Reminiscences of a Stockblogger

Feb 26

Atna Resources, Coastal Energy and the 80-20 rule

I do not know if an 80-20 rule has ever been expressly stated for a portfolio. However I do feel that such a rule exists. Anecdotally, I am pretty sure my portfolio follows an 80-20 rule of sorts. 20% of the stocks I own are responsible for 80% of the gains. Or thereabouts anyways.

If you take a look at the gains in my current online portfolio you will notice the following:

Atna and Coastal make up a massive amount of my current gains.

Albeit this is far from scientific but it is not the first time that I have noticed that I make all my outperformance from a couple of stocks. In 2010, I’m pretty sure that most of my gains were due to Tembec, Mercer and Avion Gold, all of which tripled or better. In 2009, it was Western Canadian Coal, Grande Cache Coal Mirasol Resources and Teck Resources (call options), all of which rather insanely increased some 5x to 10x during the year. 2007 and the first half of 2008 was all Potash and Agrium (in the second half of 2008 nothing went up but puts and the dollar).

A couple of points come to mind:

1. Do more of what’s working

First of all, you have to know when you’ve got a winner and when you have a winner you have to add to it. I have done this of late with Atna. I bought more Atna this week at $1.30 after having bought more at $1.15 after having bought more at $1 after having bought more at 90 cents. I have bought it all the way up. I did the same thing with Coastal (though that acccumulation was unfortunately interrupted by the European fiasco) during the first half of last year, as it ran from $4 to $10.

Of course the obvious question is: Why not just buy more of the position at the start? It’s a great idea if you know the winners in advance. Unfortunately you don’t. At least I don’t.

I come up with lots of ideas. Some turn out to be really good ideas. Some turn out to be so-so. I’ve gotten better at it over the years, so less turn out to be full-on stinkers. Yet I still get a majority of so-so ideas that do nothing, and a couple winners that go to the moon. And I generally have very little idea at the beginning which one an idea is going to be.

Take for example PHH right now. This one feels to me like it could be the next big winner. It’s worked out so far. I have been adding some on the way up. But do I know whether the stock is going to be $25 or $12 6 months from now? Nope. It could go either way. Nevertheless when it hits $16 I will add more. And when it hits $18 I will add more again. If then, it gets to $25 it will be a big winner and I will be talking about PHH like I am talking about Atna and Coastal. On the other hand, if PHH goes back to $12, I will likely carry a much reduced position in the stock, if I am not out entirely.

2. Don’t give stock tips

This leads me to my second point. Giving advice on an individual stock, such sharing a stock pick with a friend or relative, or putting the name up on an investment board, is dangerous when taken out of the context of the portfolio as a whole. My portfolio has had between 12 and 20 stocks in it over the last 8 months. Unless I know which two or three are going to be the big winners (I don’t) then trying to give someone a tip is a losers game. There is an 80% chance (give or take a few percent) that I am going to give them a loser (or at least not the big winner)

Feb 26

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Back into Geologix

I was out of Geologix for a couple of days (part of my sacrificial purge) but I decided to jump back in this last week after my thoughts on the liquidity situation crystallized. If we are indeed going to be liquidity driven for a time, then you might as well own the stocks most sensitive to it.

The basic premise behind Geologix remains what it was when I first bought the stock a few months ago:

The PEA that was published on Tepal a few months ago put the NPV5 of the project at $412M based on $1000/oz gold and 2.75/lb copper. Geologix has $14M of cash on hand. With 145M shares outstanding, the market capitalization of the company was $28M at my entry price of 20 cents. That puts half the market cap in cash and the other half in a project with an NPV that is nearly 10x the value of the company. Something has to give here.

The market capitalization has increased since that time but its still a fraction of the overall NPV of Tepal. In other words, there remains plenty of room for the speculative elements to move the stock higher.

Tepal remains a fairly high start-up cost, fairly high operating cost, deposit that will only go ahead at a decent copper and gold price. Thus Geologix is acutely sensitive to the market perception of liquidity (it needs money to build the mine) and the future (Geologix needs high metal prices to make the mine economic). Whether it all comes together an the mine gets built is anybody’s guess, but so long as the liquidity is a flowin I believe the market will be inclined to look positively on the potential, while ignoring the risk.

New Drill Holes

On February 16th Geolgix announced the results of infill drilling at Tepal. There were some higher grades in these result (though we are still talking about extremely low 0.7-0.9 g/t grades). Below is a cross section that identifies a couple of the higher grade holes against the lower grade historic holes.

As you can see from the intercepts, the deposit does hold together rather well across a long length. In addition, the North deposit, where the mining will start, takes well to the shape of a pit. If it wasn’t that the grades were so low, it would be quite a nice little deposit.

The higher grades in these recent holes do perhaps bode favourably for better economics early on. That could help the NPV of the project. As stated by the CEO of Geologix in the news release:

“We are pleased with these latest results as eighty (80) of the last ninety-one (91) holes being reported encountered mineralization equal to, or greater than the Company’s internal North Zone cut-off and represent the final data required to complete the upgraded resource estimation currently being conducted by Micon International Limited. Additionally, multiple holes drilled within the central portion of the North Zone returned intervals of gold and copper grades well in excess of the 2011 Preliminary Assessment North Zone’s mine plan average grade of 0.37 g/t gold and 0.24% copper. These elevated grades found over substantial intersections support the potential for the North Zone to host a sizable higher grade starter pit which could positively impact Tepal’s production profile, specifically within the critical early years of the project’s mine life.”

Bottom Line

I’m still unsure whether Tepal will ever become a mine or not. It just seems like such a low grade. It will inevitably put the company on a knife edge between being profitabilty and cost overruns, and wil require an able operator with a strict eye on the budget. Every mistake will be amplified. Nevertheless, the mine is not yet built and so that is not really my concern. In this period of liquidity, I am willing to put some dollars into Geologix on the expectation that the market will push the stock back up to its pre-euro-crisis levels in the 60 cent range. This does not seem unreasonable given that the case can be made that in a perfect world Tepal would be worth $3 per share. Its kind of like Greece and the rest of Europe: why worry about tomorrow before its here?

Feb 20

1 Comment

Week 33: Admitting the possibility of a bull market

Portfolio Performance

Portfolio Composition:

Weekly Trades:

Posts this week:

Can’t Stay Away: Arcan Resources and Second Wave Petroleum

PHH, Newcastle Investments and Mortgage Servicing Rights

Shadow Inventory and how an improving US Economy begets an Improving Housing Market begets and Improving US economy begets….

PHH and one way to bet on a turn in the US economy

Jumping on the Bandwagon

As I wrote about earlier, I am coming around to the view that the US economy will perform reasonably well over the next few quarters.

Now let us not confuse the short term with the long term here. I don’t for a moment think that the longer term issues in the US have been solved. The situations in Europe, in Japan, and in the US are very similar. There are massive storm clouds on the horizon, and those coming storms are causing the winds to pick up and the boats of the economy to waver in the seas. But the storms themselves have not yet reached us, and so while we may have bouts of turbulence brought on by rising winds, or even, as in the case of Europe in November, sudden gusts that threaten to capsize the rigs, the actual storms are still a little ways off in the distance, far enough that we can pretend at times that they are not there.

Now appears to be one of those times.

The LTRO seeming to have stabilized the banks of Europe in the near term.

TED Spread:

Italian 10 year:

Spanish 5 Year:

The economies of the European periphery, while entering what has to be an inevitable and deep recesion, are still far enough away from the consequences of these (maybe 2-3 more quarters) that we can ignore that more bailouts or a mass exodus from the euro is close at hand.

Finally, there can be no doubt that the numbers in the US are picking up some steam of late. How long will this continue? Perhaps not too long, but who is to say.

More specifically, the housing sector has been beaten to such a pulp in the past few years, and the stocks involved have taken such a beating, that even a stabilization at these low levels (both prices and activity) may lead to a substantial uptick in the share prices.

Always on the look-out for a bull market

So while I don’t really believe it can last over the long term, that doesn’t mean I can’t take advantage of it. In the absence of the arrival of a true storm (like what happened in 2008), there is always some bull market somewhere. You just have to find it.

Where am I looking?

US Regional and Community Bank stocks
Mortgage Servicing companies
Oil stocks with large resources that can take advantage of Hz-multifrac technology to exploit those fields

I still don’t know what to think of gold. There is a bull market out there, but only for select stocks (see Atna and Argonaut Gold for a couple of examples).

Buying into Newcastle and buying more into PHH

As I wrote earlier, I believe that the mortgage servicing business provides a unique opportunity right now, and while I have started a position in Newcastle Investments in response to that, I expect to increase that position substantially over the coming weeks. I have also turned PHH Corporation into one of my largest positions.

I’ve already talked about both of these investments ad nauseum in the last couple posts so I am not going to reiterate those theses here. What I will say is that I am becoming more and more cozy with the mortgage market bottoming idea and I would expect that you will see more of my capital make its way over to this market in the coming weeks. I am already looking for an opportunity to exit OceanaGold and reduce my position in Aurizon Gold. The proceeds are likely to either go into PHH or NCT, or into another mortgage leveraged corporation that I find.

Feb 20

Can’t stay away: Arcan Resources and Second Wave Petroleum

If you remember, I sold both Arcan and Second Wave a week ago Friday. That lasted about a day and a half.

Sometimes selling a stock can make you think about it more clearly. Such was the case with both Arcan and Second Wave. In fact I spent last weekend working through their prospects. I hope to post on this soon, but for now, let me just say that the work reiterated to me just how much potential these two companies have.

The main reason for not owning both of these Beaverhill Lake producers is because they are spending a lot more then they are taking in.

They really have been spending a lot more than they take in. The original reason I reduced my position in both companies last fall was because with Europe appearing on the precipice, being invested in companies in need of capital seemed like a poor proposition.

However Europe seems to be back on the back burner. For Arcan and Second Wave, spending a bit more then you make is not such a bad thing anymore. It can actually be perceived as a good thing; growth and potential and all that jive.

The reality is that the prize at Swan Hills continues to prove itself up, and the NAV of both companies will likely continue to rise as they drill more wells.

Perhaps the kicker for me was the news release put out by Second Wave last Monday. In the release SCS announced a number of new boomer wells in and around the existing boomer wells that they (with the JV with Crescent Point) and Coral Hills have been drilling. But more importantly, SCS announced the success of a well drilled far to the south of this existing “sweet spot”:

[Second Wave] completed its 100% working interest 01-17-062-10W5 Beaverhill Lake light oil well in south Judy Creek with an initial two day flow test rate estimated at 800 bbl/d of light oil further delineating the Company’s south Judy Creek land base.

The 01-17 well (big red circle) is well to the south of the existing sweet spot and it opens up a whole mess of land in between. A lot of those southern sections are 100% interest for SCS as well:

While we are somewhat away from proving up the sections in between, the 800boe/d success gives me a lot of confidence that they will be proved up over time.

I ran the cash flow numbers on 2012 based on their expected average production of 3,850 boe/d and $95 oil and I figure they can generate around the $85M mark of cash flow. I will post that cash flow analyis more thoroughly in a later post. For now, suffice to say that my estimate compares favorably to the $85M CAPEX estimate that the company had in their February presentation. Perhaps the days of spending in excess of what you make are soon to be over for Second Wave?

Future Catalysts?

I see a couple of catalysts for Arcan and Second Wave that made me want to stay out of the stocks.

I think that the biggest catalyst to get me back into both stocks in short order was the spector of the upcoming reserve report of both companies. I suspect that the reserves for both Arcan and Second Wave are going to show some excellent numbers, potentially with NPV10 estimates decently above the current share prices.

Arcan has the additional catalyst of the waterflood of Ethel. I posted late last year how quickly Ethel production was declining without waterflood. I wrote:

If you look at the average Ethel and DMU production curve, you can see the effect of the waterflood taking place at DMU versus Ethel. Ethel wells do appear to stabilize at a lower level. The following chart looks strictly at horizontal Ethel and DMU wells drilled after Jan 1st 2010 (I didn’t want to confuse things by adding data from old completions) averaging out the monthly production for all wells at that point in their decline. Producing day rates are used.

Now it has to be pointed out that the post 6 month data for Ethel is a single well (the 10-27). So we are not dealing with a large dataset here. Still, I think the conclusion can be made that Ethel wells drop off quicker and stabilieze at a lower rate without the waterflood.

Presumably with waterflood one would expect that Ethel type curve would shift up to where the DMU curve is. One mitigating factor to this improvement might be reservoir quality. The sands at Swan Hills have often been thought to thin to the south. On the other hand, Arcan’s completion techniques have improved quite dramatically lately with the move to the larger acid fracs (another detail that was provided in the Q2 MD&A). This is witnessed by the significantly higher IP30 and IP60 results produced by these presumably thinner sands at Ethel. So this may help the Ethel wells outperform.

Its a bit of a guessing game until you get some data.

So what does it mean to production? Two things. First, with the waterflood implemented you would expect that the existing wells at Ethel would deliver a higher rate. I’m going to speculate that, on average, this would be about 40bbl/d for the post 2009 drills. This would add about 350bbl/d of production to Arcan.

Since that time Arcan has drilled a number of additional wells at Ethel. I would estimate that once in full operation, if the 40 bbl/d per well increase number holds up one could expect around 500 bbl/d extra production from Ethel. But it could be more, and at least in the short run, likely will be more.