Monday, February 29, 2016

Precious Metals Portfolio - February Results

The chart below shows performance of the precious metals portfolio since inception:

As the chart shows, since December 16, 2015 the portfolio has brought a return of 47.6%. In the same period GDX made a profit of 37.94% and the broad stock market, represented by the S&P 500 index, made a loss of 6.8%:

Now, let me show the performance of each stock included in my portfolio:

As the chart depicts, Richmont Mines was a leader and Claude Resources ranked second.

I am a little bit surprised (positively) to see the excellent performance of Fresnillo, a heavy-weight company - it made a profit of 46% since inception. Tomorrow this company will publish its preliminary 2015 results - it should be an interesting report.

Sunday, February 28, 2016

Gold To Silver Ratio - Be Careful With That Indicator

Despite the big move up printed by gold, silver and precious metals stocks, one of the basic measures watched by precious metals analysts i.e. the gold / silver ratio (the number of ounces of silver it takes to buy one ounce of gold), is currently at one of its highest readings in history:

As the chart shows, today this ratio stands at 83.27. In modern history such high readings were printed only in 2003 and in late 2008. In the long-term, the absolute high was seen in 1991.

Usually such a reading is regarded as an indication of a revearsal (the end of a bear market) . However I would be cautious about this thesis. Let me show how this ratio was working in the past.

Period 2001 - 2006

As the chart shows, a BUY signal for silver was generated in the middle of 2003. However, both gold and silver (and precious metals stocks) were in their bull markets since 2001. The extreme reading printed in 2003 was a good signal to exchange long positions in gold for long positions in silver but both metals continued their up leg after 2003 (until 2008).

Period 2007 - 2010

This time the high reading of the Gold / Silver ratio was a good indicator of the end of a short but huge correction in the precious metals bull run (March 2008 - November 2008). Taking long position in silver (especially in this metal), gold and precious metals stocks, according to the Gold / Silver ratio, was a very good idea.

Period 1990 - 1991

In February 1991 the ratio of Gold / Silver printed its absolute high - above 102. However, both metals continued their bear markets after February 1991. Despite its extremity, the high ratio was not an indication of a trend reversal.

Summing up

I would be very cautious when analysing the Gold / Silver ratio. As the charts above show, sometimes it was a good indication of a trend reversal but more often this ratio was just a confirmation of the  ongoing trends (upward or downward).

On the other hand, the high reading of this ratio was always a good indication to take long positions in silver, instead of long positions in gold (or a combination of a long position in silver and short position in gold).

The current high reading tells that it is better idea to have long position in silver than in gold but the final absolute return does not necessarily have to be positive.

Saturday, February 27, 2016

If You Think Precious Metals Sector Made A Relevant Move Up - Look At These Chart

Most recently precious metals sector went significantly up:

Since bottoming in January 2016, the whole sector, represented by GDX, went up 60.2%. It was a furious movement, a typical behaviour clearing oversold conditions. Some easing is expected now but in the long-term this move means really nothing. Nothing at all - please, look at the chart below:

As the chart shows, precious metals market is way behind the broad equity market, represented by the S&P 500 index (lower chart).

What is more, the upper chart proves that precious metals miners stocks (represented by XAU) are standing at the levels seen in 2001. Simply put, the last move, while quite impressive in the short-term, in the long-term is totally meaningless.

Friday, February 26, 2016

Seadrill - It Is Still A Very Decent Company

Seadrill (NYSE: SDRL) is a drilling offshore contractor offering its services to petroleum / natural gas explorers / producers. The company holds a modern fleet of various drilling and auxiliary vessels, as, for example, jack-up drills, semi-submersible platforms, tender rigs etc. Seadrill rents these vessels to oil-majors, which use them to look for oil and natural gas.

                                                 An example of a semi-submersible platform

For many years the company was a kind of a tasty morsel for many investors, mainly due to excellent financial results and generous dividends. Additionally, Seadrill is controlled by a multi-millionaire sea - industry tycoon, John Fredriksen.

When oil prices started their bear market, Seadrill shares crashed:

Well, I agree that the company was too optimistic about its future. Due to heavy investments and generous dividends the debt level increased significantly. However, despite the currently lower demand from oil-majors (sales went down from $5.28 billion in 2013 to $4.34 billion in 2015) Seadrill, in my opinion, is able to service its debt.

I would picture this situation through these two charts. The first one shows debt levels and dividends. To make things clear, I present cumulative dividends (the pink area shows total dividends paid since 2008):

in millions of USD

As the chart shows, at the end of 2015 the company was holding debt of $11.13 billion. Since 2008 it has paid $8.0 billion in dividends so it means that if Seadrill had been not paying any dividends its debt would have stood at just $3.13 billion now ($8 billion less $3.13 billion consumed by paid dividends). Simply put, the company is a victim of its generosity.

Additionally, Seadrill is a living example of the theory that heavy investment (since 2008 it invested as much as $20.6 billion!) plus high dividends is a very toxic mixture, which may kill even a decent company.

Despite that I believe that the company is still able to service its debt.The chart below shows its net debt (debt - cash) and a ratio of net debt to ebitda, which is widely used by creditors to assess a liquidity / insolvency risk:

in millions of USD

It is acknowledged that a "safe" ratio should stand at around 2.0. In the case of Seadrill, since 2009 it has been standing at around 4.0, so it was way above the safety limit. However, in good times the creditors were not afraid because the company was increasing its sales, had reliable customers and was delivering sound financial results.

Today it is different. But only a little bit. Oil and gas prices are much lower than in 2014 and demand for the company's services is definitely lower. But Seadrill still delivers decent results.

Despite the fact that the company's results are good, I guess that creditors do not fell comfortable.

Well, in my opinion they exaggerate - please, look at the chart below:

in millions of USD

The chart shows the debt payment schedule. This year Seadrill has to repay $1.52 billion. In 2017 it should repay $2.87 billion, etc. Is the company able to do it? Let us look at the company's free cash flow:

in millions of USD

Free cash flow is defined as cash from operating activities less cash from investing activities. As the chart shows, in 2014 and 2015 the company delivered positive free cash flows, $1.64 and $1.60 billion, respectively.

I believe that Seadrill has one of the most modern offshore rig fleets in the world so there is no need to invest vast amounts of money to build this fleet further. Therefore there should be no problem for the company to generate the annual free cash flow of around $1.60 billion in the coming years, even taking into account today's low oil and gas prices. With such cash flow the company is able to repay its 2016 debt of $1.52 billion.

There is only one big problem, which may endanger the company - new drilling contracts may be signed at lower prices. The table below lists a few drilling contracts and their day rates:

Some of these renewed contracts were signed at lower prices (for example West Phoenix) but part of them presents better conditions than before (West Aquarius).

Finally - the chart below shows current valuation metrics (EV / EBITDA and P / BV):

As it is easily seen, today Seadrill shares (market price of $1.90 a share) are trading at:

  • EV / EBITDA of 4.40
  • P / BV of 0.09

I do not risk too much saying that Seadrill shares are totally undervalued.

Thursday, February 25, 2016

Bearish Developments In US Equities, Yet Again

US equities are going up but market internals are continuously sending warning signals.

Firstly, despite the fact that most recently S&P 500 has been going up, the volume is going down. It is not a support for bulls:

Note that during the last consolidation (yellow area), around 3.5 billion shares were changing hands daily. Now, when the index started marching up the volume is going down. In my opinion, such an occurrence does not support thesis that there is intensive buying pressure. Quite contrary, it looks like distribution.

Another chart:

This month (February) more shares have been changing hands during sessions when S&P 500 was falling. The month is not over yet but we are approaching the November 2015 reading, when this tendency was particularly visible. Well, such a development is not typical for bull markets. Quite contrary.

And the last chart, this time Nasdaq 100:

Since July 2015 the number of new lows over new highs has been increasing. It is a very strong pattern supporting a bearish thesis.

In The Long - Term, There Is No Fear In Equity Markets

The spread between junk bonds and US treasuries widens when something wrong is in the making - look at the chart below:

The chart shows the spread between junk bonds, represented by HYG, and 10-year US treasuries. When there is fear in bonds, the spread widens (the chart goes down). When things are good, the spread shrinks (2009 - 2011) - the chart goes up.

In 2007, when the last bear market in equities started, the spread was an excellent leading indicator - it started widening before equities started to go down.

In the beginning of 2009, when the bear market in equities was blowing at full speed, the spread started to shrink. Shortly after that occurrence equities started their bull market.

Since the first half of 2014 the spread has been widening quite furiously. However the bull market in equities is still intact. 

If the pattern repeats, the equities should follow the spread. What is more, due to the fact that spread has been in its bear market for quite a long time, I believe we may see quite a dramatic fall in the prices of equities.

Tuesday, February 23, 2016

Newmarket Gold Is Going To Redeem All Of Its Convertible Debentures

Newmarket Gold is one of the companies included in my precious metals portfolio. That is why I closely track this company. Most recently Newmarket announced its intention to redeem all its convertible debentures. In this article I want to discuss what impact this transaction may have on the company's ownership structure.

Convertible Debentures

In April 2013 Crocodile Gold (a predecessor of Newmarket Gold) issued C$34.5 million of 8% convertible unsecured debentures for net proceeds of US$31.03 million. The debentures mature on April 30, 2018, unless converted or redeemed earlier.

According to the agreement, debentures may be converted into the company common stocks in two ways:

  • at the holder's option at any time prior to maturity (April 30, 2018) 


  • by the company at any time after April 30, 2015

The conversion price is C$1.02.

This year Newmarket Gold decided to exercise the second alternative. It means that the company is going to convert all debentures into common shares.

There is another condition - prior to April 5, 2016 (Redemption Date) the volume-weighted average trading price of common shares for the 20 consecutive trading days ending five trading days before Redemption Date is not less than C$1.53 per share. I think this condition should be fulfilled because since February 8, 2016 the company's shares have been trading at the price higher than C$1.52.

Number of New Common Shares 

In its last financial report, Newmarket reported that at the end of September 2015 the book value of convertible debentures was standing at U$23,450 thousand. At that time it was equal to C$32,146 thousand. If the company converted all these debentures into common stocks at the price of C$1.02 the number of common shares would go up by 31,579,981 shares. I do not know the precise number of new common shares - it depends on the exchange rate between the US and Canadian dollar on April 5, 2016 - but this calculation should be more or less O.K.

Summing up, as a result of redemption of debentures the number of Newmarket shares should go up by around 31.6 million.

Main Shareholders

Digging a little bit into Newmarket ownership structure I have found the following big shareholders (all figures comprise common stocks, warrants and common stocks coming from conversion of debentures):

  • Luxor Holding - 61,756,671 shares
  • Lloyd Miller - 14,743,416 shares
  • Zebra Holdings (controlled by Lundin family) - 27,333,334 shares
  • Sun Valley Gold - 6,666,666 shares
  • Management - 13,587,000 shares
         Total: 124,087,087 shares

Number of shares outstanding (diluted plus shares convertible): 187,879,981

It means that after conversion the biggest shareholders should control around 66% of all shares outstanding. I think that all big shareholders, excluding Lloyd Miller (a private investor), should be regarded as the so-called strong hands.

It means that free float should stand at around 78.5 million shares (41.8% of all shares outstanding).


  • Newmarket Gold wants to redeem all its convertible debentures into common stocks
  • If such is a case, the number of fully diluted common shares will go up by around 31.6 million (an increase of 20.2%).
  • After redemption the company will have more commons shares (higher dilution) but less debt (it will go down from around US$25.3 million to US$1.9 million)
  • In my opinion, Newmarket Gold has quite strong ownership structure. After redemption, big shareholders should control around 66% of the company.

Saturday, February 20, 2016

U.S. Dollar - Ahead Of A Major Drop

It looks like the U.S. dollar is poised to a big correction. First of all, less and less players take part in the current price action:

Normally, when the price of any instrument is in a strong trend the open interest follows it (or vice versa - rising open interest magnifies the trend). The chart above demonstrates that the current upward trend is not supported by open interest, which is not a bullish development.

What is more, speculators are leaving the U.S. dollar long-play but do not initiate new short positions:

As the chart shows, speculators do not want to short the U.S. dollar. They are simply leaving this instrument (decreasing open interest) without building new short positions. That is why the U.S. dollar is still going up - there is no organized action against it. However, the current upward trend is weakening - please, look at the chart below:

The chart is another picture showing limited interest in taking part in the U.S. dollar long-play - speculators still hold net long position but their involvement is much lower than it was a year ago (net long position went down from 81 thousand contract in March 2015 to 31 thousand contracts last week).

Summing up - although the U.S. dollar is still in its upward trend, less and less facts support it. It is not a bullish case for this currency...but it is a bullish case for gold.

Sunday, February 14, 2016

Gold Looks Good But The First Correction Will Tell Something More About This Market

As usually - the nature of any big move is defined by corrections. Most recently gold, silver and the entire precious metals market have made a huge move up. Many people are excited but, in my opinion, the best way to say something about the nature of any big move is the first correction against a new trend.

It seems that we are going to see this first correction soon. Looking at the price of gold, represented by GLD, one can spot that last week the players were less interested in opening new long positions in gold:

That is why I think the prices of gold are close to their first correction.  

What is more, during bull markets in gold it is silver that is a stronger metal than gold itself:

As the chart shows, in the long-term (since April 2011) gold has been stronger than silver (although since July 2015 both metals go neck and neck, more or less). I believe that a real bull market in precious metals will start when a ratio of gold to silver falls below 70. Today we are quite far from that point.

Sunday, February 7, 2016

US Stock Market Looks Like Oversold But Investors Must Decide How They Look At The Market In The Long-Term

After the last fall, the US stock market is looking like oversold in the short-term.

Firstly, less players are interested in taking part in the game, no matter whether on the long or the short side of the game.

The chart below shows the decreasing open interest in VIX futures - open interest went down from around 450,000 contracts in June 2014 to 250,000 contracts these days:

What is more, now the speculators hold quite large long positions in VIX futures (green arrow) - in other words they bet on the US stock market going lower. Most recently such an occurrence meant that the market was oversold in the short-term: (red arrows):

The question is - is it a good buying opportunity? In my opinion there are two answers:

  • if you think that US stocks are still in their uptrend or they are in a topping pattern - the answer is "Yes"
  • if you think that US stocks started a bear market - the answer is "No"

For those thinking that a new bear market has started - please, look at the chart below:

The chart shows net positions held by big speculators in S&P futures. The blue arrow indicates that in the short-term the market is oversold. However, in the long-term there is a lot of room to go lower. The red arrow shows that in the middle of 2011, during the last big correction in the bull market, big speculators were holding much bigger net short positions than today (108 thousand contracts versus 45 thousand today).

Friday, February 5, 2016

S&P 500 - The Increased Volume Means Something

Generally, after a big move, the trading volume is falling. Then there is a period of accumulation / distribution  - in this phase the trading volume is much lower than during a big move.

However, looking at the price / volume action, presented by US indice,s I see something totally different - let me take S&P 500 as an example:

Since the middle of January we saw very high volatility but basically the index was trading between 1,870 - 1,950 points. The strange thing is that the accompanying trading volume was very high - most frequently around 3.1 - 4.5 billion shares were changing hands every day.

To show this situation better - the chart below presents the 10-day volume average:

Here we may spot that since January 7, 2016 the average volume went quickly up from around 1.9 billion shares to 3.3 billion shares a day.

Well, when prices go nowhere and volume is rising rapidly the market wants to say something important. In my opinion, the message is: SOMETHING BIG IS IN THE MAKING...

Wednesday, February 3, 2016

Another Strange Seesion In New York

It was really a strange trading day:

  • US dollar weakened 
  • Gold and precious metals stocks went strongly up
  • US stock indices were very volatile

Let me dig a little bit on today's stock market action.

The table below shows the ultra short-term market action, starting from January 27, 2016. Please, note the yellow area. On January 28 S&P 500 went up but the number of new highs was lower than new lows (minus 41)  - as I noticed in my post, it was a very strange occurrence. Then, on January 29, the market went strongly up (from 1893.36 to 1940.18).

Now, look at the greenish area. Today the market went slightly up but the number of new highs was lower than the number of new lows (similarly to January 28). If history repeats, tomorrow S&P 500 should go strongly up.

Well, I do not have the slightest idea where the market is going to go in the short term - there is so much volatility that everything is possible. That is why the best idea today is to stay on the sidelines. It is especially recommended for those encountering cardiac problems.