Thursday, August 25, 2016

Energold Drilling - Energy Division Overshadows The Company

Yesterday Energold Drilling released its 2Q 2016 results. The table below shows basic figures:

Generally, the company is still in a slump. Although there is some improvement in the Mineral Division (this business line offers drilling services mainly for precious metals companies) the Energy Division is in trouble. For example, in 2Q 2016 the company drilled 200 metres for oil sand companies. Well, I guess I would be able to drill more meters with my personal hand drill - it is just an evidence what problems Energold encounters as far as serious energy drilling is concerned.

I have written something about an improvement in mineral drilling. Look at the chart below - it shows basic operating measures reported by Mineral Division: 

source: Simple Digressions

It looks like this division encounters a slight improvement - since 2Q 2014 both operating measures (meters drilled and prices) have reached sort of plateau. 
Similarly to another drilling company, Geodrill, in 2Q 2016 the company had drilled more meters but at lower prices. I believe it may be a sign of the beginning of the recovery (slightly higher demand for drilling services but pricing power still at the mining companies).

Summarizing - I am not recommending Energold as a buying opportunity. It is not a pure precious metals related play. Apart from running its Mineral Division, the company is heavily involved in energy drilling and specialized industrial manufacturing. The latter two divisions are not doing well and, what is more, there are no signs that the situation in these sectors is going to improve. 

I am staying aside...

Wednesday, August 24, 2016

Precious Metals Correction Enters Its Panic Stage

It  looks that today precious metals investors started to panic. Nearly every mining company is being sold heavily. For example, big miners are down as follows (at the time of writing this post):
  • Goldcorp is down 3.5%
  • Newmont: 3.8%
  • Randgold: 3.6%
  • Barrick: 5.7%

As for smaller miners:
  • Fortuna: down 7.4%
  • Gold Resources: 7.2%
  • Endeavour Silver: 8.5%
  • B2 Gold: 4.6%
etc, etc

Now, look at the chart below:

The chart shows that GDXJ (ETF representing smaller mining companies) is still stronger than GDX (big miners) - it is indicative of the bull market in precious metals stocks (smaller companies go up faster than bigger ones).

Note also that GDXJ is very close to its important support at around $44 a share.

Of course, it is possible that the current correction will be much deeper but, trying to look at the big picture, in my opinion, today's price levels create the first major buying opportunity for those interested in increasing their long positions in precious metals stocks. Me included (added a few fresh positions today).

Another note (near NYSE closing time)

The chart below shows today's price action (gold and GDX):

Note, that gold is down around 0.9% while GDX is crashing. 

In my opinion, it is typical panic.

Monday, August 22, 2016

Fortuna Silver - Why Are You So Greedy, Boys?

Fortuna Silver is one of my five picks for this bull market in gold / silver.

However, the first thing each independent analyst has to do is to look for and report any strange behavior of a company covered by this analyst.

Unfortunately, Fortuna did such a thing in 2Q 2016. Due to higher silver prices, in 2Q 2016 the company delivered quite decent financial results. And what did the management do? It granted itself very high share-based payments.

Look at an excerpt from the last financial statement:

source: Fortuna Silver 2Q 2016 Financial Report

Firstly, look at the first line in red. Higher revenue resulted in much higher "Mine operating earnings". They went up from $10,402 thousand in 2Q 2015 to $15,917 thousand in 2Q 2016 (an increase of 53%). Quite a nice increase, indeed.

Now, look at the red circles. These are "Selling, general and administrative expenses". At this point the company's management made a very sad thing - it increased these costs from $5,471 thousand in 2Q 2015 to as much as $12,341 thousand in 2Q 2016 - an increase of 126%! On a per half-year basis there is a similar relationship - an increase of 101%.

Well, I do not like it at all. To show the scale of this misbehavior, look at the average "Selling, general and administrative expenses", on a per quarter basis, starting from 2009:

source: Simple Digressions

It looks that the management's greed is at its highest level since 2009.

Another excerpt shows a breakdown of "Selling, general and administrative expenses":

Look at the line "Share-based payments" and note that these costs went up from $1,195 thousand in 2Q 2015 to $8,031 thousand in 2Q 2016, nearly eightfold!

Well, the management may defend itself saying that these costs are non-cash expenses. No way. They are absolutely cash expenses but paid by other company's shareholders in the form of dilution (me included). 

Summarizing - I am changing my positive opinion on the company. While I still own these shares I no longer recommend them as a buying opportunity.

Sunday, August 21, 2016

Gold Still Shows Signs of Weakness

As I wrote on August 7, gold still shows signs of weakness. Let me show the current situation, taking GLD as an indicator:

Yellow areas indicate periods of weakness. During these periods gold outflows from GLD (red line going down). Note that during the current phase of the gold bull market the first period of weakness was between late March and the end of April. Now we have a similar situation - gold is going out of GLD vaults and the price of yellow metal is trading in a narrow range.

If history repeats, before gold prices start the next leg up we should see gold flowing into GLD (and the red line rising).

In my opinion, periods of weakness should be used to remodel our portfolios.
Next week I will try to present my opinion on this issue...

Saturday, August 20, 2016

Geodrill - An Idirect Exposure To The Precious Metals Market

Geodrill is one of my favorite companies indirectly exposed to the precious metals sector. To remind my readers - the company is active mainly in four African countries: Ghana, Burkina Faso, the Ivory Coast and Mali. Most recently these countries are encountering very high mining activity with a number of established, decent miners putting new gold mines online. I would say that Africa, especially its western part, is a place to be, as far as gold mining is considered.

A few days ago Geodrill released its 2Q 2016 report.

Let me summarize its results:

Well, the best thing is that the demand for the company's services is getting stronger. In 1H 2016 Geodrill drilled 391.8 thousand meters (a 47.2% increase, compared to 1H 2015):

However, the drilling prices were still lower than in 1H 2015 so it looks that we are at the very beginning of the gold cycle (higher demand for drilling services but drilling prices still well below their multi-year highs):

To mitigate the negative impact of still low prices, the company is cutting its direct costs of drilling (from $57.3 per one meter in 1H 2015 to $49.7 in 1H 2016, a drop of 13.3%).

Now, the best part. This year Geodrill shares went strongly up:

What is more, these shares were even stronger than precious metal miners shares (represented by GDX).

Despite this excellent performance, in my opinion, Geodrill is still cheap. For example, now its shares are trading at an EV / EBITDA multiple of 5.3 (it is much lower valuation than that offered by gold / silver stocks).

Last but not least - one of the biggest Geodrill shareholders, Maxam Opportunities Fund, took advantage of high share prices and on August 16 sold part of its stake (look at the high volume on the lower panel of the chart). Well, these guys are real investment masters - they bought 5.8 million of Geodrill shares in November 2015 (when nobody was interested in anything related to gold), paying C$0.45 a share, and sold 1.5 million shares in August for C$2.10 a share. Nice deal.

Thursday, August 18, 2016

Wesdome Gold Mines: Not Everything Is Fine

After the 1Q 2016 disaster, in the last quarter Wesdome Gold delivered much better results. However, the company is still quite far from its "business as usual" performance.

Let me show just one chart:

                              source: Simple Digressions

The chart shows cash cost of production (direct costs  of mining and milling per ounce of gold sold), starting from 1Q 2015. Note that in 2Q 2016 Wesdome was still incurring quite high costs of production to extract its gold. The progress visible in 2015 (costs going down) was stopped this year.

I guess this mess may last. Remember that there is a new CEO, Mr. Middlemiss.  Usually, in hard times, when a company has problems and changes in the management board occur, it takes time to make things better.

Let me cite the company (Wesdome's report page 3):

"Mr. Middlemiss has extensive mine management and planning experience. A review of operations, including these recent developments, will refine the existing guidance in Q3 2016"
It looks like the company is preparing Wesdome's investors for a cut in 2016 Outlook. To remind my readers, according to this guidance, the company should deliver 54,000 - 60,000 ounces of gold in 2016. In 1H 2016 it delivered 20,183 ounces so it should have been delivering around 17 thousand ounces per each of remaining quarters of 2016. I doubt it.

On the other hand, Wesdome has just started mining in the totally new zone of Eagle River:

"We have now opened up three parallel zones in the western portion of the Eagle River Mine. Of particular interest currently is a sill drift on the 300 Zone which has encountered 140 m of strong grades and continues west beyond available drilling information"
New zones may bring big surprises so, who knows...

The current state of uncertainty is well evidenced by Wesdome share prices action:


Shortly after hitting its three year high at around C$2.20, the company's shares went quickly down to their strong support at C$1.55.

What is more, the upper panel of the chart shows that this year Wesdome shares were one of the worst performers among gold / silver plays.  

I do think that Mr. Market is wrong. In my opinion, Wesdome is a very decent company and its short - term problems create a nice buying opportunity.

On the other hand, keep in mind that Resolute Fund, the unsatisfied company's shareholder, most recently sold a large stake in the company - surely this event increased the selling pressure (by the way, this fund sold its shares at very good prices - near multi - year highs). Now it looks like there is no big selling (low volume) so either Resolute stopped its campaign or it is going to show us another, much better, buying opportunity.

Last but not least - the lower prices of Wesdome 's shares the better buying opportunity for a potential acquirer. 

Wednesday, August 17, 2016

Despite Weaker 2Q 2016 Results, Richmont Mines Still Looks Good

In my last article on Richmont Mines I claimed that 2Q 2016 results should have been weaker than before. And they were:

                                    source: Simple Digressions

Generally, all financial measures were worse than those reported in 1Q 2016. Currently the company is in its transition period - it goes deeper at its flagship property, Island Gold. However, it will take some time to start mining operations at high - grade Lower Zone of the Island Gold Mine. Hence, weaker results.

To mitigate these negatives, in 2Q 2016 Richmont sold more gold than it produced (23,320 ounces of gold produced vs. 24,888 ounces of gold sold).

In my opinion, it was the right decision - the management took advantage of higher gold prices.  This higher amount of gold sold had a major impact on better financial results than I forecasted (in my forecast I assumed that the company would have sold the same amount of gold it produced).

The table below shows the actual results compared to my forecast:

                               source: Simple Digressions

As the table shows, in 2Q 2016 the company's sales were C$40,618 thousand, a little bit higher than my forecast of C$37,970 thousand. On the other hand, direct costs of mining were very close to my forecast.

What now? To be honest, although 2Q 2016 was weaker than 1Q 2016, generally, the last quarter was similar to previous quarters. Or, better said, 1Q 2016 was an exceptional period. So, in my opinion, there are no signs of an incoming deterioration in the company's performance. Quite contrary - in the long-term Richmont is still an excellent play.

The best evidence of this thesis is the fact that the company sustains its 2016 production guidance - it should deliver 87,000 - 97,000 ounces of gold.

That is why I still own Richmont shares.