Tuesday, January 31, 2017

2017 Top Five Portfolio - January Results

January has ended so it is time to publish the results delivered by my 2017 Top Five Portfolio. Here are they:

As the chart shows, since December 12, 2016 the portfolio returned 29.5%, 14.2 percentage points more than the broad precious metals stock market, represented by GDX. What is more, each single pick returned more than GDX (that is why the overall performance was that good).

O.K. It is the last post on the 2017 Top Five Portfolio. This blog is about investing, not about advertising. The subscribers will get the first update soon (when 2016 final results are disclosed). And those interested in the subscription may still subscribe (here).

Thursday, January 26, 2017

Caterpillar - No Signs Of Improvement In The Precious Metals Sector

Despite recovery in the precious metals sector, Caterpillar did not improve the results of its Resource Industry segment in 2016. Look at the chart below:

source: Simple Digressions and Caterpillar data

As the chart shows, revenue went down from $7.6 billion in 2015 to $5.7 billion in 2016.

The only region where Caterpillar recorded a small improvement was Asia and the Pacific Ocean region:

source: Simple Digressions and Caterpillar data

However, the year-to-year Asia / Pacific sales declined in 2016 by 17%, compared to 2015.

Summarizing - there are generally no signs of improvement in the resource segment of Caterpillar. 

Wednesday, January 25, 2017

Banro - Production Results

A few days ago Banro Corp published its 2016 operating results. Let me start from the oldest mine, Twangiza:

Twangiza's head grades, although lower than in 2015, were improving from quarter to quarter (except for 3Q 2016). On the other hand, recovery ratios have been in a downward trend since 2014. It looks like the company's metallurgists have some problems with processing.

As a result, in 2016 the mine delivered 104.4 thousand ounces of gold (a decrease of 22.9%, compared to 2015). In other words, Banro did not meet its 2016 guidance of 110 - 120 thousand ounces in gold production.

Now Namoya. It is a new mine. It is still ramping - up its production so its operating results should be considered as initial ones:

As the chart shows, the grades delivered by the mine are generally stable but recovery ratios are fluctuating (once again metallurgical problems?).

Similarly to Twangiza, Namoya also did not meet its production guidance. In 2016, instead of 100 - 110 thousand ounces, it produced 93.2 thousand ounces of gold.

So the company did not meet its 2016 guidance at all.

Therefore the question is: are Twangiza and Namoya good assets (I am not asking about corporate financial issues - they are terrible)? Well, let me wait with answering this question until I see remaining figures (mainly costs of production).

Wednesday, January 18, 2017

Timmins Gold Corp: Very Decent Year 2016

A few days ago Timmins Gold Corp (TGD) published its 2016 production results. In my opinion, the company made relevant progress last year.

First of all, it stopped a negative trend in gold production:

Further, the company was able to improve the economics of mining:

The chart shows revenue and direct costs per ton of ore processed. For comparison reasons, I recalculated the revenue applying a fixed price of gold over the entire period. Therefore it is easy to spot that in 2016 Timmins increased revenue delivered by one ton of ore processed at the company's mill.
In other words, the company was processing higher grade ore (0.58 grams per ton of ore in 2016 vs. 0.51 g / t in 2015). Apart from that, the company's metallurgists were able to increase a recovery ratio from 67.7% in 2015 to 70.4% in 2016.

What is more, Timmins' management cut the direct cost of production from $11.3 in 2015 to $9.4 per ton of ore processed (it is my estimate).
I think that lower strip ratios (waste mined / ore and waste mined) were standing behind this improvement:

Simply put, the company was spending less cash to mine its gold.

Despite these positives Timmins shares are trading at a very low EV / EBITDA multiple of 4.0 (assuming 4Q 2016 EBITDA of $10M). Well, it looks like the investors are afraid of Ana Paula, a gold project the company is developing. This very decent project is located in the Guerrero State, Mexico. However, this state is surely not the safest place to run any business. Ask Goldcorp about it...

Monday, January 16, 2017

2017 Top Five Portfolio: One - Month Return

The 2017 Top Five Portfolio works well:

The first month (December 12, 2016 - January 13, 2017) returned 16.8%, 7.2 percentage points more than the broad precious metals stock market (GDX).

Sunday, January 15, 2017

Metanor Resources: Bachelor - A Failed Project

Metanor Resources (MTO.V) is a tiny gold  producer operating one mine, called Bachelor. The mine is located in the Quebec Province, Canada. Production at Bachelor started in late 2012 and till the end of 2016 the mine delivered around 160 thousand ounces of gold.

In my opinion, the Bachelor project is generally a failure. Look at the table below:

source: Simple Digressions

In 2011 the company submitted a Preliminary Economic Assessment on Bachelor. The main assumptions are in the column titled "PEA" and the actual results are presented in the column "actual". Although it looks like the Bachelor mine should continue its operations in the future, due to the fact that, according to the PEA, Bachelor was supposed to operate until the end of 2016, it is a good time to look at this mine from the long - term perspective.

As the table shows, the main factor standing behind the failure was a much lower head grade at which the company was processing the ore extracted from Bachelor. According to the PEA, the Bachelor was supposed to be a high - grade operation (grade of 7.4 grams per ton of ore). However, the actual grade was just 5.4 grams per ton of ore (27% below initial assumptions). What happened?

Let me cite the company:


"The mining method used at Bachelor is long hole stoping mining with sub-level. It is an efficient method with low extracting costs, but can generate important dilution if the structure is narrow as was completed in the A and B veins. In the pre-feasibility report published in April 2011, the overall planned dilution rate was 10%. In the A and B veins, the dilution rate was closer to 40% due to the narrow nature of the veins. This resulted in lower feed grade at the mill and had a negative impact on the cost of sales"
 source: Management Discussion, June 30, 2016 page 4 (SEDAR)

Although the citation refers to the A and B veins, the dilution problem relates to all veins at Bachelor. In my opinion, the Bachelor project is a typical case of a the underestimation of the mining at thin vein - gold deposit. For example, the main part of the deposit, called the Main Zone, had an average horizontal width of 2.8 metres (median at 2.1 metres). It is a very thin vein. As a result, to extract gold from such a narrow vein the company had to mine a lot of waste as well (higher dilution factor). In the PEA, the average dilution was set at 10% but in reality it was rather around 37% (refer to the table above and the row called "Grade"). Hence, a failed project and, instead of generating the operating cash flow of C$57.8M over the mine life, the project delivered just C$10.4M. What is more, this poor figure was delivered at much higher gold price than the company projected in 2011 (C$1,508 actually vs. C$1,271 per ounce of gold).  

What now? Well, first of all, the operating results improved in 2016, especially in 4Q 2016:

source: Simple Digressions

Look at the grade and the recovery ratio in 4Q 2016 - they were much higher than in the previous quarters of 2016.

As a result, the company produced 9,763 ounces of gold in 4Q 2016 (the highest amount in 2016). What is more, it sold 10,431 ounces of gold last quarter (also the highest amount in 2016). That is why I expect decent results delivered by the company in 4Q 2016 (revenue higher by 23%, compared to 3Q 2016 and lower operating costs).

However, the biggest problem remains unanswered. The company promised to publish the estimate of mineral resources / reserves at Bachelor until the end of 2016. Till today there is no estimate so it is hard to say what Bachelor is worth in the long - term...

Saturday, January 14, 2017

At Last! The First Gold Flow Into GLD Since November 2016

Since the beginning of November 2016 there were no gold flows into GLD vaults. Not even single one.

However, yesterday GLD reported the first inflow of gold - 95.3 thousand ounces. Of course it is not much (one swallow does not make a summer) but...at last I may report something positive for gold bugs, as far as GLD is concerned:

Wednesday, January 11, 2017

Comments Are Open Again

Comments are open again (they were blocked for some time). Please, comment (if you want).

Tuesday, January 10, 2017

This Gold Rally Is Suspicious

Since middle December 2016 gold prices have been going up nicely:

source: www.stockcharts.com

However, this picture is still not supported by gold flows reported by GLD:

source: Simple Digressions and GLD data

For example, yesterday as many as 276 thousand ounces of gold left GLD vaults. Simply put, the American investors are not buying this rally (more - they are selling) and since December 15, 2016 (when the current rally had started) they decreased their holdings by 1.4M ounces. In my opinion, it is quite a large figure.

That is why I have serious doubts about this rally...

Friday, January 6, 2017

Mineral Drilling Companies - Nobody Cares, Nobody Is Interested But...

I tried to cover the mineral drilling sector on Seeking Alpha website. In vain. Either my articles were extremely boring or nobody was interested in this sector.

Whatever the reason, since the beginning of 2016 (the start of this bull market phase in gold) this sector has been performing much better than the precious metals sector. Look at the chart below:

The chart shows the so-called DRILL index. This index was invented by the author of this blog and tracks the share price action of the following drilling companies: Geodrill, Orbit Garant, Energold, Major Drilling and Capital Drilling.

As the chart shows, most recently the DRILL index made a new top (point A). On the other hand, the broad precious metals stock market (GDX) is now (point B) much below the last top (established in August 2016). In other words, during this gold bull market phase DRILL has been performing much better than GDX. 

The forgotten but very decent sector...

Thursday, January 5, 2017

In The Long- Term Gold Has Been Stronger Than The US Dollar

Contrary to what the gold bears think, in the long - term the gold has been stronger than the US dollar. Look at these three charts (as of the end of January 5, 2017):

1. US Dollar:

For better comparison, I have plotted the inverted US dollar index . The inversion means that if the US dollar index goes up, the inverted chart line goes down.

Since December 2015 the US dollar has strengthened so the blue arrow has been in its downward trend.  

2. Now, gold:

As a rule, if the US dollar index goes up (or the inverted US dollar index goes down - chart 1) gold should go down as well. However, the chart shows that since December 2015 the gold has strenghtened (the blue arrow has been in its upward trend).

3. Next (and the last) chart - golddollar index (the definition of the golddollar index is here):

Similarly to gold, the goldollar index has been trending up since December 2015. However, this index has been even stronger than the gold itself. Simply put, the gold expressed in other currencies (than the US dollar) shows extra strength.

Summarizing - the gold bears are looking for lower gold prices but gold is showing its intrinsic strength...

Monday, January 2, 2017

2017 Top Five Picks Initial Return

The end of 2016 was a tough time for precious metals stocks:

source: www.stockcharts.com

As the chart shows, since the top, printed in early August 2016, GDX went down by around 41%. Then, in middle December 2016, precious metals stocks rebounded.

Well, technically speaking, the medium - term downward trend is not finished. In my opinion, GDX has to break above $22, the price level at which huge amounts of stocks changed hands during the ongoing correction. So... be patient.

On the other hand my 2017 Top Five Portfolio works quite well. Since its inception (December 12, 206) it returned 7.0%. I know, it is not much but still it is more than the return delivered by GDX (4.8%):

* - the chart updated on January, 3

Generally, the idea is that in the long - term the portfolio should deliver higher returns than the broad precious metals stock market, represented by GDX. The two - week period is an ultra short - term period but still...the return is promising.

Those interested in my 2017 picks should visit the section "Top Five 2017".

This and next month all mining companies should publish their 2016 results. As promised, the subscribers to the portfolio will get my survey of results delivered by all five picks plus some additional stuff.

Sunday, January 1, 2017

GLD - Update

Most recently, although gold is still leaving GLD vaults, the outflows have been lower (the green arrow):

I would say that the selling pressure is less intensive than it used to be in October and November 2016.

Now, a quick look at yearly changes:

As the chart shows, 2016 was positive for gold - 180 tons of gold went into GLD vaults, which is a positive sign for gold in the long - term.

However, as I repeatedly stated - as long as there are no inflows of gold into GLD the chances for a renewed leg up in gold prices are weak.