Posts from the ‘Uncategorized’ Category

Sep 13

More on why you need to Consider the Position of French Banks to Buy Canadian Oil Stocks

Just a quick note before I head off for the day. The following was reported in the WSJ this morning.

“We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore,” a bank executive for BNP Paribas, who declines to be named, told me last week. “Since we don’t have access to dollars anymore, we’re creating a market in euros. This is a first. . . . we hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore.”

The full article is available here for subscribers. For non-subscribers, FT published some thoughts here.

I’m surprised that so far the market is taking this in stride.

The article goes on to explain the source of the concern.

BNP, Société Générale and Crédit Agricole together hold nearly $57 billion in Greek sovereign and private debt, versus $34 billion held by the largest German banks and $14 billion at British banks. And then there is Spain and Italy. French banks held more than €140 billion in total Spanish debt and almost €400 billion in Italian debt as of December, according to the latest figures from the Bank for International Settlements. If either of these governments were to default on their debts, their banking systems could collapse and take the French system along with them. BNP, Société Générale and Credit Agricole all say that their finances are in order and the market worries are unfounded.

In the event of a Greek default the French will need to bailout their banks just as the Germans will need to bail out theirs.

The problem is that the French banks are so large compared to French GDP. This is the question FT asks.

Now, let’s say the French government is forced to recapitalise its banking sector. What would that mean for its AAA rating?

It would not be good for it.

The situation in Europe is evolving and not in a good way. I think that the market opening up today presents another good opportunity to reduce risk.

Jul 14

4 Comments

Lydian International

Its honestly not my intention to write exclusively about gold stocks on this blog. But they do make up a significant fraction of my portfolio right now, and I think the gold stocks hold the most chance of significant upside in the short term. Yesterday is evidence to that. Gold stocks jumped to the upside. Now one never knows is such moves are breakouts or fakeouts, but we can only hope for the former.

As for Lydian International., its too bad I didn’t start my blog a few months ago. This post on Lydian would have been writing about the stock near its lows. Since then the stock has moved up 25%, including almost 10% yesterday alone. I still think its going to go much higher, but its always nice to catch the low end of the trading range before the breakout.

Recommended by Trusted Folks

At any rate, I’ve held Lydian International since late last year, when I was first introduced to the stock during a BNN interview with Rick Rule. Since that time it has been recommended here and here by Brent Cook, a geologist that writes a newsletter I used to subscribe to. I’ve gotten a lot of stock ideas by searching for and listening to interviews with Rick Rule and Brent Cook. That they both own Lydian is encouraging.

Looking at Lydian’s Deposit

As Rule describes in the interview, Lydian is a little gold company with a decent sized gold deposit called Amulsar, located in Armenia. The deposit is about 2.5Moz, its low grade, near surface, and will be surface mined using bulk tonnage techniques. The deposit that Lydian has have a number of things going for it:

1. Its a oxide gold deposit – oxide gold can be extracted from the rock using a heap leach process that requires very little in the way of capital costs. You don’t need to build a complicated mill circuit. To put this in perspective, if the deposit was not oxide the CAPEX to build a mill would probably be around $300M to $400M. In the 2008 scoping study it was determined by Golder that Lydian would have to spend less than $30M CAPEX to bring on a large enough run of mill heap leach operation to process a 3Moz deposit (see figure below).

2. The strip ratio looks like it should be quite low. The deposit sits right on top of a hill (see cross sections below).

This will make it much easier to get at the ore without having to dig through a lot of overburden first. That means lower cash costs. Below are the operating costs assumed by Golder in the scoping study.

3. The metallurgy looks favorable. I already mentioned the oxide nature of the gold. That’s great. But sometimes its difficult to get a large percentage of the gold out. Take a look at Aura Minerals as a contrasting example. Aura has struggled on and off with recoveries with each of their deposits. Albeit part of those problems has been the mix of oxide and sulphide ore, but it just goes to show how metallurgical complexity can ruin an otherwise good deposit. Lydian shouldn’t have that problem.

4. Permitting should be in hand by the end of the year.

What’s Amulsar Worth?

Using the numbers from the scoping study that the company performed, I worked out a spreadsheet of what the net present value of Amulsar is. Here is a list of the assumptions I used, followed by the results of the spreadsheet.

Total production is expected be 135,000oz per year to occur over a 15 year period
Strip ratio is 0.5 each year
Recovery is 92% each year
Mill grade is 0.9g/t each year
Operating costs are $4/t mining and $2.5/t milling (I checked these against some other heap leach ops to make sure they were reasonable).
The capex is $100M. This is conservative but it also includes $15M that they have to pay to Newmont and another $15M contingency I added on.
Taxes of 20% base plus 12.5% excess profit are included.

I looked at two scenarios. One with gold at $1100/oz and the other with gold at $1300/oz (I’ve attached the original spreadsheet to the end of the post).

You can see that the upside to the stock, even at $1100/oz long term gold price, is still fairly substantial. Also note that cash costs should be less than $400/oz. This would put Amulsar on the map as a very low cost producing mine.

A lot of brokerages seem to be using NPV with a 7.5% discount these days. If you use that discount rate the NPV rises to $6.82.

An Eventual Takeover?

Honestly, I think what will happen with Lydian is that they will be taken on before they get the mine into production. I think this will occur at a substantially higher price than what its currently at (even after the run up yesterday).

One possible candidate for a takeover is Newmont. They own 9% of Lydian shares. There are probably also a number of mid-tier producers that would be happy to take on 150Koz per year production with cash costs of less than $400/oz.

The company should have an updated Preliminary Economic Assessment out any day now. It was scheduled for June but these things are inevitably late. The PEA will (hopefully) go a long ways to confirming some of the numbers I have put forth here.

Appendix

This is the original spreadsheet that I used to calculate the NPV. Also included is a low case sheet. This was done when the resource Lydian had was only 1.4Moz, so the low case incorporates that smaller resource. Now that more gold has been found, the low case is not realistic.

Jul 9

Growth Slowdown but not Recession

I put a fair bit of stock in what the Lakshman Achuthan and the ECRI says. I have done well in following their forecasts. They are not always right, but they are right more than most. I try to put their calls in the context of what makes sense to me and what the market seems to be saying.

Lately Achuthan has been talking slowdown. But not recession.

http://finance.yahoo.com/video/breakout-25484663/is-the-economic-recovery-over-25892586

This is the sort of environment that should be good for the sort of stock that I invest in. I like to invest in commodity stocks and in special situation stocks that are undervalued. Stockpicking within both of these stock groups can be successful in a low growth environment. I will point to the second half of 2007 and the first half of 2008 as an example. The market went sideways to downwards during that time but there was enough interest in the market, and enough liquidity, to let a stockpicker find stocks that still did well.

What I need to watch closely is whether Achuthan begins to get even more negative, and signs that a recession become more clear. Because that’s an environment that no one with longs does well in.

Jul 3

What to Expect?

For this first post on my new blog, I’m going to take a minute to describe what to expect from subsequent posts. As I have described in the About section, I plan to use this blog to track the stocks I own and the reasons I own them. The next few posts are going to detail the research on those stocks that I own right now. After that, you can expect updates on those stocks as I revise and rethink my opinions, buy new stocks and sell old one’s.