Wednesday, April 26, 2017

Each Day JP Morgan Adds Silver Bullion To Its Holdings

Since April 17 each trading day silver prices have been going down. I realize that precious metals bugs are in despair. Yes, it is an awful market. The question is not whether gold or silver prices go down  but how deeply they are going to drop.

However, JP Morgan does not care about it. Look at the chart below:

                                        source: Simple Digressions

As the chart shows, each trading day the guys at JP Morgan are adding silver to the bank's vaults at the COMEX.

Interestingly, the accumulation of silver by JP Morgan has just entered its parabolic stage (red circle):

                                     source: Simple Digressions

P.S. Today (April 28) they added another 915 thousand ounces (the chart has been updated)

Tuesday, April 25, 2017

What Is Going On With Barrick? My Answer: Nothing Special

Today Barrick Gold (ABX) released its 1Q 2017 report. In my opinion the results were decent however Barrick's shares are diving now (at the time of writing this post they are 9.8% down). What is going on? Well, the company also published its updated production outlook for this year. Look at the table below:

all figures in thousands of ounces

 source: Simple Digressions

The table compares the current and initial outlook (I have plotted the average values). Here is my comment:
  • firstly, according to the current outlook, the overall production is estimated to stand at 5,428 thousand ounces of gold
  • it means a cut of 365 thousand ounces, compared to the initial outlook
  • the biggest cut in production is attributable to the Veladero mine (345 thousand ounces of gold less than in the previous estimate)
  • however, this cut is mainly due to the strategic agreement with the Chinese gold miner, Shandong. According to that agreement, starting from July 1, 2017 Veladero will be shared 50%:50% with this miner. Hence, the overall Veladero production is going to be lower by 200 thousand ounces, compared to the initial outlook
  • unfortunately, due to the technical failure at Veladero, the mine is temporarily suspended. Barrick estimates that the production will be negatively impacted by around 145 thousand ounces of gold
  • the other changes are marginal (for example, production cuts at Kalgoorlie or Porgera)
Interestingly, Barrick estimates that costs of production should remain unchanged, compared to the initial outlook. 

Summarizing - I think that investors are overreacting and the current drop in share prices should be perceived as a nice speculative buying opportunity.

Friday, April 21, 2017

The Chinese Are Less Eager For Copper And Silver

It looks like the Chinese pressure on hoarding some metals is dissipating. Look at copper:

source: Simple Digressions

The blue circles indicate periods of decreasing copper stocks at the Shanghai Futures Exchange (SFE). Note that during these periods the prices of copper go down or level off. As the chart shows, since middle March the Chinese have been cutting copper stocks with copper prices following this decrease.

Another example - silver:

source: Simple Digressions

Similarly to copper, since middle March the Chinese have been cutting silver stocks.

Finally, a different picture. This time it is about gold:
source: Simple Digressions

As the table shows, in February and March of 2017 the Chinese withdrew more gold than in the corresponding months of 2016. It looks like the Chinese still show strong demand for gold...

Thursday, April 20, 2017

Is JP Morgan Taking Silver Out Of SLV?

Yesterday I asked this question: What is going on with silver? The question is still open but let me show a probable solution.

This year (till April 19) the SLV silver holdings decreased by 15.0 million ounces. However, in the same period JP Morgan has added as many as 19.9 million ounces of silver to its COMEX holdings. Interestingly, all that silver added by JP Morgan belongs to the category called "Eligible" (held by JP Morgan on its own account). In other words, JP Morgan increased its silver holdings (belonging to JP Morgan and/or its customers only) by 19.9 million ounces.

Summarizing, it looks like this bank is withdrawing silver from SLV to increase its holdings at the COMEX.

As a result, the thesis that something strange is going on with silver is not correct. Quite opposite, it looks like the silver, similarly to gold, is heavily accumulated and the main entity doing it is JP Morgan.

source: Simple Digressions

Wednesday, April 19, 2017

What Is Going On With Silver?

As I discussed in my previous article, since the beginning of 2017 two large gold ETFs, GLD and IAU, have been generally accumulating gold. However, the largest silver ETF (SLV), has been doing the opposite:

source: Simple Digressions

The chart shows that every single month SLV reported an outflow of silver from its vaults. As a result, now there are 327.3 million ounces of silver at SLV vaults:

source: Simple Digressions

It means that since the beginning of the current bull phase in gold and silver (December 2015), the SLV holdings increased by a mere 3.0% (look at two red circles). To be honest, it is not an impressive result because, for example, GLD gold holdings went up by 29.6%!

So the question is - what is going on with silver? 

Monday, April 17, 2017

Gold ETFs Do Not Always Do The Same

Generally, gold ETFs should behave in the same way. For example, when one gold ETF accumulates gold, the other ETFs should do the same. However, sometimes it is not the case. Look at these two charts:

source: Simple Digressions

Note that in January the first gold ETF, IAU, accumulated 125.2 thousand ounces of gold (its total gold holdings increased by this amount of gold) but its much larger counterpart, GLD, decreased its holdings by 742.7 thousand ounces.

Over the next months both ETFS were doing the same:
  • added gold in February and April (up-to-date)
  • got rid off the gold in March
Interestingly, gold prices were going down or got stuck only in March, when both ETFs were selling gold...

Friday, April 14, 2017

JP Morgan - Heavy Accumulation Of Precious Metals In April

JP Morgan, apart from being an active trader in precious metals futures, has been also aggressively accumulating gold and silver bullion this year. Look at the bank's precious metals holdings at the COMEX:

Interestingly, the bank has been particularly active in April, adding 380.8 thousand ounces of gold and 6.8 million ounces of silver to its COMEX vaults. It looks like this big speculator wants to hedge itself against something big... 

Thursday, April 13, 2017

Is The US Stock Market Topping?

Here is the chart of the week:


The chart shows the 30-year treasury bond price to S&P 500 ratio. The blue circles show cyclical lows of this ratio. Note that these lows correlate with the tops printed by the US stock market (red circles), represented by the S&P 500 index. The one-million dollar question is:

Is the US stock market topping now? 

Richmont Mines - Very Good Operating Results In 1Q 2017

Today Richmont Mines (RIC) released its 1Q 2017 operating results. Let me show just three charts showing what is going with this miner.

The first chart shows cash costs of production at Richmont's flagship property, the Island Gold mine:

source: Simple Digressions

This year the company is going deeper into Island Gold (deeper than 400 metres below surface) and expects to increase production (to 87 - 93 thousand ounces vs. 83.3 thousand ounces in 2016) and cut cash costs of production (C$715 - C$765 per ounce). As the chart shows, the start into 2017 was really good and the cash cost of production was much lower than company's estimates (C$668 per ounce for 2017, on average).

However, the second mine, Beaufor, was kind of a problem to Richmont:

source: Simple Digressions

As the chart shows, between the beginning of 2015 and middle 2016 Beaufor's production was in a steep decline. This negative trend was stopped last year (red arrow) and the company expects Beaufor to deliver 23 - 27 thousand ounces of gold this year (19.6 thousand ounces in 2016).  

What is more, the declining production was not the only problem at Beaufor because last year the mine was a high-cost gold producer:

source: Simple Digressions

According to the company, this year Beaufor should be producing gold at cash cost of C$1,265 - C$1,320 per ounce (C$1,444 in 2016) so the first quarter (red circle) shows that this forecast is not overly optimistic...

Wednesday, April 12, 2017

Dundee Precious Metals - 1Q 2017 Operating Results

A few minutes ago Dundee Precious Metals (DPM.TO) announced its 1Q 2017 operating results. I guess Dundee is not a popular company among precious metals investors. Maybe it is so due to its quite complicated business model - the company, apart from a typical mining business, runs also a chemical plant in Namibia (the Tsumeb smelter).

Anyway, today's results are really good. Chelopech, the largest underground gold mine in Europe (located in Bulgaria), produced a substantial amount of gold:

source: Simple Digressions

Last year the company sold the Kapan mine so now it operates only Chelopech. However, Dundee is currently constructing its second mine, also located in Bulgaria. This time it will a medium-size open-pit mine called Krumovgrad - it should be online in late 2018.

The Tsumeb smelter delivered disappointing results but  I would not bother about it. Due to some maintenance issues, this plant was not fully operational in 1Q 2017. Hence, lower amount of concentrates smelted (only 41.6 thousand tons) compared to, for example, 4Q 2016 (61.3 thousand tons). Since no additional stoppages are expected, the smelter should process 210 - 240 thousand tons of concentrate this year.

I think that Dundee shares are substantially undervalued against the company's peers (I mean precious metals miners). For example, they are trading at the EV/EBITDA ratio of 5.6 which is much lower than other mid-cap miners (around 8.0 - 9.0). It looks like a mining company involved in a capital intensive business (smelter) does not attract too many investors. Pity...

Tuesday, April 11, 2017

Gold Prices Breaking Above Their Strong Resistance

Today gold broke above its strong resistance at around $1,250 - $1,260 per ounce. The importance of this move has been additionally confirmed by other measures. Let me start from the golddollar index:

To remind my readers:

“The GolDollar Index was invented by Tom McClellan (of McClellan Financial) and is calculated by multiplying the price of gold by the U.S. Dollar Index. Its purpose is to cancel the effects of currency fluctuations on the price of gold. By comparing it with the spot gold index we can determine if there is inherent strength/weakness in the price of gold”

The blue circles are indicating today's breakout - note that the gold and the golddollar index did the same (they broke above their resistance marked in violet). 

Another picture:

This time it is the inverted US dollar index chart. As a rule, gold and the inverted US dollar index go in tandem. If something different happens it may be an indication of the relative strength of gold or the inverted US dollar index. The chart shows that now gold is much stronger than the inverted US dollar index (note that gold is above its strong resistance but the inverted US dollar index is not).

Another graph:

Now it is gold against 10-year US treasury notes prices. I believe that 10-year US treasury notes are a good proxy for real interest rates (excluding inflation).

Lower real interest rates (and higher prices of US treasury notes) support higher prices of gold. So, as a rule, gold prices go in tandem with the prices of treasuries. However, as the chart shows, gold is once again stronger than treasuries - it did break above its strong resistance while the prices of treasuries did not.

Summarizing - gold is very strong now. Its price goes up without bothering about the US dollar. What is more, it is also stronger than US treasuries so it looks like we are ahead of another rally in gold...

Monday, April 10, 2017

Metanor Has New Big Shareholders

Most recently Metanor Resources (MTO.V) completed a public placement with Eric Sprott acquiring a substantial stake in the company. Then the company announced it was going to close another private placement - this time addressed to Kirkland Lake (KL.TO) and Wexford Capital (a private investment company). If the last placement is successful, the company's shareholder base should look as follows:

source: Simple Digressions

It looks like Eric Sprott and Kirkland Lake, a mining company in which he holds a large stake, will jointly hold a 27.5% stake in Metanor. 

Then, assuming that Wexford is going to cooperate with these two investors, they should jointly control 40.2% of the company. In other words, it seems that Metanor is going to become a part of Mr. Sprott's empire.

On that news the investors replicating Mr. Sprott movements rushed to buy Metanor shares (look at the red circle on the right):


However, the problem is that now Metanor shares are trading at the EV/EBITDA multiple of 11.2 (calculated on a fully diluted basis). In other words, Mr. Sprott made these shares quire expensive now...

Sunday, April 9, 2017

A Message For The Subscribers To The 2017 Top Five Portfolio

The update to the 2017 Top Five Picks Portfolio has just been sent to you. Please, let me know if you have not received the report (technical problems happen). In such a case I will send it again.

Thursday, April 6, 2017

Energold - Last Year Was Not Turnaround

Energold Drilling (EGD.V) is the last drilling company to publish its 2016 results.

To remind my readers - Energold is not a pure mineral drilling play. Apart from its Mineral Division, the company also runs two other business lines: energy drilling and manufacturing. And these latter businesses did not perform well in 2016. As a result, 2016 was not a turnaround year for the company. Look at the chart below:

source: Simple Digressions

As the chart shows, since 2013 the company was not able to deliver any cash from its operations. What is more, last year was one the worst in the company's history.

Does it mean that everything is bad at Energold? Not necessarily. Its Mineral Division reported quite promising results. Let me start from two operating measures - metres drilled and drilling prices:

source: Simple Digressions

Well, the green bars (representing the amount of metres drilled) look quite good - in 2016 the company drilled more metres than in 2015. However, the red chart line showing drilling prices looks like an ECG (electrocardiogram) chart. Surely, the company has some problems with its pricing policy...

Further, mineral drilling margins improved in 2016. The left panel of the chart below shows annual gross margins (defined as revenue less direct costs, then divided by revenue). Note an uptick in a gross margin in 2016, compared to 2015. 

The right panel of the chart shows margins reported in 2016 on a-per-quarter basis:    

source: Simple Digressions

On the other hand, last year the Energy Division reported much lower gross margin than in 2015:

source: Simple Digressions

I would summarize this discussion as follows:

Although the Mineral Division reported promising results (in 4Q 2016 it even booked a net profit of around C$1M) , two other business lines (energy and manufacturing) performed badly in 2016. 

The result is here:

source: Simple Digressions

As the chart shows, since the beginning of 2016 Energold shares have been the worst performing shares amongst their peers.

Tuesday, April 4, 2017

Endeavour Silver - Terronera

Yesterday Endeavour Silver announced the results of the Pre-Feasibility Study on Terronera. Well, the problem is that the detailed study will be available within 45 days from the announcement. However, on the first sight the project is not impressive (at least for me).

Firstly, net present value of the project (I assume the company means the after-tax NPV) is $78.1M (base case scenario):

Recalculating this figure on a-per-share basis it means that Terronera should increase the company's value by $0.61 a share so investors reacted on the news and started aggressively buying Endeavour shares. At the time of writing this post the shares are up by $0.46 per share since the announcement looks like the initial impulse is going to dissipate quickly. But you know, markets are crazy so...who knows.

Other measures, IRR and payback period, are not impressive as well (especially the payback period of 4.3 years is quite extended).

Another point - the total cost of production (mining, processing, administration and royalties) is estimated at $72 per ton of ore. Well, it is a very low cost. For example, the lowest cost mine in the company's portfolio, Bolanitos, has been producing its metals at the average costs of production (2012 - 2016) of $75.4 per ton of ore.

Further, it looks like the company omitted the external dilution factor, which, for the cut and fill mining method stands at 15%. Here is an excerpt from the company's  reserves estimate (point 7):

"Dilution factors for mineral reserve estimate calculations averaged 29% for Guanaceví, 21% for Bolañitos, and 30% for El Cubo. Dilution factors are calculated based on internal stope dilution calculations and external dilution factors of 15% for cut and fill mining and 30% for long hole mining"

If I am correct, the total life of mine production  should stand at 19.2M ounces of silver (instead of 22.6M) and 157 thousand ounces of gold (instead of 185 thousand). Expect my additional comments when the PEA is available.

Sunday, April 2, 2017

Silver Demand - Poor March Figures

In March the demand for silver eased a little bit:

in millions of silver ounces:

The largest private holder of silver bullion, the iShares Silver Trust (SLV), reported an outflow of silver from its vaults amounting to 1.6 million ounces. 

Interestingly, the Shanghai Futures Exchange, which in 2015 started aggressive accumulation of silver, decreased its stakes in March (by 4.3 million ounces).

On the other hand, JP Morgan was still accumulating silver in March and added 0.7 million ounces.

Summarizing - the physical demand for silver retreated in March.

Similarly to the physical market, the paper demand did the same. Big speculators cut their net long positions in silver futures by 4.7 thousand contracts (attributable to 23.5 million ounces of silver). However, the net long position held by these traders still stands at a very elevated level (the green circle):

What now? Normally I would say that silver prices are poised to correct but the problem is that the gold market is in a totally different situation. Here the speculators are rather pessimistic about gold prices and it is the gold market that is a leading indicator in the precious metals sector.

Thursday, March 30, 2017

Message For The Subscribers To 2017 Top Five Portfolio

All companies included in the portfolio have announced their 2016 results. Please, expect an update to the initial report next week.

Eldorado Gold: Turnaround?

Yesterday Eldorado Gold made this announcement:

"Improved Concentrate Sales Terms

The Company is pleased to announce that it has received multiple tenders for significantly better concentrate sales terms for material produced beyond 2017. Under the new sales terms, gold payability rates have increased from 58% up to a maximum of 71%, which is expected to result in an increase of approximately 15,000 ounces of payable gold production per year.  Annual Phase II production is now estimated to be approximately 85,000 ounces of gold (from 72,000 ounces per year previously) plus approximately 55,000 ounces of gold equivalent production."

It seems that this event is not widely commented but, in my opinion, it is a very interesting message. Why? Well, the quality of a concentrate does not suddenly improve so much as is in the case of Eldorado. If a smelter wants the concentrate from Eldorado and wants to pay more for it (the gold payability of 71% instead of 58%) it may mean that the demand for the gold concentrate (and for the gold itself) is stronger than people think.

On the other hand, for a few last years Eldorado shares have been lagging behind their peers. Look at the chart below:


The blue arrow indicates the last downward trend of EGO against GDX.

Now the question is: is the last announcement (which should substantially improve the Olympias economics) a turnaround event for this unpopular company?

Wednesday, March 29, 2017

Eric Sprott Leaves Barkerville Gold

For many years Eric Sprott was a major shareholder of Barkerville Gold. He firstly got involved in the company in 2013 when his subsidiary loaned C$15M to Barkerville.

Unfortunately Barkerville defaulted on the loan payments and in July 2015 the loan was converted into common shares of the company. 

Apart from that, Mr. Sprott between 2013 and 2016 made a few minor purchases of Barkerville's shares.

Then, in August 2016 Mr. Sprott sold 50 million shares to Osisko Gold Royalties. Today he announced that the remaining stake was also sold to Osisko.

Let me show the final result (not bothering about the time value of money, ha, ha):
  • Over the years Mr. Sprott paid around  C$28.7M to purchase/convert all the shares he had.
  • His holding was sold to Osisko for C$68.1M 
  • It means that he made a gross profit (before taxes) of around $39.4M
Well, in 2015 Eric Sprott helped to rescue the company. Now, it looks like he not only rescued Barkerville but made a nice profit on its shares. I like it...

Monday, March 27, 2017

Copper - Small Speculators Are Still Overly Optimistic About Copper Prices

Not many analysts, if any, bother about the so-called small speculators. However, in my opinion, the Commitments Of Traders (COT) reports on this class of investors deliver quite important information about the state of the futures markets, for example, the copper futures market.

How do I define the so-called "small speculators"? Generally, according to the COT reports, there are three groups of investors:
  • big speculators (mainly hedge funds)
  • commercial traders (mainly investment banks)
  • small speculators - the traders not classified as big speculators or commercial traders

I calculate a position held by these traders as:

  • net position held by big speculators plus net position held by commercial traders
  • then the above calculated sum has to be rewritten with the opposite sign

Let me take copper futures as an example. As of March 21, 2017:
  • big speculators held a net long position of 21,670 contracts, which may be written as +21,670 contracts
  • commercial traders held a net short position of  25,857 contracts, which may written as -25,857 contracts
After summing up these two figures I am arriving at minus 4,187 contracts. After changing a minus sign into a plus sign I arrive at plus 4,187 contracts - that is a net position held by small speculators.

Now, look at the chart below:

The chart shows net positions held by small  speculators in copper futures, applying the above discussed formula. Note that when small speculators are overly optimistic on copper prices (red circles) the prices of copper print local tops. It means that a position held by small speculators may be considered as a nice contrarian indicator. Practically, any position above 4 thousand contracts may be regarded as overly optimistic.

Last time the small speculators were overly optimistic was during the first week of March, when a net long position held by these traders was standing at 6,650 contracts. Since that time copper prices have retreated by around 3% but it looks like the pattern is still bearish for copper prices in the short - term (small speculators still hold quite a large net long postion of 4,187 contracts).

However, in the long-term I am bullish about copper prices so I believe that each strong correction should be regarded as a buying opportunity.

Sunday, March 26, 2017

Precious Metals Market - A Long Term Picture

From time to time it is very helpful to look at the market in the long-term. Let me show a popular ratio of Silver / Gold:


The lower panel of the chart shows the ratio of Silver / Gold prices and the upper panel shows gold prices, starting from 2002 when the current long-term bull market in precious metals had started.

The green area on the lower panel indicates long-term buying opportunities for gold, silver and precious metals stocks. On the other hand, the red area depicts selling opportunities.

Now, it looks like we are at a very early stage in the current bull run.

Friday, March 24, 2017

The Chinese Are Cutting Their Silver Stakes But JP Morgan Is Still Increasing Its Holdings

For the last three weeks the Chinese have been cutting their silver holdings.

According to the Shanghai Futures Exchange (SFE), the amount of silver held at this entity decreased by 181 tons (5.8M ounces). It looks like the highest Chinese demand for silver is around Y110 (Yuan - the Chinese national currency) per ounce:

On the other hand, JP Morgan is still accumulating silver (no matter at what price):


Thursday, March 23, 2017

Endeavour Silver - Supplement

Yesterday I published an article on Endeavour Silver (EXK) (link). In this post I would like to publish a short supplement.

First of all, look at the chart below:

Usually, when gold / silver prices go down a mining company delivers lower cash flows from its operations (lower metal prices = lower revenue = lower cash flow from operations). And vice versa.

Until 2014 Endeavour was no exception to this pattern. However, in 2015, despite lower prices of silver, the company was able to deliver higher cash flow.

Why? Because in 2015 Endeavour cut its production costs by 20% and silver prices realized by the company decreased "only" by 15.8%.

Then, in 2016 the situation changed. Endeavour once again was able to cut its costs but the company produced and sold much less silver and gold than in 2015. Hence, lower cash flow from operations (excluding working capital issues). 

Why did the company produce less metals? Here is an excerpt from the 2016 Outlook, page 30:

Well, I am not satisfied with this explanation. What is more, seeing higher prices of silver and gold, Endeavour updated its guidance (higher production) in middle 2016 but the actual production was nevertheless much lower than in 2015.

Now, according to the 2017 Outlook, the company wants to increase its production from 5.4M ounces in 2016 to  5.5 - 6.0M ounces of silver this year. The problem is that the entire growth is going to be attributable to the Guanacevi mine, the smallest but also the best operation in the company's portfolio.

It seems that other mines (Bolanitos and El Cubo) are simply not able to deliver economically viable production in larger quantities.

Wednesday, March 22, 2017

Eric Sprott Increases Its Stake In Metanor

Eric Sprott, a notable Canadian resource sector investor, took part in the last company's offering. Now he holds 81.3 million shares of Metanor and 51.3 million warrants (each warrant entitles to acquire one Metanor share for a price of $0.09 until March 2019).

If all warrants were exercised, Mr. Sprott would control 19.5% of the company. Eric Sprott started investing in Metanor last year. The current acquisition means that he has increased its stake in the company.

Interestingly, Mr. Market seems not to spot this event. Metanor shares are trading at C$0.06, which is the price at which the last offering was conducted.

I discussed Metanor two times at this blog: here and here.

Tuesday, March 21, 2017

Oh Fortuna

Yesterday Fortuna Silver made an astonishing annoucement. Let me cite the most interesting part:

"As part of a review by the staff of the United States Securities and Exchange Commission (the "SEC") of the Company's Annual Report on Form 40-F for the year ended December 31, 2015, the SEC has provided comments on the Company's use of inferred resources in its audited financial statements for the calculation of depletion expenses (the "SEC Comments"). The Company considers the use of its inferred resources in the calculation of depletion expenses to be appropriate under IFRS and consistent with the practice of other Canadian mining companies. However, until the SEC Comments are resolved, the Annual Financial Documents cannot be finalized"

It looks like the company was calculating its depletion cost using inferred resources. Interestingly, Fortuna claims that everything is alright but is it?

Here is an excerpt from the company's 2015 Annual Report, page 11:
"Costs of producing properties are amortized on a unit-of-production basis over proven and probable reserves and the portion of resources expected to be extracted economically"
Maybe I am blind but there is nothing about inferred resources. To remind my readers - according to the Canadian Institute of Mining (CIM):
"An Inferred Mineral Resource is that part of a Mineral Resource for which quantity and grade or quality are estimated on the basis of limited geological evidence and sampling. Geological evidence is sufficient to imply but not verify geological and grade or quality continuity.
An Inferred Mineral Resource has a lower level of confidence than that applying to an Indicated Mineral Resource and must not be converted to a Mineral Reserve. It is reasonably expected that the majority of Inferred Mineral Resources could be upgraded to Indicated Mineral Resources with continued exploration"

In other words, inferred resources are that part of a mineral resource which cannot be converted into reserves, is not economically viable and is not "the portion of resources expected to be extracted economically".
Simply put, inferred resources are just a dream that may become reality in the future (rather distant future). What is more, converting inferred resources into reality definitely takes time and a lot of money but the final result may be a complete fiasco.
Summarizing - in my opinion, inferred resources cannot be taken into account when calculating depletion.
The problem is that mining companies do not disclose how they calculate depreciation of their mineral properties (where depletion accounts for the biggest part of this cost). Who knows, maybe Fortuna is not just an exception - the company states that its practises are: "consistent with the practice of other Canadian mining companies". By the way, I would like to know which companies calculate their depletion in the same way as Fortuna does... 
Now the question is what if the SEC is right? Well, higher depletion means lower taxes (higher expenses = lower taxes). What is more, if the company has been calculating its depletion incorrectly for many years it would have to pay the taxes due plus some fines. Next, it would have to recalculate its past financial statements. Many problems ahead.
I hope Fortuna is able to explain everything and focus on its business (any dispute with the taxman is time, energy and money consuming)....

Monday, March 20, 2017

Mineral Drilling Sector - Another Buying Opportunity In The Making

Since February 2017 the stocks of mineral drilling companies have corrected by around 16%, on average.

The chart below shows the so-called DRILL Index, an index created by the author of this site and replicating the share performance of the following drilling plays: Energold, Major Drilling, Orbit Garant, Geodrill and Capital Drilling.

For comparison reasons, in the lower panel of the chart I have plotted the price action of a broad precious metals stock market (represented by GDX):

First of all, note that since the summer of 2016 the DRILL Index has been much stronger than GDX. Despite GDX showing lower values than those printed in August 2016, the DRILL Index is still above the levels recorded last summer.

Further, the DRILL Index is once again close to its strong support (the green line on the upper panel of the chart). That is why I think the drilling companies present another interesting buying opportunity.

Apart from that, drilling companies are quite cheap now. Let me show two popular valuation measures.

The first one is a ratio of Enterprise value / EBITDA:

And the second one is a Price / Book Value ratio:

In my opinion, two companies are especially interesting: Geodrill and Capital Drilling. Both drillers are very cheap (EV / EBITDA ratio below 5) and operate mainly in Africa (Geodrill exclusively in this region) - the place where many decent miners develop or explore gold properties. 

Finally, let cite the Chairman of Capital Drilling:

source: Capital Drilling 2016 Annual Results, page 5

Friday, March 17, 2017

After The FED Meeting

So, interest rates are up. This time the FED did what a majority of investors were expecting. Interestingly, contrary to popular wisdom, gold prices went up as well.

What is even more interesting, although FED rates went up, market interest rates went down (for example, 10-Year Treasury yield went down from 2.6% to 2.5% on the announcement day). I am not surprised - the general rule is as follows:

before an event the financial markets try to adjust to this event; after the event the markets go in the opposite direction, at least for some time 

Now we are in this second stage of market reaction, which can take some time. Anyway, gold bugs regained some optimism. For example, this week the SPDR Gold Trust (GLD) reported a high inflow of gold into its vaults (380.9 thousand ounces until yesterday).

What is more, share prices of gold / silver miners also reacted very positively on higher interest rates. For example, the Market Vectors Junior Gold Miners ETF (GDXJ) went up 11.5% on the FED announcement day.

However, in this post I would like to look at precious metals miners in the long - term. Let me show this chart:

The chart shows the well-known ratio of GDXJ / GDX (GDX stands for the Market Vectors Gold Miners ETF). As a rule, when this ratio goes up it means that:

  • we have a full-blown bull market in gold / silver
  • there is an initial phase of a bull market in gold / silver and investors may consider investing in precious metals shares

When the opposite happens (the ratio goes down):
  • there is a bear market in gold /silver
  • investors have to be very cautious about investing in precious metals shares (a bull market is close to its end).  
For example, the blue arrow indicates an initial stage of a bull market in the precious metals market. This phase started in March 2015, when everybody was pessimistic about gold / silver. However, in March 2015 the ratio GDXJ / GDX had started its upward trend. It was an early signal for gold bulls that, after a four-year correction in gold prices, they should have considered investing in the precious metals sector again.

Last but not least - the GDXJ / GDX ratio still supports a bullish thesis on gold...

Tuesday, March 14, 2017

Ahead Of The FED Meeting

US investors are buying gold bullion once again. Surprisingly, it is happening ahead of tomorrow's FED announcement day.

Yesterday and today as many as 314.2 thousand ounces of gold were added to GLD vaults:

 Another gold bullion vehicle, iShares Gold Trust (IAU) added 9.6 thousand ounces of gold.

Interestingly, today the share prices of precious metals mining companies went down strongly:
  • GDX lost 3%
  • GDXJ lost 6%
It looks like the precious metals stock market is mini-crashing but American investors are accumulating physical gold. Who is right? Let us wait until tomorrow...

Wednesday, March 8, 2017

A Quick Look At Silver Plays Valuations

It looks like silver producers are out of investors' fashion. Look at current valuations of a few silver majors:

I do not remember when last time these shares were so poorly valued. Looks like a great buying opportunity...

Tuesday, March 7, 2017

Geodrill Delivers Excellent 2016 Results

Geodrill (GEO.TO), a mineral drilling company operating in West Africa, released its 2016 results. I was expecting really good figures and I am not disappointed. Contrary to other drilling companies, Geodrill looks as if there was no industry slump at all:

As the table shows, in 2016 Geodrill showed improvement across the board. In my opinion, the most important measures are operating ones:
  • In 2016 the company drilled above 1 million meters (an increase of 37.2%, compared to 2015)
  • Drilling prices went up by 11.6% - I think that higher prices are a strong indication that an industry slump is probably over, at least in West Africa (Ghana, Burkina Faso, Mali or the Ivory Coast)
  • Another positive - drilling cost per meter drilled went up less than prices. As a result, a gross margin per meter drilled went by 36.2%!
The above listed positives make me optimistic about Geodrill and the drilling sector in Africa (yes, it is an excellent place to be now). Interestingly, despite the nice share prices run over last year, the company's current market valuation measures are not elevated. For example, a popular ratio of enterprise value / EBITDA stands at a mere 4.4 which, in my opinion, is funny valuation (very low). 

Sunday, March 5, 2017

US 10-Year Treasury Note Yields And The Price Of Gold

Today a short look at the correlation between the US 10-year Treasury Notes yield and the price of gold.

Next week (March 14 - 15) the FED is going to raise US interest rates. To be honest, I do not bother about the FED at all. On the second day of their meeting there is always a big mess but then...the markets go as they want.

Therefore I prefer looking at what markets are telling us. And 10-year Treasury Note yields are telling this:

Note that the yield is going in the opposite direction to gold prices. For example, between July 2016 and November 2016 the yield was in its upward trend and gold prices were going down.

Since the end of 2016 the yield has stuck at around 2.4% (the blue, dotted line on the upper panel of the chart) and the price of gold has been in its upward trend (the blue, dotted line on the lower panel of the chart). What is more, the price of gold was relatively stronger, compared to yields (the yield little changed but the price of gold going strongly up).

Now, let us wait until the FED meeting...

Friday, March 3, 2017

Fresnillo plc And Its Fresnillo Mine Problem

Fresnillo plc, one of the largest world's gold / silver miners, published its preliminary 2016 results. In my opinion, they were very good but in this post I would like to discuss one of the main assets, the Fresnillo mine.

I guess that the company's management has a real weakness for this operation. Look at the chart showing Fresnillo plc capital expenditures, starting from 2008:

As the chart shows, since 2008 the company has allocated as much as $0.84 billion to improve the Fresnillo mine operations. It was the largest amount of money spent on any mine in the company's mineral portfolio.

To be more specific, here is the chart showing the Fresnillo mine Capex:

The chart shows that the highest Capex was in 2012, 2014 and 2015. In 2016 the management came to its senses and spent "only" $52.8 million. I think it is the right decision because the Fresnillo mine performance has been in graduate deterioration for many years:

The main problem are silver grades. The Fresnillo mine is a silver producer operating since 1554. Despite its long history, a few years ago the mine was able to deliver silver grading above 500 grams per ton of ore, which was an excellent, high grade. Now it is producing silver grading around 220 grams per tone of ore so the deterioration is impressive. 

Of course it does not mean that this mine is worth nothing. Quite contrary, it is still a decent operation but the question is:

"Is it still worth spending so much money on it?"

In my opinion, it is not.

Last but not least - the company plans to improve Fresnillo / Saucito operations (both mines are close to each other) through construction of the so-called Pyrites plant. The planned Capex stands at $155 million and the plant should be commissioned in 2018. I would like to see a business plan for this project...(contrary to Canadian miners, Fresnillo plc does not disclose technical reports, PEAs etc.)