Precious metals investors are wondering why most recently gold and silver prices have been going up but precious metals stocks have been going down.
I wonder too and my short explanation is simple: PM stocks went up too quickly and too far, compared to gold / silver prices. So now is the time for correction.
However, this explanation does not explain anything and I have to be more specific about that problem. Let me show something:
The upper panel of the chart shows the price action of GDX. The lower panel shows the so-called PM stocks indicator. It is an indicator that measures a correlation between gold prices and GDX.
The formula is a little bit complicated (but not too much). What is more, I am testing the efficiency of this indicator now. It means that I am not convinced about this indicator (it is too early to follow it).
However, the first results are promising. Generally, you have to look at the indicator and GDX. Normally, they should go in tandem. If not, the red flag is waving.
In the beginning of February the indicator made a new high while GDX did not (look at the arrows A and B). Now we see the result - GDX corrected strongly.
What now? I do not know (the test is still ongoing) but if I spot any divergence I will let you know...
Most recently the game called "Copper Futures" became very popular:
As the chart shows, now the open interest in copper futures stands at its historic high of 296 thousand contracts.
What is more, the copper trade is not only overcrowded but I see excessive optimism among speculators as well:
Money Managers (in other words, big speculators) are holding the largest long positions in copper futures in history.
Summarizing - the copper market does not look attractive for the buyers now.
As a rule, when the price of gold goes up, the US dollar index goes down. And vice versa. To make things simpler, let me show the US dollar index in its inverted version. In such a case when the price of gold goes up, the inverted US dollar index also goes up. And vice versa.
Now look at the two charts below:
The upper panel shows the price of gold and the lower panel shows the inverted US dollar index.
Applying the basic rule, both measures should go in tandem. It means that the price of gold should have gone below the point A in the way the inverted US dollar has gone below the point B. However, gold is still above the point A.
In my opinion, it is an indication of the gold's strength, which is a bullish message for gold bugs.
Orbit Garant is a drilling company operating mainly in Canada (in 4Q 2016 as much as 73% of revenue was attributable to Canada). Similarly to Sandvik, a few days ago Orbit reported slight progress. Both drilling prices and meters drilled went up, compared to previous periods:
As the chart shows, since 2014 the company was able to get more drilling work at higher prices. It looks like Canada emerges as sort of eldorado for such a drilling company as Orbit. However, the problem is that Orbit incurs quite high costs of production, mainly "Employee benefits":
Note: Orbit fiscal year starts on June 30
Look at significantly higher costs in 2H 2016. As a result, despite higher drilling prices and more work to do, in 2H 2016 the company's cash margin (defined as revenue less all direct cash costs) was lower than in 2016:
- revenue: C$95.9
- employee expense: C$52.1
- other cash costs: C$40.1
- Cash margin: C$3.7
In my first article on Metanor Resources I stated:
"...I expect decent results delivered by the company in 4Q 2016 (revenue higher by 23%, compared to 3Q 2016 and lower operating costs)"
A few days ago the company published its 4Q 2016 results. As expected - the results were really good. Revenue went up by 25.4%, compared to 3Q 2016 and operating costs went significantly down. Let me summarize the main measures:
source: Simple Digressions and Metanor
Note: the company's fiscal year ends on June 30
As the table shows, in 2H 2016 Metanor was profitable. Due to higher gold prices and lower costs, the company delivered a gross profit of C$4.5M and net income of C$1.8M. It is a radical improvement, compared to previous years.
Further, in 2H 2016 Metanor delivered free cash flow of C$1.2M (defined as cash flow from operations less capital expenditures), of which C$1.3M was delivered in 4Q 2016 (it means that the company burnt small cash in 3Q 2016). Generally, most of the profits were made in 4Q 2016, for example:
- 4Q 2016 gross profit: C$3.3M ($1.2M in 3Q 2016)
- 4Q 2016 operating profit: C$2.1M (-0.1M in 3Q 2016)
- 4Q 2016 net income: C$2.0M (-0.2M 9n 3Q 2016)
- 4Q 2016 cash flow from operations, excluding working capital issues: C$4.6M (C$1.9M in 3Q 2016)
To remind my readers - currently Metanor operates only one mine, called Bachelor and located in the province of Quebec, Canada. The table below shows operating cost per ton of ore milled:
source: Simple Digressions
According to the company, during the fiscal year 2017 (ending on June 30, 2017) Metanor should deliver 28 - 33 thousand ounces of gold coming from Bachelor. However, the problem is (I mentioned it in my first article) that Metanor has not delivered the updated resource estimate on Bachelor yet. Therefore it is very hard to make any assumptions on the future of the deposit.
Apart from Bachelor, the company has another project in its pipeline, called Barry and also located in Quebec, Canada. Most recently Metanor published the PEA on that property. According to that study, Barry should deliver 193.5 thousand ounces of gold over a production period of 9 years.
When the resource estimate on Bachelor is out I will try to combine all information available and present my opinion on the company.
Sandvik, one of the world's largest engineering companies, signals recovery in its "Mining and rock technology" division. Look at the chart below:
The order intake in 4Q 2016 was very impressive: SEK9.1 billion in new orders. It looks like Sandvik, contrary to Caterpillar, sees recovery in the mining sector, especially in the gold / silver one.
Today Excellon Resources (EXN.TO) announced a new offtake agreement. Why am I writing about it?
Well, the main products of Excellon, a high - grade silver / gold producer, are two concentrates (silver - zinc and silver - lead). These concentrates have to be smelted and refined at special chemical plants. It is a necessary and money - consuming process for any concentrate producer.
The table below shows TC/RC costs (treatment and refining costs), paid by Excellon over three quarters of 2016 (the row marked in red):
source: Excellon
Note that TC/RC costs are not reported in the statement of operations. The trick is that the company discloses only net revenue, i.e. $13,640 thousand (this figure is disclosed as "Revenue"). However, in fact the gross revenue was $16,351 thousand (look at the line "Sales before TC/RC).
Now, according to the company's statement,
"The final terms agreed with two purchasers are materially better than terms seen in recent years and represent an approximately 60% reduction in treatment and refining charges relative to 2016 based on budgeted tonnage for 2017 and at current metal prices"
In my opinion, it is the good news for Excellon's investors. Theoretically, if the company applied these lower TC/RC rates last year, the operating result disclosed by Excellon would be higher by $1,627 thousand (TC/RC costs of $2,711 thousand x 60%). As a result, instead of a loss of $1,185 thousand the company would have shown a profit of $442 thousand.
Today the higher relative strength of junior gold miners (GDXJ) over big gold miners (GDX) was confirmed:
Look at the breakout of a multiple of GDXJ / GDX above the last top recorded in September 2016. Although GDX itself is still way below the August 2016 top the gold bugs should feel quite comfortably today.
In my opinion, today's breakout is a strong, bullish indication....
