Thursday, July 30, 2015

Twitter - Is It Really A Business?

Today Twitter published its 2Q 2015 results. Below I put three charts showing the basic measures.

Firstly, a chart showing revenue and operating losses incurred by the company.

Note: operating loss for 2015 is calculated as: 2014 operating loss - 1H 2014 operating loss + 1H 2015 operating loss.

As the chart shows, although revenue generated by the company had been in a rapid increase since 2011, Twitter has not been able to make any profit on its core business.

Another chart - this time it shows revenue and cash flow from core business operations (excluding working capital issues):

Well, this time it looks much better. It seems that the Twitter's core business brings some cash to the company.

Unfortunately, since 2011 Twitter has been reporting a negative free cash flow. Please, look at the chart below:

Free cash flow is calculated using the following formula:

Free Cash Flow = Cash Flow From Operations (including working capital issues) - Investment Expenditures

Investment expenditures contain purchases of property and equipment plus spending on business combinations.

Free cash flow is one of the most important financial measures - if a company is not able to report free cash flow in the long term it's future does not look bright (at least).


Sunday, July 26, 2015

Managed Money - Negative Sentiment At Highest Level In History; Gold, Silver and Copper Ahead Of A Furious Rebound

When pessimism prevails there is practically no chance the market will go down. These days Managed Money (mostly big hedge funds) holds the highest short positions in gold, silver and copper  ever.
To make the picture clear, instead of presenting three charts, I have added and adjusted short positions held by Managed Money in these commodities. Please, look at the chart below:

Well, every time the Managed Money was totally pessimistic about any market, no new down leg started. Quite contrary - if such was a case, we saw the market bouncing up. Looking at the highest short position in three popular commodities, I think the rebound will be really surprising.

Friday, July 24, 2015

Japanese Equities Are Still In Fashion

The scale of capital flows is one of the best indicators identifying whether a specific market is bringing the investors' interest.

In the case of the Japanese equities, below I am presenting two flow indicators showing that these shares are still been acquired by foreigners and the Japanese investors.

Please, look at the charts below:

As the charts show, foreigners have been buying the Japanese equities since the beginning of 2013. From that same time the Japanese investors have been selling foreign shares - therefore they have been probably using the funds acquired from these sales to buy the Japanese equities.

Both trends magnify themselves so we see the ongoing bull market in Japan (weak Yen is another factor standing behind it).

Well, for the time being there are no signs that the current bull market is going to end.

Wednesday, July 22, 2015

My Fortune-Telling On Gold

Financial markets go in cycles. After a strong appreciation in prices there is time for correction. While I am not a believer in the Fibonacci wave theory, sometimes it is interesting to look at the so-called Fibonacci retreat levels. This time I am trying to use this theory to look at the entire bull market in gold.

Since its beginning in 2001, gold had gone up from $250 per ounce to $1,920 per ounce (in 2011). According to the Fibonacci theory, a corrections of 33%, 50% and 66% are the most probable ones. These days, gold is standing close to $1,083 per ounce, which is a point of 50% correction of the current big bull market. So the bottom could be in.

If not, another important level is $888, which means a 66% correction.

Monday, July 20, 2015

US Equities - Be Very Careful This Time

Today Nasdaq 100 hit another all-time high. Another index, S&P 500, is jut 2 points below its all-time high. It looks fine for the bulls.

But the market internals deteriorated once again. This time this deterioration is especially impressive.
Well, it is nothing strange that less and less companies hit their 52-week highs (I had written about it many, many times). What is strange is that today, while Nasdaq 100 was very busy with making its record, actually more stocks hit their new 52-week lows than highs. It is not a common thing when index makes new high. I would say - it is very uncommon.

Please look at the table below:

Friday, July 17, 2015

At The End Of Day Gold Bulls Are Defeated And Nasdaq 100 Prints Another Record At The Awful Market Internals

Gold bulls are in despair - both gold and silver made new lows today:

Nasdaq 100 made another record but it was printed at less new highs and more new lows. It is totally strange situation....

Precious Metals Sector - Hard Times For Gold Bulls To Be Continued?

Today we have another bad day for the gold bulls. Bears, who have been controlling the PM (precious metals) market since 2011,  are trying to break the gold support once again.

Looking at the relative strength of gold against world equities, one could easily spot that on this front the gold bulls are loosing once again:

But I have a chart, which could make the gold bulls a little happier. Please, look at it:

The chart shows the relative strength of silver (SLV) against gold (GLD). The chart line is going down, which is a sign of a bear market in the precious metals sector (silver going down faster than gold). The chart confirms that since 2013 silver has been much weaker than gold.

For example, every time the 50-day simple moving average (50 SMA) had been closing to the 200-day simple moving average, it was not able to break above its 200-day sister (200 SMA). These days we have the similar situation once again. It seems that 50 SMA is going to bounce down once again.

But if it fails to do that - and it could make the gold bulls happier - a new up leg in PM sector could start shortly after that.

Thursday, July 16, 2015

Nasdaq 100 Prints New Record But The Style It Has Done It Is Very Problematic

Usually if any index makes a new high, such a record should be printed at favorable market internals. For example the number of share issues printing new records should be larger than the number printed at the previous pick.

Let me look at Nasdaq 100:

As the table shows, today Nasdaq 100 had less new highs (185 issues) then previously (228 new highs on Aug 2, 2013). It does not look healthy when Nasdaq 100 is 46% higher than nearly two years ago but the number of new highs is 19% lower then previously. Additionally, the number of new lows is really puzzling. The index makes new record but as far as 63 issues print their lows.

The same situation occurred at S&P 500. Although this index did not make a record today (not yet) but the last record, made on May 21, 2015, had 30 issues making their lows. Today as far as 132 issues printed their lows. Well, this index is very close to its record but the number of companies going down is increasing.

I do not know how high this market will go but it is definitely not a healthy market. What is more, these internals have been worsening for many, many months.

EBAY - Stalling Fundamentals And The Ongoing Bull Market

Ebay is an excellent company. Everybody knows PayPal and the platform. Most recently both companies have split into two separate, publicly traded companies.

But today, for the last time, the company published its 2Q 2015 results attributable to both PayPal and eBay entities. Good results.

Unfortunately, since 2010, eBay has been reporting the decreasing dynamics related to revenue and nopat (economic income). Simply put, the company results are stalling. Please, look at the chart below:

As the chart shows, both revenue and nopat have been rising since 2009. But they have been rising slower and slower. This is much better visible at the chart below:

As the chart shows, the 2015 nopat dynamics is even negative. I guess this is why such "activist' investors as Carl Icahn, want a spin-off - they hope it will add some dynamics to PayPal or eBay, or both companies.

Anyway, eBay shares are still going up, not caring about fundamentals:

Looking at the today's pre-market quotations, investors are eager to buy these shares once again:

Monday, July 13, 2015

Precious Metals Miners Have Cut Exploration Expenditures Substantially

Big gold and silver miners explore less and less. Please, look at the chart below:

After printing a top in 2012, exploration expenses have been going down sharply since then. In 2014 big miners spent $1,324 million on exploration, 40.4% less than in 2012. In the short term these lower costs should have a positive impact on the miners' cash flows (less spending = more cash). But in the medium and long term it will definitely have a negative effect on the miners mineral base. Simply put, if a gold miner does not search for gold now, it will have no gold to sell in the future.

This trend was still intact in the first quarter 2015 and, I guess, we will see similar developments in the coming quarters.

Here is the list of miners included in the above calculations: Barrick Gold, Agnico Eagle, AngloGold Ashanti, AuRico Gold, Yamana Gold, Coeur Mining, Eldorado Gold, Fresnillo, Gold Corp, Hecla Mining, Harmony, Hochschild, IAM Gold, Kinross, Newmont Mining, PanAmerican Silver, Silver Standard Resources.

Saturday, July 11, 2015

Hot Chili - An Emerging Copper Producer

It is not easy to buy shares of Hot Chili, one of the most promising copper exploration companies (in my opinion). But for those interested in copper mining sector, Hot Chili could of some interest.

The company overview


Hot Chili is a copper exploration company that is totally focused on projects located within the iron-oxide-copper-gold (IOCG) belt in Chile. According to the company:


“The advantage there over the high Andes projects is stark. They're low altitude, close to the coast and close to infrastructure, so development hurdles will be lower.”


Currently,  the company's immediate objective is to to develop its flagship Productora Project, while also undertaking exploration work programmes over other advanced projects - Frontera, Banderas and Los Mantos. All projects are located in the coastal range of northern Chile, where the company plans to emerge as a major copper producer with potential future annual production target of 120 – 150 thousand tons of copper.
The map below presents the location of the company's properties in Chile:



The Productora deposit


The company’s main property, currently under intensive exploration and development, is called Productora. It is located 15 kilometers south of the township of Vallenar in Chile’s Region III. The ore deposit is near surface, near the coast, at low altitude (< 1,000 meters) and has significant infrastructure advantages. Importantly for a Chilean project, it has access to power and water. Hot Chili started the Productora’s exploration program in 2010. As history of that exploration shows, it was a quite strange process.


First of all, in 2010, when Hot Chili was acquiring the first rights to Productora, this property was perceived as a uranium deposit, one of the largest and most advanced uranium projects in Chile. The company had only fractional knowledge that the property could comprise some amount of copper as well.

Next, since the very beginning the company was aware that to conduct the exploration process properly, it had to consolidate many properties, which were owned by the State, private owners or private or state-controlled companies. It was a hard and time-consuming process that nobody before was able to carry out. But the consolidation plus intensive exploration program brought very impressive results.


Firstly, the company discovered the so-called Main Zone. According to the company, the Main Zone is a breccia style deposit comprising significant amounts of copper of relatively high grade, located near surface (in large breccia chambers).


What is breccia? According to many geological sources, breccia is a sedimentary rock of angular or subangular fragments larger than 2 millimetres. The spaces between the large angular fragments can be filled with a matrix of smaller particles or mineral cement that binds the rock together.


There are two main areas of the Main Zone. The first one is the sulfide copper deposit comprising a few zones of concentrated mineralization (as, for example, the zone called Habanero). The second one is an oxide copper deposit, which is located within the Main Zone and at its northern and southern ends.

Up till now the company has delivered the Main Zone resource estimates only.  



The Main Zone reserves and resources


The Productora’s Main Zone indicated mineral resources comprise 214.3 million tons of ore grading 0.48% copper, which is equal to 1,029 thousand tons of copper. Mineral resources also contain 675 thousand ounces of gold and 29 thousand tons of molybdenum.


According to the Australian JORC Code 2012, mineral resources are inclusive of mineral reserves, which comprise 90.5 million tons of ore grading 0.48% copper. It means that mineral reserves contain 433 thousand tons of copper, 308 thousand ounces of gold and 15.5 thousand tons of molybdenum. Both reserves and resources were calculated using price assumptions of $3.0 per pound of copper, $1,250 per ounce of gold and $10.0 per pound of molybdenum. Since these prices are around today’s market prices, there is a low possibility that the company would have to downsize its reserves.


The above described resources and reserves do not include copper oxide deposits, which are located around the main sulfide deposit. The company estimates that these oxide deposits contain additional 25.6 million tons of ore grading 0.52% copper, which is equal to 133 thousand tons of copper. On February 19, 2015 the company announced that the Productora’s pre-feasibility study would include a copper-oxide project. Including this deposit should improve the project’s economics through adding the additional production of around 6 thousand tons of cathode copper per year.


Alice deposit


The Alice deposit, discovered in 2014, is a porphyry style deposit located 400 meters west of the Main Zone.

What is a porphyry deposit? Well, according to a number of geological sources, porphyry deposits are large mineralized systems comprising large tonnage of ore. These systems are low-grade deposits (below 1% of copper), where copper is mined as open-pit operations. As much as 65% of world’s copper supply comes from porphyry mines.

There is one special feature of these deposits. According to the book “Understanding Mineral Deposits” by Kula C. Misra:


“Most porphyry copper systems contain one or more varieties of breccias.

All copper-bearing, intrusion-related breccia bodies are not integral parts of porphyry copper deposits, although they often show close space-time associations with porphyry copper emplacement in a given tectonic unit. Such breccias bodies, often referred to as breccia pipes or chimneys because of their cylindrical morphology, are of minor importance compared to porphyry copper deposits, but they are attractive targets of exploration as they tend to carry higher grades and require less capital investment to develop. “


Taking into account the above citation, it was quite probable that after the discovery of the Main Zone, which was a breccia style deposit, a porphyry system could be somewhere in a close vicinity to it. But in 2012 the company ceased exploration program at Productora and focused on development of the Main Zone aiming at preparing a pre-feasibility study as quickly as possible. It took two years and the study is expected very soon.

Then, last year Hot Chili renewed exploration and very quickly the theory was confirmed - Hot Chili discovered the Alice deposit. In the first quarter 2015 the company continued intensive drilling program at Alice.

At the moment there are no resource estimates for Alice but the company is confident that the discovery of this deposit should substantially increase the Productora’s mineral resources. 

According to the company:


“Drilling returned from Alice has intersected very wide zones of copper extending from surface, outlining the potential for significant extensions of higher grade copper. Results include 204m grading 0.6% copper and 0.1g/t gold from within a broader intersection of 237m grading 0.5% copper and 0.1g/t gold from surface.

Importantly, these wide zones of higher grade copper at Alice remain open toward the west and at depth. Further drilling is planned to expand the extent of Alice mineralisation in advance of a maiden resource estimate.”


It is probable that the Alice resources (and reserves) estimates will be an integral part of the incoming pre-feasibility study. If Hot Chili chooses this approach, investors should have much broader knowledge on the Productora’s total mining potential.


Productora – economics and development timeline


It is too early to make advanced estimates of the Productora’s mining potential and its value. Investors should wait for the pre-feasibility study, which is supposed to disclose many details on the deposit’s future. Currently only a fractional knowledge is available. Anyway, Productora is supposed to be a medium-size mine of low capital intensity (measured as capex per production volume). The chart below shows how Productora is positioned among other Chilean copper development projects:




According to the company’s announcements and press publications the basic economic assumptions for Productora mine are as follows:


·         Productora should produce approximately 45 thousand to 55 thousand tons of copper concentrate annually; the estimated initial life of mine is nine years

·         Apart from copper concentrate, for six to eight years approximately 6 thousand tons to 6.5 thousand tons of cathode copper per year will be extracted from the oxide deposit

·         The above mentioned production figures are expected to be revised after including the Alice deposit

·         the estimated capex should stand at least $650 million; this figure includes $80 million - $90 million cathode production capex



Productora – development timeline


·         End of the second quarter 2015- publication of the pre-feasibility study on Productora.

·         Fourth quarter 2016 – publication of definitive feasibility study and closing of financing

·         From the fourth quarter 2016 to the end of the second quarter 2018 – mine construction

·         Second half 2018 – commencement of production.



Other mineral projects


Apart from Productora, there are three projects at various stages of exploration and development:


Frontera copper project


The project, a copper-gold porphyry deposit, is located 50 km south of Productora, in Region IV of Chile. Frontera is in a close vicinity to the Pan-American Highway and existing power transmission corridor. The project’s mineral resources comprise 50.5 million tons of ore grading 0.4% copper and 0.2 g/t gold, which equals to 187 thousand tons of copper and 356 thousand ounces of gold.

Currently Hot Chili is conducting drilling program at the property.


Banderas copper project


The project is located in Region III of Chile, 50 km north of Productora. Currently Banderas is at its early exploration stage.


Los Mantos copper project


Los Mantos is located in Region IV of Chile. Similarly to the Banderas project, Los Mantos is at an early exploration stage.



Financial situation


Hot Chili is an exploration / development company. At the moment it does not report any operating revenue. Therefore, to conduct exploration and development, Hot Chili has to be very smart in finding financing sources. And this company is indeed very smart at it.

Between 2010 and June 30, 2014 the company spent around A$71 million (A$ - Australian dollar) on exploration, evaluation, plant and equipment. These expenditures were financed mainly through equity financing. In that period Hot Chili issued 347.7 million shares (this year the company issued additional 67.1 million shares via placement to major shareholders). The main Hot Chili shareholders are as follows (as of March 2015):

·         CAP S.A. - one of the biggest Chilean steel producers, holding a stake of 11.8%

·         Taurus Funds Management, an-Australia based global fund manager, holding a stake of 11.7%

·         Exploration Capital Partners, an affiliate of Sprott, holding a 5.4% stake

·         Kalgoorlie Auto Service Pty Ltd – holds a 19.3% stake.


Apart from these shareholders, the company’s management also holds a big stake in the company. The two company’s directors, Murray Black and Christian Easterday, hold 16.8 million and 17.1 million shares respectively (stakes of 4.8% and 4.9%). These directors also hold significant amounts of options over ordinary shares.


Another source of capital is a credit facility of $25 million from Sprott Resource Lending Partnership. Currently, the amount drown against the facility is $10 million and Hot Chili, after the last equity placement, is confident that it will not need to use additional funds from Sprott. 


According to my estimations, the company currently has around A$10 million in cash at hand, which should fulfill the company’s financial needs for the coming three quarters.


As I have mentioned above (section on the Productora economics), Hot Chili will need at least $650 million to build the Productora mine. It is a lot of money but the company has already found a partial solution to that problem. The last general meeting of the Hot Chili shareholders approved a landmark deal with Chilean resources major Compania Minera del Pacifico S.A. (CMP). CMP is a subsidiary of Compania de Aceros del Pacifico S.A. (CAP), the largest iron ore mining company and integrated steel business in Chile (and a big Hot Chili’s shareholder). As the company states:


“This approval opens the door to funding options and provides access to vital infrastructure, saving time and money in the development of Productora.”


The deal is structured in the following way:

·         CMP will contribute surface rights in certain Productora tenements, enabling Hot Chili to build the project’s infrastructure

·         In exchange for these rights CMP will be granted a 17.5 stake in Productora

·         CMP holds an option to increase its stake in Productora to 51% at a price between $80 million and $110 million (the option price, $1.5 million, will be paid to Hot Chili) to be paid in two tranches;

·         Until the pre-feasibility study is completed, CMP will be free of any financial contributions into Productora

·         If CMP exercises the option to increase its stake in Productora, it will provide Hot Chili with $13 million loan facility

·         CMP, holding a 51% stake in Productora (if it exercise the option), will be obliged to co-finance the mine construction.


Let me sum up all these figures. The agreement with CMP will provide Hot Chili with cash of $1.5 million to $123 million, depending on exercising the CMP option. In my opinion, if CMP exercised its option, Hot Chili would be very near to close the Productora financing (to remind my readers – the Productora capex is at least $650 million). If such were the case, CMP would be responsible to cover expenditures of around $332 million (attributable to its 51% stake in Productora).

Hot Chili, holding cash of around $123 million (provided by CMP) would have to find additional $196 million to finance its share of the Productora construction. It is still a lot of money but, well, it is much easier to find around $200 million than $650 million…




Currently, the main value of Hot Chili is attributable to Productora. Due to the fact that the Productora pre-feasibility study has not been published yet, it is too early to value it.

Fortunately, in March 2015 the company delivered some value assumptions. According to these assumptions, Productora was valued between A$245 million and A$297 million, which translates into A$0.58 – A$0.70 per one share of Hot Chili. Currently these shares, listed on the Australian Stock Exchange, are trading at A$0.095 a share.



Key people


There are two managers responsible for the company’s operations:


Murray Black (Non-executive Chairman) – he has over 35 years experience in the mineral exploration and mining industry and has served as an executive director and chairman for several listed Australian

exploration and mining companies. Apart from Hot Chili, he part-owns and manages four Australian drilling businesses, has interests in several commercial developments and has significant experience in capital financing.


Christian Easterday (Managing Director) – he is a geologist with over 15 years experience in the mineral exploration and mining industry. Easterday held several senior positions and exploration management roles with top-tier gold companies including Placer Dome, Hill 50 Gold and Harmony Gold, specializing in structural geology, resource development and mineral economic valuation. He was also involved in various aspects of project negotiation and valuations covering gold, copper, uranium, iron ore, nickel, and tantalum resource projects in Australia and overseas.





Today Hot Chili is a small exploration / development company focused on the development of its flagship project called Productora. If the company is successful, by 2018 it should become a mid-tier copper-gold mining company producing at least 50 thousand tons of copper per year. What is more, it is quite probable that the company would produce even more copper – most recently Hot Chili has discovered another copper deposit, which should be an integral part of Productora. Last but not least – it seems that the estimated capex should be at least $650 million, which positions this mine as one of the lowest capital intensive projects in Chile.

In my opinion, investors interested in investments in copper producers should take Hot Chili into their consideration.

Price action as reported by the Australian Stock Exchange:



Friday, July 10, 2015

Corn - Will It Break Up At Last?

In May 2015 I posted this text about corn. Since that time corn had found a bottom at $3.85 per bushel. Then it went up in a parabolic way.

Today USDA published another report on agriculture commodities, corn included. To be honest, corn looks the best (much better than its sisters: wheat and soybeans). Please, look at the chart below:

Once again, USDA forecasts a deficit between production and consumption (with consumption higher than production). What is more, this deficit is getting wider. It favors price increases.

Another chart:

The world stocks of corn are getting lower, which is attributable to the widening deficit between consumption and production.

Now the question is - are the prices of corn going higher? A quick look at the chart below confirms that these days the corn prices are a bit below their strong resistance:

While fundamentals favor corn prices going higher, it could take some time for corn prices to break up. We'll see.

Last but not least. China's economy is really weakening. The chart below evidences it quite well:

As everybody can notice, USDA estimates that the forecast of wheat consumption in China is going down abruptly. Historically, China used to consume around 124 million metric tons of wheat annually. But according to the today's forecast, in the coming season China will have consumed only 116.5 million tons of wheat.

Thursday, July 9, 2015

Gold Is Trying To Break Up Against World Equties

I know. Gold, silver and everything what has something to do with these metals, look just terrible. Who knows, maybe the whole sector is going to go lower. But let us face facts. At least facts, which are valid today.
The chart below shows the gold's relative strength against world equities (represented by $DJW - see my last post):

As the chart shows, after four-month consolidation, gold is trying to break up against world equities. Simply put, world equities look much worse than gold, which favors this metal. Additionally, looking at the upper chart one can spot another technical formation emerging- triple bottom in gold prices.

Add to that the highest short positions in gold and silver held by the so-called Managed Money and we have quite perfect situation for the whole precious metals sector to surprise most of the market players.

Silver - short positions held by Managed Money:

Friday, July 3, 2015

Gold Probably In A Transition Period

Since 2011 gold and related equities have been in their downtrend. But in most cases financial markets go in cycles with some transition periods in between. Looking at the gold market I try to measure its strength against other markets/instruments. Then I try to find at which stage the gold market is or could be.

Below I am comparing the gold market to the world equities ($DJW).

As the chart shows, between the middle of 2007 and the third quarter 2011 the gold market was much stronger than equities (yellow area is attributable to this period). Then, between the third quarter 2011 and the end of 2012 there was a transition period, where gold was loosing its strength. Since the beginning of 2013 we have seen much stronger equity market (green area).

Then, since October 2014 gold seems to be in its transition period once again. At least it is not weaker than the world equities. Will it break up? I do not know (it is still one of the most hated sectors) but the chart below should generate appropriate signal when the time is right.