeed work out…

NMI.TO is one of my favorite mid-tiers; this is an Australian producer (first world jurisdiction) that is still highly undervalued. The company produces ~200,000 oz/year, and in addition, you’re getting a very strong management team running the show. Drilling at the flagship Fostervile Mine also continues to make new discoveries (very late in the stage of its mine life), which is providing a nice higher-grade boost to the bottom line. The current enterprise value of ~C$220 million looks very low for all the pros associated with this company.

Anyway, those are just some of my thoughts… Please do you own due diligence, as ALWAYS, before making any kind of investment decision!

 

Until then, I hope everyone: friends, family, readers, etc. enjoy the ride up!

 

Fight On!

{ 8 comments… add one }
  • No Nonsense LandlordNo Gravatar February 13, 2016, 4:16 pm

    I would be thinking of unloading some of the winners. Typically gold and gold miners are not good long term investments. Take your gains.

    Remember, Bulls make money, bears make money and hog get slaughtered..

    • FI FighterNo Gravatar February 13, 2016, 6:37 pm

      Eric,

      It’s always prudent to take some gains off the table, which I have done from time to time. In this case, I did that yet again by closing put positions and using the proceeds to buy more shares.

      However, I would add this caveat — In the event of a significant trend reversal, I ain’t selling anything.

      As far as my investing career, I only know how to invest like a hog, whether in a bull or bear market. Pigs get fat and that’s what I’m trying to do!

      Cheers!

  • SeanNo Gravatar February 14, 2016, 5:32 pm

    Another possibility is that we get another down leg in gold but the miners (valued similarly to gold 200-300 dollars back in 1999) have bottomed or increase in to the decline. From what I have read mining companies tend to bottom prior to commodity. My understanding is as money starts moving in to the sector, the shorts leave, releasing the suppressed price.
    I sold my positions in cde and kgc on Friday for small profit.
    Will be interesting to see how the gold and miners mover over next several weeks.

    • FI FighterNo Gravatar February 15, 2016, 10:40 am

      Sean,

      Yeah, I’ve heard the same as well, and it really looks like the miners have bottomed, for sure… With gold, if it can consolidate around $1,200/oz and build new support, I don’t think it would take much to push it north of $1,300/oz.

      Kind of interesting to watch this all play out. The S&P 500 is making lower highs and setting lower lows… Gold is making higher highs and setting higher lows.

      Good call on booking some short-term profits. You got in at the BOTTOM, so congrats on those excellent moves!

      Cheers!

  • JamesNo Gravatar February 14, 2016, 8:41 pm

    Thoughts on new gold? Not a huge producer but being close to being monetized I’m enthused…

    • FI FighterNo Gravatar February 15, 2016, 10:42 am

      James,

      New Gold isn’t one of my best ideas, but it’s a quality company with great management and they operate in 1st world jurisdictions. The projects and current valuation don’t really do it for me, but I was a HUGE fan when it dropped to around $1.80/share… I like it closer to $2.00 than to $3.00, where it is now.

      I don’t think you can go wrong with it though, it will do very well in the next bull run.

      Take care!

      • JamesNo Gravatar February 15, 2016, 10:44 am

        And true gold?

        • FI FighterNo Gravatar February 15, 2016, 10:56 am

          True Gold (TGM.V) was a real bargain at C$0.15/share, sub C$70 million market cap… My cost basis is C$0.20/share, and even at that level, I should have backed up the truck more… I knew it was a good deal.

          Where it trades today, around C$0.33/share and C$133 million market cap, I still like it, but the market has re-rated it, which makes sense since they are on the verge of production now.

          Last week, the market cap of TGM.V wasn’t much smaller than Teranga Gold (TGZ.TO), another West Africa peer, when Teranga was at C$0.46/share (market cap was sub C$200 million). Since Teranga is a proven producer, has a very strong balance sheet (EV = C$177 million now), and is a 200,000 oz/year producer (True Gold is projecting around ~120,000 oz/year, initially), I had to go with TGZ.TO, instead. Plus, Senegal beats Burkina Faso when it comes to jurisdiction.

          But I do like the exploration potential of True Gold more…

          After Friday, shares of Teranga have risen to C$0.55/share, so the delta between the two companies has widened, and now I’m neutral on both.

          Long story short, I like both companies and I own both. But I think it’s always important to pay attention to the peer group when evaluating companies… Endeavour Mining (EDV.TO), for example, has exploded upward, which is why I sadly don’t own any shares.

          Hope that helps 🙂

          Cheers!

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