Sunday, July 31, 2016

Which buffett you prefer? A Canadian Or The American One?

It is Sunday so enjoy a little bit relaxing post on investment ideas.

Canadians have their own buffett - he is called Prem Watsa and runs Fairfax Financial Holdings. Americans have Warren Buffett and Berkshire Hathaway.

It is quite interesting to look at the long-term price performance of Fairfax and Berkshire:

The chart evidences that since 2002 Fairfax delivered higher return than Berkshire Hathaway. However, since middle 2011 Berkshire took the lead.

Now it looks like the situation may change. Since middle 2013 both companies have been delivering similar returns so, if historical patterns repeat, Fairfax should return to its over performance against Berkshire soon..

Saturday, July 30, 2016

My Precious Metals Portfolio - July Update

July was another month when my precious metals portfolio delivered a positive return. This time its value increased by 18.7%:

What is more - as usual, the portfolio delivered better results than the broad precious metals stock market, represented by GDX (an increase of 10.4%).
I think it is the best evidence that Fresnillo, B2 Gold, Newmarket Gold, Fortuna Silver and Richmont Mines are the best in class miners. 

Further, the chart below shows the way the portfolio and its peers performed since inception:  

Well, my picks returned 106.7 basis points more than GDX. The broad stock market, represented by S&P 500 returned nearly nothing. It is clear what works at the moment and what does not. 

Another interesting chart - it seems that since inception all stocks, apart from Fresnillo, delivered more or less similar returns (around 250%):

Of all my picks only Newmarket Gold released its 2Q 2016 results (I am going to present an update on this company soon) - they were excellent.
However, one thing was especially clear - the whole Newmarket story is about its Fosterville mine; the other two operations are becoming nearly negligible, which is definitely not a positive factor in the long-term.

Friday, July 29, 2016

Soybean Trade Is Bullish Now

Now the soybean trade is in my favor:

1. - downtrend line broken
2. - the price did not go below the bottom at around 973.75
3. - resistance broken (green line)

Prem Watsa Increases Its Hedge Against Stock Market Slump

Today Fairfax Financial Holdings (FFH:TO) released its 1H 2016 results. It is not my aim to provide a detailed analysis of this insurer but Prem Watsa's (the company's CEO) approach to financial markets and economy in general may be, in my opinion, a good lesson for all investors.

To remind my readers, Prem Watsa is well-known for his contrarian investment approach. For example, for many years his company has been betting on major world deflation.

Apart from that, since around 2011 the Fairfax CEO has been negative on US and Canadian stock markets. Therefore, since 2011 he has been using various hedging strategies to hedge his company against the risk of a major stock market downturn.

The current 1H 2016 report discloses that Mr. Watsa did not change his mind:

Fairfax hedge against a major stock market downturn

The chart below shows Fairfax net equity exposure. It is calculated in the following way:

net equity exposure = long positions in equities less short positions held in equity derivatives

As the chart shows, at the end of June 2016 the net position in equities was short of $969 million. It means that the company's exposure in common stocks, preferred stocks, preferred bonds, investments in associates etc. was totally hedged by short positions held in equity total return swaps, index total return swaps etc. What is more, the total short position held in various derivatives was higher than the company's equity exposure (by $969 million). It means that any stock market slump would be profitable for Fairfax.

Note: in 2Q 2016 Fairfax increased its net short position in equity related issues (from $474 million at the end of 1Q 2016 to $969 million at the end of 2Q 2016).

Summing up - Fairfax is well hedged against any stock market slump. If that is a case and US or Canadian stocks go down, Fairfax will make money (and vice versa - if stocks continue their march up, the company will lose money).

CPI-linked derivatives

It is the biggest Fairfax bet. Prem Watsa believes that in the coming years the developed economies will encounter major deflation. To make money on this economic event a few years ago Fairfax opened a huge position in CPI-linked derivative contracts.

The company writes:

"At June 30, 2016 the company owned $112.4 billion notional amount of CPI-linked derivative contracts with an original cost of $668.2 million, a market value of $227.3 million, and a remaining weighted average life of 6.1 years. The majority of the contracts are based on the underlying United States CPI index (52.8%) or the European Union CPI index (40.2%)"

For the time being Fairfax has lost $440.9 million on that deal (this amount is accounted for as "unrealized losses"). What is more, the results delivered by these instrument are very volatile:

As the chart shows, between 2011 and 2013 Fairfax was booking high losses on CPI-linked derivatives but since 2014 the situation seems to be turning in favor of the company. 

Well, Mr. Watsa is a long-term player so during the next 6.1 years many things may happen.

Finally, one question. I wonder why Mr. Watsa has no position in gold?
Any suggestions?

Last but not least - Fairfax share prices action:


It looks like Fairfax is an excellent long-term play. No matter whether US stocks go up or down (look at red lines) - Fairfax slowly goes up.

Thursday, July 28, 2016

Precious Metals Miners In 1H 2016 - Do Not Expect A Radical Improvement

A few big mining companies have just released their 1H 2016 reports.

Quite interestingly, in my opinion, these results are not too impressive. Although it is too early to present a full analysis of these reports but, for the time being, let me show the EBITDAs reported by a few miners (Barrick, Newmont, Kinross and Agnico Eagle):

source: Simple Digressions

As the table shows, the results are mixed. The biggest negative surprise is Goldcorp - due to much lower production figures, in 1H 2016 the company delivered much lower EBITDA than in 1H 2015.

On the other hand Kinross looks better now but I think that there are still many obstacles ahead of this company.

Summarizing - I think that many investors, seeing higher gold prices, are betting on much better financial results across the board.

I do not share this optimism - after many years of a bear market in gold it is too early to claim a radical improvement. I think that apart from a few really excellent miners, the overall results reported in 1H 2016 should be just decent .

Wesdome Gold Has A New CEO

It looks like there is something in the theory of a possible takeover of Wesdome Gold Mines by Kirkland Lake. Yesterday Rolly Uloth, Wesdome's CEO, was replaced by Duncan Middlemiss.

Mr. Middlemiss is a former CEO of St. Andrew Goldfields, a company acquired by Kirkland Lake early this year.

It seems that Kirkland Lake and particularly Eric Sprott, a notable Canadian investor and the director of Kirkland, are standing behind this nomination - now they have their man in Wesdome's management team, which makes the acquisition much easier.

The chart below shows the last price action of Wesdome shares:


Wednesday, July 27, 2016

Soybean Deal Looks A Little Bit Better For Bulls

A few days ago I initiated a small trade in soybean futures. This deal now looks a little bit better:

As the chart shows, the short - term downward trend in soybean prices was broken - it is the first indication that something is changing.

Today the FED holds its July meeting so big fluctuations in asset prices are expected.

Soybeans are no exception - FED statement is 15 minutes to the close of soybean trading so everything may happen...

Tuesday, July 26, 2016

Eric Sprott Increases His Stake In Excellon Resources

Excellon announced today that Eric Sprott, a notable Canadian resource investor, acquired 5.83 million units at a price of C$1.15 per unit.

Each unit comprises of one common share and one half of one Share purchase warrant.
Together with previously acquired units, Mr. Sprott now owns and controls 14.43 million common shares and 6.25 million purchase warrants representing around 25.5% of the outstanding shares on partially - diluted basis. 

According to the company, it intends to use this cash to:

" accelerated exploration at the Platosa Project, for capital expenditures at the Platosa Mine and Miguel Auza Mill, for working capital expenses and for general corporate purposes"
To remind my readers, in April Mr. Sprott acquired his first tranche of Excellon shares paying C$0.45 per share. Now, after a dramatic increase in Excellon share prices (look at the chart below), he still thinks these shares offer value.

Fresnillo Silver Mine - Deteriorating Asset

Fresnillo plc took its name from the Fresnillo mine, a giant silver operation. Quite interesting but this mine has been in operation since 1554 when one of the Spanish conquistadores started mining silver up there.

Once the company's flagship property, these days the Fresnillo mine is the third most important asset. In 2015 two other mines, Saucito and Herradura, reported higher revenue than Fresnillo.

Although the company tries to improve Fresnillo, this operation is deteriorating.

Let me show this slow but negative process in the long-term perspective.

Fresnillo is mainly a silver operation. Let me assume that all silver, delivered by the Fresnillo mine, was being sold at $15.55 per ounce, the average gross price of silver realized in 2015. If that was the case Fresnillo would deliver the following revenue, calculated per ton of ore processed:

How to read this chart? For example, if in 2005 silver was trading at $15.55 per ounce the company could get $240 per each ton of ore processed at Fresnillo.

In 2015, ten years later, it could get only $101 per each tone of ore processed.

As the chart shows, the deterioration is substantial and its main reason are lower grades reported at Fresnillo:

In 2005 the ore processed at Fresnillo contained 524 grams of silver while in 2015 there were only 220 grams of silver.

In 1H 2016 this negative trend stopped (at least for a while) - the company was processing the ore grading 234 grams of silver per ton. However, in my opinion, the magnificent Fresnillo mine's performance is a thing of the past...

Monday, July 25, 2016

Dundee Precious Metals - Power Outages In Namibia Are A Risk Factor

Today Dundee Precious Metals announced that its smelter, located in Tsumeb, Namibia, encountered a power outage. Well, I have made a quick research on this issue and it looks like power outages in Namibia are quite a common event.

I believe that DPM is prepared for such events and the company has signed a proper insurance policy. However, the last announcement reveals that the Friday's outage made some serious damage to the smelter. The company writes:

"...cooling water entered the Ausmelt furnace as a result of the back-up systems for power and cooling water not operating as expected, which compromised the integrity of the refractory lining. As a consequence, and following initial inspections completed on Sunday, July 24, 2016, management believes that the refractory lining will need to be fully replaced.
This outage is expected to reduce 2016 concentrate throughput by approximately 20,000 tonnes. The vast majority of the costs associated with repairing the physical damage are expected to be covered through the Company's insurance program. The response taken by operations management during this event ensured that no one was placed at risk during the outage"

To remind my readers, DPM planned to process 215 - 250 thousand metric tonnes of concentrate at Tsumeb so a 20 thousand tonnes reduction means a 10% lower output (and 2016 revenue lower by around $12 million).

Apart from the loss in revenue, the company has to make some serious repairs.
According to the announcement above, the costs associated with repairs should be covered by insurance policy. But what about the lost revenue? The company did not comment on that issue.

Market reaction

Market reaction on that news was, in my opinion, fairly negligible. DPM share prices lost 4.58% on the Toronto Stock Exchange. The broad market, represented by GDX lost 3.65%

Fresnillo plc - Overvalued In The Short - Term

Fresnillo plc is the largest world’s silver producer. Most recently the company’s shares benefited from the current bull market in silver and since the beginning of 2016 they appreciated by 155%. 

In my opinion, it is quite a significant increase, especially when it is realized that Fresnillo is a giant miner. With its market capitalization of $17.6 billion, the company ranks among such heavyweights as Barrick ($23.9 billion), Newmont ($21.3 billion) or Goldcorp ($14.9 billion). Of these giants only Barrick appreciated more than Fresnillo – since the beginning of 2016 this company increased 169% in its market cap.

Is that outstanding share price increase justified? In my opinion, it is not. I like Fresnillo – the company is well – managed, profitable even during down-turns and has a few very interesting projects under development / construction. What is more – Fresnillo accounts for a large part of my model precious metals stocks portfolio (together with B2 Gold, Richmont Mines, Fortuna Silver and Newmarket Gold). So what is the problem?

Investment thesis

Well, in my opinion, in the short-term Fresnillo shares are currently overvalued against its peers. Additionally, Fresnillo's 1H 2016 results should be a kind of a negative surprise. Therefore, my investment thesis is:

“Do not buy these shares now”

1H 2016 results – my forecast

On July 20, 2016 the company announced its 1H 2016 production results:

As the table shows, the company increased its production substantially. Paradoxically, the lowest increase was in the silver segment. I say “paradoxically” because Fresnillo is perceived as a silver producer. 

However, it is no longer a case. In 2015 the company sold gold for $827 million while silver sales were just $617 million. What is more, even putting the San Julian mine on line (it will be a silver producing operation) should not change the company’s profile – gold is going to be the main metal delivered by Fresnillo.

Metals produced by the company were sold at the following gross prices (it is my estimate – the company did not disclose these prices):

And here is the first problem. As the table shows, apart from gold, all metals were sold at lower prices than in 1H 2015.

Another thing – Fresnillo sells mainly metal concentrates, which means that it is paid only for the so-called payable amounts of metals. What is more, the company has to pay smelting and refining charges to process its concentrates at smelters' facilities. Unfortunately, Fresnillo does not disclose the payable amounts of metals sold. However, I have calculated the average ratios between metals produced and sold over the years so, assuming that all metals produced in 1H 2016 were sold (here I may be wrong – such a reasoning is a little bit simplified), Fresnillo should have sold the following amounts of metals:

…and the company should have reported the following revenues:

Well, for the time being all things look nice – the total 1H 2016 revenue should be higher by 13.5% than that reported in 1H 2015.

Now, problems. Fresnillo did not disclose its costs of production. However, looking at the amount of ore processed, grades and recovery ratios reported at each mine, I assume that to produce one ounce of silver equivalent the company had to spend the same amount of money as in 2015 - $13.64 per ounce.

Note that this figure includes also treatment and refining charges.

If I am right, Fresnillo spent $803.2 million to produce its metals in 1H 2016 ($13.64 x 21.18 million ounces of silver sold divided by 36% (silver share in total revenue). So, due to higher amount of metals sold, in 1H 2016 Fresnillo incurred higher costs of production than in 1H 2015 ($665.1 million).

The table below presents the final forecast:

Note that the line “Silverstream and forex impact” contains the effects of the silverstream contract (signed in 2007 with Penoles) and a number of commodity (yes, Fresnillo is using hedging strategies to hedge itself against lower gold prices) and forex hedges. Due to these instruments, in 1H 2015 the company reported a negative result. According to the last production report, in 1H 2016 the losses should be even higher ($35.0 million against $13.8 million).  


As the table shows, 1H 2016 results should be weaker than those reported in 1H 2015. I think it may be a negative surprise for many investors. The mass mentality is that we are currently in a bull market phase in gold / silver and mining companies should report much better results than in the past. And they are generally right but…not so fast. In the case of Fresnillo, 1H 2016 was rather a disappointment but I am sure that the company is going to deliver much better results in the not so distant future.

So, in the short - term Fresnillo's shares are overvalued but in the long – term they still present a great buying opportunity.

Last but not least, if I am right, at today’s share prices the company is trading at 33.3 of its EV / EBITDA ratio. Really elevated valuation...

Sunday, July 24, 2016

Soybeans Once Again

One of the readers has asked about possible correlation between soybean and silver prices. Well, it looks that this thesis may work. 

The chart below shows that sometimes soybean prices are positively correlated with silver ones:


This correlation has been particularly visible since October 2014. So, if the thesis is correct, we should see the continuation of a bull market in these grains. 

The upper panel of the chart shows that, similarly to soybean prices expressed in gold, now we have a nice entry point to involve on the long side of the trade.

Anyway, now this trade looks as follows

July 25, 2016 - 10:15 GMT:

At end of day (July 25) the trade is still unfavorable:

Saturday, July 23, 2016

Soybeans - A Nice Buying Opportunity

A few days ago I posted a piece on soybeans. The main thesis was that soybean prices were strongly supported by fundamentals (demand higher than supply).

However, the problem is how to find the best entry point to get involved on the long side of the trade.

For long-term players there is no problem - buy on any weakness in prices.

Well, as for soybeans or any other futures contracts, I am not a long - term trader / investor. As a matter of fact, I am no trader at all (commodities are about trading, not investing). However, sometimes, when something looks good, I get involved and bet some small amount of money (in such circumstances my hidden nature of a casino gambler emerges from the darkness). If such is a case, I try to find the best entry point.

So what is my entry point for soybeans? Look at the chart below:

The chart shows soybean prices measured in gold (lower panel of the chart). It looks like whenever soybean prices, expressed in gold, are close to the red line there is a nice buying opportunity (black circles). What is more, now we are close to such an entry point. Since the June peak in soybean prices (upper panel) these grains corrected significantly. So, why not to try?

To close the trade I will use the green area on the lower panel. This area indicates the best selling opportunities starting from middle 2014.

Note: this post is not a buying / selling recommendation. As my readers know, I am not in a business of publishing entry / exit points in commodities, stocks etc.

Silver And Gold These Days

Today a quick look at the precious metals market.

Since the start of a bull market in gold and silver in January 2016 it looks like now it is silver that leads the entire precious metals market:

At the beginning of the ongoing cycle silver was weaker than gold - look at the red line in upper panel of the chart.

Then, in April silver took a leadership. Since that time this metal was much stronger than gold (and silver related companies were stronger than gold related ones). And, in my opinion, it is nothing unusual. If this bull market is going to keep on, silver has to be stronger than gold.  

Now, let me look at a few sentiment indicators.

The first one shows that silver is a hot issue today. The open interest of the silver futures market is standing at its highest level in history:

It means that a lot of new money is entering this market. Is it something dangerous in the short - term?

Well, signals are mixed. The chart below shows the current net positions held by speculators in silver futures:

Of course, speculators are holding a net long  position in these futures. What is more, this position is standing at one of the highest levels in history, close to the readings indicating the excessive optimism. 

However, another chart shows that we are still far away from a bullish frenzy in silver:

I define a bullish frenzy in any commodity as the state when speculators are generally only long a specific commodity. It means that the number of their long positions held is much higher than the number of their shorts.

In silver futures a bullish frenzy is when the number of long positions held by speculators is around 13 times higher than the number of short positions.

Well, now this figure stands at 4.57 so speculators are not totally involved in silver buying.

How to summarize the entire situation? Well, before I do it, let me look at gold, represented by its largest ETF, GLD.

In July, for the first time since March 2016, investors were cutting their GLD gold holdings. The red line within the yellow area on the right indicates that the total amount of gold entering GLD is going down in July. It looks similarly to the situation visible at the beginning of March (another yellow area, this time on the left).

So, summarizing, I am not ruling out that we may enter a period of relatively stable gold prices (trading range). As for silver, well, this metal may be very tricky and I would not be surprised if it went its own way. 

Thursday, July 21, 2016

Newmont Mining Is A Classic Example Of Market Inefficiency

Newmont Mining (NEM) is one of the largest world gold producers. Yesterday the company announced its 2Q 2016 results so it is the right time to show Newmont's performance in the long-term. 

Below I have plotted the graph showing cash flows from operations (excluding working capital issues), calculated on a per quarter basis. 

Next to these cash flows I have plotted Newmont's share prices, as of the end of each quarter: 

As a rule, share prices should follow the company's fundamentals. For example, if in subsequent quarters a company delivers lower cash flows share prices should be going down. And vice-versa.

However, it may be easily noticed that between the second quarter of 2014 and the third quarter of 2015 (violet arrow) Newmont has been steadily increasing its cash flows from operations. 

To remind my readers, at that time the entire precious metals sector was in the middle of a severe bear market - PM stocks were going down and Newmont was no exception.

And during that hard time Newmont, very quietly, was piling its cash (mainly due to radical cost cuts). 

Does anybody think that financial markets are effective?

Wesdome Gold Mines: 2Q 2016 Production Results

After the 1Q 2016 disaster Wesdome Gold delivered its 2Q 2016 production results. In my opinion, the company is slowly getting out of trouble.

To remind my readers, at its flagship property, Eagle River, the company is entering the new deposit, called 300 Zone (later on Wesdome plans to start mining from another deposit, 7 Zone). In 2Q 2016 Eagle River delivered 10,210 ounces of gold. Together with 6,254 ounces extracted in 1Q 2016, it makes 16,464 ounces of gold during 1H 2016. 

Well, it looks like the company is not going to meet its 2016 guidance of around 43,000 ounces of gold in annual production at Eagle River. Although Wesdome's CEO, Rolly Uloth, says:

"The Company anticipates further increases in production for Q3 and Q4 over Q2." 

I doubt that Wesdome is going to deliver around 13,300 ounces of gold a quarter. But who knows...

As for the Mishi open pit mine, in 2Q 2016 it delivered 1,937 ounces of gold (a little bit more than in 1Q 2016 when Mishi produced 1,782 ounces of gold). 

Now, because Wesdome also delivered sales data (volume and gold prices realized) it is possible to build 2Q 2016 financial results forecast:

As the table above shows, I believe that 2Q 2016 was much better than 1Q 2016. However, generally, these results should not have been as good as investors could expect. 

Reasons? Still relatively low production figures and practically no increase in gold prices realized, expressed in Canadian dollars. 

Finally, valuation based on EV / EBITDA multiple. Assuming that:

  • the company continues to deliver the EBITDA of around C$4 million per quarter (C$16 million a year)
  • the stock price is C$1.90 a piece
  • enterprise value stands at C$262.5 million 

today Wesdome Gold shares are trading at 16.4 of its EV / EBITDA. 

Well, in my opinion, these shares are neither particularly cheap nor expensive...

Wednesday, July 20, 2016

Dundee Precious Metals - I Like This Company

Dundee Precious Metals (DPM.TO) is not a typical precious metals company. Apart from Chelopech, an operating mine in Bulgaria, it runs a smelter called Tsumeb. So the proper analysis of this company is quite complicated. However, without going into technical issues, in this post I will try to present a quick look at the company's business.


Tsumeb, a smelter located in Namibia, is de facto a chemical plant. Apart from processing the copper concentrate delivered from DPM's Chelopech mine (here are quite nice inter-company synergies), Tsumeb processes copper concentrates for other customers (it is called toll milling) and produces acid and arsenic trioxide (the latter one is particularly an awful thing). 

source: DPM

DPM invested a lot of cash in Tsumeb but now it looks like this investment is paying off:

The chart shows that the company's smelter is a stable part of the entire business - each year it delivers operating cash flow of $400 - $550 per ton of third party concentrate smelted. So if the company is able to find customers, Tsumeb should be delivering more and more cash to DPM. And it looks like the management is able to do it:

The line in red shows that since 2012 the company has been steadily increasing its third party production so Tsumeb looks like the cash provider for the company.


After selling the Kapan mine, DPM has only one operating mine, called Chelopech and located in Bulgaria. It is a gold / copper mine with some marginal amounts of silver. Here the situation is not as bright as in the Tsumeb's case because since 2013 Chelopech has been delivering lower amounts of gold:

To explain it, one has to realize that there are two aspects of Chelopech's operations:

  • the mine itself
  • copper and pyrite concentrates issues

The mine

Generally Chelopech looks relatively good although the quality of the ore has been deteriorating over time. The problem lies in recovery ratios (metal grades are more or less the same as they were a few years ago). It looks like the ore is more resistant to process but, to be honest, it is not the easy ore (mainly sulfide - rich zones). 

To mitigate the negative effect of lower recovery ratios the company is increasing throughput. For example, in 2010 it processed around 1.1 million tons of ore while in 2015 the throughput was 2.0 million tons. However, since 2013 even the throughput has stacked at around 2 million tons a year - hence lower production of gold.

Fortunately, direct costs of production are stable at Chelopech and in 1Q 2016 the mine economics looked as follows:

How to read this table? Firstly, it is easy to notice that Chelopech is about gold and copper. Now we are encountering a bull market in gold but copper is going nowhere. So at the moment Chelopech is supported only by gold. 

It costs $43.4 to mine and process one ton of ore so after deducting this figure from total metal content the mine should be delivering $72.1 in cash per each ton of ore processed.

Now the tricky part of the story.


The Chelopech mill delivers two final products: copper and pyrite concentrates. The copper concentrate is better - it contains more metals than the pyrite one. For example, one ton of copper concentrate contains around 30 grams of gold while there are only 4.6 grams of gold in one ton of pyrite concentrate. 

What is more, Chelopech delivers much more copper concentrate than the pyrite one. So Chelopech stands mainly on copper concentrate. And it is a good thing because the company owns a smelter, which specializes in smelting complex copper concentrates. Although part of the material delivered by Chelopech is smelted at other smelters, the vast majority of copper concentrate goes to Tsumeb. And...that's all.  

At this point let me close this discussion. I do not have any idea whether it is possible to find at what final cost the company produces its gold - it is an exercise for financial controllers (provided that they have the right figures). I do not have them so the only thing I can do is to look at the entire company. 

And the most important thing, for any company, is cash. The chart below shows cash flows from operations delivered by DPM business, calculated on a per-quarter basis:

The bar in green shows cash flow reported in 1Q 2016. It looks like the company's business is in pretty good shape at the moment. Simply put, Tsumeb and higher prices of gold support the company strongly.


DPM management has very ambitious plans for the future. Let me summarize them shortly:

  • Tsumeb - the company plans a number of upgrades at Tsumeb
  • Krumovgrad - it is  another gold / silver mine located in Bulgaria; it should go on-line in Q3 2018
  • Chelopech - the company plans to increase the annual throughput to 2.5 million tons
  • apart from these three topics, the company also owns / controls a number of other mineral properties

Relative valuation

DPM shares are currently trading around $2.7 a piece. At this price the company's enterprise value stands at $575 million (the last C$54.65 million bought deal financing is included into my calculations) so it means that the company's shares are trading at an EV / EBITDA multiple of 10.1, which is one of the lowest valuation multiples in the entire industry at the moment:

Last but not least - investors seem to like DPM:

During the ongoing bull market the company's shares have been stronger than the broad precious metals stock market, represented by GDX (the line in violet on lower panel of the chart). However, since early May DPM shares are stuck - they behave more or less like GDX. 


I like this company. It is a relatively unknown miner, trading at quite low relative valuations at the moment. Apart from typical mining activity DPM runs a smelter in Namibia. In my opinion, this smelter is a stable leg of the company's business while the growth lies in the mine / mines operated by DPM. 

Tuesday, July 19, 2016

In 2Q 2016 Avino Will Be A Different Company Than Before

On April 1, 2016 Avino Silver and Gold Mines put its Avino mine on-line. It is a great event for the company because the results recorded in 2Q 2016 will comprise the results delivered by this new mine. And the Avino mine is a much bigger operation than the San Gonzalo mine (another mine operated by the company). 

I do not know what amounts of metals the company sold in 2Q 2016. Avino published only production results for 2Q 2016. Let me summarize them:

As the table shows, in 2Q 2016 the Avino mine delivered 815,727 ounces of silver equivalent (San Gonzalo delivered 529,986 ounces). The biggest advantage of Avino over San Gonzalo is copper - San Gonzalo does not produce the red metal. 

Next, in 2Q 2016 the company produced less metals than in 1Q 2016 (629.8 thousand ounces of silver equivalent in 2Q 2016 against 715.9 thousand ounces in 1Q 2016. 
However, due to the fact that the Avino mine was declared commercial in April, in 2Q 2016 report the investors will see the additional revenue coming from this mine (before 2Q 2016 the metals sold by the Avino mine were recorded in the cash flow statement). As I noted above, the amount of metals coming from Avino and sold in 2Q 2016 is not known (the company did not disclose this figure) but it will definitely be a large figure. 

In my opinion, in 2Q 2016 Avino is going to be a totally different company than before.

Monday, July 18, 2016

Richmont Mines - Beware. In 2Q 2016 Weaker Results Expected

On July 12, 2016 Richmont Mines published its 2Q 2016 operating results. As my readers know, I am invested in Richmont so the company's success is my success as well. 

However, I think that the results reported in 2Q 2016 may be a negative surprise. Last quarter the flagship property, Island Gold, performed a little bit worse than in 1Q 2016:

source: Simple Digressions

Note: cells in yellow are my estimates

As the table show, in the second quarter the company was processing the ore of lower quality (substantially lower grade of 7.51 g / t vs. 11.31 g/t in 1Q 2016). It means that in 2Q 2016 the company could not get more than C$380.9 per ton of ore processed and sold (much less than in the previous quarter). 

To mitigate the negative impact of lower grades the company processed more ore (79,900 tons vs. 75,941 tons in 1Q 2016). However, it was surely not enough to overshadow the negative impact of lower grades. 

As a result, I believe that in 2Q 2016 the Island Gold mine delivered revenue of around C$30.4 million (C$43.3 million in 1Q 2016). This, together with practically no additional revenue delivered by the Beaufor mine (C$7.7 million vs. C$7.5 million in 1Q 2016) and no revenue from Monique (in 2Q 2016 this mine was idle) means that in 2Q 2016 the total revenue was much lower than in 1Q 2016 (C$38.1 million against C$52.7 million).

Of course, there are a few undisclosed figures (as, for example, total ounces of gold sold), that may improve the situation (for example, the company could sell some additional gold coming from Monique's stocks) but generally the gross margin generated in 2Q 2016 should have been lower than that reported in 1Q 2016 (C$16.0 million vs. C$27.9 million).

Lower margin means lower bottom line so expect worse 2Q 2016 results. 

And, paradoxically, gold prices, denominated in US dollars, were higher in 2Q 2016 than in 1Q 2016... 

Sunday, July 17, 2016

Soybeans: Another Opportunity To Go Long

In March I posted a piece on soybeans fundamentals. Since that time soybean prices have been in a strong bull market:


After an impressive increase of around 31% in just two months soybean prices are in a correction mode now. In my opinion, it may be a good opportunity to open long positions in soybean futures. Soybeans price chart looks good in the medium-term but, what is more, a bullish thesis on this grain is still supported by fundamentals.

For example, since the 2009 / 2010 season the world demand went up from 238.55 to 328.78 million metric tons (an increase of 37.8% or 90.23 million metric tonnes). However, the supply increased by only 25.3% or 65.86 million metric tonnes: 

                   source: United States Department of Agriculture

Of course it is China that is responsible for this additional huge demand for soybeans (nearly half of the additional demand is attributable to China). 

What is more, the USDA expects that during the ongoing season the demand should be higher than supply by 2.83 million metric tonnes (328.78 vs 325.95 million metric tonnes). 

And basically, when the demand is higher than the supply, the prices of such an asset should go up. 

Those looking for additional information on soybeans and other agri-futures - visit this page:

Saturday, July 16, 2016

Silver Prices Are Ripe For An Increase (As They Always Were)

There are three places in the world where the biggest amount of silver is stored. These places are:

  • London Bullion Market
  • Shanghai Futures Exchange

Of these three vaults, only COMEX and Shanghai deliver data on their stocks. 

When you look at COMEX and Shanghai data, one thing should be noticed - since the end of 2015 the Chinese have been very wildly accumulating silver:

source: Simple Digressions and Shanghai Futures Exchange

Another interesting thing - since the beginning of 2015 the biggest silver player at COMEX, JP Morgan, has been wildly accumulating silver as well. 

However, it looks like it is Shanghai that is going to win this race:

It should be spotted that both players, JP Morgan and Shanghai, now hold nearly the same amounts of silver. However, if Shanghai continues accumulating silver at the rate it has been doing that since the end of 2015, it should outpace JP Morgan soon. 

What does it mean?

Well, firstly, look at the gap between the world supply of silver and the demand for it:

source: Silver Institute

The chart shows that since 2006 the demand for silver was always higher than its supply. 

To be honest - due to this fact there should have been no huge correction in silver prices. As everyone knows, between 2012 and 2015 silver prices corrected significantly - they went down from around $48 to $13 per ounce. Why? I have no idea but let me say that between 2012 and 2015 it was mass psychology that won. Fundamentals were losers (I know it is a little bit funny explanation but if any of my readers has better theory - feel free to comment)

However if markets are driven by the relationship between demand and supply, it is the highest time for silver prices to go up. It looks like the Chinese and JP Morgan try to position themselves to take part in this ride...

Friday, July 15, 2016

Alterra Power Is Breaking Up

A couple of days ago I posted a piece on Alterra Power, a renewable energy company run by Ross Beaty. The main thesis was this:

Alterra is getting bigger and its shares are poised to break-up

Et voilá:


The chart shows a technical pattern called "Cup With Handle". According to the theory it is a continuation pattern, which means that Alterra shares should continue heading north after breaking up.

And it looks like Alterra share prices are just breaking up...

Thursday, July 14, 2016

B2 Gold - Decent Operating Results

A few days ago B2 Gold published its 2Q 2016 operating results. As usual, I would like to drop a short comment.

Let me start with the overall effectiveness, measured by gross margins delivered by each mine.

To remind my readers, B2 Gold currently operates four mines:

  • Masbate in Phillipines
  • El Limon and La Libertad in Nicaragua
  • Otjikoto in Namibia

The chart below shows gross margins delivered by each mine (excluding Otjikoto - due to its short history there is not enough data). 

Note that these margins (defined as revenue from metals sold less direct costs of mining and processing) are calculated using the following assumptions:

  • revenue is calculated using the price of gold realized by the company in 1Q 2016 (using different wording - for example, revenue delivered in 2013 was calculated using the prices realized in 1Q 2016)
  • direct costs are reported as in financial statements (i.e. they are actual costs incured in each period)
What is more, I call these margins "potential". It means that they are calculated taking an assumption that all gold produced in each period is then sold at the market. Usually it is not the case - any mining company sometimes sells more gold than it produced in a specific period (this additional gold decreases the gold stocks) and sometimes it sells less gold (part of gold produced in a specific period increases the gold stocks)

source: Simple Digressions

The chart shows that since 2015 Masbate and La Libertad have been improving their operating economics (remember that the price of gold in any period does have no impact on the mine economics - it is fixed). The third mine, El Limon, has been delivering fluctuating results (in 2Q 2016 it delivered nice results but it is not the rule). 

Now, let me show my 2Q 2016 margin's forecast (this time these margins were calculated using actual figures, not fixed):

The forecast was prepared using the average gold price recorded in 2Q 2016, i.e. US$1,258.7 per ounce (B2 Gold did not report at what prices it was selling its gold last quarter).

The table shows that B2 Gold financial results depend mainly on two mines: Masbate and Otjikoto. In 2Q 2016 these mines should have delivered US$82 million in gross margin (74.5% of total margin). 

Note that in 1Q 2016 B2 Gold delivered gross margin of US$82.6 million so, if I am right, the 2Q 2016 gross margin should be 33.2% higher than in 1Q 2016.

Simply put - B2 Gold is heading in the right direction...