Posts from the ‘Jaguar Mining (JAG)’ Category

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.

Aug 25

What I’ve Been Doing

On the weekend I posted the reasons why I am very afraid that the situation in Europe is about to get a whole lot worse. At the end of that post I highlighted a number of things that I planned to do to deal with this risk. Over the last 3 days I have mostly completed these items.

Get out of Gramercy – I sold out of Gramercy today at $2.56. In retrospect I could have waited and sold out 10 cents higher. We can’t know which way the market will go on any given day. I may regret this. Gramercy is likely coming ever closer to the day they settle their Realty division issues with their lending consortium. The stock could make quite the pop on that day once the deal is announced. I will be watching the news very closely for that day and will pounce if it settles positively.
Trim Oils – I did this in my actual account but not in the practice account. In my actual account Arcan, Coastal and Equal Energy were all trimmed by 10%. I am dealing with somewhat larger positions in my actual account, so trimming is a more reasonable proposition. I have found that using my strategy of taking off little bits at a time leads to extraordinarily high commissions with the practice account. If and when I get to the point where I want to trim these positions to 25%, I will do the same in the practice account in one move.
Cut the Banks in half – Oneida Financial was cut in half. I held onto all the Community Bankers Trust that I own. I sold all of Xenith Bancshares. I don’t think I will regret these moves. The US economy, at best, will be sluggish for the next few months. I don’t expect big moves in the banks for a while yet.
Cut Leader Energy Services by as much as I can – In my actual account I cut the position by half. In the practice account I had a stink sell order at 69 cents and low and beyold it got filled today so I am out of Leader entirely there. Some might say this is hypocritical. How can I write up Leader a few short weeks ago and then suddenly turn around and liquidate my position. All I can say is that when the facts change… look I underestimated the crisis that is occuring in the Eurozone. Leader Energy is in a cyclical business and has a lot of debt. This is a good company to be in during a economics expansion and especially during a time when oil prices are highly profitable. This is not a good company to be invested in during a time when debt markets tighten.
Watch Gold Stocks Closely – I haven’t done a lot here, though I did lighten up on Jaguar on Monday and add to Argonaut Gold today. I’m still of the mind that gold stocks are breaking out and have higher (maybe much higher) to go. But I reserve the right to change my mind here. I am wary of how far this gold correction will go. However, the stocks never priced in the move anyways. To take an example, should Newmont be crushed as gold moves from $1900 to $1600 when its price is lower than when gold was $1200? Its ridiculous.

We’ll have to see how the next few days play out and what Bernanke announcement comes out of Jackson Hole. But for the moment I feel a lot more secure after having made these moves.

Aug 14

Turning the Corner? Jaguar Mining Q2

I just finished reviewing Jaguar’s conference call and results for Q2. There is a chance, and I do say a chance, that they are turning the corner.

Turmalina

It appears that the worst is over for Turmalina. Costs in Brazilian Real were constant with Q1. Feed grade was reasonable at 3.3g/t. Below are Turmalina’s operating results.

Caete

Caete had the already disclosed problem with the mill break down. $hit happens. Mines inevitably run into operating blips. This affected costs in the short term. But that is a lot different from a grade problem, or a sequencing problem. Those are long term issues. A dysfunctional gear box is not something to worry about.

I think its important to note that while the mill had problems, Caete mining costs remained stable compared to Q1. The company is also moving forward with the expansion of Caete from a 700,000t/y operation to a 900,000t/y operation. Management said that this would raise gold production to a 100,000oz/y level, though I have to say I don’t understand the math on that one.

The company said that they expect significant improvements to Caete in Q4. That means that you shouldn’t expect too much from Q3, apart from a reversal of the one time issues. I think Q3 will look more like Q1, meaning $850/oz costs and 13,000 oz. That would be ok.

Guidance

The company wouldn’t give a mine by mine breakdown of production so far in Q3. However they did provide an aggregate estimate. They said production in July was similar to June, which was 15,000 oz. August was expected to be better than July. Extrapolating to September and adding it all up, one might expect Q3 production to be in the 46,000-49,000 range. That would be a solid quarter and would generate some serious cash flow.

Gurupi and CAPEX Worries

The company gave some details about what to expect for Gurupi. They are investigating other sources of funding. I got the impression that there was a JV of some sorts in the works. I think this would be positive. First of all, Gurupi sounds like its growing, which is great but it also means higher CAPEX. Second, I think that one dead weight on the share price is that when you work out the company’s CAPEX requirements versus cash flow for the next 5 years, there isn’t a lot of wiggle room.

Below is a snipit from Jaguars own press release on February 10th. The tables show how Jaguar expects to fund its capital expenditures over the next 5 years. The most important row to look at is that “Beginning Cash Balance” row. In the first couple of years the cushion is only about $100M. I don’t think the market is comfortable with that cushion given Jaguar’s problematic production past. A cash inflow for Gurupi would allieve these concerns.

Short Sellers

The last thing that was talked about on the CC was the short interest. As I’ve pointed out before, Jaguar has an enourmous short interest. Management believe that most of it is linked to the convertible, where hedge funds short the stock against the convertible to hedge the downside risk. I don’t really know what management can do about this, but they seem to think they can do something. A divided seems unlikely given the CAPEX requirements described above. I don’t think a share buy back would do much. They expect to announce measures to counter the short selling in the next few months. We’ll just have to see what they come up with.