Reminiscences of a Stockblogger

Jun 18

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.

Jun 12

Sold out of Equal Energy

I exited my position in Equal Energy last week. I took the hit.

I had originally bought Equal at a little over $4. I sold out the rest of what I owned last week at $2.85.

Why take the loss?

I decided that I would rather take the loss then wait for the outcome of the strategic alternatives process. I’m worried about the repercussions if that process does not end well. I’ve watched a few of these processes go badly in the last couple of months. The result to the share price wasn’t pretty. Take a look at Second Wave and Ithaca for a couple of examples.

In the Calgary Herald today there was an article on the struggling junior resource sector in the city.

There are 17 companies currently in strategic alternatives processes that are advertising and being broadly shopped. That’s about 65,000 boe/d,” he said. “And there are 35 asset packages, giving us another 76,000 boe/d.”

With this many companies on the selling block it is a buyers market out there. That doesn’t bode well for Equal.

A second concern is the Hunton. The Hunton is a solid producing asset when natural gas and natural gas liquids prices are decent. It is not as solid when prices are as weak as they are now. 70% of the NGL production from the Hunton is ethane and propane.

I have written before about my concerns with respect to ethane and propane. NGL’s are commonly talked about in the same breath as oil. They are all “liquids”. Except they aren’t; ethane and propane are not oil. They do not have the same end uses as oil and therefore can have a completely different supply/demand dynamic then oil.

Moreover, Conway propane prices, of which Equal has said the Hunton NGL pricing is based, have gone from bad to worse over the past couple of weeks. You can access the Conway weekly pricing along with other marketing hub pricing here. Some of the price decline at Conway has been due to short term bottlenecks that will go away, but not all of it. If you look more broadly at propane prices across the west they show a broad based decline.

I could be totally wrong about my decision. Equal could sell assets tomorrow, or even sell the whole company, and I would lose out for having sold.

The decision is really one based on risk and reward. The risk is that if Equal announces that they are no longer pursuing strategic alternatives the stock could drop suddenly and I could be left holding the bad. The concomitant risk is the ever present problems in Europe. The reward of course is that with the right sale the stock could rise to $4, or maybe more.

In the current environment I have decided to not take the risk and instead forgo that potential reward in the name of capital preservation.

Jun 10

Week 49 Update: Hedged Bets

Portfolio Performance

Portfolio Composition

For the last two weeks of trades, click here.

With the news this weekend that Spain will receive E100B to help recapitalize its banks, one has to think that the markets will open higher on Monday. However whether these gains can hold is an open question. One hundred billion euros hardly fixes Spain. It won’t bring down unemployment, or plug the budget deficit. It will do nothing to help persuade the Greeks to stay in the EU. All the problems that existed on Friday still exist. But now the Spanish banks have more capital.

My strategy for almost a year now has been that with regards to the Eurozone, it is best to sell first and ask questions later. What I realized from living through 2008 is that no one, or at least very few, can predict the consequences of a major shock to the financial system. I come back to the point that I have made before that in 2008 it took for two days after Lehman for the markets to begin to react to what the bankruptcy had unleashed. It was not anticipated. The consequences of systemic shocks are not at all clear beforehand.

Some would say that I am fighting the last war with my fears. They might be right. But I have yet to hear a pervasive argument as to why what is happening in Europe will definitely not create a systemic shock at some point. There are plenty of arguments as to why it should not. Greece is too small. Money managers and banks have known about it for a year. The banks have been capitalized through the LTRO (and now the Spanish bailout). The problem with these arguments is that they deal with the knowns, and the problem with a financial shock is with the unknowns. Moreover, there are very intelligent people, like the Michael Novogratz interview I posted, that believe the consequence of a Greek departure is an open question.

Staying Small

My response to the uncertainty has been to get smaller. I was smaller throughout the second half of 2011. When the LTRO led to a rally in stocks, I briefly got bigger again. This was, perhaps, a mistake. As I wrote in early January I didn’t believe that the effects of the LTRO would be much beyond the short term liquidity it provided. Yet I got caught up in the mini-bull that occured from January to March and took on more risk. The lastmonth and a half has been about taking that risk back off.

As an individual investor the primary advantage that I have is that there are no expectations of performance. I do not have to outperform the benchmarks and no one will be taking away the money I manage or my job if I don’t. The consequence is that the only thing keeping me from derisking in an uncertain environment is my own psychology. If I can warm up to the perspective that it is ok for others to make money while I am not for a time then there is nothing to prevent me from getting out and waiting it out until a time when the game appears to be more clear.

Its that last point that can be tough to follow. When markets are rallying and I am sitting in 30% cash, it can be difficult to swallow. Monday will undoubtedly be frustrating. Stocks I have pared back on will rally, and stocks I have not bought yet will be bid up further.

There are a number of companies I have been looking seriously at in the last couple of weeks, but that I am waiting to pull the trigger on until at least the Greek election has past. Xerox, AIG, MBIA are all companies I think will do well in the coming months. I just want to buy them at a lower price.

Waiting for a lower price is perhaps the most difficult thing to do with investing. But I don’t see the resolution in Spain as a lasting solution to the greater problems of either that country or of Europe as a whole. It certainly does nothing to remove the risk of a Greece exit. Until that risk begins to diminish, either from an exit or an integration, I am reluctant to take on too much risk myself.

And so it is that I plan to sit on my 30% cash position. Staying small.

Jun 6

8 Comments

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).