Tuesday, June 27, 2017

Paladin Energy - The Road to Zero

Paladin Energy is (or was?) one of the world's largest uranium producers. Now the company is generally non-existent - most recently Paladin shares have been withdrawn from exchanges.

Below I present a few charts showing the Paladin's road to zero.

Uranium prices:

source: stockcharts.com

Uranium prices topped in 2007, ahead of a big financial crisis. Then, in 2011, the Fukushima disaster set the downward trend in uranium prices. For many years...

Poor prices = poor investment and impairment charges

When uranium prices  go down, a uranium producer generates lower cash flow from operations:

source: Simple Digressions

Poor prices have a negative impact on the value of assets. Hence, impairment charges:

source: Simple Digressions

Then, when there is no cash, a company has to borrow money to keep operations going:

Negative cash flow from operations + debt service + impairment charges are a poisonous mixture. As a result, a company's equity goes to zero...or even lower:

source: Simple Digressions

End of story

Oh, is it? Not really - now Paladin tries to restructure its debt and...sell its best asset (the Langer Heinrich mine)

Monday, June 26, 2017

Simple Gold Trading System

In an ultra short - term the relation between gold prices and US 10-year treasury notes prices generates interesting trading signals. Look at the charts below:

source: Simple Digressions

How does the system work? Trading signals are generated when the ratio gold / 10 year is close to one of the red lines on the lower panel of the chart.

The red and violet arrows point to BUY / SELL signals.

Now it looks like gold is very close to generating a BUY signal.

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...