Thursday, June 30, 2016

My Precious Metals Portfolio - June 2016 Update

In June the precious metals market continued its bull run. Gold went up 8.7% but the absolute winner was silver - 17.1% up. 

My model precious metals stocks portfolio increased its value by 25.8% (3.1 percentage points above GDX):

Below you will find the results delivered by my portfolio, GDX and a broad stock market (represented by S&P 500) since inception: 

In June it was Fresnillo that delivered the highest return. The sleeping silver / gold giant woke up and made 49.7% (measured in US dollars) - in my opinion, it was an outstanding result, taking into account the size of the company (market cap $16.1 billion):

Well, the above presented results confirm the fact that the entire precious metals market is in its bull stage.  

Wednesday, June 29, 2016

Checking My Negative Articles On Precious Metals Miners

Most recently I have published a few negative articles on a few mining stocks (some of these articles were published on Seeking Alpha and some on this blog).

However, because there is an ongoing bull market in gold and gold - related stocks, it is no sense to short these shares. Even if they are not as good as other miners, they will probably go up. Why? Because, basically, a furious bull market lifts all stocks, no matter whether the companies standing behind them are decent or hopeless ones.

Therefore the only chance to check whether my negative outlook is worth anything is to measure the relative strength of a specific stock against the broad precious metals market.

Let me check myself (and I will be doing it from time to time). And let GDX represent the broad precious metals stock market.

The following companies were awarded with my negative outlook:

  • IAMGold - article on IAG was published on June 24, 2016
  • Endeavour Mining - June 19, 2016
  • Banro Corp - January 6, 2016
  • Energold - June 14, 2016
  • Gold Resource (GORO) - March 9, 2016

Now, the chart below shows the relative strength of the above listed stocks against GDX:

Well, it looks like I have been right on IAMGold, Banro and Energold. All these stocks were weaker than GDX. 

On the other hand, I have been wrong on Gold Resource (stronger than GDX by 23.1 percentage points) and neither wrong nor right about Endeavour Mining.


Monday, June 27, 2016

Oh Britain

The British are unlucky. After saying no to the European Union, today Britain was downgraded by two rating agencies, S&P and Fitch.

The main British stock market index, FTSE 100 is 2.55% down today (the second down - day after Brexit). 

Quite interestingly, since March 2009 FTSE has gained 69%. However, it gained only 55% when the result is measured in US dollars (it means that an American investor would earn only 55% if he / she invested in FTSE 100): 

Further, the British Pound lost 11.8% against the US dollar since last Friday (yellow area):

Etc. etc.

Finally, today England lost to Iceland at EURO 2016 Championship. After Brexit there is EUROxit. 

Oh boy...

Sunday, June 26, 2016

One Of The Highest Gold Inflows Into GLD After Brexit Results

In my opinion, there are still no indications that the ongoing bull rush in precious metals is going to pause or end. 

Quite contrary, apart from the usual activity visible in COT reports (the charts below), the investors, horrified by the British Brexit, loaded up large quantities of gold:


The chart above shows gold in / out flows, reported by GLD. Last Friday (the day after the Brexit vote; I remind the heavy sleepers - the British voted to leave the European Union) GLD reported one of its highest gold inflows  - as many as 18.4 tonnes of gold (592 thousand troy ounces) went into GLD vaults.

As a matter of fact, there were only four cases when GLD reported higher inflows during the current bull market in gold:

  • December 18,2016: an inflow of 603 thousand ounces
  • February 19, 2016: 622 thousand
  • February 22, 2016: 622 thousand, once again
  • May 2, 2016: 669 thousand

Finally, to make my readers informed - below you will find the updated charts showing net positions held by speculators in gold / silver futures:

source: COT Report

source: COT Report

Friday, June 24, 2016

Investors Do Not Believe The British Economy Will Suffer Due To Brexit

It looks like the investors do not believe that the Brexit is going to have a significant impact on the British economy. 

For example, today, in the morning, the 10 year gilt yields (gilts are bonds issued by the British government) dropped 25% in heavy trading:

However, in my opinion, investors took advantage of this event and used much lower exchange rates between the British Pound and other currencies to buy gilts. 

Let me present a short analysis of this event, taking the American investor as an example. 

The 10 year gilt bears a coupon of 2%:

source: Bloomberg

Let us assume that the investor is buying the 10 year gilt at 7.38 a.m. paying 108.08 pounds. Here are cash flows embedded into this deal:

An internal rate of return for the above case is 1.14%. It means that an investor buying a 10 year gilt today and holding it until redemption will earn 1.14% a year.

Yesterday a 10 year US bond was yielding 1.69%. Assuming that an American investor wants to earn at least 1.69% on buying gilts for US dollars (why would this investor want to earn less?) let me check what exchange rate between the British pound and the US dollar would have to be to fulfill this scenario.

The cash flow is below:

Note, that today in the morning the exchange rate GBP / USD was 1.36981:1 so an American investor paid US$148.05 for a gilt worth GBP108.08.

To earn 1.69%, the exchange rate has to be standing at 1.44, which means that American investors think that in the coming years the British Pound should go up 5.1% against the US dollar (1.44 : 1.36981), on average.

I have no idea whether an American investor is right about it but he / she surely expects that the British Pound should go up. 

On the other hand, if that is the case, investors are trying to take advantage of the fact that the British Pound slumped to lowest levels since 1985: 

Well, I am curious what George Soros thinks about it.

Wednesday, June 22, 2016

Wesdome Gold - No News But The Charts Are Telling There Is Something Big In The Making

Since the Annual Meeting there is no news from Wesdome Gold. However, many things are happening as far as Wesdome share price action is concerned:

Note the following events:

  • The upper panel shows that since middle 2013 Wesdome shares have been stronger than the broad precious metals market, represented by GDX (the way I present the chart is a little bit unorthodox - GDX is expressed in US dollars while WDO.TO chart is in Canadian dollars - well, there is no Wesdome chart available in US dollars)
  • the panel in the middle shows that Wesdome shares are trading in rectangles. Firstly, they were trading in the rectangle 1, then, after breaking up, they started trading in the rectangle 2 etc. - well, the pattern is quite simple
  • the lower panel shows that, starting from late 2015, the trading volume went strongly up. You can spot similar patterns looking at the charts of other small-cap miners but Wesdome beats them all. Here the increase in volume is particularly impressive.
Summarizing - although there is no news from the company, the trading activity indicates that something big is happening...

Tuesday, June 21, 2016

Teranga And Gryphon Deal - Additional Remarks

Today I published an article on an acquisition of Gryphon Minerals by Teranga Gold. The article is available at Seeking Alpha website

The main thesis presented there is that it is a nice deal but only for Teranga. 
To remind my readers, Teranga is going to acquire Gryphon (with its flagship project called Banfora and located in Burkina Faso) for around US$49.1 million.
However, according to my calculations Gryphon is worth at least US$148 million.

That is why I think that Gryphon shareholders should say "NO" to this deal.

On the other hand, I cannot comprehend why the Gryphon management accepted this offer. For example, let me look at what the Gryphon shareholders put into the company over past years. 

The best place to find this figure is the company's consolidated statement of financial position, especially the issues included in the line called "Equity":

source: Gryphon 2015 Annual Report

The graph shows the figures as of the end of 2015. 

Summing up the following figures, I may find out how much money the Gryphon shareholders invested into the company:

  • Contributed equity: A$229.0 million
  • Accumulated losses: A$215.8 million
  • Total investment: A$444.8 million

So the Gryphon shareholders invested around A$444.8 million. 

It is around US$333.6 million, using the exchange rate between the Australian dollar and the US dollar of 0.75:1.

And today, when West African deposits are in fashion (read: there is high demand on them), the Gryphon management wants to sell the company for US$49.1 million. 

Additional remarks (added on June 22):

At this point, don't get me wrong. I do not mean that the Gryphon management has to sell the company at around US$333 million. No way, the company is not worth that amount of money. All I want to say is this: in my opinion, the price should be somewhere between the Teranga's offer (US$49.1 million) and the fair value (US$148 million).