Wednesday, August 31, 2016

My Top 5 Portfolio - August Results

My portfolio of five precious metals stocks was slaughtered in August:

Although the August result was slightly better than that delivered by GDX (-16.4% against -16.6%) the loss was substantial (much higher than that incured in May 2016).

Well, I am not impressed - at last there was (or still is) a healthy correction.

A question to my readers: Are you still long precious metals stocks?

Another chart. This time it shows the results delivered by my portfolio from its inception in December 2015. To compare, I plotted the results delivered by GDX and the broad stock market, represented by S&P 500:

How to read this chart? Taking my portfolio as an example - if anybody invested $10.0 thousand on December 16, 2015 in my portfolio, this person would own the portfolio worth $27.2 thousand now (an increase of 171.6%). And so on.

Note that in the same period the broad stock market delivered a very small return of 4.7%. 
I would say - this year precious metals stocks have been the winners.

Finally, a look at the August performance of each stock included in my portfolio:

As the chart shows, there was no  exception. All picks delivered negative returns. The worst performer was Richmont Mines. I do not know the exact reasons of this awful performance but in 2Q 2016 the company delivered quite poor results  (readers of this blog were warned at the right time). However, in the long-term I still perceive this company as one of the best miners.

Alterra Power Becomes A Dividend Company

Yesterday Alterra Power announced an annual cash dividend of C$0.005 per share. Because it is not possible to pay such a small dividend to the shareholder owning one share, the company has to consolidate its shares at the rate of 10:1.

After consolidation Alterra's share count should stand at 46,919,545 shares. A recalculated dividend is C$0.05 per share. It means that the dividend yield should be 0.77% (C$0.05 divided by C$6.5).

Well, although the just announced dividend is rather symbolic I think it is a great day for Alterra and its shareholders. From now on Alterra is a dividend paying company. What is more, its management declares that it plans to increase the dividend regularly:

"John Carson, Alterra's CEO, said, "This inaugural dividend reflects the recent completion and incremental cash flow of the Shannon and Jimmie Creek projects, but is sized modestly for now to accommodate the substantial growth we anticipate over the next four years. We will target regular increases of the dividend as we bring new projects on line"
I am curious about today's market reaction. In the long-term Alterra is drawing a continuation technical pattern called "Cup with Handle": 

Tuesday, August 30, 2016

Another Panick Day For Gold Mining Stocks

History repeats and today we have another panic day in the precious metals sector. The chart below shows GDX and gold price action, two hours before the closing:

As the chart shows, gold is down 0.8% while GDX is crashing 3.8% (and GDXJ is down 5.1%).

However, looking at 10-day price action, silver looks to be bottoming (while gold is not):

Note: gold is in red, silver is in black

Let us wait till the end of session.

O.K. The session is closed but the situation did not change significantly.

Let me show two charts.

The first chart shows the old relationships between gold and gold miners:

It looks like we are in the healthy correction mode where the basic relationship, GDXJ being stronger than GDX, is still intact.

Another chart:

Typically for a strong correction, during down days the volume is higher than that recorded during up days. However, note that the high volume during down days is going down. In my opinion, it may be another sign of the decreasing selling pressure.

Summing up - although there are signs of the dissipating selling pressure, we are still in the correction mode.

Sunday, August 28, 2016

How To Play This Bull Market In Gold In A Disciplined Way, Revisited

In a post titled "How To Play This Bull Market In Gold In A Disciplined Way" I presented a chart showing the relationship between the broad precious metals stock market (represented by XAU) and gold. Then I put a thesis that as far as XAU is stronger than gold, precious metals investors should not worry about their PM portfolios because such a relationship is indicative of a healthy bull market. 

Yesterday one of my readers spotted that now the broad precious metals market is weaker than gold. The chart below shows this situation:

Well, the question is: "Is the upper panel of the chart showing an upward or a downward trend?".

Let me answer that question as follows:

The facts are that:
  • surely, the trend line has been broken
  • surely, since middle August precious metals stocks have been weaker than gold
Now, I do not think it would be a well supported thesis that now XAU is trending down against gold. Why? According to Investopedia:

"A formal downtrend occurs when each successive peak and trough is lower than the ones found earlier in the trend"
I am sure that what we see now is not a downward trend as defined above.

However, who knows, financial markets are unpredictable and the current upward trend may develop into a downward one. That is why it is so hard to make money in financial markets. However, now it is too early to pronounce the end of the current trend. 

I hope this explanation helps...

A final note - the long-term view on XAU / Gold relationship (once again):

In late June 2011 investors had got an important signal - XAU / Gold relationship entered its downward trend. The chart above shows lower highs and lower lows established by a multiple XAU / Gold. The blue, vertical line shows the point in time when the signal was clear. Note that PM stocks investors still had time to sell their stocks (XAU was trading in a range until early 2012 - the area marked in yellow).

Now we are still at the beginning of the entire cycle but it cannot be ruled out that PM stocks had just entered a period of comparable-to-gold performance.

Unfortunately, the most important rerlationship between gold stocks and gold itsel is this:

"In the long-term gold is the winner".

Here is the saddest (for gold bulls) chart:

Saturday, August 27, 2016

Despite Lower Prices Of Gold There Is Only Marginal Selling Pressure

Most recently gold / silver related stocks corrected substantially. As I wrote in one of my last posts  - this week there was even a panic selling. Now many stocks are trading 20% - 30% below their last tops. 

On the other hand, gold prices saw just a small correction. Since its top, recorded in early July ($1,367 per ounce), now gold is trading at  $1,321 per ounce (a drop of 3.4%).

Another thing - since early July, when the current slump in gold prices had started, there were four weeks when GLD (the biggest world gold ETF) recorded gold outflows:

What is more, it seems that selling pressure (gold outflows) is dissipating. The chart above shows that the amount of gold outflowing from GLD is going down:

  • during the week starting from August 12 as many as 639 thousand ounces of gold went out of GLD's vaults
  • then, during the week starting from August 19, only 143 thousand ounces left GLD
  • last week GLD reported small gold inflows of 19 thousand ounces.
It seems that despite lower prices of gold investors are not eagerly selling the yellow metal.

The chart below shows GLD flows from a little bit different perspective:  

This time the red line shows cumulative gold in / out flows. Two yellow boxes show periods when GLD was recording gold outflows. During these periods gold was going nowhere (it was trading in a trading range).

The first period (the first yellow box on the left) lasted around one month (March 2016).

Now we are in the second month of a slump in gold flows. What I am waiting for is a renewal of the upward trend in gold inflows. Shortly after that we should see gold prices to go up. 

US dollar and gold

Last but not least. The chart below shows the relationship between the US dollar and gold. Usually, when the US dollar goes up gold goes down and vice versa.
However, since early May this relationship is no longer valid:

Note: for better comparison the upper panel of the chart shows the inversion of the US dollar (it means that the inverted US dollar and gold should, as a rule, behave in the same way).

The area marked in red shows the breakdown of the usual relationship. Since May 2016 gold has gone up while the US dollar has gone...also up (and the inverted US dollar has gone down).

Well, for the time being let me leave this phenomenon without any comment...

Thursday, August 25, 2016

Energold Drilling - Energy Division Overshadows The Company

Yesterday Energold Drilling released its 2Q 2016 results. The table below shows basic figures:

Generally, the company is still in a slump. Although there is some improvement in the Mineral Division (this business line offers drilling services mainly for precious metals companies) the Energy Division is in trouble. For example, in 2Q 2016 the company drilled 200 metres for oil sand companies. Well, I guess I would be able to drill more meters with my personal hand drill - it is just an evidence what problems Energold encounters as far as serious energy drilling is concerned.

I have written something about an improvement in mineral drilling. Look at the chart below - it shows basic operating measures reported by Mineral Division: 

source: Simple Digressions

It looks like this division encounters a slight improvement - since 2Q 2014 both operating measures (meters drilled and prices) have reached sort of plateau. 
Similarly to another drilling company, Geodrill, in 2Q 2016 the company had drilled more meters but at lower prices. I believe it may be a sign of the beginning of the recovery (slightly higher demand for drilling services but pricing power still at the mining companies).

Summarizing - I am not recommending Energold as a buying opportunity. It is not a pure precious metals related play. Apart from running its Mineral Division, the company is heavily involved in energy drilling and specialized industrial manufacturing. The latter two divisions are not doing well and, what is more, there are no signs that the situation in these sectors is going to improve. 

I am staying aside...

Wednesday, August 24, 2016

Precious Metals Correction Enters Its Panic Stage

It  looks that today precious metals investors started to panic. Nearly every mining company is being sold heavily. For example, big miners are down as follows (at the time of writing this post):
  • Goldcorp is down 3.5%
  • Newmont: 3.8%
  • Randgold: 3.6%
  • Barrick: 5.7%

As for smaller miners:
  • Fortuna: down 7.4%
  • Gold Resources: 7.2%
  • Endeavour Silver: 8.5%
  • B2 Gold: 4.6%
etc, etc

Now, look at the chart below:

The chart shows that GDXJ (ETF representing smaller mining companies) is still stronger than GDX (big miners) - it is indicative of the bull market in precious metals stocks (smaller companies go up faster than bigger ones).

Note also that GDXJ is very close to its important support at around $44 a share.

Of course, it is possible that the current correction will be much deeper but, trying to look at the big picture, in my opinion, today's price levels create the first major buying opportunity for those interested in increasing their long positions in precious metals stocks. Me included (added a few fresh positions today).

Another note (near NYSE closing time)

The chart below shows today's price action (gold and GDX):

Note, that gold is down around 0.9% while GDX is crashing. 

In my opinion, it is typical panic.

Monday, August 22, 2016

Fortuna Silver - Why Are You So Greedy, Boys?

Fortuna Silver is one of my five picks for this bull market in gold / silver.

However, the first thing each independent analyst has to do is to look for and report any strange behavior of a company covered by this analyst.

Unfortunately, Fortuna did such a thing in 2Q 2016. Due to higher silver prices, in 2Q 2016 the company delivered quite decent financial results. And what did the management do? It granted itself very high share-based payments.

Look at an excerpt from the last financial statement:

source: Fortuna Silver 2Q 2016 Financial Report

Firstly, look at the first line in red. Higher revenue resulted in much higher "Mine operating earnings". They went up from $10,402 thousand in 2Q 2015 to $15,917 thousand in 2Q 2016 (an increase of 53%). Quite a nice increase, indeed.

Now, look at the red circles. These are "Selling, general and administrative expenses". At this point the company's management made a very sad thing - it increased these costs from $5,471 thousand in 2Q 2015 to as much as $12,341 thousand in 2Q 2016 - an increase of 126%! On a per half-year basis there is a similar relationship - an increase of 101%.

Well, I do not like it at all. To show the scale of this misbehavior, look at the average "Selling, general and administrative expenses", on a per quarter basis, starting from 2009:

source: Simple Digressions

It looks that the management's greed is at its highest level since 2009.

Another excerpt shows a breakdown of "Selling, general and administrative expenses":

Look at the line "Share-based payments" and note that these costs went up from $1,195 thousand in 2Q 2015 to $8,031 thousand in 2Q 2016, nearly eightfold!

Well, the management may defend itself saying that these costs are non-cash expenses. No way. They are absolutely cash expenses but paid by other company's shareholders in the form of dilution (me included). 

Summarizing - I am changing my positive opinion on the company. While I still own these shares I no longer recommend them as a buying opportunity.

Sunday, August 21, 2016

Gold Still Shows Signs of Weakness

As I wrote on August 7, gold still shows signs of weakness. Let me show the current situation, taking GLD as an indicator:

Yellow areas indicate periods of weakness. During these periods gold outflows from GLD (red line going down). Note that during the current phase of the gold bull market the first period of weakness was between late March and the end of April. Now we have a similar situation - gold is going out of GLD vaults and the price of yellow metal is trading in a narrow range.

If history repeats, before gold prices start the next leg up we should see gold flowing into GLD (and the red line rising).

In my opinion, periods of weakness should be used to remodel our portfolios.
Next week I will try to present my opinion on this issue...

Saturday, August 20, 2016

Geodrill - An Idirect Exposure To The Precious Metals Market

Geodrill is one of my favorite companies indirectly exposed to the precious metals sector. To remind my readers - the company is active mainly in four African countries: Ghana, Burkina Faso, the Ivory Coast and Mali. Most recently these countries are encountering very high mining activity with a number of established, decent miners putting new gold mines online. I would say that Africa, especially its western part, is a place to be, as far as gold mining is considered.

A few days ago Geodrill released its 2Q 2016 report.

Let me summarize its results:

Well, the best thing is that the demand for the company's services is getting stronger. In 1H 2016 Geodrill drilled 391.8 thousand meters (a 47.2% increase, compared to 1H 2015):

However, the drilling prices were still lower than in 1H 2015 so it looks that we are at the very beginning of the gold cycle (higher demand for drilling services but drilling prices still well below their multi-year highs):

To mitigate the negative impact of still low prices, the company is cutting its direct costs of drilling (from $57.3 per one meter in 1H 2015 to $49.7 in 1H 2016, a drop of 13.3%).

Now, the best part. This year Geodrill shares went strongly up:

What is more, these shares were even stronger than precious metal miners shares (represented by GDX).

Despite this excellent performance, in my opinion, Geodrill is still cheap. For example, now its shares are trading at an EV / EBITDA multiple of 5.3 (it is much lower valuation than that offered by gold / silver stocks).

Last but not least - one of the biggest Geodrill shareholders, Maxam Opportunities Fund, took advantage of high share prices and on August 16 sold part of its stake (look at the high volume on the lower panel of the chart). Well, these guys are real investment masters - they bought 5.8 million of Geodrill shares in November 2015 (when nobody was interested in anything related to gold), paying C$0.45 a share, and sold 1.5 million shares in August for C$2.10 a share. Nice deal.

Thursday, August 18, 2016

Wesdome Gold Mines: Not Everything Is Fine

After the 1Q 2016 disaster, in the last quarter Wesdome Gold delivered much better results. However, the company is still quite far from its "business as usual" performance.

Let me show just one chart:

                              source: Simple Digressions

The chart shows cash cost of production (direct costs  of mining and milling per ounce of gold sold), starting from 1Q 2015. Note that in 2Q 2016 Wesdome was still incurring quite high costs of production to extract its gold. The progress visible in 2015 (costs going down) was stopped this year.

I guess this mess may last. Remember that there is a new CEO, Mr. Middlemiss.  Usually, in hard times, when a company has problems and changes in the management board occur, it takes time to make things better.

Let me cite the company (Wesdome's report page 3):

"Mr. Middlemiss has extensive mine management and planning experience. A review of operations, including these recent developments, will refine the existing guidance in Q3 2016"
It looks like the company is preparing Wesdome's investors for a cut in 2016 Outlook. To remind my readers, according to this guidance, the company should deliver 54,000 - 60,000 ounces of gold in 2016. In 1H 2016 it delivered 20,183 ounces so it should have been delivering around 17 thousand ounces per each of remaining quarters of 2016. I doubt it.

On the other hand, Wesdome has just started mining in the totally new zone of Eagle River:

"We have now opened up three parallel zones in the western portion of the Eagle River Mine. Of particular interest currently is a sill drift on the 300 Zone which has encountered 140 m of strong grades and continues west beyond available drilling information"
New zones may bring big surprises so, who knows...

The current state of uncertainty is well evidenced by Wesdome share prices action:


Shortly after hitting its three year high at around C$2.20, the company's shares went quickly down to their strong support at C$1.55.

What is more, the upper panel of the chart shows that this year Wesdome shares were one of the worst performers among gold / silver plays.  

I do think that Mr. Market is wrong. In my opinion, Wesdome is a very decent company and its short - term problems create a nice buying opportunity.

On the other hand, keep in mind that Resolute Fund, the unsatisfied company's shareholder, most recently sold a large stake in the company - surely this event increased the selling pressure (by the way, this fund sold its shares at very good prices - near multi - year highs). Now it looks like there is no big selling (low volume) so either Resolute stopped its campaign or it is going to show us another, much better, buying opportunity.

Last but not least - the lower prices of Wesdome 's shares the better buying opportunity for a potential acquirer. 

Wednesday, August 17, 2016

Despite Weaker 2Q 2016 Results, Richmont Mines Still Looks Good

In my last article on Richmont Mines I claimed that 2Q 2016 results should have been weaker than before. And they were:

                                    source: Simple Digressions

Generally, all financial measures were worse than those reported in 1Q 2016. Currently the company is in its transition period - it goes deeper at its flagship property, Island Gold. However, it will take some time to start mining operations at high - grade Lower Zone of the Island Gold Mine. Hence, weaker results.

To mitigate these negatives, in 2Q 2016 Richmont sold more gold than it produced (23,320 ounces of gold produced vs. 24,888 ounces of gold sold).

In my opinion, it was the right decision - the management took advantage of higher gold prices.  This higher amount of gold sold had a major impact on better financial results than I forecasted (in my forecast I assumed that the company would have sold the same amount of gold it produced).

The table below shows the actual results compared to my forecast:

                               source: Simple Digressions

As the table shows, in 2Q 2016 the company's sales were C$40,618 thousand, a little bit higher than my forecast of C$37,970 thousand. On the other hand, direct costs of mining were very close to my forecast.

What now? To be honest, although 2Q 2016 was weaker than 1Q 2016, generally, the last quarter was similar to previous quarters. Or, better said, 1Q 2016 was an exceptional period. So, in my opinion, there are no signs of an incoming deterioration in the company's performance. Quite contrary - in the long-term Richmont is still an excellent play.

The best evidence of this thesis is the fact that the company sustains its 2016 production guidance - it should deliver 87,000 - 97,000 ounces of gold.

That is why I still own Richmont shares.

Sunday, August 7, 2016

Short Vacation Break

Sometimes one has to relax a little bit. I am no exception so in the coming week there will be no new articles on this blog. The author is on vacations.

But, as Arnold Schwarzenegger once said:

"I'll be back"


A Quick Look At The Gold Market

This week, despite lower prices of gold (since the weekly high of $1,374.2 per ounce, gold retreated to $1,344.4, which means a drop of 2.2%) GLD reported a high weekly inflow of 715,087 ounces (look at the blue bar):

source: Simple Digressions

It was one of the highest inflows into GLD vaults, reported this year. It is another evidence that gold investors behave like real investors  - when the price is lower they are buying.

Look at another chart, this time it shows GLD gold flows, measured on a cumulative basis:

source: Simple Digressions

The red line trending up means that more and more gold flows into GLD, which is a positive indication for gold prices.

Technical weakness

On the other hand, technical analysis sends a sign of a short-term weakness:


1. It looks like there is a sort of resistance at around $1,380 per ounce (red, horizontal line)

2. an indicator, called Chaikin Money Flow, is going down; last time this indicator went down (February 2016, red down-sloping line on the lower panel of the chart) gold prices entered a period of weakness. Currently there is a similar situation (red, down-sloping line on the right of the lower panel)

Chinese are still buying gold, although the demand is lower

Lastly, there is still high demand for gold in China. However, due to higher prices of gold, since the beginning of 2016 the Chinese bought less gold than last year:

source: lawrieongold

Summing up - in my opinion, the bull market in gold develops in the right way. Physical demand is high (for example, GLD and Shanghai), which is the most important message for gold bulls. On the other hand, it looks like we may encounter a short-term weakness in gold prices - signals delivered by the technical analysis opt for such a development.

Friday, August 5, 2016

How To Play This Bull Market In Gold In A Disciplined Way (Without Getting Mad)

It is not easy to play any asset cycle, gold included. The best recipe is to load up as many gold-related stocks as possible and wait till the cycle ends.

However, it is easier said than done. An investor playing the gold cycle is exposed to many doubts, psychological problems, cash flow issues etc. As a result, he / she jumps from one stock to another, listens to the noise made by Wall Street clowns and panics at short - term corrections. Simply put, loses part of the earned profits or even makes nothing at all...  

For those "lost in the mist" I prepared this post.

So how to play this gold bull cycle without going mad?

Firstly - all financial cycles have a few phases. As for the gold cycle, in my opinion, the best way to find at what phase the cycle is, is to look at the behavior of the gold itself and gold - related stocks. 

Let me take the Philadelphia gold and silver index ($XAU) as a benchmark of gold - related stocks.

Now, each gold cycle may be divided into three stages (phases):

1. at the beginning of the cycle it is XAU, which is stronger than gold itself

2. in the middle of the cycle both gold and XAU appreciate at the same pace; what is more, this stage is much longer than the stage 1

3. late cycle is indicated by gold being stronger than gold-related stocks; if you spot this phenomenon - start thinking about selling your stocks!

Now, let me show how the cycle worked before:


The chart shows the gold cycle, which started in late 2008 and ended in the beginning of 2016.

The three stages were as follows:

1. October 2008 - September 2009: it may be easily noticed that during that period XAU was stronger than gold (the area in orange on the lowest panel of the chart)

2. October 2009 - May 2011: both gold and XAU were appreciating at the same pace (look at the horizontal line in the green area on the lowest panel of the chart)

3. Since May 2011 XAU was relatively weaker than gold - astute investors should have been selling their stocks then

I think it is quite a simple way for any investor to stay disciplined during the current cycle. And how does the cycle look now?

Well, look at the chart below:


As the panel in the middle shows, now we are definitely in the first stage of the gold cycle. So, do not panic. There is plenty of time to get nervous.

Thursday, August 4, 2016

B2 Gold Is Shining

I am impressed by B2 Gold 2Q 2016 results. The company owns four mines, of which one is excellent (Masbate), two are O.K (Limon and Libertad) and the fourth is going to be excellent (Otjikoto). 

A few weeks ago I posted the B2 Gold 2Q 2016 margin forecast. According to my estimates, in 2Q 2016 the company was supposed to delivered a gross margin of $110 million. I missed a little bit - in fact, it was $99 million. Anyway, B2 Gold is heading for the right direction.

For example, it is steadily increasing cash flows from operations (for comparison reasons, I have calculated these cash flows on a per quarter basis):

On the other hand, B2 Gold is a shark company - it wants to produce more and more gold. Now it is building its fifth mine, Fekola in Mali. The mine should cost around $395 million (plus $66.7 million in mine fleet, which will be lease financed). Production is expected to commence in late 2017; during life of mine Fekola should be delivering 276 thousand ounces of gold in annual production.

Due to heavy investments, since 2012 the company has been reporting negative free cash flows:

Fortunately, higher prices of gold should support the company during the construction phase at Fekola. In 2Q 2016 B2 Gold generated $72 million in cash flow from operations - it makes around $290 million in annual cash flow at today's prices of gold. After deducting $80 million on sustaining capital needs, the company should have around $200 million per year to finance the Fekola construction. I think it should be enough to complete Fekola so there should be no need to increase the company's debt load (which is quite high today).

The table below summarizes 1H 2016 results:

Now, let mu list the main pros and cons for B2 Gold:

  • B2 Gold is quickly adding new mines to its mineral portfolio
  • Production is going up
  • Costs of production are going down
  • Despite the implementation of heavy investment program, the company keeps its debt at safe levels (at the end of 2Q 2016, debt was 2 times higher than the annual EBITDA - banks consider this figure as a safe ratio)
  • the company is lucky (I realize it sounds funny but good luck really matters) - rising prices of gold should make the Fekola construction easier
  • there are no prepaid, streaming agreements (the company economics is not spoiled by these expensive instruments)
  • each operating mine presents decent economics (Masbate and Otjikoto are the leaders)
And the management is not greedy:

Despite excellent financial results, in 2Q 2016 they cut their salaries by 60%, compared to 2Q 2015 (on the other hand share-based payments went up by 24% but the total compensation was down, compared to 2Q 2015).

Summarizing - in my opinion, B2 Gold is one of the best world's miners. The company's development is really impressive and in the not too distant future B2 Gold should add another big, low-cost mine to its portfolio.

As my readers know, B2 Gold is included in my precious metals portfolio. 2Q 2016 results are the best evidence that my choice was rational.

Finally, B2 Gold share prices action looks also impressive:


During the current bull market in gold B2 Gold shares are much stronger than the broad precious metals stock market, represented by GDX (upper panel of the chart).

Wednesday, August 3, 2016

Endeavour Silver - 2016 Forecast

Endeavour Silver is a predictable company. Its three mines, Guanacevi, Bolanitos and El Cubo, are well covered in the company's reports. Therefore it is quite easy to prepare the 2016 results forecast. The table below delivers all figures:

As the chart shows, assuming metal prices, metal sales and costs of production as shown in the table, in 2016 the company should deliver the EBITDA of $51.2 million.

Today Endeavour shares are trading at $5.03 a piece. At that price the company's enterprise value (EV) stands at $600.8 million so, if nothing changes, at year end the company should show a multiple of EV / EBITDA of  11.7 (today this multiple stands at 29.2).

Therefore it looks like in the medium - term Endeavour shares are not too expensive (the current high reading of 29.2 should hit 11.7 at year end).

However, the entire picture is not as bright as it seems. The company has quite a serious problem with production. This year it should produce less silver and gold than last year. Looking at operating profiles of its three mines I am confident that Guanacevi looks problematic:

Since 2014 Endeavour squeezes less and less from this operation (green line). For example, using today's prices of silver and gold, in 2014 it could sell one ton or ore processed and get around $160 for metals contained in this ore. In 2Q 2016 it was able to get only around $120 per one ton of ore. What is more, it looks like costs of production (red line) reached a plateau at around $70 - $80 per ton of ore. It means that margin delivered by Guanacevi is shrinking.

On the other side there is El Cubo:

Here everything is different (and better): metal value is going up and costs are stable or even going down.

I realize that the  management team is very busy to oversee its current portfolio - well, it is not an easy task. Fortunately, there are at least two projects, which in a relatively short time may go online: El Compas and Terronera , both located in Mexico (as other operations).

To be honest, if Endeavour does not open a new mine, the problems may escalate.

Tuesday, August 2, 2016

Fresnillo plc - I Have Underestimated This Company

In one of my last posts on Fresnillo I presented the 1H 2016 operating profit forecast. According to that forecast, the company was supposed to deliver an operating profit of $130.4 million.

Today the company released its 1H 2016 report. I was very positively surprised - the operating profit was $360.7 million, much higher than my estimate.

Let me explain the reasons of my underestimation:

  • In 1H 2016 Fresnillo was selling its silver for $16.58 per ounce but in my calculations I assumed a lower price of silver ($15.85 per ounce - the average silver price recorded in 1H 2016). It looks like Fresnillo is able to sell its metals at higher-than-average prices. And it is good.

  • I assumed the costs of production to stand at $13.62 per ounce of silver (the level reported in 2015). However, the company was able to decrease these costs to just $11.69 per ounce. Thanks to better quality of ore, higher output and better recovery ratios (especially at the Herradura mine) in 1H 2016 Fresnillo was producing its metals at costs of production lower by 14.2%, compared to 2015. 

And that is the main point -   I did underestimate the Fresnillo's management team and at this point I would like to say: "My sincere apologies".

Last but not least. Fresnillo is not an easy company in terms of forecasting. In its production reports (which precede the financial reports):

  • it does not disclose the prices at which it is selling its metals
  • no costs of production are delivered
  • the amount of metals sold is not disclosed

Well, I have to rethink the sense of presenting any forecasts of Fresnillo results. Simply put, production reports are lacking in information.

A short summary of my soybeans trade.

Well, this trade was a defeat, as most of my trades. Simply put, I am not a trader.
Although for a short while the trade was working on my favor then the positive trend reversed and started another leg down. I closed the position at a loss of 2.5%. Now the soybeans price action looks as follows: