My Precious Metals Portfolio - June 2016 Update

In June the precious metals market continued its bull run. Gold went up 8.7% but the absolute winner was silver - 17.1% up. 

My model precious metals stocks portfolio increased its value by 25.8% (3.1 percentage points above GDX):

Below you will find the results delivered by my portfolio, GDX and a broad stock market (represented by S&P 500) since inception: 

In June it was Fresnillo that delivered the highest return. The sleeping silver / gold giant woke up and made 49.7% (measured in US dollars) - in my opinion, it was an outstanding result, taking into account the size of the company (market cap $16.1 billion):

Well, the above presented results confirm the fact that the entire precious metals market is in its bull stage.  

Checking My Negative Articles On Precious Metals Miners

Most recently I have published a few negative articles on a few mining stocks (some of these articles were published on Seeking Alpha and some on this blog).

However, because there is an ongoing bull market in gold and gold - related stocks, it is no sense to short these shares. Even if they are not as good as other miners, they will probably go up. Why? Because, basically, a furious bull market lifts all stocks, no matter whether the companies standing behind them are decent or hopeless ones.

Therefore the only chance to check whether my negative outlook is worth anything is to measure the relative strength of a specific stock against the broad precious metals market.

Let me check myself (and I will be doing it from time to time). And let GDX represent the broad precious metals stock market.

The following companies were awarded with my negative outlook:

• IAMGold - article on IAG was published on June 24, 2016
• Endeavour Mining - June 19, 2016
• Banro Corp - January 6, 2016
• Energold - June 14, 2016
• Gold Resource (GORO) - March 9, 2016

Now, the chart below shows the relative strength of the above listed stocks against GDX:

Well, it looks like I have been right on IAMGold, Banro and Energold. All these stocks were weaker than GDX. 

On the other hand, I have been wrong on Gold Resource (stronger than GDX by 23.1 percentage points) and neither wrong nor right about Endeavour Mining.

Hmmm.....

Oh Britain

The British are unlucky. After saying no to the European Union, today Britain was downgraded by two rating agencies, S&P and Fitch.

The main British stock market index, FTSE 100 is 2.55% down today (the second down - day after Brexit). 

Quite interestingly, since March 2009 FTSE has gained 69%. However, it gained only 55% when the result is measured in US dollars (it means that an American investor would earn only 55% if he / she invested in FTSE 100): 

Further, the British Pound lost 11.8% against the US dollar since last Friday (yellow area):

Etc. etc.

Finally, today England lost to Iceland at EURO 2016 Championship. After Brexit there is EUROxit. 

Oh boy...

One Of The Highest Gold Inflows Into GLD After Brexit Results

In my opinion, there are still no indications that the ongoing bull rush in precious metals is going to pause or end. 

Quite contrary, apart from the usual activity visible in COT reports (the charts below), the investors, horrified by the British Brexit, loaded up large quantities of gold:

source:GLD

The chart above shows gold in / out flows, reported by GLD. Last Friday (the day after the Brexit vote; I remind the heavy sleepers - the British voted to leave the European Union) GLD reported one of its highest gold inflows  - as many as 18.4 tonnes of gold (592 thousand troy ounces) went into GLD vaults.

As a matter of fact, there were only four cases when GLD reported higher inflows during the current bull market in gold:

• December 18,2016: an inflow of 603 thousand ounces
• February 19, 2016: 622 thousand
• February 22, 2016: 622 thousand, once again
• May 2, 2016: 669 thousand

Finally, to make my readers informed - below you will find the updated charts showing net positions held by speculators in gold / silver futures:

source: COT Report

source: COT Report

Investors Do Not Believe The British Economy Will Suffer Due To Brexit

It looks like the investors do not believe that the Brexit is going to have a significant impact on the British economy. 

For example, today, in the morning, the 10 year gilt yields (gilts are bonds issued by the British government) dropped 25% in heavy trading:

However, in my opinion, investors took advantage of this event and used much lower exchange rates between the British Pound and other currencies to buy gilts. 

Let me present a short analysis of this event, taking the American investor as an example. 

The 10 year gilt bears a coupon of 2%:

source: Bloomberg

Let us assume that the investor is buying the 10 year gilt at 7.38 a.m. paying 108.08 pounds. Here are cash flows embedded into this deal:

An internal rate of return for the above case is 1.14%. It means that an investor buying a 10 year gilt today and holding it until redemption will earn 1.14% a year.

Yesterday a 10 year US bond was yielding 1.69%. Assuming that an American investor wants to earn at least 1.69% on buying gilts for US dollars (why would this investor want to earn less?) let me check what exchange rate between the British pound and the US dollar would have to be to fulfill this scenario.

The cash flow is below:

Note, that today in the morning the exchange rate GBP / USD was 1.36981:1 so an American investor paid US$148.05 for a gilt worth GBP108.08.

To earn 1.69%, the exchange rate has to be standing at 1.44, which means that American investors think that in the coming years the British Pound should go up 5.1% against the US dollar (1.44 : 1.36981), on average.

I have no idea whether an American investor is right about it but he / she surely expects that the British Pound should go up. 

On the other hand, if that is the case, investors are trying to take advantage of the fact that the British Pound slumped to lowest levels since 1985: 

Well, I am curious what George Soros thinks about it.

Wesdome Gold - No News But The Charts Are Telling There Is Something Big In The Making

Since the Annual Meeting there is no news from Wesdome Gold. However, many things are happening as far as Wesdome share price action is concerned:

Note the following events:

• The upper panel shows that since middle 2013 Wesdome shares have been stronger than the broad precious metals market, represented by GDX (the way I present the chart is a little bit unorthodox - GDX is expressed in US dollars while WDO.TO chart is in Canadian dollars - well, there is no Wesdome chart available in US dollars)
• the panel in the middle shows that Wesdome shares are trading in rectangles. Firstly, they were trading in the rectangle 1, then, after breaking up, they started trading in the rectangle 2 etc. - well, the pattern is quite simple
• the lower panel shows that, starting from late 2015, the trading volume went strongly up. You can spot similar patterns looking at the charts of other small-cap miners but Wesdome beats them all. Here the increase in volume is particularly impressive.

Summarizing - although there is no news from the company, the trading activity indicates that something big is happening...

Teranga And Gryphon Deal - Additional Remarks

Today I published an article on an acquisition of Gryphon Minerals by Teranga Gold. The article is available at Seeking Alpha website. 

The main thesis presented there is that it is a nice deal but only for Teranga. 
To remind my readers, Teranga is going to acquire Gryphon (with its flagship project called Banfora and located in Burkina Faso) for around US$49.1 million.
However, according to my calculations Gryphon is worth at least US$148 million.

That is why I think that Gryphon shareholders should say "NO" to this deal.

On the other hand, I cannot comprehend why the Gryphon management accepted this offer. For example, let me look at what the Gryphon shareholders put into the company over past years. 

The best place to find this figure is the company's consolidated statement of financial position, especially the issues included in the line called "Equity":

source: Gryphon 2015 Annual Report

The graph shows the figures as of the end of 2015. 

Summing up the following figures, I may find out how much money the Gryphon shareholders invested into the company:

• Contributed equity: A$229.0 million
• Accumulated losses: A$215.8 million
• Total investment: A$444.8 million

So the Gryphon shareholders invested around A$444.8 million. 

It is around US$333.6 million, using the exchange rate between the Australian dollar and the US dollar of 0.75:1.

And today, when West African deposits are in fashion (read: there is high demand on them), the Gryphon management wants to sell the company for US$49.1 million. 

Additional remarks (added on June 22):

At this point, don't get me wrong. I do not mean that the Gryphon management has to sell the company at around US$333 million. No way, the company is not worth that amount of money. All I want to say is this: in my opinion, the price should be somewhere between the Teranga's offer (US$49.1 million) and the fair value (US$148 million). 

My Old, Boring Mantra - US Stocks Are Poised To Go Down

I am a very boring person. Once again I want to look at the US stock market. And once again I think US stocks are poised to go down.

Let me show the first chart (in all charts I am using the COT Report):

The chart shows net positions held by speculators in S&P 500 futures. It looks like the most popular method of playing US stocks, i.e. trend following, is not working anymore. Since middle 2015 the S&P 500 index has stuck between 1,860 and 2,130 points. 

What is more, speculators are less interested in taking long positions in this index - see the green arrow indicating lower net long positions held by speculators (despite higher highs in S&P 500).

Further, it looks like we are currently at some kind of an inflection point. The chart below shows that these days the largest amount of players is betting on VIX futures (the highest open interest in history), which is an alternative way of playing US stocks:

However, the question is: "What are speculators betting on?"

Well, the answer is here:

The bet is called: "Stocks go higher". The chart shows that speculators hold huge net short positions in VIX futures (they bet on lower VIX readings), which means that they are betting on higher readings in S&P 500 (lower VIX means higher stock prices).

Well, I know I was wrong on the US stock market many times. Am I wrong once again?

Endeavour Mining - In My Opinion, The Last Offering Makes No Sense

A few days ago Endeavour Mining announced that is was going to increase its share count by 6.25 million ordinary shares at a price of C$20 a piece for net proceeds of C$118.75 million, at least (there is an option to increase the issue by another 0.9 million shares). Endeavour intends to use the proceeds as follows:

• C$40 million – funding the two-year drilling program conducted on the premises located in the Ivory Coast, Burkina Faso and Mali
• C$70 million – funding development projects, especially the Ity carbon-in-leach processing facility
• C$8.75 million – general corporate purposes

It looks like Endeavour needs around C$118.8 million (US$92.6 million) to finance its drilling program and the Ity upgrade.

Let me calculate how much cash the company actually has.

At the end of 1Q 2016 it had cash of US$117 million. 

Then the company announced the so-called La Mancha anti-dilution offering of 7.5 million shares, priced at around US$8.5. This offering will bring around US$64.4 million to the company. 

The last offering should add another US$92.6 million in cash.

Summarizing, after these two offerings Endeavour should have around U$S274 million in cash. 

Because the Hounde project (discussed in my last article on Endeavour) was fully funded before these offerings, the company is going to have US$181.4 million in excessive cash (US$274 less total cash needs of US$92.6 million). 

The question is: “Did the last offering of 6.25 million shares make any sense?”. 

In my opinion it did not. What is more, Endeavour is able to deliver significant cash flow from operations. For example, in 2015 it delivered US$54.7 million in free cash flow (defined as cash flow from operations less expenditures on mining interest). Lastly, at the end of 1Q 2016 a ratio of net debt / EBITDA was standing at 0.78, which means that the company carries vey low debt level (no cash is needed to pay debt off).

Summarizing – I perceive the last offering as something harmful for the current shareholders. Further, this offering makes me wondering about the quality of the company's management.

Forget About SGDJ - GDXJ Is Even Better

A few of my readers noticed that GDXJ is even better ETF than SGDJ. Definitely, they are right and I was wrong in my last article.

Here is the chart showing the relative strength of GDXJ against SGDJ:

As usually, it is clear that both ETFs have been in their uptrends since January 2016 (the violet vertical line - a start of the ongoing bull market in gold). 

However, GDXJ has been stronger than SGDJ - look at the panel in the middle and the green down-trending line.

Now, let us look at the GDXJ top 10 holdings:

Five companies are these same miners as those held by SGDJ (Alamos, B2 Gold, First Majestic, IamGold and Osisko Gold). The next five are different (Pan American, Hecla, Centamin, Nova Gold and Pretium).

Well, there is quite a big difference between these two ETFS (I mean their 10 top holdings):

• GDXJ is more about silver (there are three silver miners in the GDXJ 10 top holdings: First Majestic, Pan American and Hecla; as for SGDJ - there are only two silver producers: First Majestic and Coeur); it is an advantage of GDXJ over SGDJ - during bull markets in precious metals silver prices are stronger than gold ones
• GDXJ is more risky than SGDJ - such companies as Nova Gold and Pretium are development-stage miners where no gold is delivered; however, note that higher risk means, as a rule, higher profit

Summing up - forget about SGDJ; GDXJ is better...

...and hats off to my intelligent readers.

Forget About GDX; SGDJ Is Better

GDX (Van Eck Vectors Gold Miners) is one of the most popular gold-related ETFs. However, after a closer look at its performance I think there is another, much more suitable ETF to play the precious metals bull market. This ETF is called "Sprott Junior Gold Miners ETF and its ticker is "SGDJ".  

Why do I think so? Let me show the price action of both ETFs:

The upper panel shows GDX and the lower panel SGDJ price actions.
The panel in-between shows the relative strength of SGDJ against GDX. Note that since the beginning of the current bull market phase in gold (the violet vertical line) both ETFs price actions have looked similarly (upper and lower panels). 

However, the panel in the middle shows that SGDJ has been stronger than GDX. 

In my opinion, the most important factor standing behind this phenomenon is the structure of both ETFs. For example, 13.4% of total GDX holdings belongs to royalty and streaming companies (mainly Franco - Nevada, Silver Wheaton and Royal Gold). 

These companies are the laggards - since January 2016 they have gone up "only" 45.8% while GDX is 84.7% up. 

As a matter of fact, during bear markets in gold, streaming and royalty companies are stronger than GDX. And vice-versa - during bull markets they are weaker. So those trying to make money during a bull run should avoid GDX. Instead of GDX they should choose SGDJ.

The chart below shows the SGDJ top 10 holdings:

As the chart shows, there is only one royalty company, Osisko Gold. 

However, Osisko is not a typical royalty company. Apart from royalty interests, they also have significant stakes in such companies as: Oban Mining, Falco Resources or Barkerville. Add to that Exploration and Evaluation Assets (for example Coulon Project) and you have something between a miner and a financial royalty company. 

Finally, all top 10 holdings are quite large companies (market caps starting from around $1 billion). 

Brexit? What Brexit?

In a few days the British will decide whether the UK remains a member of the European Union or leaves it. These days everybody seems to be fixated on that issue.
However, financial markets seem to be not bothered with a probable Brexit.

Let me show a few charts.

Firstly, let us look at the British 10-year bond yields:

As the chart shows, despite the incoming "catastrophe", investors are vey busy buying gilts.

Now, the exchange rate between the British Pound and two major currencies, the US dollar and the Euro (especially the Euro):

source: www.stockcharts.com

Well, most recently the Sterling has weakened against the Euro but in the long-term the British currency is in its upward trend against the European currency. 

Last but not least, a few days ago the British Pound weakened strongly against gold. Maybe this is an indication that financial markets fear about the Brexit?  

Well, I do not think so. The same pattern we may spot at the chart below. The Euro is also weakening against gold:

Summarizing - for the time being I can see no spectacular signs of an incoming tragedy. Brexit? What Brexit?

Wesdome Gold - Is There A Compromise?

Yesterday Wesdome Gold held its Annual Meeting of Shareholders. 

To remind my readers, Resolute Performance Fund, the biggest shareholder in the company, wanted to support the following members of the board: Nadine Miller, Rostislav Raykov, Barry Smith and Rowland Uloth (the company's CEO).

On the other hand, a few days before the meeting the fund sent a message that it was against Duncan Middlemiss, Charles Page and Bill Washington.

Here are the results of the election:

As the table shows, Mr. Washington and Mr. Page were elected as the directors.
Mr. Raykov, supported by Resolute, was not elected.

However, Mr. Middlemiss, although initially undesirable by Resolute, was unexpectedly supported by the Fund.

Well, it looks like the Fund and the company have compromised on some issues. Now I am expecting additional news / comments from the company / Resolute.

By the way, did any of my readers take part in the Meeting?


Additional note:

Wesdome shares went strongly up today (an increase of 15.6% on TSX) on huge volume:

source: www.stockcharts.com

Energold Wants More Cash

Today Energold announced a new public offering. The company wants to sell 5 million shares at a price of C$1.0 a unit (one unit consists of one common share and one common share purchase warrant giving a right to purchase one common share at a price of C$1.75). 

It means that Energold wants to increase its cash level by C$5 million. The company states that it intends to use the proceeds to fund working capital.

Well, in my opinion, it sounds strange because Energold maintains a high level of working capital:

                        source: Simple Digressions

Note: working capital is defined as: inventory plus receivables less payables

Since 2012 the company's revenue has been going steeply down but its working capital has been relatively stable (around C$60 million). 

Generally, a company needs more working capital to finance its growth, for example to increase its revenue. However, Energold, since 2012, has been shrinking. It means that it should have needed not more but less working capital. So what is going on?

Here is the answer:

                                   source: Simple Digressions

In my opinion, Energold is getting short of cash because it holds too high inventories. Let me have a look at the company's inventories:

source: Energold 2015 Annual Report (page 51)

Basically, the Energold's inventory comprises just one category: "Supplies and raw materials". Energold defines its supplies and raw materials as:

"The Company maintains an inventory of operating supplies and drill  consumables such as drill rods, tubes, bits, casings, consumable supplies and lubricants as well as pumps, motors and other drilling equipment and parts. Procurement, transportation and import duties are included in inventory cost. Inventories are valued at the lower of cost and net realizable value. Cost is

determined on a weighted average cost method"

And then:

"The Company applies the following policies with respect to inventory accounting and valuation:

• (i) Higher value drilling equipment parts and supplies, as well as consumable inventories are valued at landed cost, based upon country of use, less an allowance for normal wear and tear based upon management’s judgment of the expected remaining field service life of the equipment parts and supplies.
• (ii) Each drill has a base inventory of smaller value equipment parts and supply items which are valued at landed cost"

Well, it looks like there is too much about "landed costs" and too less about "net realizable value". Note that such a high level of inventory is nothing new for the company (this level has been more or less the same since 2012). 

In my opinion, Energold needs fresh cash because the company "invested" too much in the aging inventory. 

At the time of writing this post, investors are selling Energold shares at huge volume (and shares are down 14%). It is surely a reaction to the new offering (share count will increase by 10.4%):

                                 source: www.stockcharts.com

What is more, most recently Energold shares went too high and too fast.

On the other hand,  if I am right on the company's problems, in the medium-term Energold shares are too risky. 

Tony Makuch Leaves Lake Shore Gold

Today Tahoe announced that Anthony Makuch, the former CEO of Lake Shore Gold, has left Tahoe. At the same time another mining company, Kirkland Lake, announced that Mr. Makuch was elected the CEO of Kirkland.

To remind my readers, a few months ago Lake Shore Gold was acquired by Tahoe Resources. On this acquisition, Mr. Makuch became the Executive Vice-President and President of Canadian Operations. 

However, it looks like this post did not meet his expectations. Let me remind a few facts from Mr. Makuch biography:

• First of all, he was the CEO of Lake Shore Gold (since March 1, 2008). Under his leadership the company became a mid-tier gold producer with annual production of 179 thousand ounces of gold in 2015. 
• Before Lake Shore Gold, he was a member of the management team of FNX Mining, a company acquired by Quadra in 2010 (then, in 2012 Quadra was acquired by a Poland-based copper - silver giant, KGHM). 
• Before FNX, Mr. Makuch was Vice President of Dynatec, responsible for the Sudbury JV, comprising such projects as McCreedy West, Levack Mine, Victoria (now under KGHM's development), Podolsky and Kirkwood. Later on the assets of Sudbury JV were purchased by FNX (with Mr. Makuch continuing as the Sudbury's manager). 

Well, it looks like Lake Shore Gold has lost an excellent manager. 

Fortunately, Kirkland gained the right person to run its excellent business. 

GLD - Still More Gold At Its Vaults

Investors continue to pile up gold in GLD. It does not matter whether gold goes up or down, there is more and more gold in GLD vaults:

It looks like in June we are going to see one of the highest gold inflows into GLD. Since the beginning of this month as many as 812 thousand ounces of gold (25.2 tons) were acquired by GLD. In other words, the uptrend in gold prices is supported by higher demand. 

What is more, since the beginning of 2016 GLD increased its gold stakes by 251.6 tons. It is quite a similar development to that seen in 2009. To remind my readers, in 2009, at the beginning of the last bull market phase in gold, GLD increased its gold holdings by 353.4 tons. 

On the other hand, since the beginning of 2009 to June 10, 2009 as many as 351.9 tons of gold had flowed into GLD (40% more than this year). Then, between June 10 and December 31, 2009 only 1.5 ton of gold entered GLD: 

Well, in general, fundamentals look good but we should bear in mind that the gold market is very tricky and volatile.

How About Zinc?

According to Geology com:

"Zinc is currently the fourth most widely consumed metal in the world after iron, aluminum, and copper. metals. ....about one-half of the zinc that is produced is used in zinc galvanizing, which is the process of adding thin layers of zinc to iron or steel to prevent rusting.

The next leading use of zinc is as an alloy; the zinc is combined with copper (to form brass) and with other metals to form materials that are used in automobiles, electrical components, and household fixtures. 

A third significant use of zinc is in the production of zinc oxide (the most important zinc chemical by production volume), which is used in rubber manufacturing and as a protective skin ointment."

All of the above listed uses are industrial ones, which means the demand for zinc is cyclical. However, despite the popular thesis that a majority of world economies are slowing down, zinc prices are going up:

The start of a rally in zinc lifted market valuations of zinc producers:

Well, there are no only-zinc producers. But Trevali and Canadian Zinc are, more or less, mainly zinc-related companies (Canadian Zinc is currently a junior company, preparing its Prairie Creek Mine Project for incoming construction phase). All these companies took part in the last zinc rally. 

I realize that the world stocks of zinc are at their lowest levels but this rally is really counter - intuitive...

Impact Silver - Progress, Progress

Impact Silver is a strange company. The way it reports its revenue is unique. 
Generally, mining companies disclose the average metal prices received during the reporting period. Most often this price is expressed in US dollars per ounce of gold / silver etc.

Impact Silver is different - it discloses its sale price per ton of ore. I have contacted the company to explain why they use such an usual way of reporting. 

They answered:

"While we would love to report various other non-silver elements, the simple fact is IMPACT sells metals concentrates to smelters such as ...(names of smelters removed by Simple Digressions) and any other metal traders on a month to month basis. Pricing changes daily and it’s also not as reliant on spot as most would think – due to distance, smelting costs, and the metallurgy factor (see below.)

It’s simply much more efficient for us to report figures on a ton-by-ton basis. For interested investor it’s always possible to work backwards and arrive at a dollar/revenue figure and/or revenue %.

Further, our silver mix and metallurgy is much “cleaner” and has less deleterious elements so smelters often will price ours more to mix in with their lower quality ore. This makes our concentrate command a premium on a certain month to these clients"

Well, I think it is not that easy to arrive at a dollar figure but O.K. Let it be.

The most important thing is the fact that Impact is making steady progress. They cut their production costs:

                                    source: Simple Digressions

Note: accounting costs are defined as: operating expenses + depreciation, amortization and depletion + all administrative expenses + share based payments + management fees

As the chart shows, since 2013 the company managed to cut these costs from C$105.9 to C$89.8 per ton of ore (in 1Q 2016) - a decrease of 15.2%. 

Impact uses a little bit different metrics - it reports its direct costs of production. Here the company also made progress - in the same period these costs went down from C$70.2 to C$68.36 per ton of ore (a decrease of 2.6%). Well, it looks like cutting direct costs of production is much harder than other costs (mainly overhead). I think the message is clear: "Do not expect substantially lower mining costs when the company is mining at higher grade zones" 

The indirect confirmation of this thesis is below. Let me cite the company (2015 Annual Report, page 2):

"Despite persistently low silver prices throughout 2015 , our focus on profitability and mining higher grade zones of silver (especially at San Ramon Deeps and Mirasol) resulted in revenue per tonne of $91.68 in Q4 2015 compared to $68.75 in Q4 2014."

Lower costs and higher revenue per ton of ore translate into stronger cash flows from operations:

                           source: Simple Digressions

Note: working capital issues and taxes paid are excluded from operating cash flow 

It looks like the above described positives were at last spotted by investors and most recently the deeply oversold shares of Impact Silver went strongly up:

                               source: www.stockcharts.com

Randgold - A Perfect Gold Miner?

Yesterday I presented a way of assessing the quality of a miner, using Banro Corp as a negative example. 

Today I would like to use the same method to show the opposite thing - an African miner operating excellent assets. I think everybody interested in the gold sector surely knows Randgold Resources. In my opinion it is one of the best world's miners (maybe the best). Its quality lies in excellent assets the company owns. 

To remind my readers - Randgold operates four mines, of which two are fully consolidated in the company's financial statements (Tongon and Loulo - Gounkoto complex) and the other two are accounted for using an equity method of accounting (Kibali and Morila). 

To keep things as simple as possible, below I present revenue delivered by all four mines per ton of ore processed, using a fixed price of gold realized in 1Q 2016: 

The chart shows that if between 2012 and 2015 Randgold were selling its gold at a fixed price of $1,187 per ounce (the average price realized in 1Q 2016) it would have increased its revenue from $88.4 per ton in 2012 to $105.7 per ton of ore processed in 2015. In my opinion, this assumption confirms the high quality of the company's assets.

Note: The last drop from $105.7 to $96.4 should be treated as a one-off. 

Now, cash costs of production:

Here it is easy to spot that between 2013 and 2015 Randgold cut its cash costs of production from $53.9 to $44.2 per ton of ore. 

Summarizing - higher revenue per ton of ore processed plus lower cash costs result in higher margins delivered by Randgold's mines.

Indeed, Randgold is the best in class...

How To Assess The Quality Of A Miner - Banro's Case

In my  opinion, one of the best ways to assess whether a miner makes any progress is to compare the economics of its operating mine / mines, using at least one fixed parameter. 
Let me explain it, taking Banro Corp as an example. 

In my last article on Banro, published on Seeking Alpha, I have noted that this company is regressing. Banro's flagship property, the Twangiza mine, is a good example of this sad process. 

Let me assume that Banro sells its gold at fixed prices, realized in 1Q 2016, i.e. $1,109 per ounce. Using this theorethical price, I may calculate Twangiza's basic economic measures in a little bit different perspective.

Firstly, if the gold produced at Twangiza had been sold for $1,109 per ounce in 2014, 2015 and 1Q 2016, the company would get $79.9, $87.4 and $71.4 per ton of ore processed. This revenue, called net smelter return (NSR), varies from period to period, mainly due to two factors:

• grades of ore processed
• recovery ratios

Then, because costs of production do not depend on the price of gold, I am subtracting these costs (actual ones) from NSR. As a result, I am calculating a margin delivered by the mine. The table below shows results:

                                          source: Simple Digressions

Now it is easy to spot that in 1Q 2016 Twangiza delivered very poor results. 

First of all, even if gold prices were the same in all periods the mine would generate smaller NSR - $71.8 per ton in 1Q 2016 vs. $79.9 per ton in 2014 or $87.4 per ton in 2015. Why? Because the ore processed at Twangiza was of lower quality (lower grades, lower recovery ratios). 

As a result, despite lower costs of production ($38.9 per ton in 1Q 2016 vs. $43.8 in 2015 etc.), in 1Q 2016 Twangiza delivered quite a low margin of just $33.0 per ton of ore processed.  

Summarizing - the biggest Banro's problem are not its costs of production (here the company is making good progress) but the quality of the ore processed (and mined). But to disclose this problem, the above analysis has to be done.