Newmarket Gold Is Deeply Undervalued

On March 4, 2016 Newmarket Gold published its 2015 results. In my opinion, keeping in mind that in 2015 gold was in its strong downturn, these results were excellent. Despite lower revenue, the company reported higher profit from mining operations than in 2014 ($60.6 million versus $41.3 million). This is a clear indication that Newmarket was very successful in cutting its costs of production. The chart below compares production costs for all three mines: Fosterville, Cosmo and Stawell, starting from 2013:

Apart from costs, the chart depicts gold prices realized by the company in 2013, 2014 and 2015 (black line). It is easily seen that Newmarket was able to cut production costs at each mine. For example, Stawell (in green color) was unprofitable in 2013 - it cost $1,641 to produce one ounce of gold at this mine but the company could get only $1,407 per ounce of gold sold; it means that Stawell was making a loss of $234 on each ounce of gold sold at market prices. However, in 2015 the cost of production at Stawell was only $1,018 per ounce of gold and the mine was able to deliver a profit of $138 on each ounce of gold sold.

Now, the best part of this story. The chart confirms that the best asset in Newmarket mineral portfolio is its Fosterville mine. This mine carries the lowest costs of production (they went down from $1,308 in 2013 to just $744 in 2015 per ounce of gold sold) and delivers the highest amount of gold (123 thousand ounces in 2015, which accounted for 55.3% of total production)).
The table below summarizes the basic operating measures reported by Fosterville:

 Well, there is no mystery in the Fosterville performance. Due to the high grading ore, the company is able to mill (process) less ore to produce big amounts of gold. Lower milling means lower costs - as a result, in 2015 the Fosterville mine made a profit of $49.4 million (Cosmo made $5.5 million and Stawell $5.7 million).

Now, the main question - what about the future? The company has provided the guidance for 2016. Generally, no spectacular growth is expected. All three mines should deliver more or less the same amounts of gold as in 2015. So the main catalyst, which could have  a positive impact on the company's valuation, is the price of gold.

The chart below presents the projected profits from mining operations, depending on the price of gold applied:

How to read this chart? For example, if the average price of gold in 2016 is $1,300 per ounce, Newmarket is going to make a profit from mining operations of $92.4 million (please, remember that in 2015, at the average gold price of $1,156 per ounce, the company made $60.6 million). Etc.

Now, it is easy to project the valuation of the company, applying these prices of gold.

As a main metric I am using a multiple of EV / EBITDA. Today the company's shares are trading at this multiple standing at 5.45 (I assume that Newmarket shares are trading at $1.67 a share).

However, if in 2016 the average price of gold is $1,300 per ounce and the trading price does not change, the multiple would be standing at just 2.7. Etc.
Please, look at the chart below:

In my opinion, Newmarket Gold is deeply undervalued today - today its peers are trading in the range of 6.5 (Newmont Mining) - 20.0 (Randgold). If gold prices start another leg up in its bull run, Newmarket shares should go much higher than its peers just to get closer to them.

Gold Resource Corp - Problems Ahead

Today Gold Resource Corp (NYSE MKT: GORO) posted its 2015 results. In this article I am listing a few major problems  the company is / will be encountering in the future.

First of all - production costs. As the chart below shows, since 2012 the Arista mine (the only producing mine) has been reporting higher production costs:

Note: accounting costs are defined as production costs + depreciation, depletion and amortization + reclamation and remediation costs + administrative expenses + exploration and project evaluation expenses + facilities and mine construction costs + treatment and refining charges + other costs

It is totally different development than in the case of other miners, which most recently reduced their costs substantially. In my opinion, it is a major issue for GoRo - its main asset is less and less effective than it used to be.

Another thing - at the end of 2015 the company was holding mineral reserves of 258.5 thousand ounces of gold equivalent (a decrease of 27.4%, compared to the end of 2014). Although GoRo has other mineral properties, I guess that in the medium - term the company fully depends on the deteriorating Arista mine.

This deterioration is best seen on the charts below:

Since 2014 Arista has been delivering lower amounts of precious metals - in 2016 this trend, according to the company, should be continued.

Another thing. Due to lower grades reported by Arista, GoRo has to process more and more ore to deliver substantial amounts of metals. That is why the company incurs higher production costs - mining and milling more ore costs more money:

GoRo management has to increase its mineral base. Exploration is expensive and the company has less cash than it used to have (therefore GoRo had to cut its dividend). At the end of 2015 the company had $12.8 million in cash (at the end of 2014 it had $27.5 million). Fortunately GoRo has practically no debt so the company should be able to find some cash on credit or capital markets. But for the time being the company is trying to finance its operations through decreasing its working capital (inventory + receivables - payables). As a result, at the end of 2015 GoRo reported negative working capital of $2.5 million. Well, in my opinion, it is an example of some sort of financial problems (a healthy production business, mining included, shows positive working capital).

Fresnillo plc Posted Decent 2015 Results But The Company Is Now More Expensive Than Its Peers

2015 was a good year for Fresnillo plc (LSE: FRES). Despite weak silver and gold prices, the company was able to post net profit of $117.1 million. This was due to the fact that Fresnillo has excellent assets - its mines are very efficient (low production cost) and deliver vast amounts of metals - gold, silver, zinc and lead. Yes, it is the right order - Fresnillo is no longer mainly silver producer - now the company delivers higher revenue attributable to its gold sales.

The charts below show production of gold and silver, starting from 2008:

As I noted above, Fresnillo has been very successful in cutting its costs of production:

As the chart shows, the company decreased its costs of production from $14.92 per one ounce of silver equivalent in 2012 to $12.04 in 2015 (a decrease of 19.3%). I realize that a big part of this decrease was attributable to the favorable exchange rate between the Mexican peso (all mines are located in Mexico) and the US dollar but it is still an impressive success.

Another thing - the flagship property, the Fresnillo mine, is no longer the biggest mine in the company's mineral portfolio. Now Saucito and Herradura are the mines, which took the leadership. Both mines provided the highest revenue and the biggest profits in 2015, while the Fresnillo property had ranked third:

However, in my opinion, Fresnillo shares are today overvalued against its peers. The chart below shows the current valuations of a few big precious metal miners. As a main metric I have chosen an EV / EBITDA (enterprise value to EBITDA) multiple:

The chart shows that today Fresnillo plc and Randgold are around two times more expensive than such big miners as Newmont Mining, Goldcorp or Barrick Gold.

The problem is that it is a short-term overvaluation. In the medium- or long-term, Fresnillo offers a nice leverage to the price of silver. Please, look at the chart below:

At today's silver prices (around $15 per ounce) Fresnillo shares are trading at the EV / EBITDA multiple of 20.9. However, if the price of silver goes up to $18 per ounce, the ratio will go down to 12.7. At the price of silver of $20 per ounce, the ratio (assuming that Fresnillo shares are still trading at today's level, i.e. $13.0 per share), would go down to just 10.1.

Last but not least - all these calculations do not take into account of putting into operation a few new projects (as, for example, the San Julian mine, which should be delivering 10.3 million ounces of silver in annual production).

Fresnillo accounts for the biggest share in my precious metals portfolio - and it will stay there despite the short-term overvaluation.

Claude Resources Is Leaving My Precious Metals Portfolio

Today Claude Resources announced that Silver Standard Resources (NASDAQ: SSRI) would acquire all its shares. While  I do not have any opinion about this transaction at the moment I am quite sure I do not want to hold SSRI shares in my portfolio. That is why today, at the end of day, Claude will leave my portfolio. Cash generated by this sale will be invested in another company / companies. I will let my readers know about details soon.

Caterpillar's Resource Segment Results Tell Us There Is No Recovery In The Global Mining Industry

Generally, when any industry flourishes, its suppliers should flourish as well. And vice versa.

One of the main suppliers to the mining industry is Caterpillar (NYSE: CAT). When you look at pictures showing works at any mine, there is a high probability that you will spot Caterpillar's heavy equipment.

That is why I closely track Caterpillars results, especially those delivered by the company's Resource Segment.
The chart below shows revenue and operating profits (losses) reported by this segment, starting from 2010:

As the charts show, since 2012 Caterpillar has been delivering worse and worse results: revenue has been going down and operating profits have been following it. Finally, in 2015 the segment printed an operating loss of $88 million. To remind my readers, in 2012 the last bear market in precious and base metals started.
Simply put, a slump in the mining industry has a negative impact on Caterpillar's Resource Segment results. What is more, there are no short - term indications that this slump is going to an end. To prove it, below I have put revenue and operating profits (losses) reported in the last 8 quarters:

Both revenue and operating results have been going down since the beginning of 2014. Note, that the operating profit (loss) reported in the fourth quarters is distorted - at year end Caterpillar, as any company, recognizes various accounting charges.

However, the overall tendency is clear - there are no signs of recovery in the global mining sector.

Last but not least. Asia / Pacific area seems to be relatively invulnerable to the ongoing slump:

In 4Q 2015 revenue in Asia / Pacific was only 7.2% lower than in 4Q 2014.

In The Short - Term US Equities Are Overbought

One of the best short - term stock market indicators is the so-called "CBOE Options Total Put / Call ratio".

According to Investopedia:

The put-call ratio is a ratio of the trading volume of put options to call options. The put-call ratio has long been viewed as an indicator of investor sentiment in the markets. Times where the number of traded call options outpaces the number of traded put options would signal a bullish sentiment, and vice versa.

The chart below shows this ratio:

                                               source: www.stockcharts.com

Yesterday the ratio was below 1.0 (actually 0.77) so the number of traded call options was outpacing the number of put options. It is an indication of extreme (in the short - term) bullishness among the players.

As the chart shows (red circles), when the ratio was standing at these levels, equities were ahead of a substantial drop in their prices.

Note: the chart shows historic data (the last reading was on March 3, 2016). Today equities are still going up so, I guess, the indicator is even below 0.77.

Navios Maritime Acquisition - A Decent Proposal For Dividend - Seekers

Navios Maritime Acquisition (NYSE: NNA) is a Greek ship operator. Currently the company owns 38 vessels:

• 8 crude tankers
• 26 product tankers (8 LR1 and 18 MR2 tankers)
• 4 chemical tankers

In 2014 Navios achieved its critical mass and now the company is large enough to fully utilize its modern fleet and bring value to its investors.

Despite these facts, Navios share prices are tanking. Today they are trading at around $1.70 a piece, close to their historic minimums.

                                         source: www.stockcharts.com

I realize that the entire marine sector is in crisis (world trade is slowing down, mainly due to China) but NNA is, in my opinion, an absolute leader among its peers and sails very nicely across various world economic problems.

What is more, the company regularly pays dividends, very decent ones. At today's share prices the dividend yield stands at 11.2%. I believe that there is no material threat, which could make Navios to change its dividend policy. Let me dig a little bit into that matter.

Revenue and costs

The chart below shows revenue and costs (operating costs and cash costs), starting from 2010:

                                              source: Simple Digressions

It is easily seen that Navios made substantial progress in cutting its costs. For example, operating costs went down from $19,700 a day in 2010 to $12,370 in 2015 (a decrease of 37.2%). In 2015, when charter rates went up, the company printed a nice operating profit of $138.9 million.

Economics

The table below demonstrates basic economic measures. Year 2015 shows actual figures, while years 2016 and 2017 are forecasts:

                                                       source: Simple Digressions


As the table shows, in 2015, due to favorable charter rates, NNA was able to cover all its cash costs plus interest expense and dividends.

The company predicts that 2016 is going to be the tougher period - charter rates should go down to $19,238 per day. Fortunately, Navios has 84.2% of available days fixed so there only a small risk that the company could report lower revenue:

                                           source: the company's presentation

According to the picture above, if the rest of NNA fleet is rented at $4,284 a day, the company will break even. I believe that Navios will rent its vessels at much higher rates than just $4,284 per day so 2016 should be another decent year for the company.

Assuming that in 2016 the entire fleet will be rented at the average rate of $19,238 per day, Navios should have no problems with covering its cash costs, interest expenses and dividends. As the table shows, the company should book a surplus of $2,571 per day in 2016 and $5,861 per day in 2017.

Last but not least - there are no relevant debt maturities until 2019, which supports the thesis that dividends are sustainable.

                                         source: the company's presentation