How To Assess The Quality Of A Miner - Banro's Case

In my  opinion, one of the best ways to assess whether a miner makes any progress is to compare the economics of its operating mine / mines, using at least one fixed parameter. 
Let me explain it, taking Banro Corp as an example. 

In my last article on Banro, published on Seeking Alpha, I have noted that this company is regressing. Banro's flagship property, the Twangiza mine, is a good example of this sad process. 

Let me assume that Banro sells its gold at fixed prices, realized in 1Q 2016, i.e. $1,109 per ounce. Using this theorethical price, I may calculate Twangiza's basic economic measures in a little bit different perspective.

Firstly, if the gold produced at Twangiza had been sold for $1,109 per ounce in 2014, 2015 and 1Q 2016, the company would get $79.9, $87.4 and $71.4 per ton of ore processed. This revenue, called net smelter return (NSR), varies from period to period, mainly due to two factors:

• grades of ore processed
• recovery ratios

Then, because costs of production do not depend on the price of gold, I am subtracting these costs (actual ones) from NSR. As a result, I am calculating a margin delivered by the mine. The table below shows results:

                                          source: Simple Digressions

Now it is easy to spot that in 1Q 2016 Twangiza delivered very poor results. 

First of all, even if gold prices were the same in all periods the mine would generate smaller NSR - $71.8 per ton in 1Q 2016 vs. $79.9 per ton in 2014 or $87.4 per ton in 2015. Why? Because the ore processed at Twangiza was of lower quality (lower grades, lower recovery ratios). 

As a result, despite lower costs of production ($38.9 per ton in 1Q 2016 vs. $43.8 in 2015 etc.), in 1Q 2016 Twangiza delivered quite a low margin of just $33.0 per ton of ore processed.  

Summarizing - the biggest Banro's problem are not its costs of production (here the company is making good progress) but the quality of the ore processed (and mined). But to disclose this problem, the above analysis has to be done.

More Gold In GLD Vaults

GLD, the biggest publicly traded gold vault, is a good example of what is going on in the entire precious metals industry. 

Since middle February, despite GLD trading in a narrow range (yellow area at the chart below), as many as 5.8 million ounces of gold had flowed into the vault (violet line):

In my opinion, it is a bullish pattern for gold. When the price of gold is going nowhere and investors increase their gold holdings we should see price increases in the future.

Gold Dollar Index Says That Gold Was Accumulated During Its Last Correction (Or Bear Market Phase)

Not many analysts use the gold dollar index to show the relative strength of gold. But this indicator is of some quality. Let me cite Chip Anderson of Stock Charts:

"Generally speaking, gold and the dollar have an inverse relationship - a rising dollar causes the price of gold to decline and vice versa; however, supply and demand pressures also influence the price of gold, but it is often difficult to see them. For this we use the GolDollar Index.

The GolDollar Index was invented buy Tom McClellan (www.mcoscillator.com), and is calculated by multiplying the price of gold by the U.S. Dollar Index. 
Its purpose is to cancel the effects of currency fluctuations on the price of gold. By comparing it with the spot gold index we can determine if there is inherent strength/weakness in the price of gold"

Now, the chart. Firstly, a long-term chart:

                                source: www.stockcharts.com


The chart shows that the current bull market in gold started in 2001 (yellow area) and its first phase ended in 2013. Then we encountered a medium-term correction (or, some say, a bear market) in gold prices.

However, this correction (or a bear market) was accompanied by a rising relative strength of gold, expressed by the GolDollar index. Let me show it:

                           source: www.stockcharts.com

The yellow area comprises a period of lower gold prices (the upper panel of the chart - red line) accompanied by an increasing relative strength (lower panel and the up trending red line). Well, it looks like the last correction was the time when gold was accumulated - hence, the last strong rally in gold (and all gold related issues). 

On the other hand, Technical Analysis says that the gold is currently below its strong resistance, expressed by the blue line at the bottom panel of the chart. 

Impact Silver - Resolute Funds Is The Biggest Shareholder Now

Today Resolute Funds announced that it acquired, through the private placement on behalf of one of its funds, 4.4 million commons shares of Impact Silver. It means that, together with shares previously acquired, Resolute controls 12.07 million common shares of Impact. 

The chart below shows the biggest Impact shareholders:

Well, from now on the company is not controlled by Energold, the biggest shareholder so far. 

I wonder whether Impact is going to face similar problems (with Resolute Fund) as Wesdome Gold...

US Auto Sales Indicate An Incoming Recession

Auto sales in the USA are a very efficient indicator of an incoming recession. A few days ago markets were shocked seeing US auto sales dropping 6% in May.

Let us look at the auto market in the long term (the data below does not include the May reading):

                                  source: FRED economic data

Firstly, it is clear that since 2009 auto sales have been going up rapidly. 

On the other hand, since eighties the American consumer has never bought more than around 20 million vehicles a month - in my opinion, it is a permanent feature of a debt-ridden economy. Simply put, any debt-ridden economy grows much slower than a debt-free one (if there is any growth at all).

Now, let me plot the same chart but in a little bit different perspective:

                                 source: FRED economic data

The chart shows a percent change (from a year ago) in auto sales. Red lines indicate periods of slowing sales followed by economic recessions. Every time the auto sales were slowing, the economic recession was only a matter of time.

The chart shows that since February 2011 auto sales have been steadily slowing down. I suppose that after including the May reading the US auto sales may show a negative figure. 

If the pattern drawn by US auto sales repeats we should see a recession. The question is as usual: When?

Final note:
The US stock market seems to be fed by any info (positively). I would not be surprised seeing another rally in stocks. The negative news delivered by auto sales may be read as "No increase in US interest rates".  

Eric Sprott Is Also A Trader

A few weeks ago I posted a number of articles on the acquisitions made by Eric Sprott. Mr. Sprott is a notable resource investor - he invests in the long-term and his acqusitions are tracked by many investors. However, apart from being a long-term investor, Eric Sprott is a short-term trader as well. 
Let me show a few of his last transactions.

Excellon

Excellon shares went strongly up on the news that Eric Sprott made a substantial acquisition. To remind my readers - on April 4, 2016 Mr. Sprott acquired 6.67 million shares of Excellon (plus 3.33 million warrants) paying C$0.45 a share.

Then, between May 2 and May 20, he sold 0.6 million shares (a small part of his holdings) at prices ranging from C$1.32 to C$1.36 a share. In that way he made a nice profit of C$536 thousand in just a few weeks:

                                     source: www.stockcharts.com

Newmarket Gold

On April 4, 2016 Eric Sprott bought 10 million shares of Newmarket Gold at C$2.25 a share. On April 26 he bought additional 16.2 million shares paying C$2.80 a share. 

Then, between May 13 and May 18 he sold 455.3 thousand shares at C$3.97 a share, on average. Similarly to the Excellon deal, he made a quick profit of C$627 thousand:

                        source: www.stockcharts.com

Summary

In the above described transactions, Eric Sprott made a total profit of C$1,163 thousand in just a few weeks. 

I do not know why Mr. Sprott does it. Maybe he tries to time the market - when he sees that prices went too high and too fast he sells part of his investment to buy back at lower prices. We'll see. 

But looking at his transactions it looks like he is able to time the market in some way.

Wesdome Gold - Are You Too Quick?

After announcing new Annual General Meeting date (June 14), Wesdome Gold Mines is preparing for the fight with its biggest shareholder, Resolute Fund.

In one of its last announcements the company has strongly criticized the measures undertaken by Resolute Fund. Apart from that, Wesdome management has set forth "Key points of growth strategy". I think these key points document very clearly what the company had made at Eagle River Complex and other properties over last years. 

Then, on May 31, Wesdome announced that it wants to start mining at its newly discovered 7 Zone of Eagle River. Well, at first glance this announcement looks good. But on second thought I am quite skeptical. Why? Let us look at the picture below:

                                         source: Wesdome Gold


The picture shows the part of 7 Zone where the company wants to start mining - it is the area between 890 m L drift (which is completed) and Next Drift (which is going to be constructed soon). In other words, it is the area between Level 890 and Level 945. When the second drift is completed the company may start the underground mining between these levels. 

However, there is a problem. There are only three holes drilled between Level 890 and Level 945. Of these holes only two are significant. Let me show the results delivered by these three holes:

Hole 900-E-88: true width 1.48 m; grade 2.95 grams per ton of ore
Hole 900-E-90: true width 2.18 m; grade 13.35 grams per ton of ore

Hole 900-E-92: true width 1.57 m; grade 55.50 grams per ton of ore (uncut)

I agree, the last hole, 900-E-92, shows a bonanza grade. The hole 900-E-90 is also nice. The hole 900-E-88 is probably waste. 
Anyway, Wesdome wants to start mining after drilling just three holes (or even only two). 

Well, either they know their deposit so well (to start mining) or they want to strengthen their position ahead of a very important Annual Meeting (promising to start mining at the underexplored part of the deposit very quickly). It looks like the decision to start mining has been taken too quickly.

By the way, the above plotted picture does not look very informative (it is impossible to spot how the holes are situated). For comparison, look at the picture below. It shows drill holes at Ixtaca gold-silver deposit owned by Almaden Minerals:

                                source: Almaden Minerals

Here everything is clear - I may easily spot:

• where the holes are
• the length of each hole
• the angle at which it was drilled
• the grades attributed to each hole

Can you tell the difference between these two pictures?