Posts from the ‘Argonaut Gold (AR)’ Category

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 7

Argonaut Gold

Over the past couple months I have put together a fairly decent sized position in Argonaut Gold. I’ve taken advantage of its dip below $5 (who’d a thunk it?) and the stock now makes up my largest gold stock position. In preparation for the companies coming Q3 release (operating results will be released October 15th if history is any guide) this last weekend I sat down and listened to Argonaut Golds Denver Gold Show presentation and re-listened to their Q2 conference call.

Now I want to talk for a second about capex. A lot of the simpler analysis that you will read on the web will provide a valuation of the company on a EV/oz basis. In the case of most micro-cap evaluations (pumping?) this is usually followed by a comparison to the EV/oz value of a number of competitors, and then a conclusion that the stock in question is undervalued by some multiple of its current price.

So the unwitting gold mining investor jumps on this yet-to-be-discovered-by-the-market gem and proceeds to agonize over the fact that years later the value has yet to be realized and the stock, which has likely been diluted by multiple share offerings at this points, is still languishing at or below its current price.

Such is the agony that most of us gold stock investors have gone through when we first began investing in the sector. Unfortunately, it seems that many continue this mistaken evaluation technique until they either give up or lose all their money. I myself got tired of losing money and instead decided to try to understand why some gold stocks go up and others seem to do nothing for years.

One of the main differences between the winners and the losers of gold mining are the capital expenditures that it takes to bring the mine into production. Mining is a process that takes place over many years, but the costs to build a mine are incurred mostly up front. In any discounted cash flow model, those costs loom particularly large in determining whether a project is economic.

The cheapest type of mine development (as a general rule), is a heap leach mine, particularly if the ore does not have to be crushed before being taken to the pad. All a heap leach mine requires are a bunch of yellow trucks and some cyanide solution to leach the gold out of the rock. Lydian’s Amsular project is an example of a heap leach development. Argonaut says that a typical heap leach project can usually be built for about $50/oz. That means a 2Moz deposit can be built for $100M. That’s about 1/4 of the costs it would take to build a mine of similar size that requires a mill and circuit.

During the Denver Gold Show presentation Argonaut put a lot of emphasis on the fairly minimal capital costs that it will take to bring on their two advanced stage projects. Argonaut can bring on a lot of production for what amounts to a relative pittance of capital expenditures. How can they do this? The company was smart in acquiring a couple advanced stage projects when they bought out Pediment Gold. The projects they bought were heap leach projects.

Management said during the presentation that an SRK estimate done by Pedimont (previous owners) suggested that La Colorada could be brought into production for around $25M. I took a look at the PEA released for the San Antonio project and the CAPEX for that project is estimated at $70M.

There are not many companies that can boast near term production potential with so little up front costs.

Both of these projects will have a material impact to Argonauts production profile, but the San Antonio is the bigger of the two. Once built, San Antonio has the potential to produce 80,000-90,000 oz of gold a year at $500/oz. The study (by AMEC) that developed that production profile was based on a resource of 1.2Moz. Recent drilling at San Antonio has discovered an additional new zone with potential and the resource has grown to 1.6Moz.

I wrote an article the other day where I quoted from a recent Rick Rule interview. One of the points he made was that pretty much all the PEA’s that are coming out these days are being done at $1100/oz gold. Impressively, many of them are showing good economics at this price, but they would show much better economics if something approaching the forward strip price was used. Most juniors are being evaluated and priced on this much lower gold price.

While Rule was referring to non-producing juniors, the same could be said for producing juniors with a pipeline of projects like Argonaut Gold. And San Antonio is a poster child for just that kind of valuation mismatch.

I spent a couple of hours working through the August 2010 PEA that Argonaut released on San Antonio. I looked at how the economics of the project would be affected by higher gold prices. Below are the NPV10 results that I determined (the full analysis is available here).

I think you could make the argument that right now, Argonaut is getting minimal or any value attributed to San Antonio. The stock is trading on par or at a discount to peers based on metrics of current production, when those peers have nowhere near the growth profile that Argonaut has.

This is particularly perplexing, I would say, given the relatively low capital cost associated with bringing the mine into production. Below is where Argonaut sits on an earnings and cash flow basis in the BMO universe.

And San Antonio is not the only growth opportunity that Argonaut has. La Colorada is smaller, and it seems like the company is still trying to get a firm understanding of the mineralization, but the project does boast over 600,000 oz of resource, and there was mention made that this probably exceeds 750,000 oz now with the recent drilling. As I mentioned already, a mine can be built at La Colorada for the paltry sum of $25M.

It looks like La Colorada has a bulk tonnage deposit at about 1g/t, but with a couple thin but very high grade veins fairly close to surface. There should be a new resource estimate on La Colorada coming out shortly. The advantage of La Colorada is that it is a past producing mine, so it is fully permitted and partially developed.

Together the two projects will cost about $90M to bring into production. Argonaut should be able to generate in the neighbourhood of $70M cash flow from El Castillo if gold prices stay around these levels. Thus, Argonaut should be able to substantially grow its production with little, if any, share dilution.

The key to this though will be El Castillo. El Castillo is an extremely low grade (0.33g/t) heach leap mine, also in Mexico. Argonaut has been very successful at producing fairly low cost ounces (~$550/oz) at El Castillo.

I have to admit that the low grade ore at Castillo scares me some. Such low grade leaves little margin for error.

The reason Argonaut can mine cost effectively with such low grades is because the deposit has a very low strip of less than 1. I grabbed the following screen capture from a presentation on El Castillo.

If you were to extend the graph into 2011, the strip would be even lower. In Q1 the strip was 0.88 and in Q2 it was down to 0.78.

During the Denver Gold Show presentation management went on to point out that the mine plan should allow them to lower the strip further in the coming yeasr. The strip ratio is expected to drop further as they progress deeper into the pit. The company has also recently built a processing facility on the east side of the mine. This should not only expand capacity, but it will help reduce costs. One of the biggest expenses in a low grade mine is the transportation costs. Having processing on either side of the pit should help reduce those costs.

When you put it all together you have a company with decent positive cash flow trading on reasonable metrics and with a tremendous growht profile that can be funded without dilution. It seems like a reasonable investment to make as long as the fundamentals remain in place for gold to stay at these levels.

Oct 2

Crisis-Weary and I Why I still own some Gold Stocks

I’ve gotten tired of reading about Europe and sovereign debt and under-capitalized banks. I think I have read all I need to know to be able to make the decisions I have to make. I’ve already gotten out of most everything but my very core positions, with those being a couple of oil companies, a special situation REIT, and a few gold stocks.

Its the gold stocks that I am most interested in understanding better. While the gold stocks, particularly the junior and mid-tier one’s, performed terribly last week, I remain somewhat suspicious as to whether this under-performance can be maintained.

The gold stocks have a few tail winds in this environment that very few other stock groups have:

The price of the commodity they sell has risen dramatically in price. Keep in mind that at this time last year we didn’t even have $1400/ox gold. Many of the stocks I am investing in are trading at valuations cheaper than they were at that time.
The costs of production and the costs of construction have come down and, if this is going to turn into a recession, likely will continue to come down. This goes not only for oil, rubber, steel, but for labor too, as in most mining districts gold companies are competing with the gambit of base metal producers that will be less able to bid up for workers
For gold companies operating outside of the United States, in particular those in emerging economies like Brazil and Mexico, the currency headwinds that they have faced have subsided, and these companies should be able to enjoy falling cash costs in USD.
As I have said ad nauseum, the likely endgame for the euro-crisis remains likely to be the end of the euro. It is hard to imagine how the traditional store of value will not do well in an environment where the second largest currency ceases to exist in its present form.

So with those points in mind, and being somewhat euro-ed out from the past weeks of non-stop reading, I sat back this weekend and listened to conference calls and presentations from gold companies. There were a few that piqued my interest, many that provided nothing new, and a few that stood out. I’m going to spend the next few posts, which I will put out over the next few days hopefully, talking about 3 companies that stood out for me:

Argonaut Gold
Atna Resources
Jaguar Mining

Sep 25

Gold Stocks: Am I Wrong?

Last week was playing out just dandy until about 7:30 am on thursday. That’s when the stock market opened and the gold stocks I owned fell along with the rest of the market.

Since the peak on Wednesday afternoon Jaguar Mining is down $1.10, or 16.4%. OceanaGold is down 0.65, or 23%. Argonaut Gold is down 14%. Lydian International is also down 14%.

Now I could write a post about how unjustified this is. How these 4 stocks, and gold stocks in general, never began to price in a gold price of $1500/oz, let alone $1800/oz. And about how in the case of OceanaGold and Jaguar Mining, the stock price is significantly lower then it was when the gold price was $1000/oz.

All of this is true, but its not necessarily helpful going forward. What is helpful is to assess the situation and determine if I am best to stick it out, or admit that maybe I am wrong about the direction of gold stocks.

I’ve spent most of the weekend pondering the reasons for gold stocks to go up and the reasons for gold stocks to go down.

I think that the basis of all the arguments for and against come down to the causation of the rise in the price of gold. Now maybe I am simplifying the situation too much, but think you can narrow it down to two contrasting views of why gold is going up. Each view leads to a drastically different opinion of what will happen to the price of gold (and the price of gold stocks) going forward.

These views are:

Gold has gone up on the expectation of Federal Reserve balance sheet expansion
Gold has gone up on fear of the disintegration of the Euro and the EU

The first argument is what is being bandied about the most over the weekend. Gold, and thus gold mining stocks, were pricing in QE3 and that didn’t happen. Operation twist is not quantitative easing. There is no expansion of the Federal Reserve balance sheet and there is none on the immediate horizon. So if the price of gold is a function of the Federal Reserve balance sheet, then gold must return to pre-QE3-anticipation levels. A good starting point would be $1400-$1500/oz. Or perhaps gold goes lower if it overshoots to the downside or if the Fed begins to gain credibility in its balance sheet management.

The second view was invoked quite often over the last month, but it seems to have fallen on deaf ears in the last couple of days. That’s because it doesn’t fit the evidence. the EU is still a mess. The price of gold is falling precipitously.

So does the move of the last two days mean that the Fed watchers are right and that the run in gold is over until there is at least some evidence of QE3 on the horizon? I’m not willing to say that yet. I’m going to re-quote what I paraphrased from Donald Coxe a couple days ago:

The investment case for gold lies in the 500 million people living within 17 different countries that have their savings, pay cheques, and pensions tied to a currency that was based on a theory and seems by the day to have less of a tie to reality.

This argument still holds a lot of water in my mind. There is still no good way to resolve the situation in Europe. As long as this is the case, gold should continue to have a bid. And I can’t see how this will stop being the case. There simply isn’t the money available to resolve the debt issues of the PIIGS. The only solution seems to be the extradition of at least some of the PIIGS from the EU. That is going to be such a messy process, with so many potential pitfalls for both the sovereigns and the banks, that I can’t see how gold would fall in such an environment.

But I remain open to the possibility that I am wrong. I will be watching the price of gold over the next few days and if the weakness continues I will have no choice but to cut my positions. In that regard, I will likely lighten up on OceanaGold first. Both Jaguar Mining and Argonaut Gold are in somewhat envious positions right now. Jaguars mines are in Brazil, while Argonaut Gold has its mines in Mexico. Both the Real and the Peso have been falling lately. This will help bring down Q3 costs and even more bring down Q4 costs.

OceanaGold operates in New Zealand, and while the currency there has began to weaken, it is still above the average levels of Q2.

Lydian I will continue to hold because the story there is really less attached to the price of gold then in the other cases. Lydian is moving forward an exploration project that will be profitable at much lower gold prices. At some point the company will be taken out. So that one I will hold as well.

We’ll just have to see how this next week plays out.