Sunday, June 25, 2017

Copper - A Big Move In The Making

Uncertainty precedes big price moves. Most recently I have spotted an unprecedented event in the copper market. The so-called spreading figures, the data delivered by the Commitments of Traders Report (the COT report), are standing at the highest level in history.

According to the COT report, spreading figures are defined in the following way:

"For the futures-only report, spreading measures the extent to which each non-commercial trader holds equal long and short futures positions... For example, if a non-commercial trader in Eurodollar futures holds 2,000 long contracts and 1,500 short contracts, 500 contracts will appear in the "Long" category and 1,500 contracts will appear in the "Spreading" category"

Look at the chart below:


source: Simple Digressions and the COT data

The circle marked in red points to the last spreading figure. It can be easily spotted that this week (the report was dated June 20) this figure was standing at its highest reading in history - as many as 8.6% of big speculators trading copper futures was very uncertain about future copper prices.

In my opinion, it is a very reliable data to take a position in the copper futures market. The only question is this: what position? Long or short?

Well, it is hard to say - spreading figures cannot help here. What I know nearly for sure is that a big move in copper prices is in the making.

The validity of this signal is additionally strengthened by the total open interest in copper futures:


source: Simple Digressions

As the chart shows, the total open interest is close to its highest readings now. Therefore the message is this:

  • the copper market is ahead of a big move
  • due to a very high open interest in copper futures (there is a vast amount of traders on this market), this big move should be additionally supported
  • the problem is that the direction of this move is unknown

Thursday, June 22, 2017

SLV - The Downward Trend Has Reversed

Most recently the iShares Silver Trust (SLV), the world's largest silver ETF, has been reporting the increased silver inflows to its vaults:


source: Simple Digressions and SLV

As the chart shows, since the beginning of 2017 there was a continuous outflow of silver from SLV (the red arrow). However, in the middle of April this trend reversed and since that time (with a short break in May) we have seen a rapid increase of silver holdings at SLV (the green arrow).

Interestingly, the metal is hoarded at relatively low prices.

Tuesday, June 20, 2017

Jaguar Mining - I Am Touched...

Just to finish the previous post on Jaguar Mining (JAGGF) - here is an excerpt from the last company's announcement (SEDAR):

"The following subscribers who are “related parties” within the meaning of Multilateral Instrument 61-101 (“MI 61-101”) participated in the Offering:
  • (i) 2176423 Ontario Ltd., a company controlled by Eric Sprott, an insider of the Company, subscribed for 4,545,455 Shares;
  • (ii) Tocqueville Gold Fund, which, together with its investment adviser, Tocqueville Asset Management L.P., is a control person of the Company, subscribed for 3,770,909 Shares;
  • (iii) Resolute Performance Fund, an insider of the Company, subscribed for 4,637,000 Shares;
  •  (iv) Rodney A. Lamond, the President and Chief Executive Officer of the Company subscribed for 35,000 Shares"
Well, it is fine to see other, besides Eric Sprott, notable investors among Jaguar shareholders (Tocqueville Gold Fund and Resolute Performance Fund - two very active funds investing in mining companies) but I am very, very touched by the last acquisition. The company's CEO, Mr. Lamond,  subscribed for...35 thousand shares of the company. Well, investment of C$15.4 thousand is very impressive. Let me look at his salary:
 
 
source: Jaguar Mining
 
So last year Mr. Lamond made C$268.5 thousand. Apart from this basic salary, the CEO owns 2.33M not-exercised options valued at US$625.6 thousand:
 
 
source: Jaguar Mining
 
Well, it is good that Jaguar's CEO invests in his company but the size of this investment is very "impressive". I am touched...
 

Friday, June 16, 2017

Jaguar Mining Finds Investors For Its New Shares

Despite poor 1Q 2017 financial results (mainly attributable to the unfavorable exchange rate between the Brazilian real and the US dollar), Jaguar Mining (TO:JAG) was able to find investors for its new 17.6M shares, issued through the last non-brokered private placement financing.

When the private placement was announced I was curious whether Eric Sprott, a notable Canadian resource investor, was going to increase its stake in the company. He was.

According to the last announcement (SEDAR), now Mr. Sprott controls 64.3M shares in the company (18.7%, including the new shares added through the private placement).    

What is more, the placement was priced at C$0.44 a share, around 10% above the current market price. 

As a result of the placement (and including the second tranche of the Sprott debt financing of US$5.0M), the company should hold cash of around US$29.0M and debt of US26.3M.

Additionally, this quarter the US dollar has strengthened against the Brazilian real (which is good for the company) but investors do not care and Jaguar shares are 40% down.


source: stockcharts.com


Wednesday, June 14, 2017

No Logic In Financial Markets - The Case Of Fairfax

I know it sounds trivial but there is no logic in financial markets. Let me take Fairfax Financial Holdings (FRFHF) as an example.

Briefly, Fairfax is an insurance company run by the so-called Canadian Buffett, Prem Watsa. The company, apart from running a typical insurance and re-insurance business, is also an active portfolio allocator (investing in equities, holding large long / short positions in equity futures, betting on major economic events etc.)

Now, shortly after the US presidential elections Fairfax made the following adjustments to its investment portfolio:
  • the US bonds exposure was radically reduced (the company sold-off a large portion of its US and Canadian treasuries)
  • a short position held on Canadian and US equity markets was radically cut
As a result, Fairfax positioned itself for higher equity prices and lower treasury prices.

What is more, the company (or, better said, Prem Watsa) was right. Since the US elections the prices of treasuries went down and the US and Canadian stock markets went up.

However, Fairfax share prices did something strange - they went down:


source: stockcharts.com

In the lower panel of the chart I have plotted Tembec share price action (Tembec is one of the largest equity holdings acquired by Fairfax a few years ago; a few days ago Fairfax sold part of its stake in Tembec).

Summarizing - Prem was right but the stock market was...more right?




Monday, June 12, 2017

Is The Copper Market Worth Nothing?

The copper sector looks like the precious metals segment at the end of 2015. Look at the current market valuations of a few copper plays:

source: Simple Digressions

Now most of the copper miners are trading at very low EV / EBITDA ratios. It looks as if the entire copper market was worth nothing or close to nothing.
Interestingly, most recently the copper mining companies made similar progress as the precious mining companies did and cut their costs of production significantly. Look at a number of copper plays and their operating costs:

source: Simple Digressions

Note: operating cost is defined as: direct cost of production + royalties + depreciation + administrative expenses + share-based payments + other operating costs

As the chart shows, Southern Copper (SCCO), Taseko Mines (TGB) and Atalaya Mining (TO:AYM) are very-low-cost producers (with operating costs below $2.0 per pound of copper). 
The other miners also produce their copper at quite low prices so...what is the problem?

As usually - the problem lies in copper prices. However, the copper price action does not look bad:


source: stockcharts.com

Although I am not a fan of Technical Analysis, sometimes it is good to look  at the big picture. And the big picture delivers an important message: since late October 2016 copper has been in a strong bull market. Now, after the last correction, copper prices try to break out to the upside.

Additionally, the data delivered by the Commitments of Traders report supports a bullish thesis:


source: Simple Digressions and the COT data

The blue circle on the chart above shows the current net position held by Money Managers (mainly hedge funds) in copper futures. Notice that the blue circle is well below the red circle, which indicates the excessive optimism among traders. It means that the copper market is now generally neutral (or far away from overbought conditions).

Now, combining the last two charts it looks like the chances for another leg up in copper bull cycle are higher than the chances for the opposite move...

Thursday, June 8, 2017

Gold Bullion Flowing Into Private Hands

A positive gold price action this month is supported by gold bullion inflows into GLD and IAU:


source: Simple Digressions

On the other hand, two big silver holders, SLV and JP Morgan (its COMEX warehouse) have delivered mixed signals up to June 7:


source: Simple Digressions

As the chart shows, in June JP Morgan has added 1.6M ounces of silver but SLV reports the outflows of silver (1.4M ounces).

Friday, June 2, 2017

US Stock Market - A Rare Red Flag Waving

I stated many times that it is very hard, or even impossible, to predict the stock market. However, sometimes Mr. Market delivers quite clear indications that something different is in the making.

Let me take the US stock market. Here is the chart showing the so-called NAAIM Exposure index:


source: NAAIM

According to the NAAIM:
"The NAAIM Exposure Index represents the average exposure to US Equity markets reported by our members"

It looks like most recently American investment managers are a little bit less bullish on US stocks than before (despite the index printing new historic highs).

Additionally, the red arrow depicts the divergence between the S&P index and the NAAIM. Interestingly, such divergence is quite a rare event. The last time it occurred (middle 2015 - the blue arrow), the US stock market dived 20% shortly after.

Well, I know that the US stock market is unstoppable (forgive me for being a little bit sarcastic) but now it is waving a rare red flag...




Wednesday, May 24, 2017

The Update 2 To The Top Five Portfolio Dispatched

Please, check your e-mail boxes to find the Update 2 to the 2017 Top Five Portfolio.

If any of my subscribers did not receive it - please, let me know. Bad things happen (then I will send it again).

Tuesday, May 23, 2017

A Message To The 2017 Top Five Portfolio Subscribers

On Wednesday (May 24, 2017) I will be dispatching the second update to the 2017 Top Five Portfolio report.

Tuesday, May 16, 2017

Silver Still Rapidly Hoarded

Despite weak silver prices, this month  the metal is aggressively accumulated by SLV:


source: Simple Digressions

As the chart shows, during the first two weeks of May as many as 12.1 million ounces of silver have been added to SLV vaults. It is a vast amount. For example, in 2016 the largest world's primary silver producer, Fresnillo plc, delivered 45.7 million ounces of silver.

In theory, at the current rate of 24.2 million ounces per month, SLV would have accumulated 290 million ounces of silver within one year (six times more than Fresnillo's annual production).

The question is: will that heavy accumulation have a positive impact on silver prices?

Tuesday, May 9, 2017

The Precious Metals Market Looks Better Now (At Last)

The precious metals market is probably bottoming. Generally, the best entry points are when this catastrophic correlation between gold and the precious metals stock market (represented by GDX, for instance) stops working*.

* - I mean a pattern where gold goes, say, 1% down with GDX dropping 3%. And then again and again and again...

Look at these two charts below (the upper panel shows GDX and the lower one gold) in an ultra-short perspective:

                                                         
source: stooq.pl

It looks like the market is sending a positive signal for gold bulls (at last). Since May 4 gold prices have been going down but GDX has chosen the opposite direction (look at two red arrows). In the past such divergencies were very promising...

Thursday, May 4, 2017

B2 Gold And OceanaGold - Time To Relax

B2 Gold and OceanaGold may relax. Their big enemy, Gina Lopez, has lost her job as an environment secretary in the Philippines.

Well, apart from closing a number of mines, most recently Mrs. Lopez banned the open pit mining in Philippines. It means that a mining company trying to start a new open pit mine in that country is not allowed to do it. Or, better said, it was not allowed a few days ago (as Mrs. Lopez held her post).

The country is open for mining once again.


Tuesday, May 2, 2017

Mineral Drilling Sector - What A Day!

My DRILL index went up 7.8% today. Let me list today's winners:
  • Energold: up 10.3%
  • Major Drilling: up 3.7%
  • Geodrill: up 3.8%
  • Orbit Garant: up 6.3%
  • Capital Drilling: up 18.5%
Now look at the DRILL index:

source: Simple Digressions

Well, while big gold miners did nothing today, the DRILL index rocketed up. Now I am waiting for the traditional mining sector to follow its drilling fellows...

A Rapid Increase In Silver Held By SLV

iShares Silver Trust (SLV) is following JP Morgan now. Since April 25 as many as 9.6 million ounces of silver have been added to SLV vaults. It is a large figure - look at last changes in SLV holdings:

  • April 1 - April 25: a decrease of 5.0 million ounces
  • April 25: 2.0 million ounces added
  • April 26: 2.9 million ounces added
  • May 1: 1.1 million ounces added
  • May 2: 3.5 million ounces added

So between April 1 and April 25 SLV reported an outflow of 5.0 million ounces of silver but in just four trading days (since April 25) as many as 9.6 million ounces were added.

Interestingly, most recently silver prices go down nearly every day but SLV and JP Morgan are hoarding silver bullion...

Another thing, in January, February and March SLV was reporting outflows of silver. In April this trend was stopped and now SLV reports a rapid increase in its silver holdings: 


source: Simple Digressions

Saturday, April 29, 2017

Shanghai Futures Exchange - What Is Going On?

While JP Morgan accumulates silver, the Chinese do the opposite (or something different is happening):


source: Simple Digressions

Since the beginning of March the Shanghai Futures Exchange (SFE) has reported silver outflows. What is more, last week as many as 4.0 million ounces of silver were withdrawn from the SFE vaults (spot the red bar on the lower panel of the chart).

Now the question is: how to interpret these changes?

There are two possible answers:
  • similarly to gold withdrawals, silver withdrawals are a sign of silver accumulation by the Chinese
  • the withdrawals are an indication of the decreasing demand

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:


source: stockcharts.com

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):


source: stockcharts.com

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 so...it 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.