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:

source: stockcharts.com

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?

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...

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.

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:

source: stockcharts.com

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.

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):

   

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.

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.

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)....

  

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

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

or

• 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

or

• 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...

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...
 

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...

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). 

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...

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.)

Do Not Be Fooled - Precious Metals Market Looks Really Strong

I guess many investors are scared of the last underperformance in precious metals stocks. However, let me discuss two issues supporting a bullish thesis on gold and silver:

Physical accumulation

It seems that American investors are hoarding gold once again. For example, as many as 687 thousand ounces of gold were added to GLD vaults this year:

Since the beginning of February 2017 GLD has been reporting only inflows of gold (except for February 17 when 76 thousand ounces left GLD vaults).

Another iShares Gold Trust (IAU) added 194 thousand ounces of gold to its vaults this year.

Well, my readers know that I closely watch the data delivered by these entities because it is one of the best sources to get some idea about the physical demand for gold. In my opinion, both GLD and IAU confirm a bullish thesis on gold.


Gold strength

Since the beginning of February 2017 gold has been demonstrating substantial strength against the US dollar. Look at the charts below and the green, vertical line:

Usually, the inverted US dollar index should go in tandem with gold prices. However, since the beginning of February this relationship has been working in a different way. In other words, gold prices have been going up together with the stronger US dollar. It is not a common event. Until this phenomenon lasts the PM market is sending a bullish message.