Reminiscences of a Stockblogger

Nov 21

Week 20: Back into Gramercy, Adding to OceanaGold

This week I finally got my order filled for Gramercy Capital at $2.75. Plan Maestro had another excellent write-up on Gramercy last month. CDO-2005 did relapse and fail its over-collateralization test. This may have something do to with the weakness in the stock. Still, the stock has a net asset value somewhere north of $5. And Bloomberg has had two articles in the past two months commenting on the likely sale of the company to private equity. I feel comfortable holding shares bought at this level and waiting for such a buyout.

While on the subject of US real estate, I began to review some of the regional and community banks this week. Community Bankers Trust, which released Q3 results last week, appears to be on the upswing. The stock remains extremely cheap based on tangible book value or earnings potential. I do not own any regional banks shares at the moment but it may be something worth looking at in the next (inevitable) downdraft.

I added to my position in OceanaGold on Friday. I have had a standing bid in for OGC.to at $2.21, and it was filled. This stock seems range bound between about $2.20 and $2.70. I’m not sure why it cannot break higher. I posted Sunday about the cash generation capabilities of Aurizon Mines. I could have just as easily written about OceanaGold. The only difference between Aurizon and OceanaGold is that Aurizon can continue to generate cash at lower gold prices. In addition, OceanaGold’s costs get misinterpreted to be higher than they actually are because

so much of them are being expensed right now, as opposed to capitalized.
They are in NZD, which has been perhaps the strongest currency in the world this year

Absent these two factors, the first of which is really just smoke and mirrors, and the stock would be trading substantially higher. As it is I am picking up a company with growing production, likely lower costs (the NZD is down from 83 to 78 so far this quarter), and doing it at the lower end of the trading range.

The last trade I made did not show up in the practice account but will next week. On Friday I sold 1/3 of my position in Arcan and planto use the proceeds to buy Midway. I have nothing negative to say about Arcan. They appear on-track. Nevertheless, Midway is a cheaper stock right now, especially after the recent steep drop. Midway also appears to be a good takeover candidate to me, so I don’t mind being diversified in case of such an event.

Nov 20

A Rick Rule Example: Aurizon Mines

“Top mining companies are finally generating dramatically higher profit margin. Free cash flow is now “gushing” and will double in the next year as huge capital investments by the majors pay off.

That quote comes from a recent interview with investor Rick Rule.

The observation that gold equities are undervalued has been coming from a number of fronts of late. Donald Coxe, David Einhorn, heck even Cramer was touting gold stocks a few months ago before his favorite, Agnico Eage, ran into stability issues at Goldex and scared Cramer silly. Rick Rule said the following recently about the attractiveness of gold equities:

“There have only been two times in the past ten years when, from our own calculations, gold and silver equities were attractively priced relative to the metal, that being 2001 and 2008. We are back strongly in that territory.

I believe if current gold and silver prices hold up, and I believe they are actually going to increase, that we are going to see a rather dramatic jump higher in the prices of select gold and silver equities on a go-forward basis.

The point, made best by Rule but also by others, is that gold miners are finally in the business of making money, not just producing gold. A case and point of Rule’s comments: Aurizon Mines.

Here is a company that gets no respect from the market. The company can release an excellent quarter, as they did two weeks ago, and the market will yawn. If the price of gold falls a few bucks on any given day, the stock will crater 3% or more. You’d think the company was some sort of fly-by-night chop shop given the way the market treats their paper. Yet nothing could be further from the truth.

Below is Aurizon’s free cash flow and cash on hand on a quarterly basis. Free cash flow is cash flow from operations less capital expenditures. Keep in mind that at its current price of $5.80, Aurizon has a market capitalization of $940M and no debt.

The free cash is allowing the company to grow its cash on hand significantly every quarter.

As the above figure points out, about 20% of Aurizon’s market cap is in the form of cash on the balance sheet. The enterprise value of the company is only $740M after subtracting this cash. Annualizing the last four quarters, the company is trading at about 9x its free cash flow generated. That would be using an average gold price of about $1500/oz.

If you annualize the third quarter, where the realized gold price for Aurizon was $1695/oz, the company is generating $104M in free cash a year. This puts the companyvaluation at a little less than 7.5x free cash flow.

It is important to recognize that what I am talking about here is free cash flow. This is different then the metric that is often touted by the mining analysts in their evaluations. They focus on the operating cash flow, which ignores any capital expenditures a company has. I’ve chosen to look at free cash because:

As I pointed out last week in my comparison between Jaguar Mining and Aurizon, companies generating similar amounts of operating cash flow can have drastically different expenditures required to maintain that level of cash flow.
Free cash is what ultimately goes to the bottom line and increases the cash position of the company.

If I was going to look at cash flow from operations for Aurizon, here is what I would find. In the estimates below I have removed the exploration expense to get a true picture of cash flow from operations. Exploration expense is a tricky beast, because a company can choose to expense or capitalize the cost, which can work to obscure comparisons. I prefer to leave it out when talking about operating cash flow (though I left it in when we talk about free cash).

In the last four quarters Aurizon generated $111M of operating cash flow (6.6x)
Third quarter annualized operating cash flow was $136M (5.4x)

On either metric the equity is cheap.

So Aurizon is cheap on a basis of four quarter trailing gold prices (~$1500/oz) and certainly on the basis of current gold prices $1700/oz. I am certain that if you did the same analysis for other gold companies you would draw similar conclusions. Some would come out astoundingly cheap. OceanaGold comes to mind as a gold producer priced particularly inefficiently.

The next step I want to focus on is how Aurizon looks on a NAV basis. Cash flow is the metric to evaluate current profitability, but to fully appreciate all the assets of the company, and the productive life of those assets, you have to look beyond the current cash flow and into the expected cash generated in the future. But I will leave that for a later post.

Nov 16

Bad Timing

Sometimes your timing is so bad that you have to wonder if there is some intervention!

Shandong Gold Group Co., parent of China’s second-largest gold producer by market value, made a $785 million offer to buy Jaguar Mining Inc. (JAG), two people familiar with the deal said.

Shandong bid $9.30 for every Jaguar share, said the people, who asked not to be identified because of the information is confidential. That’s 73 percent more than Jaguar’s closing price of $5.39 yesterday in New York. The company has 84.4 million shares issued, according to data compiled by Bloomberg.

Full story here.

Nov 14

1 Comment

Atna Releases Q3 and Moves Ahead in a Big Way

I had been waiting to post more on Atna until I finished the analysis of Pinson I have been working on, but today Atna released their 3rd quarter results today and they were strong. I bought some more stock on the results, and I wanted to post a summary of what the quarter was like and why things are looking good for the company.

Atna’s one operating mine, the Briggs mine in Nevada sold 9,700oz of gold. This was 2,000 oz more than Q2. Production has been increasing steadily for 3 quarters now.

Cash costs as stated on the income statement were stable the last two quarters, albeit still fairly high, at $924/oz of gold sold (Atna calculates costs based on produced gold and also subtracts silver credits so the cash flow number that will come out with the MD&A will vary somewhat from my estimate).

What is most impressive about the quarter is the cash generation of Briggs. The Briggs mine produced $7.4M of operating cash flow. Below is the corporate cash flow generation of the company.

The cash generation of the company is going to go a long ways to financing the development of Pinson. Capex spent in the quarter jumped substantially, suggesting that Atna has already moved ahead with starting mine development.

Even with the expenditures the company ended the quarter with a cash position of $10.5M

Atna is in the enviable position of having a stable producing mine that is throwing off enough free cash to fund the development of their star project, Pinson. I’ll write more about Pinson shortly, but even ignoring that eventual production, the Briggs mine is now producing at a rate of almost 40,000 oz per year. The company has a market cap of a little over $100M and with debt only $120M (see financial structure below). A 40,000 oz producer trading at $100M is a reasonable deal in its own right.

If you add Pinson to the mix, not even to mention the potential of a 3rd mine in a few years at Reward, you have the makings of a very cheap stock. Given the growth prospects of the company, if you believe in a rising or even stable price of gold, you have to like what you see.