As of September 29, 2017 the Top Five Portfolio has returned 27.7% since inception (December 12, 2016):
Now me and my subscribers are entering the last phase of this real-time experiment (using George Soros' terminology) so it is a good time to tell you this:
"I am thinking about extending this service into 2018 but, probably, this time I would change the way I am communicating with you. Simply, instead of the updates delivered by email, the subscribers would get an instant access to the material published on a daily basis. It should be a much more effective way of communication. Details should be announced soon..."
Hochschild Mining is a mid-tier silver / gold producer operating in South America (Peru and Argentina). The company has been under my radar for years but most recently my interest in this miner has dissipated a little bit. Why? Because Hochschild was one of a few mining companies that hedged their production against lower precious metals prices. What is more, this policy had a negative impact on the company's results. However, in the 1H 2017 report I have found this statement (page 23):
"In 2016, the realized loss on gold and silver swaps and zero cost collar forward sales contracts in the period recognized within revenue was
US$3,116,000 (loss on gold: US$3,501,000, gain on silver: US$385,000). There were no forward contracts in the 2017 period"
The most important is the last part of it (bolded) - it looks like Hochschild does not hedge its production any longer (if somebody claims the opposite - please, let me know; maybe I overlooked something... ).
One issue has gone but 1H 2017 results were very disappointing and since middle August 2017 the company shares have been in their strong downward trend:
source: Stockcharts.com
What happened? The first problem is called "Arcata" - now this mine is one of the highest-cost producers for Hochschild:
In 1H 2017 the direct cash cost of production went up by 25.%, compared to 2016 and head grades went significantly down:
Well, the chart shows Arcata's mining sequences (red blocks) and now it looks like the mine has entered another sequence - this time the company is mining in the low-grade zone. Hence, poor results.
Unfortunately, Hochschild does not disclose where it is going to mine silver / gold in the future. The company's comment is quite enigmatic:
"At Arcata, first half, production was 2.9 million silver equivalent ounces (H1 2016: 3.7 million ounces) with tonnage and silver
grades adjusted following a revision of the mine plan to accommodate a reduced number of stopes and narrower veins. The
focus at Arcata is to improve its cost position by increasing the quality of resources through the brownfield exploration
programme as well as other efficiency and productivity measures in order to ensure the long term sustainability of the mine.
The forecasts for Arcata’s output for the year have been revised to 5.5 million silver equivalent ounces in 2017"
And another piece:
"In H1 2017, as expected, Arcata’s all-in sustaining cost rose substantially versus H1 2016 to $17.6 per silver equivalent
ounce (H1 2016: $13.0 per ounce) reflecting the reduced tonnage and grades resulting from the revised mine plan as well
as the previously-announced increased investment in the mine’s brownfield exploration program"
Well, it looks like there is a problem: narrow veins (and probably higher dilution) and higher capital spending (brownfield exploration). In other words, despite the fact that Arcata has been a long-life operation (mining started in 1964), now it is facing troubles...
Another problem: the San Jose mine (shared with Mc Ewen Mining) located in Argentina. This mine, similarly to Arcata, substantially increased the direct cost of production (from $7.6 per ounce of silver equivalent in 1H 2016 to $9.1 per ounce in 1H 2017).
To be honest, it is not easy to explain this increase - head grades and the tonnage processed look alright (grades were even higher than in 1H 2016) so...
The company explains in this way:
"At San Jose, all-in sustaining costs increased to $14.4 per silver equivalent ounce (H1 2016: $11.7 per ounce) mainly due
to the elimination of the Patagonian port rebate in the fourth quarter of 2016. In addition, lower than expected currency
devaluation in Argentina only partially offset ongoing unit cost inflation. Overall 2017 all-in sustaining costs are now expected
to be between $13.5 to $14.0 per silver equivalent ounce"
I am not able to comment on the Patagonian port rebate but as for inflation...yes, it can be a problem. Now the inflation rate in Argentina stands at 23.1% but in 1H 2017 the Peso was just 9.6% weaker against the US dollar, compared to 1H 2016. So inflation could be an explanation...
Of course there are positives - Pallancata, another Peruvian mine, was converted into an excellent operation (direct cost of production of $5.9 per ounce of silver eq.!) and the last mine, Inmaculada, keeps going smoothly.
However, 1H 2017 results were a negative surprise. For example:
- cash flow operations (excluding working capital issues and taxes) went down from $152M in 1H 2016 to $111M in 1H 2017
- free cash flow dropped from $89M to $29M
Hence, investors panicked and threw in the towel. As a result, now Hochschild shares are trading at quite depressed levels (EV / EBITDA of 6.1).
In my opinion, it is time to get interested in Hochschild once again...
I have not seen this before - iShares Gold Trust (IAU) is accumulating gold as if something big was to happen. For example, today this trust added the second highest amount of gold this year (74 thousand ounces). Note that today we saw big drops in gold / silver prices (0.75% and 1.54%, respectively) but...IAU investors do not care and are adding gold:
What is more, GLD has reached its strong support at around 123.0 (the yellow area on the chart below):
source: Stockcharts.com
The chart below should be of some interest to speculators in gold:
source: Stockcharts.com
Stockcharts have an interesting indicator - it discloses the trading volume attributed to certain price levels.
Let me take GLD as an example. The chart above shows that since July 2017 (when the current move in gold prices started) the highest trading volume was attributed to the price range of 121.7 - 122.7.
In other words, this level should be considered as strong support for GLD prices. It means also that any correction in GLD should end above this level.
A few minutes ago the Shanghai Gold Exchange released its August report. The chart below is especially impressive:
source: Shanghai Gold Exchange
As the chart shows, the Chinese demand for silver was the highest this year. In August the Chinese investors withdrew as many as 270.3 tons of silver.
What is more, the demand was very strong despite rising prices of silver (in August the price of silver went up from 112.8 Yuan in the beginning of the month to 114.9 Yuan at the end).
Yes, I am really impressed...
Today (8.30 a.m. New York Time) I sent the fourth update to the 2017 Top Five Portfolio. If anybody did not get it, please, let me know (via e-mail or in the "Comments" section).
European investors investing in US equities are not happy. Since March 2017 their holdings are losing value measured in Euro:
source: Stockcharts.com
While the S&P 500 (the lower panel of the chart) is still in its strong bull market, its equivalent measured in Euros is in its correction phase (the upper panel of the chart).
Note that a similar situation was an early indication of a bear market in the USA in 2007:
source: Stockcharts.com
Well, I am not saying that we are at the beginning of a bear market in the USA (it will never happen, by the way) now but caution is advised...
This bull market in silver is totally different from normal. It looks like investors are using higher prices of silver to liquidate their long positions in silver held in SLV:
Note that in August and September (up to date), SLV reported an outflow of 14.7 million ounces of silver, in total. It is really a high amount.
As a result, the current silver holdings at SLV are very close to the amount of silver held at the beginning of the current stage of a bull market in precious metals (two circles marked in red):
So the question is: what is wrong with silver?
