Tuesday, July 26, 2016

Eric Sprott Increases His Stake In Excellon Resources

Excellon announced today that Eric Sprott, a notable Canadian resource investor, acquired 5.83 million units at a price of C$1.15 per unit.

Each unit comprises of one common share and one half of one Share purchase warrant.
Together with previously acquired units, Mr. Sprott now owns and controls 14.43 million common shares and 6.25 million purchase warrants representing around 25.5% of the outstanding shares on partially - diluted basis. 

According to the company, it intends to use this cash to:

"...fund accelerated exploration at the Platosa Project, for capital expenditures at the Platosa Mine and Miguel Auza Mill, for working capital expenses and for general corporate purposes"
To remind my readers, in April Mr. Sprott acquired his first tranche of Excellon shares paying C$0.45 per share. Now, after a dramatic increase in Excellon share prices (look at the chart below), he still thinks these shares offer value.
                                             source: www.stockcharts.com 

Fresnillo Silver Mine - Deteriorating Asset

Fresnillo plc took its name from the Fresnillo mine, a giant silver operation. Quite interesting but this mine has been in operation since 1554 when one of the Spanish conquistadores started mining silver up there.

Once the company's flagship property, these days the Fresnillo mine is the third most important asset. In 2015 two other mines, Saucito and Herradura, reported higher revenue than Fresnillo.

Although the company tries to improve Fresnillo, this operation is deteriorating.

Let me show this slow but negative process in the long-term perspective.

Fresnillo is mainly a silver operation. Let me assume that all silver, delivered by the Fresnillo mine, was being sold at $15.55 per ounce, the average gross price of silver realized in 2015. If that was the case Fresnillo would deliver the following revenue, calculated per ton of ore processed:

How to read this chart? For example, if in 2005 silver was trading at $15.55 per ounce the company could get $240 per each ton of ore processed at Fresnillo.

In 2015, ten years later, it could get only $101 per each tone of ore processed.

As the chart shows, the deterioration is substantial and its main reason are lower grades reported at Fresnillo:

In 2005 the ore processed at Fresnillo contained 524 grams of silver while in 2015 there were only 220 grams of silver.

In 1H 2016 this negative trend stopped (at least for a while) - the company was processing the ore grading 234 grams of silver per ton. However, in my opinion, the magnificent Fresnillo mine's performance is a thing of the past...

Monday, July 25, 2016

Dundee Precious Metals - Power Outages In Namibia Are A Risk Factor

Today Dundee Precious Metals announced that its smelter, located in Tsumeb, Namibia, encountered a power outage. Well, I have made a quick research on this issue and it looks like power outages in Namibia are quite a common event.

I believe that DPM is prepared for such events and the company has signed a proper insurance policy. However, the last announcement reveals that the Friday's outage made some serious damage to the smelter. The company writes:

"...cooling water entered the Ausmelt furnace as a result of the back-up systems for power and cooling water not operating as expected, which compromised the integrity of the refractory lining. As a consequence, and following initial inspections completed on Sunday, July 24, 2016, management believes that the refractory lining will need to be fully replaced.
This outage is expected to reduce 2016 concentrate throughput by approximately 20,000 tonnes. The vast majority of the costs associated with repairing the physical damage are expected to be covered through the Company's insurance program. The response taken by operations management during this event ensured that no one was placed at risk during the outage"

To remind my readers, DPM planned to process 215 - 250 thousand metric tonnes of concentrate at Tsumeb so a 20 thousand tonnes reduction means a 10% lower output (and 2016 revenue lower by around $12 million).

Apart from the loss in revenue, the company has to make some serious repairs.
According to the announcement above, the costs associated with repairs should be covered by insurance policy. But what about the lost revenue? The company did not comment on that issue.

Market reaction

Market reaction on that news was, in my opinion, fairly negligible. DPM share prices lost 4.58% on the Toronto Stock Exchange. The broad market, represented by GDX lost 3.65%

Fresnillo plc - Overvalued In The Short - Term

Fresnillo plc is the largest world’s silver producer. Most recently the company’s shares benefited from the current bull market in silver and since the beginning of 2016 they appreciated by 155%. 

In my opinion, it is quite a significant increase, especially when it is realized that Fresnillo is a giant miner. With its market capitalization of $17.6 billion, the company ranks among such heavyweights as Barrick ($23.9 billion), Newmont ($21.3 billion) or Goldcorp ($14.9 billion). Of these giants only Barrick appreciated more than Fresnillo – since the beginning of 2016 this company increased 169% in its market cap.

Is that outstanding share price increase justified? In my opinion, it is not. I like Fresnillo – the company is well – managed, profitable even during down-turns and has a few very interesting projects under development / construction. What is more – Fresnillo accounts for a large part of my model precious metals stocks portfolio (together with B2 Gold, Richmont Mines, Fortuna Silver and Newmarket Gold). So what is the problem?

Investment thesis

Well, in my opinion, in the short-term Fresnillo shares are currently overvalued against its peers. Additionally, Fresnillo's 1H 2016 results should be a kind of a negative surprise. Therefore, my investment thesis is:

“Do not buy these shares now”

1H 2016 results – my forecast

On July 20, 2016 the company announced its 1H 2016 production results:

As the table shows, the company increased its production substantially. Paradoxically, the lowest increase was in the silver segment. I say “paradoxically” because Fresnillo is perceived as a silver producer. 

However, it is no longer a case. In 2015 the company sold gold for $827 million while silver sales were just $617 million. What is more, even putting the San Julian mine on line (it will be a silver producing operation) should not change the company’s profile – gold is going to be the main metal delivered by Fresnillo.

Metals produced by the company were sold at the following gross prices (it is my estimate – the company did not disclose these prices):

And here is the first problem. As the table shows, apart from gold, all metals were sold at lower prices than in 1H 2015.

Another thing – Fresnillo sells mainly metal concentrates, which means that it is paid only for the so-called payable amounts of metals. What is more, the company has to pay smelting and refining charges to process its concentrates at smelters' facilities. Unfortunately, Fresnillo does not disclose the payable amounts of metals sold. However, I have calculated the average ratios between metals produced and sold over the years so, assuming that all metals produced in 1H 2016 were sold (here I may be wrong – such a reasoning is a little bit simplified), Fresnillo should have sold the following amounts of metals:

…and the company should have reported the following revenues:

Well, for the time being all things look nice – the total 1H 2016 revenue should be higher by 13.5% than that reported in 1H 2015.

Now, problems. Fresnillo did not disclose its costs of production. However, looking at the amount of ore processed, grades and recovery ratios reported at each mine, I assume that to produce one ounce of silver equivalent the company had to spend the same amount of money as in 2015 - $13.64 per ounce.

Note that this figure includes also treatment and refining charges.

If I am right, Fresnillo spent $803.2 million to produce its metals in 1H 2016 ($13.64 x 21.18 million ounces of silver sold divided by 36% (silver share in total revenue). So, due to higher amount of metals sold, in 1H 2016 Fresnillo incurred higher costs of production than in 1H 2015 ($665.1 million).

The table below presents the final forecast:

Note that the line “Silverstream and forex impact” contains the effects of the silverstream contract (signed in 2007 with Penoles) and a number of commodity (yes, Fresnillo is using hedging strategies to hedge itself against lower gold prices) and forex hedges. Due to these instruments, in 1H 2015 the company reported a negative result. According to the last production report, in 1H 2016 the losses should be even higher ($35.0 million against $13.8 million).  


As the table shows, 1H 2016 results should be weaker than those reported in 1H 2015. I think it may be a negative surprise for many investors. The mass mentality is that we are currently in a bull market phase in gold / silver and mining companies should report much better results than in the past. And they are generally right but…not so fast. In the case of Fresnillo, 1H 2016 was rather a disappointment but I am sure that the company is going to deliver much better results in the not so distant future.

So, in the short - term Fresnillo's shares are overvalued but in the long – term they still present a great buying opportunity.

Last but not least, if I am right, at today’s share prices the company is trading at 33.3 of its EV / EBITDA ratio. Really elevated valuation...

Sunday, July 24, 2016

Soybeans Once Again

One of the readers has asked about possible correlation between soybean and silver prices. Well, it looks that this thesis may work. 

The chart below shows that sometimes soybean prices are positively correlated with silver ones:

source: www.stockcharts.com

This correlation has been particularly visible since October 2014. So, if the thesis is correct, we should see the continuation of a bull market in these grains. 

The upper panel of the chart shows that, similarly to soybean prices expressed in gold, now we have a nice entry point to involve on the long side of the trade.

Anyway, now this trade looks as follows

July 25, 2016 - 10:15 GMT:

At end of day (July 25) the trade is still unfavorable:

Saturday, July 23, 2016

Soybeans - A Nice Buying Opportunity

A few days ago I posted a piece on soybeans. The main thesis was that soybean prices were strongly supported by fundamentals (demand higher than supply).

However, the problem is how to find the best entry point to get involved on the long side of the trade.

For long-term players there is no problem - buy on any weakness in prices.

Well, as for soybeans or any other futures contracts, I am not a long - term trader / investor. As a matter of fact, I am no trader at all (commodities are about trading, not investing). However, sometimes, when something looks good, I get involved and bet some small amount of money (in such circumstances my hidden nature of a casino gambler emerges from the darkness). If such is a case, I try to find the best entry point.

So what is my entry point for soybeans? Look at the chart below:

The chart shows soybean prices measured in gold (lower panel of the chart). It looks like whenever soybean prices, expressed in gold, are close to the red line there is a nice buying opportunity (black circles). What is more, now we are close to such an entry point. Since the June peak in soybean prices (upper panel) these grains corrected significantly. So, why not to try?

To close the trade I will use the green area on the lower panel. This area indicates the best selling opportunities starting from middle 2014.

Note: this post is not a buying / selling recommendation. As my readers know, I am not in a business of publishing entry / exit points in commodities, stocks etc.

Silver And Gold These Days

Today a quick look at the precious metals market.

Since the start of a bull market in gold and silver in January 2016 it looks like now it is silver that leads the entire precious metals market:

At the beginning of the ongoing cycle silver was weaker than gold - look at the red line in upper panel of the chart.

Then, in April silver took a leadership. Since that time this metal was much stronger than gold (and silver related companies were stronger than gold related ones). And, in my opinion, it is nothing unusual. If this bull market is going to keep on, silver has to be stronger than gold.  

Now, let me look at a few sentiment indicators.

The first one shows that silver is a hot issue today. The open interest of the silver futures market is standing at its highest level in history:

It means that a lot of new money is entering this market. Is it something dangerous in the short - term?

Well, signals are mixed. The chart below shows the current net positions held by speculators in silver futures:

Of course, speculators are holding a net long  position in these futures. What is more, this position is standing at one of the highest levels in history, close to the readings indicating the excessive optimism. 

However, another chart shows that we are still far away from a bullish frenzy in silver:

I define a bullish frenzy in any commodity as the state when speculators are generally only long a specific commodity. It means that the number of their long positions held is much higher than the number of their shorts.

In silver futures a bullish frenzy is when the number of long positions held by speculators is around 13 times higher than the number of short positions.

Well, now this figure stands at 4.57 so speculators are not totally involved in silver buying.

How to summarize the entire situation? Well, before I do it, let me look at gold, represented by its largest ETF, GLD.

In July, for the first time since March 2016, investors were cutting their GLD gold holdings. The red line within the yellow area on the right indicates that the total amount of gold entering GLD is going down in July. It looks similarly to the situation visible at the beginning of March (another yellow area, this time on the left).

So, summarizing, I am not ruling out that we may enter a period of relatively stable gold prices (trading range). As for silver, well, this metal may be very tricky and I would not be surprised if it went its own way.