Posts from the ‘Gold Stocks’ Category

Jun 2

On the trials and tribulations of owning gold stocks

About a month ago I wrote the following in an email to a friend:

I probably seem crazy to be chasing gold stocks in and out like I have. I’ve been wrong over and over. But I’m not losing much money doing it because I keep selling before it gets out of hand and I know from experience that when they move up they will move so fast and you have to be ready for it. What we saw in January was nothing, in the past I have had stocks triple in a month when they move. They can move so fast in such a short time its crazy.

At the time I was getting mucho frustrated and more than a little despondent about the reaction of the gold shares. Gold stocks were being sold indiscriminantly. Even though the price of gold was holding up rather well, the stocks of the companies that produced gold were being trashed. For those companies that only explore for gold, the thrashing was even worse.

I follow a few rules for investing. One of those rules is to never add to a losing position. Another rule is to scale out of stocks that are not doing what I think they should do. A third is to mind the intraday reversals. The consequence of following these rules with the gold stocks is that I have bought in and been bounced out of these companies a few times over the last couple of months. I have owned Aurizon Mines, Lydian International, Golden Minerals, Barrick Gold, Newmont Mining. I now own OceanaGold and Agnico Eagle in addition to a large position in Atna Resources and Gold Standard Ventures and (sigh) Canaco that I have held throughout.

While my furstration has left me tempted to walk away from gold completely, the reasons I didn’t give up was three-fold.

First, I just can’t get past the conclusion that the underlying condition of the world right now should be favourable to owning gold and gold stocks. World economies are weak and weakening, and along with it so are the inputs to gold mining. Interest rates are near zero, which means that alternative paper investments (bonds) do not have their usual yield advantage over gold. Central bankers have shown a bias towards printing money to avoid lengthy recessions and prevent a destabilizing banking crisis. Debt in the developed world is still high historically.

In this environment the perception of gold should be favorable, and its perceived value in units of paper currency should increase. The truth is that the price of gold is based on perception. I think that is why you have such wild fluctuations in both gold and gold stocks. Its because gold has no value apart from the value that man has historically perceived in it. And its difficult to nail that down. I am starting to get tired of the term, but to say that gold is the existential commodity is really not very far off.

Second, the gold stocks are cheap. They are trading at multiples that I didn’t think gold stocks would ever see. Newmont and Barrick have been down as low as 8x earnings.

As well, with economies slowing, I think we are finally going to see the benefit to gold mining from lower energy, labour and capital costs. It has become so common for a gold company to report escalating operating costs, or increase the estimate of capital costs to build a new mine, that it is now almost expected by the market. But these costs do not rise in a vacuum. They rise because energy, copper, steel and labor prices have been rising. As economies around the world slow, this effect is reversing. We should begin to see that effect in the second quarter numbers, where cash costs beging to show decline.

The third reason that I didn’t give up on gold stocks is because I know that when they turn, they turn hard. I have been on the outside looking in before when this turned happened. I have learned that it is extremely difficult to buy a stock when it has risen a significant amount in a short period of time. In the same manner that gold stocks have fallen day after day for months, with seemingly no support, they can also do the opposite, and rise very quickly and dramatically in a short period of time. The only way I have found to take advantage of this, given my own constitution, is to be in before the rise begins

In my update last weekend I noted that I had bought a position in OceanaGold and in Newmont. This week I added to OceanaGold and initiated a new position in Agnico Eagle:

I finally had timing on my side with these purchases. Yesterday gold and gold stocks took off after the dismal employment report. I was pleased that in my review of the carnage after the market closed, that because of the outperformance of the gold stocks, I was actually up a reasonable amount in my portfolio. This despite the fact that Newcastle and PHH got clocked pretty hard, and the oil stocks I own, Mart, Equal and Pan Orient succumbed to the pressure of falling oil prices and oil stock malaise.

Is what happened yesterday the sort of rise I have been waiting for? While it feels like it to me, its impossible to say. What I do know is that the underlying conditions in Europe have been supportive of a rising gold price for some time now. To say that gold must fall with Europe (presumably because of margin calls) can only be taken so far. There are only so many margin calls that can be made before no one is on margin any more.

I have listened to twice and would highly recommend this interview given by Donald Coxe on the James Pulplava Financial Sense news hour. He said the following:

With the great gold mines they have 20 or 30 or 40 years of reserves and you are getting it for free. Gold prices voer the longer term are bound to go up. You don’t have to pay via a call option to own gold in the future, you are getting it for free with these great gold companies. This is an amazing investment opportunity. All you have to say is, it won’t be an amazing investment opportunity if no governments are running deficits, if the money supply growth is not above 3.5%, in which case you should not own gold. If that is what you believe is likely then you should not own gold. On the other hand if you believe that is about as likely as an invasion of spaceships from some remote part of the milky way, which is my view, then you should be owning gold. And the best way to do that is by owning the gold mines.

Before today the concern about gold, I think, was that the American economy was on the cusp of a robust recovery and quite truthfully, if the US can grow sustainably, it can solve a lot of its problems. What the job report yesterday suggested was that the recovery is not robust. It needs to be understood that there is the possibility that the US just continues to muddle. The job report today does not mean that the US is collapsing, as the stock market and bond market seemed to suggest it was.

The bottom line, I think is that gold is an asset negatively correlated asset to paper currencies, and as paper currencies lose their perceived value, gold must benefit. Gold miners remain a very cheap way to take advantage of this idea.

May 15

Was this why Atna was down yesterday?

In the last few months I have sold off most of my gold holdings, but I decided to stick it out with Atna Resources. That hasn’t looked like a terribly good decision these last couple of days, as the stock has been clobbered down to well below a buck.

Yesterday I looked at the stock thirty minutes before the market closed. It was at 94 cents. I was rather shocked to see later on that it had closed at 84 cents.

It being an earnings release day, I had already scoured the news release and determined it looked mostly benign. However I also know that Canadian regulations call for a filing of the Management Discussion and Analysis report on Sedar. The thing about Sedar is that these reports become available to paying subscribers a little bit before they do for the general public. When I saw the stock drop I wondered whether there was something in the MD&A that insited it.

This morning the MD&A was made publically available. Though I don’t think it is worthy of a 10% drop, I suspect that the following may have contributed to the drop:

The principal requirement within the next 12 months is expected to be funding development of the Pinson underground mine at a cost of $18 to $22 million. This range of costs is likely to increase when a new Technical Report is completed. Atna is considering additional sources of financing to address any potential contingent risk of having inadequate capital to complete the Pinson underground development in 2012, possibly to accelerate the development of Reward, and to ensure funding for the aforementioned projects.

Normally this might be seen as being fairly benign. In the current environment, where even good news is sold and investors are skittish that all gold stocks will soon be worthless, it carries a particular bite.

I always have known that Atna is skating on relatively thin ice with respect to the development costs of Pinson and the available cash on hand. The current report merely confirms that. I have to suspect that the reason the company has not released the technical report on Pinson (that they had originally said would be released at the beginning of May) is because they are trying to line up some financing to give the wiggle room they need. With the current share price depressed, I hope the financing is of the debt sort.

However before I concede yesterdays losses to this buried nugget of coal, it must be said that most gold stocks were down significantly. In fact it looked like a day where the larger institutions were throwing in the towel, with companies like Detour Gold and Osisko Mining down more than 10%.

It simply is a terribly time to own any gold stock. I had thought that the growth profile of Atna might overcome that gravity. Unfortunately that has not been the case.

The good news is that Atna is back to a level where it has completely unpriced Pinson from the share price. In other words, how much lower could it possibly go? You also have to wonder whether there are intermediates looking at the company. A company like Aurizon for example, with $200M in cash, could buy Atna, develop Pinson and have a growth platform for the future, all of which could likely be had for less than what they have in the bank.

I remain committed to my shares. The company has the potential to generate cash flow from Reward and Pinson next year that will match or exceed the current share price. Its too bad that the company hasn’t been a bit more prudent in managing cash levels and taking advantage of the $1.50 share price to raise a buffer of cash but that is what it is. The stock, like so many gold stocks, remains deeply depressed and it seems foolish to me to sell my shares at these levels.

May 10

Gold Stock Reversal

I am not a technician or a chartist and as a general rule I don’t pay much attention to that sort of thing. However I have learned to respect intraday reversals, and I have especially learned to respect them for gold stocks.

For whatever reason, I have seen more gold stock rallies fail after an intra-day reversal to the downside, and I likewise have seen more gold stock pummellings end after one to the upside.

Yesterday we had a very nice reversal in the price of many gold stocks. Morevoer, the reversal was led by the leader of the gold stocks, Newmont Mining. Newmont traded almost as low as $44 before breaking out to the upside and closing at $46.50.

Newmont was not the only gold stock to reverse. Of particular note for me was that Atna Resources had a hue reversal on the day, getting as low as $0.95 cents before closing at $1.10. Another stock that has shown the resilience of a leader, Argonaut Gold reversed from a low of $6.80 to close at $7.52.

It still remains to be seen whether this reversal holds. If it cannot hold through today and tomorrow its nothing more than a fake out. But given the level of selling that has overwhelmed the sector, it feels right to me for a change. Investors who have remained heavily into gold stocks have been absolutely pummelled, and yesterday, with the price of gold breaking down below $1600 per oz and with gold stocks opening down big in most cases, it feels a like a capitulation moment to me.

I have owned Atna Resources through the slaughter and ithas held up relatively well. I added to that position yesterday after it became clear it was reversing from its lows. I also added a position in Newmont. This could be considered to be a trade. Newmont at $44 does not seem like a terribly risky endeavour to me. Finally I added to my position in Golden Minerals and I added a position in Lydian International. Of interest, Lydian did not reverse higher as strongly as many of the other juniors. I suspect this is just a short term anomoly. At any rate I will be monitoring all of these positions closely and if the reversal fails I will likely be bailing out of Newmont, Lydian and probably Golden Minerals (though at $5.30 its hard to see this stock getting very much cheaper).

Apr 1

Buying: Back into Canaco Resources

I think things have gotten a little stupid with Canaco. It goes down and it goes down and it goes down.

I bought the stock on Thursday at 87 cents.

A quick look at the company’s March presentation shows that cash on hand is $110M. The market capitalization of the company is down to $174M. That puts a value on Magambazi of $64M.

As Steve T has pointed out in the comments, subtracting cash on hand from capitalization for a junior is not a best practice. The cash will inevitably be eaten up by drilling. But Canaco can do a lot of drilling for $110M and I don’t think its a terrible bet to think that they find some more gold before they go through the cash.

I still have concerns about the Magambazi deposit. The fact that the resource is being delayed until May suggests that some of my original concerns are valid (I did a detailed analysis of the Magambazi deposit here). The company stated it this way:

However challenges encountered with final assembly of the large volume of project data necessitates a revision to the completion date of the initial mineral resource, now anticipated by May 15, 2012.

If I were to read between the lines, final assembly would suggest to me that there has been some trouble outlining the resource, perhaps, as I noted in my original post, because it pinches out so abruptly in spots.

So things are not perfect. But there is a price for everything. The stock is down from $5 to less than $1. Even when I was at my most conservative I figured they had at least 1.5Moz at Magambazi. Its still a decent deposit and it has the opportunity to get bigger. The market clearly overreacted to the upside in the stock last year. In my opinion, it has now overreacted to the downside.