Posts from the ‘OceanaGold (OGC)’ Category

Jun 25

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:

The gold price is about to rise
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.
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.

Jun 6

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Comparing Gold Producers

Every quarter I spend an evening or two going through the reports of the 15 or so gold stocks that I follow and updating a spreadsheet that I use to track their progress and compare them against each other.

I do not use the spreadsheet in the way a strict value investor might. I do not search out and buy the cheapest gold stock of the bunch on a cash flow metric or per ounce metric. I do look for value, but I also look for growth. The stock market tends to treat gold producers in much the same way they treat any other business: stocks with superior growth potential get bid up to higher valuations. On the other side of the coin, you can sit on what appears to be an undervalued producer for a long time if that producer has a poor pipeline of projects or has no prospects to produce near term incremental ounces.

I did exactly that recently with Aurizon Mines. I was attracted to the value, it was cheap compared to its peers, it had a lot of cash on its balance sheet and no debt, and they have a well run and profitable operation at Casa Berardi. Yet Aurizon does not have a strong growth pipelne. Its closest to completion project is an open pit prospect called Joanna which, while it could one day produce a lot of gold, has been stuck in the feasibility stage for more than a few years and has the worry of requiring a large capital outlay out front. When you add that to a number of fairly early stage exploration projects the result is a company without the near term potential to grow ounces significantly. I sat on Aurizon for almost 6 months based on its value story and the stock went nowhere.

At the other end of the spectrum is a company like Argonaut Gold. I owned Argonaut Gold for a while last fall but sold out way too soon. I sold because I saw the stock was priced dearly compared to many of its peers. However I failed to adequately account for the growth opportunities. It was a silly oversight; I had originally bought the stock because of the low capital cost heap leach projects that they could bring to market quickly. Somehow though I forgot about this, got caught up in the valuation and that led me to sell too early. The stock has since doubled to $10 before pulling back in the recent carnage that has brought all gold stocks to their knees.

When I was looking for gold producing companies a couple of weeks ago I was on the lookout for the next Argonaut Gold. Unfortunately I have not been able to find them (if you have some ideas, please drop me a note). In my opinion the closest comparison to Argonaut in terms of near term low capital cost growth potential is Atna Resources. Atna has a legitimate chance of increasing their gold production from 40,000 to over 150,000 ounces in the next couple of years. What makes Atna an imperfect comparison is that most of its projects hover around the cash cost level of $900 per oz, which is on the high side of the cash cost scale, whereas Argonaut has been able to achieve the double whammy of low cash cost low capital cost growth.

A second producer that I have bought (back) recently is OceanaGold. I have had good luck with buying OceanaGold when the market hates them and selling when the market starts to show some love. This time around I may hold on for a bit longer. OceanaGold has typically been one of the cheapest gold stocks on cash flow metrics. This is because, in part, they have struggled with costs and production at their existing mines. However, their soon to be producing mine in the Philippines (Didipio) will bring about some growth to the company, and perhaps more importantly, it will reduce the corporate cash flow numbers substantially.

One thing that got me interested in OceanaGold again was my research of Agnico-Eagle (which by the way is the third producer I own right now). While Agnico-Eagle has had some difficulties with the closure of their GOldex mine, they remain one of the best growth stories in the industry and I believe the market will come around to forgetting about Goldex and recognizing this once again. Agnico-Eagle owns 5 operating mines. Of those five, one mine, Meadowbank, produces about 1/3 of the production. At the corporate level, Agnico-Eagle has reasonably low cash costs. They were $594 per oz in the first quarter. However Meadowbank, the largest mine, has cash costs over $1000 per oz. On its own its a marginal mine that produces a large number of ounces. Together with the other low cost assets that Agnico has, it receives a much higher valuation than it would on its own.

I liken this situation to the one at OceanaGold. At OceanaGold, the corporate level cash costs should come down fairly substantially with the introduction of gold production from Didipio. Didipio will produce a lot of copper in addition to its gold, and this will make the cash costs of the project appear to be quite low. The cash costs of OceanaGold will not get down to the level of a company like Agnico-Eagle (the high cost mines at Oceana will continue to make up too much of the production) but I do not see it as unreasonable to think they will drop into the high $700 range. My bet on OceanaGold is that when production begins at Didipio, analysts will begin to revalue the company on the basis of a mid-cost producer rather than a high cost one, and that should provide for some upside in the stock.

I updated the spreadsheet below over the weekend. I did not update it during this week with stock prices for each stock tabled. The prices are as of Friday’s close. There has been so much movement in many of these gold names in the last couple days that the prices are already somewhat outdated.

My hope with gold and gold stocks is that this move is for real. What I think we need to have for this move to be real is action out of Europe that brings gold back into the system. I wrote this weekend about how, in general, the turmoil in Europe should cause weakness in paper currencies and lead to strength in gold. On Sunday Donald Coxe was interviewed on King World News and decribed a scenario whereby gold would be used along with a value added tax as colateral for euro-bonds on ther periphery. While I am a bit fuzzy on what the details of such a bond might be, I believe that conceptually this is the sort of event that has the potential to create a great rally. On the other hand my enthusiasm is tempered that if nothing is done in Europe, and if the Federal Reserve does indeed decide that QE is not working (I don’t think its nearly as clear as others do that the Fed will mindlessly embark on further quantitive easing. The Fed is, after all, a data centric institution, and if it appears that the benefits of QE are not what was anticipated, and I believe that has been the case, they may decide that a third installment is not beneficial).

Below is my spreadsheet comparison.

Jun 2

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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 23

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Exhausting Market, Pan Orient releases news, Gold stocks take off (again…)

Man is this ever a difficult market to invest in. Stocks are up, stocks are down. Gold is down, Gold stocks are down, oh wait now gold stocks are up. Oil and oil stocks are down, now oil stocks are up, now they’re down again. Mortgage stocks are holding up, now they are way down, now they’ve recovered it all and then some. Its quite insane.

All of this is because no one has any idea what is going to happen if Greece leaves. Well first of all, no one has any idea if Greece is going to leave. And if they do leave, then no one has any idea what is going to happen next.

Dennis Gartman wrote the following today:

Panic then is in the air. Confusion then reigns. Liquidity trumps all other concerns and in that environment we can imagine almost anything happening. We can imagine the Yen moving two or three Yen… higher and/or lower. We can imagine gold moving $50/oz.… readily… higher or lower. We can “see” the dollar moving 2-3 EURs… higher or lower, and in that environment we wonder what trades, if any, make even a modicum of sense?

He’s right. It’s a crapshoot right now.

Its binary. If Greece doesn’t leave the Euro then we can pretend its all good for another few months or maybe a year. If Greece does leave the Euro then its equallypossible that A. Nothing much of anything happens, at least outside of the Eurozone itself or B. Complete chaos ensues around the world. You can probably make the argument that the delta between A and B is +/- 20% on the markets.

It just isn’t something that can be accurately priced in ahead of time. The consequences of Greece leaving are, to put it in the terms Donald Coxe has used, existential. Yet this is the problem that the market is struggling with and the result is a rollercoaster and Im tired of it.

Pan Orient News

In the midst of the chaos Pan Orient released news today that they sold their 60% interest in a number of their Thailand offshore land blocks for about $170M.

Pan Orient has operated working interest in 4 offshore concessions in Thailand: Concession SW1 (SW1); Concession 44/43 (L44); Concession 33/43 (L33); and Concession 53/48 (L53). This sale was for everything but the L53. TheL53 concession is the concession that had the recent discovery that first excited and then disappointed the market.

In total Pan Orient had 19MMbbl of proved and probable reserves in Thailand at the end of 2011. I wasn’t able to find where they break out the L53 reserves from the other concessions but if I use a rough ratio based on 2011 production, somewhere around 17MMbbl were sold. This puts the selling price at about $10/bbl. That’s not too bad.

On a flowing barrel basis, according to the Annual Information Form these concessions produced 1,306bbl/d in the fourth quarter of last year. That would make the selling price $130 per flowing bbl, which again is not bad.

These blocks have not been given much value by the market because they have had production problems and reserve writedowns. These blocks are producing from volcanic formations that are not commonly oil producing rock, there was skepticism in the market regarding whether these formations would be able to sustain production, and that skepticism was proven to be valid when Pan Orient took a technical revision of 12.5MMbbl on their year end reserve report. To get $170M for these concessions now is really quite surprising. I was shocked. Honestly I had to read the news release like 3 or 4 times to make sure I wasn’t missing something. The blocks sold don’t even include the block that has had the recent discovery. Yet here you had a $2 stock that had just sold a piece of their assets, and not even really the core piece, for about $2.80.

Almost as shocking was that the stock opened after the halt at $3.25 and traded as low as $3.10. Have we reached the point where cash is not even worth cash any more? If you do the math Pan Orient had somewhere around $60M in working capital (mostly cash) before this sale. This sale adds about another $160M (after netting out the working capital changes) or so. So that’s about $220M total cash. The stock has 60M shares fully diluted so that puts cash alone at $3.80 per share. If the market wasn’t so awful and everyone wasn’t worried the end of the world was nigh I think the stock would be have traded quite a bit higher. I added some shares at $3.25 (though to be clear, as I wrote before I had sold some shares late last week when I sliced 20% off almost all my holdings, so these shares were essentially just adding back about half of those).

Gold Stocks rising? Maybe? Could be? Or more wishful thinking?

Also today, gold stocks took off. In my umpteenth attempt to time the bottom for gold stocks, I bought a few more Newmont calls, added to my position in Atna, and added a position in OceanaGold. OceanaGold is a trade, pure and simple. If gold falters again and the stocks look weak, its gone. If not I will ride it back above $2.

The action in the gold stocks has been interesting. There has been 4 days over the past two weeks where Newmont has risen while gold has fallen. I figure that is about 4 more days than that has happened in the previous 6 months.

I have no idea what is going to happen to gold or to gold stocks next. What I do know is that it makes sense that gold will rise in the face of a declining and potentially collapsing Europe. The recent response of gold to the Euro decline makes very little sense to me. Lately it has been that if the Euro falls then gold falls about 2-3 times more. Basically the market is saying that if there is a collapse of the Eurozone you would be better off going long Euro and short gold than the other way around. Clearly this is not a sensible conclusion. Gold should be, after all, the negatively correlated asset class paper currencies. As the faith in paper currencies decline, gold should rise. Look I’m not a gold bug. I have no idea whether a gold standard would succeed or fail. But I do know that gold should act in opposition to currencies, and this certainly seems like a rather good environment to be betting against paper currencies. And so it is that I make a bet on a few gold stocks once again.

Exhausting…

I have to say though that the stress of these swings is getting to me a little. With respect to Pan Orient in particular, I was quite worried that because the market is so awful and everything has been tanking on even the slightest bit of bad news that if Pan Orient released bad results from their Indonesian well (which is what I figured was the reason for the halt) that the stock would crater further. I really felt relieved when I read the news release and it was anything but bad. However I was a little surprised with just how relieved I felt. It was one of those moments when you kind of look at yourself and think wow, I’m really quite stressed about all this aren’t I. Not surprising I suppose.

The only thing I know to do to have less stress is to have more cash. Cash is, after all, the negatively correlated asset class to market stress. I’m 35% cash right now. I have said before that I want to be 50% cash by the Greek Election. I stand by that, and will be working to get there by selling into any rallies.