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Posts from the ‘Esperenza Resources (EPZ)’ Category

Week 95: Setting the table (hopefully)

Portfolio Performance

week-95-Performance

See the end of the post for a full portfolio breakdown.

Update

Since my last update I exited Radian Group, Arkansas Best and MBIA.  The sales reflect a desire to redeploy cash in other opportunities as well as some lingering concerns about each company.

With Arkansas Best, its my uncertainty about the outcome of union negotiations.  The negotiations were extended this week for a second time.  An escalation to a strike does not seem out of the question.  If a strike occurs the stock price may or may not get hit; while a positive resolution could be quite good for the stock in the long-run (see my original post about how Arkansas Best would benefit from a contract structured in a similar manner to the one that YRC Worldwide operates with) the uncertainty may drive panic selling.  I’ve decided to wait this one out for a few weeks and see how it plays out. Read more

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Week 91: Consolidating

Portfolio Performance

week-91-Performance

Consolidation

Patience is a difficult virtue. I’ve had 3 weeks of pretty so-so performance, some stocks going up and some stocks going down and overall not much of anything happening. With the market going up seemingly every day its hard to not let that play on your mind.

But you have to have a balance of patience and impatience to do well in stocks. You need to have a healthy level of impatience so that you don’t hold onto positions for too long, but tempered with an equal dose of patience because, as I read some time ago from a cagey market veteran, you will make 80% of your gains for a year in 2-3 weeks, and figuring out which weeks those are is nearly impossible.

In the last few weeks I think I demonstrated a little bit both; witness impatience in my selling of gold stocks and of my position in Tricon Capital and patience as I held on to falling positions in MBIA, Impac Mortgage and watched YRC Worldwide and Yellow Media correct substantially from their highs. Read more

Week 88: Take-off (MTG, RDN, MBI, PKI, NTI, IMH, WD)

Portfolio Performance

week-88-Performance

See the end of the post for Portfolio Composition and weekly trades.

A week of Significant Gains from RDN, MTG, MBIA

The last seven days have been extremely good ones for my portfolio.  This has been primarily due to the price appreciation of MGIC, Radian Group and MBIA.  As regards MGIC and Radian, I have written so much about these two names, done so much work trying to understand the business (and trying to understand how other people were trying to understand the business), that it is quite rewarding to see it play out the way that it has.

It is amazing to me that MGIC has more than doubled (from a $2.40 low to a $6.10 high) during 5 days when the only notable disclosure was that the company had the ability to raise capital.  Someone with an interest in market psychology should really write a piece on MGIC – you could call it the Existential Security.

I reduced my position in both Radian and MGIC by a little more than half during the early part of this week.  My sales of MGIC occurred around $5.20 while those with Radian were at a little over $10. I don’t have plans on selling any more of either.

I sold the positions down because they were getting very large (particularly in the case of MGIC) and because my thesis, that these companies would be able to survive, has now played out.  What is going to drive the stocks going forward is the long-term potential of the mortgage insurance business and how well each company can capitalize on it. Read more

Week 70: A stock pickers Market

Portfolio Performance

(Note that I am now posting my portfolio composition and list of trades at the end of the post)

Update

I didn’t get around to writing an update last week because I was busy with other research that could not wait.  So its been 3 weeks since I updated my portfolio and transactions and quite a bit has happened over that time.

Over time my portfolio has slowly morphed into a vehicle for playing the housing recovery. I had large moves to the upside in a number of my housing related positions, with the most pronounced being of course Impac Mortgage (IMH), but also from Radian Group (RDN), MGIC (MTG) and a number of my regional banks with strong mortgage banking operations.  Its been a good 3 weeks.

In this post I want to talk about some of the changes I’ve made over the last 3 weeks.  To summarize:

  1. I sold out of all my gold stocks other then Atna Resources (ATN)
  2. I made a brief foray into, and then out of, US E&P’s
  3. I am out of JC Penney (JCP)… for now
  4. I am into Avenex Energy (AVF) and a homebuilder (HOV)

I will address each of these in order, followed by a brief discussion of what to expect from Nam Tai, which reports earning on Monday and of which I want to be clear of my expectations and actions.  But first I want to talk generally for a moment.

Twitter

I’m finding that I am using twitter quite a bit to post what I am doing on a more regular basis.  Whenever I find a relevant article, or if I start to buy a new stock, I try to put a post up on twitter.  I have also found a number of folks on there that have been useful to follow.  Its a useful tool, and has the advantage over the traditional message board format in that you follow a person rather than a subject.  So you aren’t wading through garbage to find nuggets.  You can follow me @LSigurd. Read more

Week 51: A Couple of New Positions

Portfolio Performance

Portfolio Composition

Staying Smallish

I broke down and bought a position in MBIA at the end of the week last week.  I had mentioned in my post on the company last week on the company that I had planned to wait for lower prices.  I didn’t.  Over the past couple of weeks I have read through all the conference calls and the latest quarterly’s and the more I read about the court cases between MBIA and Bank of America, the more that I think that if I were Bank of America, I would be looking to settle before any further rulings come out.  With the first ruling (on the transformation of MBIA into two distinct entities that is being opposed by Bank of America and Societe Generale) due out in August I decided that I was willing to take the risk that the stock falls back to the $8-9 range in return for the potential reward if that settlement comes out.  I haven’t bought a lot of the stock, just enough to feel like I am participating. If it does fall back to $8 I would buy more.

I also started a very small position in JC Penney.  I could see it getting significantly larger.  I plan to put out a very detailed post at some point in the near future (probably next weekend) but to briefly summarize, I am fairly comfortable that the problems that JC Penney has will be worked through and that in time the stock will trade much higher.  What I am less comfortable with is whether the stock can trade much lower first.  I have been reading everything I can find about the company and I cannot believe how hated it, and its CEO Ron Johnson, have become.  Moreover, there seems to be a consensus that because the pricing strategy change that was announce in Q1 was not immediately successful, it should be concluded that the management team is a bunch of bumbling idiots who got lucky with Apple and will suffer a fate worse than death with JCP.  Yet as Johnson said on the first quarter conference call, they are trying to turn the titanic into a bunch of little speed boats, and that is going to take time.  The turnaround that Johnson is attempting will not miraculously happen in the next month or two, so there is room for further disappointing numbers.  I would love to see the stock fall to below $20, at which time I would load up.  I actually expect that it will, I mean there isn’t an immediate catalyst to the upside, and the negativity is so strong that its taking on a life of its own.

I haven’t added to my position in gold stocks, but I have changed it up a bit. Out is Canaco Resources, and lightened up on is Atna Resources.  In are Esperanza Resources and OceanaGold.

In the case of Esperanza, they are a company with a low cost development project (~$100M capex) and low expected operating costs (~$450-500/oz) that has been beaten up because they did a share offering that was over-subscribed and that diluted the share base.

I’m looking at the offering from the other side.  That is: they managed to do a share offering that was oversubscribed in this environment.  I think there are probably some games going on with the stock post-offering, and I suspect that is why we are able to get it as cheap as we are.  The only potential negative I have heard with Esperanza is that apparently because the offering was oversubscribed there were some unhappy subscribers who didn’t get all their shares.  Some have said that this could lead to lawsuits.  I admit I don’t fully understand the legal impacts of this, but it would seem to me that the ultimate responsibility would lie with the sponsoring bank and not Esperanza.

OceanaGold is a bit of a flyer.  I bought the stock at $1.80, I sold some, but not enough, at $2.15 to book some profits, and now its back to almost where I started at $1.90.  I placed this “bet” on OceanaGold based on the following expectations:

  1. The gold price is about to rise
  2. Didipio is going to be added into 2013 estimates shortly at which point the corporate cash costs of OGC will drop to sub $800 per ounce.
  3. The falling NZD and falling oil prices are going to start working in OGC’s favor rather than against it, as has bee the case for the last couple of years

The problem with OceanaGold is that it is a trading stock and trading stocks can go up and down like a yo-yo while you wait for what you think should happen to play out. Its excruciating and it’s a reason to only have a small amount of your overall capital invested in such names.  I have a small amount of capital invested in OceanaGold right now and I would be hesitant to add more.  We’ll see how it plays out.

Next week marks Week 52 since I started tracking my portfolio on-line. I will try to publish a short wrap-up of the year.

 

Yamana take-over of Extorre Resources

I been working diligently on research of 3 companies this weekend: MBIA, OceanaGold and Esperanza Resources.  I haven’t anything to post yet on the 3, but I have bought decent positions in the latter two and am looking for an entry on MBIA.

I wanted to send out a quick update because of the news this morning that Yamana Gold entered into an arrangement to by Extorre Gold.   I looked at Extorre over the past couple of weeks and decided to go with Esperanza, which I chose because of its lower capital expenditures and that, being in Mexico rather than Argentina, Esperanza has less political risk.

Nevertheless, the move by Yamana just points to how cheap many of these gold junior companies are trading.  I expect there to be more of these sorts of transactions over the coming months, as majors pick up resources on the cheap.

Letter 24: Risk and Reward, Atna Analysis, More Community Banks

Last week I wrote that I did not understand why  the market was reacting as favourably as it was to the European proposals that came out of the Dec 9th summit.

A tweak here, a tweak there and pretty soon you have… well not a whole lot to be honest.

In a way I felt vindicated  by the market collapse that occurred in the early part of this week.  In another way I felt sick to my stomach, because though I have been creating an evermore conservative weighting to my portfolio, when the shit hits you still feel it.

Kyle Bass was on CNBC this week giving some more detail on his doomsday-like expectations:

The observation that deposits are leaving Greek banks at an annualized rate of almost 50% is somewhat frightening.  Clearly this crisis is going to come to a head soon.

John Mauldin publishes a great conversation between Charles Gave and Anatole Kaletsky.   It is quite provoking, and its hard to walk away after reading it without feeling the impending doom that awaits the Eurozone.  Kaletsky and Gave both make the quite reasonable point that perhaps Germany would prefer a break-up of the Eurozone.  If you watch what Germany is doing, and ignore the platitudes they are saying, you might question their motives.  Kaletsky points out that of the necessary measures to fix the Eurozone, Germany seems to be steadfastly opposed to both Eurobonds and to ECB intervention.  Absent those  measures, what hope does the Eurozone have?  Perhaps that is the plan all along.

Gold Stocks – I should went all out

Gold stocks got CREAMED this week.  I had been lightening up on my gold stocks the week before in anticipation that something might be about to hit.  I didn’t like the way gold was going, I didn’t like the fact that the WSJ was penning articles describing a dearth of Indian demand, and I didn’t like that Draghi talked tough during the EU summit, suggesting that money printing was still some time off.

Nevertheless being that I was not fully out of gold stocks, I got smacked about pretty good over the course of the week.   Atna, Aurizon, and with Lydian all performed quite miserably.

What’s Wrong with Aurizon?

Aurizon is a surprise to me.  I expected the stock to hold up better than it has been.  I might have expected its performance to be closer to that of Alamos.  Both are low cost producers.  Both are single mine operations.  Yet the valuation difference between the two is somewhat staggering.

I can only guess that there is a strong seller of Aurizon out there that wants to be out of the stock by year end.  I can only hope that the new year will bring some sanity to the stock.

While reviewing Aurizon, I began to wonder how much having a AMEX listing hurts the stock.  Anecdotally it appeared to me  that the Canadian stocks with AMEX listings are much more volatile then those without.  I decided to take a closer look.

I grabbed price data since August 1st for 9 stocks, 5 with AMEX listings and 4 without.  From the web I grabbed a visual basic function that calculates volatility based on the following Black-Scholes formula.

For purposes of Black-Scholes calculations, volatility is the standard deviation of the periodic percent change in prices, divided by the square root of time.  Volatility is emphatically NOT the same as “beta”, which measures the correlation of a security’s price movements with those of the overall market.  Neither is volatility simply a measure of the standard deviation of a security’s closing prices over time.

Here is the volatility of each security:

Is there a correlation?  Perhaps, though its not as clear a one as I had suspected.   The distinction is most clear between Aurizon, Alamos and Argonaut Gold.  There is no reason, in my opinion, that Aurizon is so much volatile than these other two stocks.  But apart from that, volatility seems similar between stocks on the two indexes.

I bought back some of the shares of Aurizon at $5.07 that I had sold at over $6 a few weeks ago.

The NPV of Atna

Another stock to get clobbered this week was Atna Resources.  I mentioned a couple weeks ago that I had finished an analyses of the company and would post shortly.  I never did that post, until now.

Below is the after tax NPV10 that I calculated for Atna at various gold prices.

I based my model on the following assumptions:

Briggs:

  • A 11year mine life, at 40,000 t/d
  • Total produced ounces of 476,000 oz over LOM
  • 0.017 oz/t resource over the mine life, strip ratio of 4 and with 80% recoveries
  • Resulting in gold production of  39,700 oz per year
  • Mining costs of $1.30/t mined, milling costs of $4/t milled and G&A costs of $1.7/t mined
  • Cash costs of $898/oz over LOM

Pinson:

  • A 15 year mine life, beginning at 350t/d and ramping to 750t/d by year 4.
  • Total produced ounces of 940,000 oz over LOM
  • 0.4 oz/t resource over the mine life, diluted by 30% with 90% recoveries, resulting in gold production beginning at 50,000 oz and ramping to 75,000 oz.
  • Mining costs of $110/t, milling costs of $50/t and G&A costs of $11/t
  • Cash costs of $687/oz over LOM

Reward:

  • A 8 year mine life, at 24,000 t/d
  • Total produced ounces of 292,000 oz over LOM
  • 0.026 oz/t resource over the mine life, strip ratio of 4 and with 80% recoveries
  • Resulting in gold production of  36,400 oz per year
  • Mining costs of $1.30/t mined, milling costs of $4/t milled and G&A costs of $1.14/t mined
  • Cash costs of $560/oz over LOM

Columbia and Cecil:

  • To the current resource of each I assigned a simple asset value per ounce of $40/oz measured and indicated and $20/oz inferred on the total resource of both properties

Atna is, in my opinion, is one of the best gold stock investments out there.  As demonstrated above, the stock is trading at about 1/3 of its NPV 10 at $1500 gold.  If I wanted to get more aggressive in my evaluation, I would note that many companies are moving to value feasibility on NPV5.  On an NPV 5 basis Atna is worth $3.86 per share at $1500/oz gold.  That number jumps to almost $8 per share at $2100/oz gold.  Clearly there is upside once the momentum begins to build.

I added to my position in Atna on Friday at 78 cents.

Taking Advantage of the Collapse

In addition to Atna and Aurizon, I also added new positions in a few juniors.  Call it the beginnings of a basket; I added a couple of non-producing juniors with deposits to my portfolio this week:

Geologix was recommended by Rick Rule as a takeover candidate on BNN about a year ago.  Since that time the stock has fallen significantly.  The company has a very low grade copper-gold deposit called Tepal in Mexico.  The PEA that was published on Tepal a few months ago put the NPV5 of the project at $412M based on $1000/oz gold and 2.75/lb copper.  Geologix has $14M of cash on hand.  With 145M shares outstanding, the market capitalization of the company was $28M at my entry price of 20 cents.  That puts half the market cap in cash and the other half in a project with an NPV that is nearly 10x the value of the company.  Something has to give here.

Esperanza Resources is another old Rick Rule recommendation.  Rule doesn’t talk much about specific stocks anymore, but there is some evidence that he is still interested in the company.  http://www.investmentu.com/2011/September/why-gold-mining-stocks-will-skyrocket.html .  The company certainly fits the bill of the sort of stock Rule likes.  Esperanza has 1Moz of gold in Mexico.   It’s a heap leach project so it should be able to be brought on production without a massive capital requirement (about $100M).  Like Geologix, the company has almost half its market cap ($100M) in cash on hand ($50M).

I plan to add more to both of these stocks in the coming weeks.

Regional Banks: A  Position in Community Bankers Trust

Community Bankers Trust (BTC) hit my bid when it sold off back down to a dollar this week.  BTC is trading at 27% of tangible book value.  This is, of course, partially because of the large number of non-performing loans on their books.  Non-performing loans make up 8.9% of total loans in the Q3 quarter.  This was down from 10.1% in Q2.  In fact, there are some encouraging signs that the worst of the loan losses are behind us.  The company has shown 3 quarters of lower loan amounts 30-89 days past due.  This trend is beginning to show up in the total non-performing loans, which decreased for the first time in a year in Q3.

Moreover, as I have pointed out previously, insiders continue to buy the stock.  Third quarter purchases by insiders were a little less than $50,000.

And Another Regional Bank Position in Atlantic Coast Financial

To be perfectly honest, I might have made a mistake here.  I’ve only put a very tiny amount of capital at risk, but even that may have been too much.   Atlantic Coast Financial (ACFC) is a lottery ticket.  I bought the stock at $1.70 on Friday.  There is just as much chance that it will go to zero as there is that it will double.

ACFC is a former Mutual Holding company that did their second step bank in February.  The second step added cash to the balance sheet and resulted in a bank trading well below book value.  ACFC trades at a rather crazy 10% of tangible book.  Clearly there is more to the story.

The more to the story is that the bank is centered in Jacksonville Florida.  They primarily make residential real estate loans.  Real estate in Jacksonville has not done particularly well over the last few years (though it appears to be bottoming).

The falling real estate prices have led to skyrocketing non-performing loans.  Those non-performing loans have not shown any sign of peaking yet (thus the possible mistake on my part).

The questions are, how many of these nonperforming loans will eventually be written down, and will there be value left in the equity once the non-performing loans are written down.

What drove me to take a small position in the stock was in part that an improving economy, and stabilizing home prices in Jacksonville, may mitigate further deterioration of the bank assets.  As well, the bank is generating decent earnings before provisions.  Ignoring provisions in Q3, the bank earned $1.16 per share.  In Q2 that number was $0.55.

What is going on at ACFC is something akin to a tug-of-war, whereby on the one hand loan losses strip away value every quarter, while on the other earnings power of the performing loans adds value back.  The share price is so low that it doesn’t take much a a shift in the dynamic between these two forces to change the value equation substantially.  Its easy to see how a stabilization in non-performing loans could quickly allow the earnings power to win the race and shareholder value to go up substantially.

The other factor in my decision to buy was the recent announcement that the company was looking into strategic alternatives.

On November 28, 2011, Atlantic Coast Financial Corporation issued a press release announcing that its Board of Directors has engaged Stifel, Nicolaus & Company, Incorporated to assist the Company in exploring strategic alternatives to enhance stockholder value

Part of the reason that the company is looking for options is that they are not in compliacne with the Individual Minimum Capital Requirement (IMCR) agreed to by the Bank with the Office of Thrift Supervision on May 13, 2011.  Under the IMCR, ACFC agreed to achieve Tier 1 leverage ratio of 7.0% as of September 30, 2011. Tier I capital at the bank is 6.22% right now.

It is a far from perfect scene.  Nevertheless, an improving US economy and stabilizing housing prices could give me a decent return on the stock.  The book value of $19 is unrealistic, a return to $3 is not.

Portfolio Composition