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.

Masbate

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.

Debt

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

to

lower production / lower costs and lower debt profile


In my opinion, it is a much safer model.

Tuesday, April 26, 2016

Eric Sprott To Acquire An Additional Stake In Newmarket Gold

Newmarket Gold announced today that Mr. Eric Sprott would acquire additional 16.2 million common shares of Newmarket Gold from Luxor Capital, the biggest company's shareholder. 

This time Mr. Sprott will pay C$2.80 per share. It means that this notable Canadian investor is going to pay 24.4% more than he paid in the previous transaction (also made with Luxor).

Additionally, Luxor has granted Mr. Sprott a right of first refusal to purchase up to 22 million shares of Newmarket (it expires on December 31, 2016). 

On closing of this transaction, Mr. Sprott will be holding a 17.9% stake in the company. It means that he and Luxor will be the biggest shareholders of Newmarket Gold:



This purchase is another confirmation that Newmarket Gold is still a very attractive company; what is more, despite a recent huge increase in its share prices, it is still considered by Mr. Sprott as an undervalued miner. 

Monday, April 25, 2016

Resource Sector Cycle - Caterpillar's Case

Yesterday one of my readers made a comment about my article on Caterpillar (Harry, thanks). He touched a very crucial issue, called "Business Cycle.

The question is: what goes first - gold price, earnings of a provider of mining equipment or maybe earnings of a mining company?

Well, the intuition is that during a down cycle:


  • the price of gold goes down

then

  • the earnings of a mining company go down

then

  • revenue and earnings of a provider of equipment go down

However, it is not that simple. Look at the charts below, starting from the upper one (in this example I have chosen Newmont Mining as a company representing the entire mining sector):






As the charts shows, the sequence is as follows:

  • gold prices go up
  • then, at some stage of a bull market in gold, the earnings of a miner start going down
  • some time later the earnings of Caterpillar start going down as well
  • then gold prices start going down and a bear market in gold begins

Quite interestingly, it is not the price of gold that determines a business cycle in the resource sector. As the charts show, it is a miner's performance that initiates the whole cycle (leading indicator). Caterpillar's earnings (I mean its Resource Segment only) and the price of gold are lagging indicators.

Another interesting thing - despite gold prices going down, since the end of 2014 the earnings of Newmont Mining have been going up. 

Will Newmont's earnings be a leading indicator once again?

Sunday, April 24, 2016

Caterpillar - Sad News For The Gold Bugs

On April 22, 2016 Caterpillar released its 1Q 2016 financial report. Caterpillar is a very important company for the resource industry because the equipment, made by this global giant, supports mining operations all over the world.

Similarly to my previous post on Caterpillar, I cannot spot any positives in its results, which could support a bullish thesis on the precious metals sector.

Revenues and operating profit, delivered by Caterpillar's Resource Segment, were really bad in 1Q 2016:



                                     source: Simple Digressions

As the chart shows, in 1Q 2016 revenue fell once again and was 26.5% lower than in 1Q 2015. 
What is more, this fall was caused mainly by a $463 million decrease in the company's sales:


                                             source: Caterpillar 


Operating profit was following revenue:

                            source: Simple Digressions


Well, Caterpillar's performance is definitely not supportive for the gold bulls...

Silver: There Is Excessive Optimism But Not The Highest One In History

Quite many people use the COT Report to catch turning points in gold, silver and other commodities. Most recently some analysts has spotted that big speculators are currently holding the largest net long positions in silver futures. Is that a case?

Well, they are partly right. Why only partly? Look at the chart below:



The chart shows net positions in silver futures, held by big speculators. And indeed, it looks like now these players hold the biggest net long positions in silver futures in history. According to the last report (published on April 22), their net long position was standing at 71,428 contracts. The second highest reading was printed on December 5, 2006 (net long position of 66,730 contracts). 

However, there is a catch. Since 2006 the silver contracts market has grown substantially. In my opinion, the best indication of this change is an increase in open interest. As the chart below shows, in 2006 the open interest was standing at around 125 thousand contracts. Now it is around 180 thousand:




It looks like the market has changed. Therefore, in order to make proper comparisons, I have modified the first chart a little bit. This time the net position, held by speculators, is divided by open interest:





As the chart above shows, taking into account the size of trading, the net positions, held by speculators, are quite far away from their maximums (printed in 2006, during the raging bull market in gold and silver). Today the net long positions, held by speculators, account for "only" 36.7% of total trading, expressed by open interest. In 2006 they hit much higher values: 47.2% in June 2006 and 47.1% in December 2006.

Summarizing - in my opinion, although there is currently an excessive optimism among big speculators, it is not the highest one in history. Markets change and the silver market is now much bigger than it used to be in the past. The analyst should take this issue into account. 

Saturday, April 23, 2016

Gold Standard Ventures - Hold These Shares

This article was written on request of one of my readers


It is not easy to prepare a proper analysis of the exploration company. In my opinion, the most important thing the analyst has to focus on is to answer a question whether such a company has an asset / assets, which may become an operating mine in the not so distant future or may be sold to a major producer.

There are thousands of exploration companies but a vast majority of them will never build a mine or even sell a property to a major mining company. Some people call these explorers "zombie companies". I am sure that my readers know what zombie is but let me remind this definition, just in case:

Zombie is a living dead, which means that a zombie company is a dead company fed by its shareholders to pretend to be alive. 

Note: if somebody has still some doubts about this definition, I recommend watching a classic movie "Night Of The Living Dead", directed by George Romero (1968).


However, the company I am describing in this article is not, in my opinion, a zombie explorer. Quite contrary - this company owns a prospective property, located in a notable gold district in a very safe jurisdiction. What is more, this company is within a scope of interest of a few big miners, which means that construction of a mine / selling property is quite probable. The company is called Gold Standard Ventures Corp (GSV). 

Gold Standard Ventures

Gold Standard Ventures is a Canadian exploration company, exploring its Railroad - Pinion project in Nevada, USA. The project is located within the famous gold district, called Carlin Trend:


                               source: Gold Standard Venture

As the picture shows, Pinion - Railroad comprises the following main deposits:

  • North Bullion
  • Railroad
  • Pinion
and the following deposits, currently classified as prospects:

  • Bald Mountain
  • Dark Star
  • JR Buttes
  • Dixie Creek

The Pinion - Railroad Project has been under extensive exploration since 2009, resulting in publication of two technical reports, delivering the estimates of mineral resources for the Pinion and Dark Star deposits (there are no estimates of mineral resources attributable to the Railroad and other deposits).

Pinion Resources


  • Indicated: 31.61 million tons of ore, grading 0.62 grams of gold per ton - 630,300 ounces of gold
  • Inferred: 61.08 million tons of ore, grading 0.55 grams of gold per ton - 1,081,300 ounces of gold

Dark Star Resources
  • Inferred: 23.11 million tons of ore, grading 0.51 grams of gold per ton - 375,000 ounces of gold
As the data above shows, the company has not established mineral reserves. However, it is not a problem - at this stage of exploration it is no wonder.
To remind my readers - only mineral reserves represent the economically viable material. 

What kind of ore is it, as far as metallurgy is concerned? The company underlines that the whole project is a typical Carlin Trend deposit. It means that both oxidized and refractory ores appear. However, as far as the Pinion and Dark Star deposits are concerned, the oxidized ore prevails, which should make the ore processing much easier and cheaper.

Now, Pinion - Railroad is adjacent to a few operating open - pits mines, of which the Emigrant Spring, belonging to Newmont Mining, is very similar to Pinion - Railroad.

Let me dig a little bit deeper into Newmont's open - pit mines. According to Newmont, all its open - pits in the Carlin Trend hold 89.1 million tons of ore, grading 0.87 grams of gold per ton, which is equal to 310 thousand ounces of gold. So, as far as resources are concerned, Newmont open - pits are quite similar to Gold Standard's deposits (vide Pinion - the ore grade of 0.62 grams per ton and 630.3 thousand ounces of gold). 

Note: Of course, Newmont has been operating its pits for many years (Emigrant is its newest mine in the Carlin Trend) so the company has established mineral reserves, which, at the end of 2015, amounted to 226.1 millions tons of ore, grading 1.21 grams of gold per ton (8.9 million ounces of gold).

On the other hand, Gold Standard's Pinion and Dark Star deposits are a bit better than Newmont's ones because, contrary to Newmont's open - pits, the ore at the company's properties is easier to process (it is oxidized). Newmont's ore is both oxide and refractory. 

Summarizing - Gold Standard controls a property, which may be an interesting target for a big mining company.

And, indeed, a few miners are interested in Railroad - Pinion. These miners are:


  • Oceana Gold - on May 20, 2015 Oceana purchased 25.0 million shares of the company, paying C$0.65 per share; then, in February 2016, Oceana, exercising its anti-dilution rights, increased its stake by another 13.83 million shares (this time it purchased Gold Standard shares at a price of C$1.0 a share). As a result, now Oceana holds 38.83 million shares of Gold Standard (a stake of 19.0%, calculated on undiluted basis)
  • GoldCorp - this company, one of the biggest world's miners, purchased 16.1 million shares of the company at a price of C$1.0 a share; it means that GoldCorp owns a stake of 7.9% in the company (calculated on undiluted basis).


What does it all mean?

Well, firstly, it means that both companies, Oceana and GoldCorp, value the Railroad - Pinion project at around C$205 million (number of shares outstanding x C$1.0 per share). It is much more than book value of these assets:



                       source: Gold Standard Ventures

Railroad - Pinion is included in "Exploration and evaluation assets" line in the company's Statement of Financial Position. As the excerpt shows, these assets are accounted for at C$74.7 million (at the end of 2015). Assuming that GoldCorp and Oceana are interested in Railroad - Pinion only, they value this deposit nearly three times higher than its book value.

Next thing - Gold Standard has not prepared any feasibility study yet so it is not possible to find the value of Railroad - Pinion in a proper way. At least theoretically because such experienced miners as GoldCorp or Oceana should be able to do it. So, keeping in mind that they were inclined to pay C$205 million for Railroad - Pinion, it should be worth more that that in the long - term. Writing "in the long - term" I mean that the value of any prospective project goes up in line with an extent to which it is de-risked: 



source: Brent Cook's Exploration Insights


Simply put, I am sure nobody would pay C$1.0 per Gold Standard share a few years ago, when the company started drilling its properties - it was just too risky. Then, on the announcement of the first technical report, risks associated with the project went substantially down. As a result, the company's de-risked shares increased in its intrinsic value (and their market value as well). 

I think that this de-risking process will be continued as far as the company will be exploring its properties. Going back to the chart above, Railroad - Pinion is currently at its "Exploration, Discovery" phase, which means that the company's shares are vulnerable to very volatile movements (brown area).


Summary

Gold Standard Ventures is an interesting explorer. It owns / controls a prospective deposit, located in the famous Carlin Trend, Nevada, USA. The company is still exploring its properties. Although it has published technical reports on its Pinion and Dark Star deposits, investors should expect more reports on other prospective properties. 
Despite the fact that there is still much work to do, two big industry names, namely Oceana Gold and GoldCorp, has purchased relevant stakes in the company. These companies value the company at around C$200 million, which is much higher value than that reported in the company financial statements. On the other hand, Mr. Market values the company even higher - currently its shares are trading at C$1.53 a share, which is equal to C$313 million in market capitalization.
In my opinion, the company is currently in its highly speculative stage of development, which means that the best strategy for investors, who bought these shares some time ago, is to hold them.  

Friday, April 22, 2016

Hochschild - An Interesting Company Unluckily Hedged At A Wrong Time?

In my opinion, Hochschild is a very interesting company. It is a medium-sized silver / gold producer, operating four mines. Three of them are located in Peru:
Arcata, Pallancata and Inmaculada. The fourth one is San Jose in Argentina (this operation is shared with Mc. Ewen Mining; Hochschild holds a 51% stake). 

Two mines, namely San Jose and Inmaculada, are really good operations. Arcata is just a decent mine while Pallancata is a laggard.

In the previous years the company was struggling to cut its operating costs. These costs were really high, indeed:


source: Simple Digressions and the company's reports


For example, in 2012 the lowest-cost mine was Pallancata but it is hard to tell that production costs standing at around $20 per ounce of silver were low.

Fortunately, as the red arrow shows, the company's management was able to put production costs under its control and in 2015 generally all mines were extracting metals at a cost of around $15 per ounce of silver equivalent. 

What is more, the company is confident that this trend will continue in the coming years. If such is a case, Hochschild may become not only an interesting company but also a decent one.

Let me discuss a few issues, which are, in my opinion, crucial to understand this company.

Pallancata

As I noted above, Pallancata is a lagging operation - look at the charts below:

source: Simple Digressions and the company's reports



source: Simple Digressions and the company's reports

The first chart shows the amount of ore produced (milled) at Pallancata. Most recently this mine was processing less and less ore. What is more, to solve this problem, the company was mining the ore of higher grade (recovery rates were following higher grades). I think that Hochschild, to sustain production at Pallancata, was probably high-grading. 

If such is a case, this mine may be over. However, the company is confident that at the end of 2016 it will start mining at the Pablo deposit, which is a high-grade deposit, most recently discovered at Pallancata. 

Well, maybe the company's management is right but looking at Pablo's basic metrics I see that this deposit is going to be rather a marginal issue for the company (NPV of $40.5 million): 




                        source: the company's presentation

In my opinion, it is more probable that the future of Pallancata looks like the history of another Hochschild's Peruvian mine, Selene (closed in May, 2009):




source: Simple Digressions and the company's reports

I think that the above presented charts look similar to those showing Pallancata now...

Fortunately for the company, the lagging Pallancata should weigh less and less in the coming future:


source: Simple Digressions and the company's reports

Inmaculada

Last year Hochschild put into operation its newest mine, a 100%-owned Inmaculada. It is another mine located in the so-called Southern Peru cluster (apart from Pallancata, Arcata and a closed mine Selene) so I would say that Hochschild is an expert company in that region. This year this mine should deliver 14 million ounces of silver equivalent, which means that Inmaculada is going to be the biggest mine in the company's portfolio. What is more, it is going to be the lowest-cost mine as well (all-in sustaining cost of $9 - 10$ per ounce of silver equivalent). 

According to the company, ramping - up production at Inmaculada should decrease total all-in sustaining costs from $12.9 per ounce of silver equivalent to $12.0 - $12.5 per ounce of silver equivalent - look at the chart below:



                         source: the company's presentation


However, according to my own calculations, the break-even price of silver is around $16.5 per ounce. It means that if the price of silver is higher than $16.5 per ounce, Hochschild should show operating profits. Today silver is trading at around $17 per ounce so the chances for an operating profit in 2016 are quite high. However, there is at least one problem - the company's hedge strategy.

Hedge strategy.

Last year Hochschild had hedged part of its production against lower prices of gold and silver: 

                              source: the company's presentation

Well, the management's timing could not be worse. Shortly after this decision the prices of gold and silver started to go up. In such a case, the hedged positions may start working against the company. Let me measure the potential effect that the company's hedges may have on Hochschild's bottom line.  

Assuming today's prices of silver and gold ($17 and $1,240 per ounce, respectively) the company should incur the following paper loses in 2016:


                       source: Simple Digressions and the company's reports

As the table shows, Hochschild may lose around $18.8 million if the prices of silver and gold stay at today's levels. Is is much?

Assuming $16.5 per ounce of silver as a break even-price, the company should make an operating profit of $16 million this year (32 million ounces of silver eq x $0.5 per ounce of silver eq). It means that if the prices of silver do not go higher than $17.0 per ounce the company should not show positive results this year.


Summarizing - in my opinion, Hochschild looks like a decent company for those interested in a silver / gold producer, trading at a multiple of enterprise value / EBITDA of 8.75 (which is quite a low reading, compared to Hochschild's peers). However, the hedge strategy, established most recently by the company's management, may have a big negative impact on the company's bottom line this year. 

Thursday, April 21, 2016

Newmont Mining - Decent Results And...Management Is Selling Shares

Yesterday Newmont Mining, one of the biggest world's gold producers, released its 1Q 2016 results. The table below summarizes these results:


               source: Simple Digressions and the company's reports

Generally, the results reported in 1Q 2016 were much better than those reported in the last quarter of 2015 but worse than those reported in 1Q 2015. 

Interestingly, although the price of gold in 1Q 2016 was comparable to that in 1Q 2015, Newmont was not able to improve its results (additionally, in 1Q 2016 the company produced and sold 4% more gold than last year but this improvement had no impact on results).  

Well, I am not a fan of drawing the quarter-to-quarter comparisons because using this kind of analysis you cannot spot the trends in a company's development.

Therefore, instead of going deeper into these rather meaningless digressions, let me present a few really relevant issues.

Costs

The chart below shows the company's costs, starting from 2010:

source: Simple Digressions and the company's reports

Between 2010 and 2013 Newmont's management was waisting its time. Instead of controlling the company's costs, the management let them go up significantly, from $683 to $1,271 per ounce of gold equivalent (an increase of 86% in just three years).

Fortunately, since 2013 the trend in costs reversed and in 1Q 2016 the company spent only $910 to produce one ounce of gold equivalent (production cost is defined as direct costs + depreciation and depletion + reclamation and remediation + exploration and research expenses + corporate administration + other costs). 

In my opinion, it is a big plus for the company. Taking into account that now the gold is trading at around $1,250 per ounce, Newmont should make around $340 per each ounce of gold sold. 

Next thing. Newmont produces gold and copper. Let me look at these segments.

Gold segment

The chart below shows revenues and direct costs, attributable to the gold segment:


    source: Simple Digressions and the company's reports


As the chart shows, the gold segment has been generating positive margins (revenue - direct costs) over the years. Most recently this margin even improved. 

Copper segment

Since 2013 the copper segment has been a laggard (direct costs higher than the copper price):


    source: Simple Digressions and the company's reports

But since 2015 the company has rebuilt its copper business and now the margin, made on copper, is more or less the same as that made on gold. 

The main copper operation is the Batu Hijau mine, located in Indonesia. It is an excellent mine, delivering around 500 million pounds of copper, of which 240 million is attributable to Newmont (Newmont holds a 48.5% stake in Batu Hijau). However, if the company sell its stake in this mine (there are rumours about it) Newmont's copper business will be practically over. 


Despite these decent results, the company's shares are trading at a multiple of enterprise value / EBITDA of just 7.5. It is not elevated valuation so Newmont is relatively cheap against its peers at the moment, despite a huge increase in its stock prices during the ongoing bull run in the entire sector.

However, the company's management is selling its shares. Between February 24 and March 18, 2016 the management sold 135,172 Newmont shares. Quite funny - the biggest seller was the company's CEO (he sold 52,491 shares).

Encouraging, indeed...




Wednesday, April 20, 2016

Sprott Sold But Energold Bought - Impact Silver

Impact Silver is a small silver producer, currently running three mines in Mexico (additional two are temporarily suspended). 

In my last article I noted that Sprott Asset Management sold 573,500 shares of Impact and, after this transaction, it was holding 6,292,500 shares in the company. It means that Sprott decreased its initial holding from 8 million shares at the end of 2010 to 6.3 million now.

On the other hand, the biggest Impact's shareholder, Energold Drilling, did the opposite thing. Yesterday Impact and Energold announced that the latter company purchased 1 million shares in Impact, increasing its stake from 6,980,000 shares to 7,980,000 shares. Taking into account that the current share count is around 76.8 million, it means that Energold is holding a stake of 10.39% in the company. 

In my opinion, at the end of 2015 Impact was in an urgent need for cash - the company was holding cash of C$717 thousand. It was nearly nothing so the company most recently closed two private placements, bringing C$2,620 thousand in cash. Due to these placements, the share count increased by 8.67 million, compared to the end of 2015 (an increase of 12.7%). 

Looking at these developments in the short-term, it looks like Energold has made a nice deal - it purchased Impact shares at C$0.31 per share but today these shares are trading at C$0.67 a piece:


source: www.stockcharts.com

As the chart shows, Impact was no exception as far as the the last bull run in silver / gold related stocks is concerned. Since the beginning of February the company's share prices have gone up fivefold and Energold can write up a paper profit of C$360 thousand on the recently purchased stocks. However, other shareholders should not worry about fresh supply of new shares. According to the company:

"The shares issued under the private placement will be subject to a hold period until August 13 (the first placement of 6.67 million shares) and 20 (the second placement of 2 million shares), 2016"

Coming this week: Gold Standard Ventures

Tuesday, April 19, 2016

2016 To Date Has Been An Incredible Period For Precious Metals Miners

The chart below shows market capitalizations of 11 big precious metals miners: Barrick, Goldcorp, Newmont, Agnico Eagle, AngloGold, Yamana, Eldorado, Fresnillo, Gold Fields, Randgold and Kinross:


                                       source: Simple Digressions

As the chart shows, between 2011 and 2015 the total market capitalization of these 11 miners went down from $196.8 billion to $57.5 billion (a drop of 70.7%).

It was quite funny that the top eleven precious metals producers were worth just around $60 bilion at the end of 2015, in total. Please, compare this capitalization to a few tech giants:


  • Apple - market cap of around $600 billion  
  • Facebook: $325 billion
  • Amazon.com: $295 billion

Well, I realize that there is no sense in such comparizons but it tells me something. The companies controlling money (because gold is money) are worth nothing, compared to the biggest tech companies, which have no tangible assets. 
Understand me properly - I have nothing against tech companies. Apple has an excellent business but if people stop buying its smartphones the company's market value may go quickly to zero. In the case of PM miners, the gold will always carry value.

However, this year we have seen an abrupt increase in the market value of the top PM producers:


After many years of a slump in precious metals miners' stock prices, since the beginning of 2016 the top eleven companies have increased 68% in their market value. 

Last but not least. The chart below shows investment results delivered by each company (dividends excluded):


...and the winners are:

  • Fresnillo plc returning 580%
  • Randgold: 166%
  • Agnico Eagle: 13.5%





Monday, April 18, 2016

Excellon Reports Its 1Q 2016 Production Report And Investors Overreact

Today Excellon Resources (EXN:TO) announced its 1Q 2016 production report. 
The market reaction was very optimistic. At the time of writing, Excellon shares are up 21%, compared to the previous trading day.

In my opinion, Excellon share prices are currently fuelled by the three main factors:

  • most importantly - a few days ago Eric Sprott, a notable resource investor, announced that he purchased 6.7 million shares in the company (plus the same amount of the half-share warrants)
  • this year the company is going to implement an investment program to solve all water problems it was facing before; what is more, the successful implementation of this program should bring production costs substantially lower
  • the production report, published today, is being perceived as a very promising

The first two issues I am discussing in my Seeking Alpha article. 

In this post I want to discuss the third issue, which, in my opinion, is quite good but not good enough. Therefore investors are overreacting. 

Firstly, let me enclose the company's production results:




Having the above listed figures, I am able to estimate the potential results delivered by the company in 1Q 2016. In my calculation I am assuming that in 1Q 2016 the average realized prices of metals, produced by Excellon, were as follows:

  • silver: $14.91 per ounce
  • lead: $0.79 per pound
  • zinc: $0.76 per pound

Mine economics

Metal content 

Now I have to find the value of metals contained in one ton of ore processed. Let me start from silver.
As the table shows, in 1Q 2016 the company was processing the ore grading 483 grams of silver per ton of ore processed. Apart from that, the company's mill was able to recover 91.6% of silver contained in this ore. It means that each ton of ore processed contained 442.4 grams of silver (483 x 91.6%) or 14.2 ounces of silver (442.4 grams x 0.03215 ounces per gram). Because in 1Q 2016 the silver was trading at $14.91 per ounce (on average), one ton of ore processed contained 14.2 ounces showing the market value of $212.1 (14.2 ounces x $14.91 per ounce). 

In the same way I also calculated the market value of zinc and lead, contained in one ton of ore. It was $81.7 and $69.7, respectively.

So, one ton of ore processed contained metals (silver, zinc and lead) representing the market value of $363.5, in total.  


Production costs

Excellon does not report production costs in its production reports. Therefore I assumed that in 1Q 2016 the direct production cost were standing at the level reported in 4Q 2015, i.e. $255.3 per ton of ore processed. 

Additionally, the company has to pay fees to the refiner, which processes the company's concentrates (silver-lead and silver-zinc). In this case I assumed a fee of $52.9 per ton of ore processed (the same fee as that paid in 4Q 2015).

So the direct production costs should stand at $308.2 per ton of ore processed. 

Gross margin

Gross margin is defined as revenue less direct production costs. In the case of Excellon it should stand at $363.5 less $308.2 = $55.4 per ton of ore processed.

It means that the company should have made around $55.4 per ton ore processed. 

However, apart from direct costs, there are the other expenses, mainly depreciation and overheads. In 2015 these additional expenses were standing at $124 per ton of ore processed so it is rather impossible that Excellon made any profit in 1Q 2016. Quite opposite, the company most probably made a loss of around $68.6 per ton of ore processed (gross margin less additional expenses). 

Summarizing - although Excellon:


  • improved its production results in 1Q 2016
  • the company, as other miners, was supported by higher prices of silver, lead and zinc

in my opinion, the company made a loss in the last quarter.

Note: a few relevant cost figures are missing: processing costs, treatment fees and overheads - in my calculations I assumed that these costs were similar to those reported in 4Q 2015 or 2015 - however, it is only a rough assumption. Additionally, I am assuming that in 1Q 2016 the company sold all ore processed in that quarter - however, Excellon does not report sales figures so I may be wrong.