Wednesday, May 4, 2016

IAMGold Corp Sells All Of Its Gold Bullion - Good News For Gold Bugs

It is not the news of the day but I think it is worth mentioning in a single post. 

In 1Q 2016 IAMGold, a mid-tier miner, sold all of its gold bullion it had been holding since 2002. 

IAMGold was an exceptional gold miner - apart from producing gold, it was holding part of its cash reserves in the form of gold bullion. The first acquisition of gold took place in 2002. Let me cite the company (an excerpt from 2002 Annual Report):

"During 2002, the Company converted the majority of its corporate cash balances to gold bullion. As a result, the Company is exposed to changes in gold prices"

Then the company was increasing its gold bullion holdings. The only sale of gold was reported in 2009 - IAMGold sold 73.7 thousand ounces at the average price of $1,088 per ounce.
The chart below shows the history of the company's gold bullion holdings:

As I mentioned above, in 1Q 2016 all of IAMGold's bullion was sold at the average price of $1,260 per ounce. Because the book value of gold bullion was standing at $720.7 per ounce, IAMGold made a profit of $539.3 on each ounce of gold sold ($72.9 million, in total). 

The company commented:

"During this period of continued volatility and uncertainty in the price of gold, having strong liquidity remains a priority for IAMGOLD and its investors", said IAMGOLD President and CEO Steve Letwin.  "Selling the bullion at an average price of $1,260 per ounce crystallizes the benefit of the recent rise in the value of gold, without limiting our fundamental upside leverage to our profitability and cash flow at higher gold prices"

Well, in my opinion, it seems that the company's management behaves as a small gold investor, panicking at the bottoms. The sale of part of gold bullion in 2009, when gold was entering a new phase of a bull market, is a classical example. 

In 1Q 2016 the management did the same thing. However, this time it sold all gold bullion. I think that the company need not have done that. Apart from gold bullion, at the end of 1Q 2016 it was holding cash of $586.7 million and debt of $628.5 million. It means that IAMGold is far away from liquidity problems.

If history repeats, we should see a new phase of a bull run in gold.

Tuesday, May 3, 2016

Another Precious Metals-Related Company Reported Weak Results

Foraco is world's third largest mineral drilling company. Today it released its 1Q 2016 report. Similarly to Caterpillar and Sandvik, these results were very weak. 
On the other hand, in the case of Foraco, the first quarter of each year is always the weakest one. What is more, this time 1Q was additionally weaker than usually. Let me cite the company:

"Our Q1 was quite weak as our customers took in average one month more than last year to launch their tenders and associated drilling campaigns: this has delayed considerably the 2016 ramp up. This recent trend to compress most of the drilling budget into the last 3 quarters of the year was detected a couple of years ago, and has been amplified this year by the further decrease of metal prices seen in the last quarter of 2015"

The table below summarizes basic measures:

                                    source: Simple Digressions

In this article I do not want to present an in-depth analysis of Foraco. Quite contrary, I want to discuss a few metrics that are important to show the current performance of the entire precious metals sector.

And, after a quick look at Foraco, one may say that this performance is still far from what gold bugs are expecting.

Firstly, the average revenue per operating rig (ARPOR) is still very depressed. In 1Q 2016 each rig delivered the average revenue of $79.9 thousand (a decrease of 27.5%, compared to 1Q 2015). As a result, in 1Q 2016 ARPOR was standing at its lowest level since 2009 (revenue delivered in 1Q 2016, for presentation reasons, was recalculated into a full year):

                                      source: Simple Digressions

Another indication of an industry slump is the so-called "Utilization rate". According to Investopedia, "Utilization rate" is:

"A ratio used in the oil services industry that measures the amount of rigs being used as a total percentage of a company's entire fleet"

In the case of Foraco, in 1Q 2016 this rate was also standing at a very depressed level of 25% (28% in 1Q 2015).

Summarizing - 1Q 2016 results, delivered by Foraco, in no way were an indication of the end of the industry slump. 

Note: Foraco is a global driller but, due to the industry slump, in 2015 the company shifted its operations mainly to developed economies:

                                   source: Simple Digressions

As the chart shows, in 2011, during a bull market in precious metals, only 26% of revenue was attributable to developed economies (North America and Europe). In 2015 as much as 40% of revenue was earned in developed economies. 
Well, I think that the company had to do it. Of the current fleet of 302 rigs, as much as 212 rigs (70% of total fleet) are diamond drilling rigs. Diamond drilling is the most expensive type of drilling so only major mineral companies can afford it. And in 2015 majors were cutting their spending heavily, mainly in riskier regions; hence Foraco's higher involvement in developed economies. 

I think that when the industry recovers, the company will shift its operations to undeveloped economies once again. However, it will take some time. 

Therefore, I believe that smaller and more dynamic drilling companies, operating in the regions of high mineral mining activity as, for example, Africa (especially West Africa) offer much better investment opportunities.  

Monday, May 2, 2016

Newmarket Gold - Decent 1Q 2016 Results And One Problem

Newmarket Gold delivered quite decent results in 1Q 2016 (although, due to lower gold prices and higher production costs at two of its mines, Stawell and Cosmo, these results were worse than those reported in 1Q 2015). 

As usually, the Fosterville mine was a leader with gold production of 33,138 ounces (57.1% of total production). The excellency of Fosterville is demonstrated by the chart below:

                       source: Simple Digressions

Note that direct costs have been generally stable since 2013 (between $90 - $100 per ton of ore processed) but the value of gold, contained in one ton of ore (gold content), has been in a steady increase. As a result, Fosterville delivered gross margin of $135.7 per ton of ore in 1Q 2016, 93.6% up, compared to 2013. 
It means that this much higher 1Q 2016 gross margin was generated despite the fact that in the last quarter the company was selling its gold at much lower prices ($1,139 per ounce) than in 2013 ($1,407 per ounce). 
Simply put, apart from lower costs of production, the Fosterville mineral deposit is currently of much better quality (for example - higher grade) than in 2013. 


As I was writing in my previous articles on Newmarket, the Stawell mine is a laggard. The chart showing its economics looks totally different from Fosterville's one:

                                   source: Simple Digressions

Here the trend is unfavorable: costs are rising and gold content (value of gold contained in one ton of ore) is going down. As a result, in 1Q 2016 Stawell delivered negative gross margin (direct costs higher than metal value).

What is more, this mine has been delivering lower and lower amounts of gold since 2013 (for presentation reasons I have plotted the average gold production per quarter):

                                    source: Simple Digressions

Well, despite the fact that Stawell holds 166 thousand ounces of gold, classified as mineral reserves, it looks like this mine is a closed chapter. The last two quarters support this thesis - Stawell reported losses from mining operations: $146 thousand in 1Q 2016 and $400 thousand in 4Q 2015 so mining operations at this site were unprofitable.

However, the company is confident that things at Stawell should improve in the coming future. This assumptions is based on the last discovery of the Aurora B deposit:

source: the company's presentation (slide 19)

Let me cite the company (slide 29):

The Aurora targets are located on the East Flank of the Magdala Basalt, with the shallower Aurora B approximately 400-500 m below surface. The Magdala Basalt has approximate dimensions of 3km x 1km in plan view and previous mining at Stawell has almost exclusively been from mineralization on the West Basalt Flank. The West Flank at Stawell has produced over 2.3 million ounces of gold whereas the East Flank, where the Aurora B discovery is located, has no recorded production. Aurora A could extend north to sit immediately below Aurora B (~1,200mRL), representing a potentially continuous mineralised surface for potential mining activities.

Well, I would like to know the costs of production at the Aurora B deposit. As I noted above, the Stawell's problem lies rather in its production costs than in the size of a mineral deposit. Fortunately, ore grades reported at Aurora B, are much higher than those reported in the West Flank so who knows...maybe the company's management is right.

Financial and operating results

The table below summarizes the 1Q 2016 results:

Final note

In 1Q 2016 Newmarket redeemed all of its convertible debentures. As a result, now the company holds practically no debt. Additionally, at the end of 1Q 2016 it was holding $52.1 million in cash. What does it mean? Well, let me remind one of the four pillars of Newmarket strategy (slide 4):

With quite a large amount of cash, high creditworthiness and deep capital markets relationships Newmarket Gold is, in my opinion, ideally positioned to diversify into other mining activities, for example through an acquisition of another miner / junior company.

Sunday, May 1, 2016

U.S. Equities Seem To Be Topping Once Again

Playing stock market needs patience. Since 2009 the best idea was to hold long positions in stocks. However, since the beginning of 2015 the US stock market seems to be topping. What is more, the chart below shows that big speculators lost an interest in playing stocks even earlier - the open interest on VIX futures started to go down in the middle of 2014: 

Chart 1

                    source: COT Report and Simple Digressions

Note: VIX, a measure of stock prices volatility, together with stock market indices, is one of the most frequently used ways of playing the stock market

As I stated a few times before, any financial instrument, in order to go up, must be supported by increasing optimism among market players. In the case of VIX, this optimism is expressed by two factors:

  • the increased number of players opening new positions in VIX futures, resulting in higher open interest (chart 1). 
  • the increased net short position on VIX futures, held by speculators (chart 2)

However, if the open interest on VIX goes down and stock prices go up, it means that less players participate in this run. It is often an indication of the incoming correction in stock prices or even the trend reversal.

A dissipating optimism is supported by "Chart 1" - between the middle of 2014 and the end of 2015 the open interest on VIX futures went down from 450 thousand contracts to 250 thousand contracts (red line). Then suddenly, since the beginning of this year we have seen a rapid increase in open interest on VIX futures (an arrow in violet). It looks like the market players started betting on an abrupt  change in stock prices. However the question is - are stocks supposed to go down or up?

To answer this question, look at Chart 2:

Chart 2

         source: COT Report and Simple Digressions

The chart shows a net position on VIX futures, held by big speculators. It looks like now the speculators are betting on higher stock prices - they hold a net short position. And if anybody holds short position on VIX, it means that this player bets on lower VIX readings and higher stock prices because VIX goes opposite to stock prices (when VIX goes down, stock prices go up, basically). 

This net short position plus one of the highest readings in open interest on VIX are, in my opinion, a mixture supporting a bearish thesis on the US stock market. 

As "Chart 2" shows, most recently whenever speculators were holding relatively large net short positions on VIX futures the stock market was poised to go down soon.

Another chart (Chart 3) also supports this thesis. Now a ratio of short to long positions on VIX futures, held by speculators, is standing at around 1.5. Since late 2014 such readings were an indication of a top in the stock market:

Chart 3

                  source: COT Report and Simple Digressions

Friday, April 29, 2016

Precious Metals Portfolio - April Results

April has ended so it is time to report the returns delivered by my Precious Metals Portfolio.

As the chart shows, the Precious Metals Portfolio returned 42.3%, 13 percentage points above the return delivered by the broad precious metals market, represented by GDX. 

Somebody could ask: "Why such a high return"? 

Well, I would answer:

1. I was lucky
2. Fresnillo plc, Newmarket Gold, B2 Gold, Fortuna Silver and Richmont Mines are excellent companies
3. Currently we encounter an ongoing rally in the entire precious metals sector. 

After many years of a slump we see a counter-trend reaction. Some people say it is a bear market rally while the other people say it is the start of a new bull market. 
I personally do not know whether it is a bear market rally or a new bull market. Only time will tell. In my incoming posts I will be trying to monitor this market and deliver some insight into current developments. Please, visit my blog. I hope it will be a practical lesson for investors and myself.

O.K. Let me present a few other facts related to my portfolio.

The chart below shows returns delivered by each stock:

As the chart shows, Newmarket Gold is a leader - this stock delivered a return of 179.6%, since December 16, 2015. I am sure that my readers know this company very well - I have written a number of articles on this company so it should be well understood why this company is one of the best in the industry. 

The last chart shows the performance of my portfolio, GDX and the broad stock market, represented by S&P 500: 

It is clear that the entire precious metals market was a big winner in the last months.

Thursday, April 28, 2016

B2 Gold - At Today's Gold Prices This Company Should Perform Well In 2016

Today B2 Gold released its 1Q 2016 production report. Apart from presenting production results, the company made a statement that 1Q 2016 production was better than budget. To be precise, in 1Q 2016 B2 Gold produced more gold than in 1Q 2015 but less than in 4Q 2015. 

Well, let me leave the issue what comparison is better: to the previous quarter or to the same quarter one year ago. In my opinion, it is the trend in production that counts. And this trend is as follows:

In this post I want to discuss the economics of B2 Gold mines. 1Q 2016 report delivers nearly all data needed to measure the effectiveness of the all four mines, operated by the company. 

In my calculations I assume today's price of gold of $1,260 per ounce. Let me start from the Masbate mine, located in Philippines.


In 1Q 2016 the ore, processed at Masbate, was grading 1.26 grams per ton. The recovery rate of the Masbate mill was standing at 72.9% (this rate is quite low because Masbate processes the oxide / sulphide ore, of which the sulphide one is harder to mill). It means that one ton of ore contained 0.0295 ounces of gold. Assuming the price of gold of $1,260 per ounce, each ton of the ore milled contained gold of market value of $37.2. 

Now, taking another assumption that the cost of mining and processing the ore at Masbate stands at the average costs reported in 2015 ($18.9 per ton of ore) I may calculate how much the company could make on one ton of ore. The table below shows the entire calculation:

So, each ton of ore sold should have delivered a margin of $18.3.

Now, let me show the other mines:

According to my estimates (based on the company 2016 guidance), this year each mine should process the following amounts of material:

It looks that the most important mine is Otjikoto - this year it should process 3.8 million tons of ore. Due to the fact that each ton of ore should deliver a margin of $35.4, it means that this mine is going to show profit from mining operations of $134.8 million. The other mines should deliver the following profits:

  • Masbate: $111.5 million
  • La Libertad: $65.6 million
  • El Limon: $20.2 million

Totally: $332.1 million

Is it much? Well, in 2015 the company reported profit from mining operations of $254.3 million so, due to higher prices of gold and full production at Otjikoto, B2 Gold should increase its profit from mining operations by 30.6%.

Of course, this profit should go up if gold prices continue their rally. On the other hand, lower prices of gold will reduce this result very quickly.

Wednesday, April 27, 2016

Barrick Gold - New Business Model At Work

Yesterday Barrick Gold released its 1Q 2016 report. Barrick is one of the world's biggest miners so its results are closely tracked by the precious metals analysts. 
In this post I want to discuss a few issues, that, in my opinion, are crucial to understand this company.

First of all - production. 

In 1Q 2016 Barrick produced 1,280 thousand ounces of gold, 7.9% less than in 1Q 2015. Some people could comment that the company is shrinking but it is not the case. The table below shows Barrick's gold production per asset class:

As the table shows, the company's core mines (Cortez, Goldstrike, Pueblo Viejo, Lagunas Norte and Veladero) produced more gold in 1Q 2016 than in 1Q 2015 (900 thousand vs. 802 thousand ounces). 

Then, non-core mines (Turquoise Ridge, Porgera, Kalgoolrie, Acacia, Hemlo and Golden Sunlight) delivered, more or less, the same amount of gold. 

Lastly, divested / closed mines delivered much lower amount of gold but these assets, as their class name suggests, are out of consideration.

So I would say that in 1Q 2016 Barrick delivered more gold than a year ago. 

Did you know? Although Barrick is a very large miner, its production is founded on only three mines: 

In 1Q 2016 these three flagship mines, Cortez, Goldstrike and Pueblo Viejo, accounted for 74% of total attributable production, delivered by the company's core assets. 

Production costs

Since 2013 the company management has been able to decrease production costs from $1,037 to $972 per ounce of gold in 1Q 2016. The chart below shows production costs from a historical perspective. It is easy to spot that since 2014 the company's production costs have levelled off at around $965 per ounce of gold: 

Note: accounting costs are defined as mine operating costs + exploration and evaluation costs + corporate administration + project development expense + other costs)

Cash margin

Since 2014, despite a bear market in gold, Barrick was able to deliver stable cash margins. As the chart below shows, the company is generating around $300 - $330 in cash on each ounce of gold sold:

What is more, keeping in mind that in 1Q 2016 Barrick was producing gold at cash cost of $873 per ounce, it means that the price of gold would have to go down by around 30%, compared to today's price of $1,250 per ounce, to make Barrick cash flow negative. Simply put, Barrick is a relatively safe company.


This safety is also supported by the fact that since the end of 2012 Barrick has reduced its debt level from $13.9 billion to $9.1 billion at the end of 1Q 2016. 
According to the company, at the end of this year the debt level should be reduced to just $8.0 billion (slide 10 of the company's presentation). 

Financial and operating results

The table below shows basic financial and operating measures:

There are two issues I would like to comment:

  • despite the fact that in 1Q 2016 the company was selling its gold at lower prices than in 1Q 2015, both margins (gross margin and cash margin) were higher than in the previous year
  • in 1Q 2016 Barrick delivered free cash flow of $181 million (in 1Q 2015 the company burnt cash)

What next?

This year Barrick plans to deliver 5.0 - 5.5 million ounces of gold. In 2017 it should deliver a comparable amount of gold but in 2018 production is supposed to go down to just 4.85 million ounces. 

Well, comparing two charts (Barrick accounting costs and the forecast below) it looks like the company changed its business model from:

high production / high costs profile


lower production / lower costs and lower debt profile

In my opinion, it is a much safer model.