Archive for

Oct 19

Sigh…Gold Stocks

A couple of misses and a couple of really bad days for my gold stock holdings. The fact that my portfolios are not down all that much is a testament to the power of cash (I am 55% cash at the moment), and shorts (while my banking short did not do well 2 days ago, they did quite well today, and I jumped on (off?) the Green Mountain Coffee bandwagon when I got a google alert yesterday morning about Einhorns presentation on the company (google alerts are invaluable tool in my opinion). I am up a good chunk on that short right now. Coastal has helped too.

But the gold stocks have been fairly distasterous. First a miss by Argonaut Gold, followed by an even bigger miss by Jaguar Mining. Aurizon Gold and Newmont didn’t miss anything but are respectively down 10% and 7%, presumably just for kicks. And with gold down another $16 tonight so far, I am afraid the carnage isn’t over.

Let’s start with Argonaut. I’m out! Look, I like Argonauts prospects but I don’t like the cash flow they are going to generate this quarter from a little over 12,000oz of gold sales, which is 5,000oz less than last quarter. With the stock being hardly down from its recent move up, I decided to break with the company for the moment. I will look at the stock again when the dust clears.

Onto Jaguar. I’ll admit that if Jaguar had been down 7-8% today I probably would have sold the whole thing and been done with it. But at 20% down it just seemed to me to be a little overdone.

I sold half my position in Jaguar back in September but kept the other half because I trusted management too much and it did sound in August like they were having a good quarter. So today was a bummer. It was frustrating to see them fall so terribly flat. The company has an “always something” complex. Its always a one off problem but its always something. However, I did buy back 1/3 of my original position today at the close. The reasons I bought were:

21% is a lot to be down on a single day. AEM shut a mine down today and it wasn’t down that much.
They still are going to produce a lot of cash for the quarter. They had 21.7M cashflow (0.25/share) from ops in Q2 on $60.6M of revenue. In Q3 revenue was $70M and costs were roughly $3.6M higher so cashflow from ops should be around $24-25M. Of course its all the higher gold price but cash is still cash.
While Paciencia sucked Caete looked like it finally turned around, and Turmalina looked fairly solid.
The assets aren’t that bad (they haven’t had a grade type issue yet where the gold is actually not there) and with the right management I think someone might want to go in and buy the company at this price. I mean you are getting total resource at less than $50/oz at this price.

Next is Aurizon, my as-it-turns-out-not-so-safe safe gold play. I used some of the proceeds from Argonaut to increase my position in Aurizon. Unfortunately it was a day or two too soon. I bought most of my position in the $5.40-5.50 range. Today the stock closed at $5.25. Sigh… I decided to go with Aurizon because they are really trading quite cheaply, they have around $1/share of cash on their balance sheet and no debt, and they should generate very strong cash flow in the 3rd quarter and going forward. The theory is that this will somehow help the stock during these take downs. Ha! Not today, Aurizon was down 7%.

As for Newmont, its just another instance of trying to keep some exposure to gold stocks (which may be the essence of my mistake here) while not taking too much risk (which is beginning to look like an absurd statement in this market). The stock has behaved pretty well, and low and behold it was down a mere 5% today. Sheesh.

I guess the reality the market is telling us is that in a banking crisis, you are much better off owning banking stocks then gold stocks. Clearly the losers of the collapse of fiat currency are the company’s who mine for the hard asset alternative.

Excuse the sarcasm.

Look, I am not going to get dogmatic here, and certainly not about gold. The market is saying what its saying, as insane as it might seem. I have raised more and more cash on every move back up (although never as much as I wished I would have raised in retrospect). I’ve tried to take advantage of the moves down to make trades like I did today in Jaguar and earlier this week in Aurizon. But its getting incredibly stressful to time these moves and deal with the volatility. Its wearing me down.

Probably the most frustrating part is how little time you have to get out when there is a move up. I swear that on Friday afternoon the gold stocks peaked within the last 15 minutes of trading. I pragmatically took money off the table. Problem is, usually I do this in stage. A little bit today, a little more tomorrow, gradually reducing the position down to a comfortable level. No such thing in this market. Friday afternoon the gold stocks peaked and on Monday morning most were down 5% within a few minutes of the open. Same with Tuesday when Jaguar moved up. I took a little off the table, but you have to do it all or nothing is this market, because as today is evidence, you just don’t get a second chance.

Oct 16

Week 15 Portfolio Update: Scratching Back to Even (again…)

My portfolio gained along with the rest of the market last week. The rollercoast on either side of par continues. The good news is, as the relative performance chart below shows, I have been outperforming the major indexes since inception.

Unfortunately the bad news is that I am still down 1% since I started the portfolio on July 1st. I’ve said on a number of occasions in the past couple of months that the best position to have in this market may be a cash one. Thus far that has turned out to be the case. Even though I have picked stocks and sectors that have generally outperformed the market, the fact remains that it is very hard to make money in a bear market without being short.

Speaking of shorts, I do want to point out once again that while I am not allowed to short stocks in the practice account that I post on this blog, I am short a number of stocks in my actual account. These stocks are entirely in the banking sector. Right now I am short BAC (Bank of America), UBS, and HBC (HSBC). I have been short HCG.to (Home Capital Group) but covered that recently on the suspicion that the market was going to rally. These banking shorts amount to about 1/3 of my longs, and they are there entirely as a hedge against the possibility of a systemic collapse brought on by some European catastrophe.

Also of note is that while I mentioned that I had began to buy Newmont this week, exchanging some of my gold junior shares for the shares of the gold senior, you will note there are no Newmont shares in the account displayed. I’m not entirely sure what happened here; I think I may have put the USD limit price for Newmont on the CDN dollar share order. At any rate, I didn’t get the shares I thought I got, and I didn’t realize that until I checked my portfolio this weekend. I’m not entirely sure what I am going to do about this now, as Newmont is a good 5% higher than when I had anticipated buying the shares. I think I will just sit in cash until the opportunity arises to buy the stock at the price where I actually bought it in my real accounts.

For the upcoming week, I would like to pare back some of my positions further if given the chance. D-day in Europe is coming up quickly, and god only knows what that day has in store for us. I have seen the market turn downwards on a dime too many times in the past couple of months to have any faith in the sustainability of this rally. If Europe actually comes to a workable solution, I will buy back stocks with a vengence, but until that time has clearly arisen, I will continue to exercise extreme caution.

The one stock that I might look at adding to is Atna Resources. I did a lot of work this weekend with another, more familiar, gold producer called San Gold. San Gold is an interesting story and I will try to write up a short piece on the company some time soon. I don’t anticipate buying and SanGold in the near term though; while the production and exploration potential of the company is interesting, it seems to be that a lot of this upside is already in the stock. Which brings me to Atna. What Atna has at Pinson seems fairly analogous to what SanGold had at Rice Lake before they began to ramp up production. Lots of high grade underground gold and a mill that was mostly commissioned and ready to go. The difference between the two companies is that Atna has a market capitalization of less than $100M, whereas Sangold at one time was a $1B company, and even now with recent production disappointments (which I have to say are not as disappointing as the share price performance would suggest) is a $600M company. There are differences to be sure, but nevertheless $500M is a lot of wiggle room to play with.

Oct 14

Not Buying this Rally

While I have been happily taking part in the rally this week I remain skeptical in its sustainability. The positives right now are all in the “price action”. If you look beyond the improving prices of the stocks, there is not very much positive to be said about the underlying conditions.

Lets take, as our first exhibit, Europe. The market rally seemed to get kicked off this week with the news out of Brussels that Sarkozy and Merkel had a plan. Or the makings of a plan. Or a plan of a plan. They had talked anyways, and the market deemed this to be significant and positive.

It is worthwhile here to look at some of the details of what was said by the two leaders. In particular, the emphasis that they made that changes were needed to the actual constitutional treaty that underlies the EU. Here is what Dennis Gartman said on the matter:

We continue… perhaps too dramatically… to dwell upon the statement by Ms. Merkel that France and Germany “will make proposals in a comprehensive package… that will include changes to [the] treaties” that established the European monetary and political unions. Ms. Merkel went out of her way Sunday and again yesterday to reiterate that “treaty” statement so that no one anywhere would misunderstand the seriousness of the situation. Changes to the treaties of Maastricht, Amsterdam, Lisbon and Nice require passage by either public referenda or by vote of the parliament in individual nations… that is left to the nations themselves… and importantly the votes must be unanimous. Not one… not a single nation in the “unions” in question… can vote against such changes. They are not passed by mere majorities of the member nations, nor by super-majorities, but by unanimity. Essentially, Slovakia must agree with Germany and Germany must agree with Ireland and Ireland must agree with Austria and so on to unanimity… Unless Ms. Merkel was lying openly and often in the past two days regarding the need to revise these seminal treaties at the core of the political and monetary unions, we find it difficult if not wholly impossible to believe that this unanimity can be achieved within anything less than one year…

The situation in Europe is far from resolved. I would even argue that given the difficult nature of what it looks like they are now trying to accomplish, things just got a bit worse.

Meanwhile, one of my most trusted gauges of economic forecasting, the ECRI, has been getting more and more negative on the outlook for the US economy, and last week they tipped officially into the recession camp. Now these guys are no David Rosenberg; they are not making a recession call based on a theory or the historical precedent of credit contractions elsewhere, no the ECRI is looking at the long leading indicators that have traditionally foretold economic strength and weakness and these indicators are, right now, pointing solidly downward.

I think its worth mentioning that during the sharper but shorter downturn in the index that occured in the spring of 2010, the ECRI was adamant that this did not signal a recession. A lot of other bears did, I remember reading Rosenberg at the time and he conveniently used the WLI data to foretell a recession that never came. But the ECRI did not. I think they key difference is the “persistance” of the current move down. The index has been moving down steadily since March.

The index also seems to be a very good indicator of stock market turns. It turned almost co-incidentally with the market during the March 2009 bottom. As you can see from the chart above, this year it turned down almost at the same time as the market topped. I would have somewhat more faith in this rally if the index was not foretelling more economic weakness ahead.

This week I sold out of Gramercy Capital. Gramercy was the last of my US real estate related holdings, as I have already sold out of Oneida Financial and Home Federal Bank of Louisiana. With the US economy slowing, this doesn’t seem like a particularly good time to be making long bets on real estate. FT Alphaville posted an interesting article on the state of prime mortgages in the US. It seems that a number of the prime mortgage indexes have fallen off preciptiously in the last few weeks.

Now these indexes only represent a sampling of the outstanding MBS, and it very could be that they are skewed to areas of the country (ie. Califronia) that are currently experiencing more weakness then the country as a whole. Still its a sobering thought to contemplate that the housing downturn has another leg left in it.

Tying this back to Gramercy, while the company remains in a much better position than it has been in for the last few years, being no longer overly leveraged and generating significant cash flow, the lifeblood of that cash flow is still tied to the US economy, and so Gramercy is not going to be immune to a US recession. You saw that this was the case last week when news came out that CDO-2005 failed its overcollateralization test for September. When the company released their delayed 10-Q’s, they had this to say about CDO-2005:

“We expect that the overcollateralization test for the 2005 CDO will fail at the October 2011 distribution date”

Now this is not the end of the world for the company. Indeed, Plan Maestro pointed out on one of the boards that it likely gives Gramercy more chances to buy the CDO bonds at distressed prices. CDO-2006 is still generating lots of cash flow. My point is that in an environment of a deteriorating economy, and in a world where the collapse of the second largest reserve currency is still very much a possibility, one needs to err on the side of caution.

I suspect that absent some sort of private equity take-over of the company, I will be able to buy Gramercy back at a cheaper price than I sold it at. Just a couple weeks ago the stock was trading in the $2.60’s. I sold at $3.20. I suspect I will be able to pick it back up in the $2.60’s once the dust settles and Europe is found to be still wearing no clothes.

Some last bits of news, again of the positive sort, was, first of all, that Crescent Point participated rather significantly in Arcan’s recent financing. So while retail was selling stock at sub $4, Crescent Point was buying it at $5.45. The market is somewhat ridiculous, isn’t it? I picked up a few shares of Arcan during the “panic”. I’ve been contemplating reducing my position back to its normal size now that the stock has moved up, but I haven’t done so yet. But I will; I want to use this rally lower risk in my portfolio right now, and so scaling back on everything is prudent I think.

Last night Coastal Energy released what looks like some very good news. The hope has always been that the Bua Ban North A and B reservoirs were actually a single, larger reservoir. The latest well seemes to confirm this:

“We are extremely pleased with the results of the A-08 well, which further supports the conclusion that Bua Ban North A & B are likely in communication in the western fault closure of the structure. We now plan to drill an additional delineation well halfway between the A & B fields on the western side of the structure to further confirm this. This well will spud by this weekend.

Coastal was another stock that I bought a bit more of on fire sale. I don’t think I’m going to sell any of this one. Its too cheap and the results remain too good.

The last thing I have been doing this week is paring my positions in my junior miners in favor of a position in Newmont. Why Newmont, you might say. A couple reasons. First, as the below snapshot from BMO illustrates, Newmont is not expensive. In fact the stock is trading as cheaply now as it ever has.

Second, if you look at the price performance of Newmont through the recent downturn, it has performed admirably well. While the juniors got decimated during the two week downturn, Newmont did not. An while I still really like the idea of gold stocks, I don’t totally trust that if Euope goes into freefall again that they won’t put in a repeat performance of this themselves. I’d rather own a little bit less of the volatility provided by Jaguar and OceanaGold and a little bit more of the stability (and dividends!) provided by Newmont.

Oct 11

Week 14 Portfolio Update: Treading Water

The only two changes made to my portfolio this week were to add Atna Resources and Brigus Gold to the list of gold stocks that I own. I plan to write-up Atna in short order, but in the mean time their denver gold show presentation outlines why I like the company quite well. I remain stubborn (for now) to the fact that gold stocks cannot continue to trade at the same prices they did when gold was $500/oz less. These companies are making a tremendous amount of money right now, and that is going to be born out in Q3. I am holding these stocks through the operational updates, which should begin to be released this week.

Meanwhile the takeover of Daylight Energy this weekend should help buoy my energy stocks next week, and has me actively contemplating adding to my position in Equal Energy at these levels. If it wasn’t for my continuing wariness of Europe I undoubtably would. But these are not normal times.