Although precious metals are quite weak now, the silver / gold ratio indicates that we are still in a bull market in precious metals:
source: Stockcharts.com
The red arrow on the upper panel of the chart shows gold prices trending slightly down. However, the blue arrow indicates that the silver / gold ratio is going up. In other words, silver is a little bit stronger than gold now and it could be a good time to look at valuations of a few silver plays.
Below I have plotted a popular valuation measure defined as enterprise value (EV) / earnings before interest, taxes, depreciation and amortization (EBITDA):
source: Simple Digressions
Note: EV/EBITDA calculated for Great Panther and Coeur Mining is based on the results reported in 4Q 2016, 1Q 2017, 2Q 2017 and 3Q 2017; other ratios are calculated taking the results reported in 3Q 2016, 4Q 2016, 1Q 2017 and 2Q 2017
Now, look at Hochschild Mining. In my opinion, this company does not deserve to be valued at 5.4 multiple of EV/EBITDA. Due to excellent performance of the Pallancata mine, the operating results reported in 3Q 2017 were really good. And it looks like next year, when the Pablo vein of Pallancata operates at full capacity, the results should be even better.
In my opinion, Hochschild is a buying opportunity now.
The prices of US 10-year treasury notes are at an inflection point now:
source: Stockcharts.com
The chart above shows gold prices plotted against 10-year treasury notes prices. Note that each time the treasuries are close to their suport (the area marked in orange), gold prices rebound.
Now the treasuries are again at their technical support. However, this time the situation is a little bit different. According to the Commitments of Traders report, big speculators trading treasury notes futures, are cutting their bets on lower or stable market interest rates. For example, last week (I mean the week that ended on October 17), big speculators had cut their gross long positions in treasuries by 73.2 thousand contracts - it was the largest cut since late November 2016.
As a result, a drop below the support is likely now. If that is the case, such an occurrence could spark a big mess around the world with gold prices going down (according to the rule that lower prices of US treasuries (and higher interest rates) have a negative impact on gold prices).
Today treasury prices are below the support (the chart shows the state of the market as of October 23) so...be cautious.
Yesterday Gold Resources (GORO) released 3Q 2017 production figures. These figures once again confirm the fact that GORO is a base metals producer and not, as many think, a precious metals producer:
The chart shows that in 3Q 2017 base metals' (copper, lead and zinc) contribution to the total production was 56%.
What is more, the high contribution of base metals should have a very positive impact on the company's results. To remind my readers, this year base metals go up much stronger than gold and silver so...GORO investors should be satisfied.
The chart below depicts the value of metals produced, assuming the average quarterly prices of gold, silver, lead, copper and zinc:
Note that in 3Q 2017 the value of production was the highest this year.
Today the Shanghai Gold Exchange (the SGE) released the September data on the gold and silver demand. In my opinion, the Chinese demand for gold and silver is very strong. Here are the appropriate charts:
Gold:
...and silver:
Gold figures are especially impressive - since the beginning of 2017 the Chinese have withdrawn 1.5 thousand tons of gold from the SGE. It means that this year the demand for gold has been substantially higher than last year.
As for silver - despite lower demand than in August, the September data is still impressive (the second largest withdrawal this year up to date)...
Now, although the data disclosed by the SGE has no short-term impact on the prices of precious metals, in the medium and long-term the precious metals are strongly supported by the Chinese investors.
Last year I published an article on Corvus Gold (it was dispatched in the form of a newsletter). I discussed the North Bullfrog Project and tried to assess the value of the company. Most recently Corvus shares have been rapidly going up so it is time to update my valuation figures. Assuming that nothing has changed, here is the updated calculation:
- value of North Bullfrog: C$128.5M (as in the article)
- Cash at the end of May 2017: C$1.3M
- Debt: null
- Shares outstanding: 99.78 milion (end of May 2017)
Equity value = $129.8M
Share value: C$1.30
Today Corvus shares were trading at the price of C$1.30 a share so...they hit my target price.
It looks like investors seem to share my positive opinion on Alio Gold (ALO). Since the announcement of 3Q 2017 production figures the company's shares are going up:
source: Stockcharts.com
What is more important, since the beginning of the current bull market in precious metals Alio has over performed the broad precious metals market represented by GDXJ (look at the upper panel of the chart and the green, up-sloping trend line).
According to the old rule:
If a company releases bad news and its stocks are going up, it may mean that all bad news are priced in.
Yesterday Alio Gold (ALO), one of my favorite mining companies, released 3Q 2017 production figures:
source: Alio Gold
Having this data, it is possible to make an estimate of the gross margin delivered by the company in 3Q 2017 (gross margin is defined as revenue less direct costs). My estimate cannot be accurate because I am not able to look into the company's internal figures but...let me try using the average figures.
So, over the last four quarters Alio was processing its ore at an average cost of $9.6 per ton of ore processed. Translating this figure into total material mined (ore + waste) and assuming that the amount of ore processed is equal to the amount of ore mined*, it means that the company was mining its material at the average cost of $3.4 per ton of material (ore + waste) mined.
According to the table above, in 3Q 2017 Alio had to remove 5.2 million tons of waste. To do it the company incurred the cost of $17.8M ($3.4 x 5.2 million tons). Now, to mine the ore Alio had to spend $5.8M ($3.4 x 1.7 million tons) so the total cost of mining was $23.6M ($17.8M + $5.8M).
According to the company, the 3Q 2017 revenue was $25.2M so a gross margin should have been around $1.6M ($25.2M less $23.6M).
For comparison reasons, the chart below shows gross margins, starting from 1Q 2016:
source: Simple Digressions
Am I bothered about it? Not at all - the company was expecting a very hard quarter so I am not surprised...
* - I cannot be sure about it - generally, some part of ore or waste mined comes from previous quarters
Is it the end of Warren Buffett's era? Look at the chart below:
source: Stockcharts.com
The chart shows the price action of Berkshire Hathaway shares against the S&P500 index since the beginning of the current bull market in stocks (March 2009). Note that the red arrow goes down, which means that investment in Berkshire has returned less than investment in the broad stock market...
It looks like investing in Warren Buffett's flagship company makes no sense. Mr. Buffett is beaten up by the broad stock market.
Sorry for being nasty...
It looks like the precious metals market wants to tell us something important. Look at these two charts:
source: stooq.pl
The upper panel shows the relationship between GDX and gold. The lower panel shows gold prices.
Now, since September 27 GDX has been going up (the blue arrow) while gold has been going down (the red arrow). Interestingly, the shares of precious metals mining companies are stronger despite lower prices of gold.
Another ratio, silver to gold, is also sending positive signals with silver being stronger than gold. While the signal sent by the second ratio (silver:gold) are relatively frequent, the signal sent by the first ratio (GDX:gold) is a rare event.
Note that both ratios are sending positive signals despite a stronger US dollar...
