Precious Metals Portfolio - May 2016

In May, precious metals related stocks retreated. My portfolio was no exception. It lost 8.3%. Although my performance was better than GDX (down 13.7%), a loss is a loss:

However, since inception (December 16, 2015) the Precious Metals Portfolio returned 117.3%:

As the chart shows, my picks returned 58.7 percentage points more than GDX (58.6% since December 16, 2016).

The chart below shows returns delivered by each pick, since inception:

Two stocks are the leaders: Newmarket Gold and Richmont Mines. It is no wonder - both companies own excellent properties, Fosterville (Newmarket) and Island Gold (Richmont). In the long-term the property is what counts.

Last but not least. Precious metals still perform much better than the broad stock market:

Summarizing - May was a bad month for the entire precious metals sector but in the medium-term these assets are still quite a nice proposal.

And the last chart - portfolio breakdown:

Endeavour Silver Closes The Acquisition Of El Capitan

Today Endeavour Silver completed the acquisition of Oro Silver Resources, a subsidiary of Canarc Resources. Oro Silver holds the El Compas gold - silver property. The company paid Canarc C$10.5 million by issuing 2.1 million shares. 

Well, in my opinion, it is a good deal for Endeavour. For C$10 million it acquired 100% of a very decent property. According to the Preliminary Economic Assessment, the El Compas project should deliver an internal rate of return of 97% at current gold prices ($1,200 per ounce):

On the other hand, it is a small project. Its after-tax NPV of US$39.5 million (indeed, it will be lower - Endeavour paid the acquisition price of around US$8 million, which increases capital costs from US$7.7 million to US$15.5 million) does not make any difference for the company (current market capitalization of US$329  million).

Fortunately, El Compas is open for further exploration so who knows...there is a chance that Endeavour will scale this property up. 

On the other hand, it is symptomatic what Endeavour had bought. El Compas is a low sulfidation style epithermal vein system, similar to vein systems demonstrated by all three Endeavour mines. The only difference is that El Compas has more gold than silver while the company's operating mines are mostly silver-bearing properties. Anyway, Endeavour is an expert in this type of mineralization. What is more, Bradford Cooke, CEO of Endeavour, is also the Chair of Canarc (it was a very-friendly deal). 

Silvercorp Metals Looks Attractive

Silvercorp Metals is a silver / base metals miner, operating in China. It is a little bit controversial company - its share prices were negatively impacted by the unfavorable report published in 2011 by one of the short-sellers. In today's post on Silvercorp, I consider all information published by the company as true and reliable. Those thinking differently are advised to stop reading at this point.

A few days ago Silvercorp released its 2015 financial statements. In my opinion, last year the company made significant progress. First of all, it cut its costs of production to $10.6 per silver equivalent sold (a decrease of 20% since 2013):

Note: accounting costs are defined as: cash cost of production plus depreciation plus general and administrative expenses plus government fees and other taxes

Further, since 2013 Silvercorp has increased its sales from 6.48 million ounces of silver equivalent to 8.97 million ounces of silver equivalent in 2015 (an increase of 38.4%): 

Now it looks like the company's sales are levelling off at above 8.0 million ounces of silver equivalent. However, stable and high sales plus lower costs of production plus assumed higher silver prices make Silvercorp, in my opinion, an attractive miner. 

Let me present a few main factors supporting my thesis:

Sales - although, assuming that Silvercorp 2016 sales are going to be equal to the company's production (I think that the company is able to sell even more metals than it is going to produce), the company should slightly increase its sales from $107.8 million to $116.3 million (due to higher silver prices - in my calculations I assume the silver price of $16.24 per ounce)

Production costs - assuming that:

• the Ying mine, the flagship property, will process 610 thousand tons of ore at cash cost of $74.3 per ton processed
• the GC mine will process 250 thousand tons of ore at cash cost of $47.0 per ton processed

the cash cost should stand at $57.1 million in 2016

Other costs - I assume that in 2016 Silvercorp will be able to keep its overhead at levels seen in 2015.


Taking these assumptions into account, in 2016 the company should deliver the EBITDA of around $36 million (in 2015 it was $30.3 million). 

With such a projected EBITDA, at today's share price of $1.70 a piece, now the company is valued at a multiple of the future enterprise value / EBITDA of 9.1. 
It is one of the lowest valuations among other silver miners:

Other catalysts and risks:

• share repurchase program - in December 2015 the company announced an extension to its formerly announced share repurchase program; as many as 16.3 million shares are to be acquired until December 2016. Unfortunately, Silvercorp is very unwilling to acquire its shares - since initiating the entire program (December 2014) it has acquired only 4 million shares
• the company has a lot of cash (at the end of March 2016 it had around $62 million in cash) - in my opinion, with such a large amount of cash it could be much more aggressive in its share buybacks

Geothermal Plays Added

Just a short note:

I have decided to start covering the geothermal energy sector on this blog. Such companies as, for example:

• US Geothermal
• Polaris Infrastructure
• Alterra Power
• Ormat Technologies

will be regularly covered here.

In my opinion, the geothermal sector is quite similar to the precious metals sector, with the property being the most crucial issue. 

I hope that new readers, interested in geothermal energy, will find it interesting.

Another Drilling Company Reports Signs Of Recovery

Today Energold Drilling released its 1Q 2016 report (at last). The company has three business lines:

• mineral drilling
• energy drilling
• manufacturing

Energy drilling is currently a laggard. Manufacturing also faces some serious problems. Fortunately, mineral drilling shows signs of recovery. Let me discuss this issue a little bit deeper.

The chart below shows two main metrics, reported by Energold's mineral drilling segment:

Contrary to other drillers (for example, Geodrill) the company has less work to do but, since the end of 2013, drilling prices have been going up. Well, Energold operates mainly in Mexico and Central and South America (83% of revenue, reported by the Mineral Division, is earned in these regions). It looks like the business model in Americas is different than in Africa:

• in Americas most drilling is ordered by mining majors (brownfield exploration and definition drilling)
• in Africa, especially in West Africa, there is high demand reported by junior miners; hence, a different business model. 

Another chart - this time it shows margins reported by Energold's Mineral Division:

As the chart shows, margins are still low, much lower than during good times. Fortunately, 1Q 2016 margins are a little bit higher than in 2015 and much higher than in 1Q 2015 (minus 5.6%).

Summarizing - another drilling company, this time the one operating in Americas, is showing some signs of recovery. 

Integra Gold - Another Company To Take Advantage Of High Stock Prices

Most recently many precious metals exploration companies take advantage of the last rally in gold and silver to sell its shares through private placements, bought deal financing etc.

I understand it. After many years of a bear market in gold most of explorers are short of cash so the current situation presents an opportunity to improve the cash balances.

Integra is no exception. At the end of 2015 the company had 426.3 million shares outstanding (fully diluted).

Now, after a few bought deals and private placements, the share count stands at 498.0 million at least (this number may increase due to the agreements with underwriters). During a few months the company was able to increase its share count by 16.8%. 

According to my calculations the gross proceeds should stand at C$55.5 million (this figure also comprises the gross proceeds obtained through exercising all warrants issued by the company).

Now the company is fully financed to start its exploration program at Triangle (with the budget of C$26 million). What is more, I expect Integra to announce the additional exploration programs or even new acquisitions (or to increase the company's stake in Eastmain Resources). 

Excessive Demand On Americas Silver Shares

Due to the strong demand on its shares, today Americas Silver announced an additional private placement, amounting to around C$10 million. This placement plus the one, announced on May 20, should fuel the company with cash of around C$30 million. 

As I stated in my Seeking Alpha article on Americas Silver, it is a lot of cash for the company. 

To show it, below I have plotted a pro-forma version of Americas Silver balance sheet:

As the table shows, after the two private placements the company should hold cash of $26 million. I remind my readers that Americas Silver plans to spend $21.4 million on implementing the San Rafael project. 

It looks like the project is fully funded now...

Does Investing In Mining Stocks Make Any Sense?

Investing in mining companies is a hard job. Most of the time it is a much better idea to hold gold than mining stocks. To be honest, excluding a few short periods, investing in mining companies had no sense in modern times. The chart below shows the relative strength of mining companies (represented by the XAU index) against the gold itself:

                            source: www.stockcharts.com

Indeed, only between 2000 and 2008 precious metals miners were as strong as gold. In that period the gold investors had the same investment results as the investors holding XAU (a broad portfolio of mining companies).  Then, starting from 2008, investing in a broad precious metals miners market had no sense at all (note the green, descending line). 

However, since the beginning of 2016 the situation has changed. Now mining stocks are much stronger than gold. The problem is whether this outperformance of miners is sustainable. 

Well, if history repeats, we should see a large increase in the price of gold with mining shares losing their strength against gold. If that is not the case, and mining shares continue their outperformance, we could see a gold mania. Please, keep in mind that since the start of the great bull market in gold in 2001 there was no mania at all.  

Last but not least - investing in specific miners is another thing. In my opinion, good analyst should be able to find mining stocks which are stronger than gold at various stages of the gold cycle...

GLD Flows - Update

In my last article on GLD I noted that in May this biggest world's trading gold vault was reporting only inflows of gold. 

This week ended with another large gold inflow into GLD:

And the weekly perspepctive:

Gold And Silver - An Alternative Look At The Current Situation

When analyzing the COT Report, most analysts focus on commercials (this category comprises mostly mining companies) and big speculators / managed money. 

However, there is another group of investors included in the COT report. This group comprises the so-called small speculators, i.e. the players that do not fall into commercials / big speculators category. 

Basically, these small players are always wrong about the market. Therefore it makes sense to take the opposite position to that held by small speculators. 

Let me show it, taking the silver and gold market as the examples:

The charts show that the current net positions, held by small speculators, are not indicative of a bullish frenzy. For example, despite the highest open interest in history, the net position (long), held by small speculators in silver futures contracts, is relatively low. This position, measured as a ratio:

               net position held by small speculators / open interest

stands at a mere 6.1%. During a bullish frenzy, these speculators used to held long positions amounting to 23%. 

The gold market looks similarly. Here the small speculators held long positions in gold futures contracts amounting to 4% (14% during a bullish frenzy). 

Summing up, these days the small speculators are not over-optimistic on gold and silver. Quite contrary, they are quite far away from that point, which is a bullish sign for precious metals (or, using different wording, it is not a bearish pattern).

Despite Lower Gold Prices, Fresh Gold Ounces Are Flowing Into GLD Vaults

As a rule, Western investors behave irrationally - when the prices of any asset go down the demand on that asset also goes down. 

During the last bear market in gold, these investors were liquidating their gold holdings at lower prices. For example, the biggest publicly traded gold fund, GLD, reported an ouflow of 719 tons of gold between December 2012 and December 2015 (a decrease of 53.2%). 

However, these days the investors behave differently. Let me look at the April - May 2016 GLD data:

               source: GLD data and Simple Digressions

The chart shows gold flows, reported by GLD, starting from April 1, 2016. 

The strange thing is that in May, despite lower gold prices, GLD reported only inflows into its vaults (there was no single gold outflow in that period). In other words, investors were taking advantage of lower gold prices to increase their long positions. 

It looks like they behave like the Chinese people - the lower the price the higher the demand.

In my opinion, it is a bullish pattern for gold. 

Does Gold Standard Ventures Pay Too Much For Drilling?

In my first article on Gold Standard Ventures I described the Railroad Pinion Project, a flagship property. 

Today I want to touch just one issue, which is incredibly important for the company - its drilling campaigns. 

On May 18 Gold Standard announced commencing its biggest drilling program in history:

                                  source: Simple Digressions

The company plans to drill 43,000 meters at the following locations:

• Dark Star - 20,400 meters
• Pinion - 14,200 meters (including two new targets: Irene and Sentinel)
• North Bullion - 4,800 meters
• Bald Mountain - 3,600 meters

Well, it is good news. Gold Standard has to explore its properties and, what is more, it has money to do it (two majors, Goldcorp and Oceana are big, strategic shareholders).

The problem is that this campaign seems to be very expensive. In 2015 Gold Standard was paying around US$169.0 per one meter drilled. 

This year it is going to pay around US$311.6 per one meter of drilling. It is 84.4% more than last year. As far as I know, the mineral drilling industry is still in trouble. Some drilling companies show more meters drilled but the prices are lower than in 2015. 

Next thing - the biggest part of a new drilling campaign comprises RC drilling (Reverse Circulation drilling), which is cheaper than the core drilling. So this price increase has nothing to do with more expensive drilling method.

Another thing - Railroad Pinion is a shallow deposit (that is why there is so much RC drilling). It means that there will be no expensive deep drilling. 

Well, in my opinion, it looks like the company, having a lot of cash, does not care too much about it...

Do Not Copy Big Names (for example, Soros and Buffett)

Two days ago the financial world was electrified by the news that George Soros, a famous investor, took a large long position in Barrick Gold (ABX), worth around $264 million. 

Well, I think that George Soros is by no means a model gold bug. Simply put, this guy is able to reverse any of its positions within minutes. It means that today Soros may be holding a large short position in Barrick. This guy is totally unpredictable. So, my advice is: Forget about Soros...

Since I am writing about Soros, let me put a short note on another famous investor, Warren Buffett. Or, better said, let me show this chart:

The chart shows the relative strength of Berkshire Hathaway (an investment vehicle run by Buffett) against the broad stock market, represented by the S&P 500 index. 
First of all, in the long-term Buffett has been stronger than the broad stock market (blue trend line). However, his strength is visible only during bear market in stocks (yellow areas). 
During bull markets an investor, holding any ETF tracking the broad stock market, would report better returns than Berkshire Hathaway (green lines). 

So the recipe looks like: 
Do not buy Berkshire Hathaway shares. During bull markets in stocks be invested in any ETF tracking the broad stock market. During bear markets...hold cash.

And now relax and watch the market reaction to the FED minutes.


By the way, I recommend the last report on the U.S. economy, published by two American economists, Van Hoisington and Lacy Hunt.
According to these gentlemen, the U.S. economy is not ripe for any rate hikes. Quite contrary...

Richmont Mines - It Looks Like The Management Wants To Capitalize On High Share Prices

Yesterday Richmont Mines announced it wanted to issue 2.99 million shares at a price of C$10.4 a share for gross proceeds of C$31.1 million (together with the over-allotment option). In my opinion, Richmont does not need this money so the additional dilution is unfavorable for current shareholders.

Let me discuss this matter a little bit deeper.

Below you will find the company's 2016 Capital Guidance: 

                               source: Richmont presentation (slide 18)

According to that table, in 2016 the company will need C$75.9 million for its capital expenditures.

At the end of 1Q 2016 Richmont had C$61.2 million in cash and C$11.7 million in debt so it had roughly C$49.5 million in net cash. 

Now, in 1Q 2016 Richmont generated cash flow from operations of C$21.2 million (excluding working capital issues). It means that, assuming no change in gold prices, in 2016 the company should make around C$84.8 million in cash flow from operations. What is more, even at much higher 2016 gold production Richmont does not need the additional working capital  - due to its excellent financial standing the company has negative working capital (in other words, Richmont is financed by its suppliers as far as working capital is concerned).

Summarizing - after summing up the annual cash flow from operations (C$84.8 million) and net cash of C$49.5 million we find that the company's liquid assets should stand at around C$134.3 million throughout the year. It is much more than the company's projected capital expenditures of C$75.9 million.

So the question is - why did the management take this decision? Well, most recently the company's shares went strongly up. It looks like Richmont wants to capitalize on these high share prices without any reason. Just for case...

Wesdome Gold Mines - The Battle Has Just Started

Wesdome Gold Mines is a small gold producer. The company operates two mines, located in the Mishibishu Greenstone Belt, Ontario, Canada. Mishibishu is part of a much larger mineral structure, called the Abitibi Greenstone Belt. Those familiar with world deposits surely know that Abitibi is one of the best gold-bearing areas, where many successful mining companies operate. One of such companies is Richmont Mines, operating its Island Gold Mine, located also in Ontario. To be honest, in my opinion, Wesdome is very similar to Richmont:

• similar location (Abitibi Greenstone Belt)
• similar deposit structure - quartz veins
• both mines demonstrate the high-grading ores
• last exploration programs delivered promising discoveries - levels 300 and 700 at Eagle River (Wesdome) and Lower Zone at Island Gold (Richmont)
• both mines are in their transition periods, ramping-up production from new discoveries
• both companies forecast much higher production in the coming years

Of these two companies it was Richmont which, most recently, delivered outstanding returns for its investors (the author of this blog included). Wesdome was a laggard. 

Well, I think that Wesdome is a sort of an outsider - not many investors are even aware of its existence. In my opinion, it is a mistake because Wesdome or, more precisely, its Eagle River Mine, is a very, very decent deposit. 

However, in 1Q 2016 the company delivered very poor results. Let me show just one chart:

Since 1Q 2015 the company was on track to decrease its production costs (represented by all-in sustaining costs) from C$1,971 to C$1,387 per ounce of gold. Then, suddenly, in 1Q 2016 these costs went strongly up to C$2,505 (an increase of 80.6% in just one quarter!). Well, I was very surprised. What is more, one of the largest Wesdome shareholders, Resolute Performance Fund, today announced that it initiated the action against the current company's management. Let me cite an abstract from this announcement:

"Resolute is particularly concerned with:

• the fact that gold production dropped to 8,036 ounces in the first quarter of 2016 

from 14,484 ounces in the third quarter of 2015;

• the significant increase in cash burn in the first quarter of 2016, as reflected by the 

decrease of $7.3 million in cash and cash equivalents, compared to a decrease of 

$0.362 million in the third quarter of 2015;

• the significant increase in the all-in sustaining costs per ounce on a production

basis to $2,501 per ounce in the first quarter of 2016, compared to $1,368 per

ounce in the third quarter of 2015; and

• the proposed increase in the size of the board of directors from five to eight

members, which Resolute believes will simply increase overhead and other costs

without leading to the necessary operational changes."

But the "best" part is here:

"Resolute does not believe that the proposed board and existing management are capable of addressing the pressing issues at Eagle River."

Well, Wesdome management got a very strong message. It looks like the battle of Wesdome has just started.

To be honest, I think that Resolute announcement confirms the fact that Eagle River is an excellent deposit. What is more, I do not think that Resolute action was ignited by the last quarter results. It  looks like the matter is much deeper and I expect that in the coming future we will get more info on this issue.

Summarizing - in my opinion, Resolute action against the current company's management is a starting point for the Eagle River takeover. Expect hot news on that issue soon. 

Both Gold And Silver Are Still Far From A Bullish Frenzy

A few days ago The World Gold Council released its report, called "Gold Demand Trends". Although some people are declared critics of these reports, in my opinion, World Gold Council publications are always worth reading.

I do not want to go very deeply into this report but let me show just one chart:

source: Simple Digressions and the World Gold Council

The chart shows the difference between the gold demand and its supply. For clarity, I have plotted the average quarterly figures.

The chart explains that it was the increased demand that was standing behind the last rally in gold. According to the World Gold Council, in 1Q 2016 gold demand was 1,286.4 tons while supply was 1,134.9 tons. As a result, demand was higher than supply by 151.5 tons. 

I think it is good news for gold bugs. The similar situation happened in 2008 (demand higher than supply by 65.8 tons per quarter) and in 2010, 2011 and 2012. Each time demand was higher than supply the gold prices were in their upward trends. 

Another fact - it looks like the last rally may be the beginning of a new bull market phase in gold. In 2013, 2014 and 2015 each rally in gold prices was a short-term event during the downward trend. Note that in that period demand was lower than supply - simply put, gold was not supported by fundamentals. 

In 1Q 2016 it was different - the rally was supported by gold fundamentals.


Further, it looks like many analysts are warning of incoming severe correction in gold prices. While it may be the case (nobody knows the future), I see it a little bit differently. In my opinion, there is still no excessive optimism in gold and silver markets. Let me show these two charts (according to the COT Report):

Chart 1

Chart 2

The charts show the ratio of long positions / short positions, held by speculators in silver and gold futures contracts. The excessive optimism is marked by red arrows on Chart 1. 

In the case of silver, we may talk about a bullish frenzy when the ratio is over 12 (for example, on November 23, 2010, speculators were holding total long position in silver futures contracts of 48,870; their total short position was standing at 3,222 contracts so the ratio was 15.2).

In the case of gold a frenzy is when this ratio stands at above 7.

Today neither gold nor silver are even close to their frenzy ratios.

Richmont Mines Delivers Excellent 1Q 2016 Results

Richmont Mines is one of my five stock picks included in my model precious metals miners portfolio. A few days ago the company released it 1Q 2016 results. Excellent results. Below you will find the summary of this report (the most important measures are marked with yellow color):

* - free cash flow is defined as cash flow from operations (as reported in financial statements) less expenditure on property, equipment, acquisitions etc.
** - cash flow from operations is defined as cash flow from operations (as reported in financial statements) less working capital issues


Note an increase in sales of 41.5% while the price of gold (realized) went up only 8.9%. It is an effect of much higher gold production and sales.

These excellent operating results (higher production at stable costs of production) had a tremendous positive impact on cash flow from operations (an increase of 120%), EBITDA (up146%) etc.

I am sure that my readers know that the main factor standing behind these results is the Island Gold Mine. Currently the company is going into deeper levels of Island Gold (below 400 meters). The ore there is of much better quality. For example, between 2011 and 2014 Richmont was processing the ore from upper levels with head grades in the range of 4.63 - 6.10 grams per ton. 
In 2015, which was a transition year, the company was mining the ore grading 7.31 grams per ton, on average. In 1Q 2016 the average head grade was standing at 11.31 grams per ton! 
The chart below summarizes these figures:

Well, due to the fact that Island Gold is a dominant property in the company's mineral portfolio, its excellent performance should be driving the company's results higher in the coming years:

Summarizing - in my opinion, Richmont Mines is one of the best world miners. Its flagship property, Island Gold, is still open for exploration so investors should expect additional, good news on this deposit in the coming future. 

Additional note

It is a negative note. Richmont is a growing company. It means that it should deliver better and better results in the coming future. Of course, its shareholders should be happy - Richmont share prices go up. However, there is one class of stakeholders that benefits even more. What is more, in my opinion, this class gets too much. This class is the company's management: 

The chart above shows that the so-called "Share-based payments" account for around one third of total management compensation. Between 2010 and 2015 the company's management was paid C$32.6 million, of which as much as C$11.2 million was attributed to share-based payments (34.4% of total compensation). 

It is not usual. For example, Barrick Gold usually pays its managers not more than 5% of their compensation in share-based payments (2015 Annual Report, Note 32, page 163). Well, I understand that Richmont is a much smaller company than Barrick. It means it has less cash to pay its managers decently therefore the company pays them with stock options. However, it also means that, indirectly, the company's management is paid by Richmont shareholders - between 2010 and 2015 the management exercised 2,828 thousand stock options. In other words, because the current share count is 58,651 thousand, Richmont shareholders diluted their stake by around 5% in order to compensate the management. 

Another Drilling Company Has More Work To Do

In my last article on Geodrill I have noted that West African drilling companies are doing quite well.

Yesterday another driller, Orbit Garant, released its 1Q 2016 report. Contrary to Geodrill, Orbit Garant offers its services mainly in Canada. 

However, similarly to Geodrill, Orbit also managed to increase the number of meters drilled:

The red arrow marks an uptrend in the number of meters drilled.

On the other hand, also similarly to Geodrill, the pricing power is still at Orbit's customers:

Although the company has more work to do, it gets less money for each meter drilled ($65.2 per one meter in 1Q 2016).

I would say - there are the first symptoms of a revival (more work) but the industry is still far away from a boom (low prices). 

Drilling Companies - Very Low Valuations

In addition to the last article on Geodrill, below I have plotted two charts showing the current valuations of a few drilling companies:

According to the chart above, using a multiple EV / EBITDA as a valuation measure, Geodrill and Swick were two strongly undervalued drilling companies.

On the other hand, using another metric, price to book value (P / BV), it looks like nearly all drillers are valued below their book values:

The only exception is Major Drilling, one of the biggest world drilling companies.

Geodrill - Yes, They Can!

A mineral drilling industry is in its cyclical slump. However, there is one company, which seems to be untouched by the problems encountered by its peers.

It is Geodrill. The company owns a fleet of 42 rigs, of which 37 are available for operations. Geodrill operates mainly in West African countries: Ghana, Mali, Burkina Faso and The Ivory Coast. 

My readers surely know that I am quite enthusiastic about West Africa. Despite some specific risks as, for example, the Ebola disease, these countries offer very decent conditions for mineral mining companies. Hence, a number of mining companies, mainly of Canadian origin, run very decent mining businesses there. And if there are active mines there is also the demand for drilling services in general and for Geodrill, in particular. Below I have enclosed the list of Geodrill clients, past and present: 

                                            source: Geodrill

As I noted above, despite the industry slump, Geodrill reports quite decent results. In 1Q 2016 the company was even profitable, reporting a small net income of $1.6 million. However, in my opinion, the most important thing is the fact that Geodrill has managed to increase the number of meters drilled:

                               source: Simple Digressions

As the chart shows, since 2014 Geodrill has been increasing the number of meters drilled. In 1Q 2016 the company broke its record, drilling 240.4 thousand meters, the highest number in its history. 

However, the prices obtained by Geodrill are still at their historical lows:

                                 source: Simple Digressions


It looks like there is the demand for drilling services but the conditions (prices) are set by the customers (mining companies).

Anyway, more meters drilled, even at low prices, means higher revenue and better financial results. For example, look at cash flow from operations (without working capital issues and taxes). For better clarity, I have plotted the average quarterly cash flows: 

                             source: Simple Digressions

Let me count one thing. $5 million a quarter means $20 million in annual cash flow from operations. Deduct from this cash flow:

• $2 million in taxes
• roughly $10 million in sustaining capital (to keep the company going)

and as much as $8 million is left for the company per year.

After discounting this figure by 10%, the business value (enterprise value) stands at $80 million. Because the company carries practically no net debt (cash = debt) the value of the business is equal to the market value of the company's stocks.

Today Geodrill shares are trading at $0.89 a share so the company's market value is $40 million. It looks like my quick valuation has disclosed that Geodrill is now 50% undervalued.

Endeavour Mining - The Old Question Marks Remain; One New Added

In my first article on Endeavour Mining I stated that there were too many question marks over the company. Let me remind them and add a few current observations:

One mine story

The company is a one mine story - of the four operating mines only Agbaou delivers decent results. Fortunately, in 1Q 2016 the Ity mine, the newest operation in the company's portfolio, also delivered quite a nice operating profit of $6,539 thousand:

I am very curious how this new mine will be performing in the future. Looking at 1Q 2016, I am becoming confident that it may be a very decent operation.


The Nzema mine

It is still a laggard. What is more, in 1Q 2016 its performance had even deteriorated - operating costs went up from $934 to $1,111 per ounce of gold sold (an increase of 19%):

Well, the main factors standing behind this poor performance were grades and recovery ratios:

As I noted in my last article, Nzema takes part of its ore from the third party. This ore is generally of better quality than the ore coming from Nzema. In 1Q 2016 the company was not able to bring a sufficient amount of the ore from the third party (only 7,819 ounces of gold were produced from the ore from outside; in 1Q 2015 it was 10,780 ounces). Hence, higher costs and worse results. 

Acquisition of True Gold

On April 26 the company announced the completion of the acquisition of True Gold. As a result, Endeavour has added a mine under construction, called Karma (located in Burkina Faso). 
My readers know that, in my opinion, Endeavour has overpaid for True Gold but I am very keen on getting more knowledge on Karma's performance. The data should be available very soon - Karma commercial production is expected in June.  

Hounde Project

Hounde is another project under construction and no new relevant events took place since my last article on Endeavour.


Current valuation metrics.

Similarly to the previous article, below I am putting a chart showing current valuations of a few African miners:

Summary

In my previous article on Endeavour Mining I did not recommend its shares as a buying opportunity. I sustain my stance on the company. In 1Q 2016 the company delivered more or less similar results as in 1Q 2015. Of the four operating mines, Agbaou showed decent results, Nzema performed worse than last year and the new mine, Ity, in my opinion, delivered very decent results. 
The other the so-called question marks (Karma, Hounde) are still unknowns. 

Additional note

Endeavour Mining mines are owned not only by the company. Other stakeholders, mainly the governments of resident countries, hold the following stakes:

• Agbaou - 15%
• Nzema - 10%
• Tabakoto - 20%
• Ity - 45%

And here is another problem. The best mines are Agbaou and Ity. Unfortunately, in the case of Ity, as much as 45% of net income, generated by this mine, goes to the other stakeholders; the company gets only 55% of the cake. It is not a nice info for the company's shareholders because one of its best mines delivers only a fraction of its earnings to Endeavour shareholders. 

On the other hand, 90% of Nzema loses is attributable to the company's shareholders. 

It means that one of the best mines delivers only 55% of its profits to Endeavour shareholders and the worst mine charges these shareholders with 90% of its loses. As a result, despite the fact that Endeavour 1Q 2016 net earnings were $11,131 thousand , only $4,054 thousand was attributable to the company's shareholders. 

It is another negative factor investors should remember when planning to invest in Endeavour Mining shares.