Posts tagged ‘gold stocks’

Oct 26

A couple of Gold Stock Positions (AR.to, TMM.to)

I’ve made a number of moves in my portfolio over the last couple of weeks and in a few cases the stocks I’ve bought have already started to move so I thought I’d dedicate a few short posts this weekend to talking about the changes before things get any further.

A couple of Gold Stock Positions

I haven’t been in any gold stocks since the spring. When I sold out of my positions, I gave the following state of the union.

But the path gold takes to get there could be rocky. In particular, its clear that the market believes that quantitative easing has worked. And indeed, the US economy is getting better. Whether the economy, and the financial markets, can continue to improve without massive injections of money is an open question. But until that question is answered, which could be 6-12 months away, the working assumption appears to be that it will, and that is going to be bad for gold.

A number of reasons led me to foray back into gold stocks last week. First of all, the debt ceiling appeared to be and finally did get settled on what seems to be a pretty temporary basis. Second, Janet Yellen was announced as the Fed Chairman beginning next year. Third, the latest economic data for the US economy is looking pretty milk-toasty, and fourth, the gold stocks I look at were at or lower than the levels in June and thus were reflecting none of this. I tweeted the following on October 15th.

Jul 28

5 Comments

The OceanaGold Gamble

I first bought OceanaGold at $1.80 at the end of May. I originally bought it strictly as a trade.

The price subsequently moved up and I added to the position twice, first at $1.98, and later at $2.14. You’ve heard me say it before – do more of what’s working and less of what doesn’t.

Well sometimes that backfires. When gold got pummeled in mid-June, my position in OceanaGold got hammered back below $2. It happened so quickly that I did not have time to react, and I ended up losing all of my profits and a little more on top of that.

Such is the difficulty of owning a trading stock with a secular thesis.

From that time until this week OceanaGold didn’t do much of anything. It sat in the 1.80’s, would briefly rise into the 1.90’s but never for more than a few days. I held, not wanting to sell near the low without justification and not having the time to do the work I needed to do to get that conviction. But over the weekend (last weekend), I stepped through their recent reports and presentations, made a few runs at their numbers, and I decided I might just stick this one out.

Two reasons to stick it out

OceanaGold had a terrible first quarter. Costs were up and above $1000 per ounce. Production was down over 20%. The mines that it is currently operating in New Zealand have been struggling with costs pressures for some time now. But the first quarter was particularly bad.

Part of the bet I was making when I bought OceanaGold at $1.80 was that the first quarter was an aberration. And, having stepped through that first quarter in some detail now, while I don’t expect costs to drop back to pre-2011 levels, I do find it plausible they they fall back into the low $900’s an ounce. Similarly, production could easily return to 60,000 ounces plus per quarter. The progress made in its second quarter earnings release on Thursday suggests this just may be in the process of playing out (note that I wrote most of this post before the Q2 earnings were released so I won’t be talking in detail about them).

The other part of the bet on OceanaGold is the expectation that the company will be reevaluated for the better once the Didipio project begins to produce substantial ounces. Because of the by-product credits from copper production, Didipio will produce gold at negative cash costs for the first couple of years.

Let”s step through this two-pronged thesis in more detail.

Production Costs should come down

Productions costs on a per ounce basis were bad in the first quarter and they have been rising for some time now.

When you look closely at the rise in production costs over the last number of quarters you can attribute the rise to essentially 3 factors:

Rise of the New Zealand Dollar
Fewer Ounces produced
Changes in the amount of the total costs that can be amortized as pre-stripping

I was quite astonished by just how much of the company’s costs increases could be attributed to these 3 factors. In fact all of it. If you look at the total operating costs in New Zealand dollars over the last few years, including costs that were amortized as pre-stripping, they are remarkably flat.

Note that I did this work before the Q2 earnings release so it is not included in the chart.

What the chart illustrates is that this a story of a company dealing with cost pressures due to their local currency appreciating and the natural evolution of the mine plan with changing grades and changing strip ratio.

Looking ahead, I don’t expect much further appreciation of the New Zealand dollar. With a global slowdown at hand, it seems reasonable to expect the NZD to weaken against the US dollar. The fewer ounces produced has been a function of various issues that occurred in Q1. There were issues at the Macraes open pit, at Fraser underground and at Reefton. The good news is that it appears the company made progress on all fronts in Q2 (production in Q2 was 55,000 ounces versus a little over 50,000 ounces in Q1) and expects production back to normal (which would be around 60,000 ounces per quarter) by Q3. As the above chart of total costs indicates, costs per ounce are primarily a function of ounces produced. A return to 60,000 ounces per quarter would show a drop in costs to about $900 per ounce.

Didipio

The other part of the bet on OceanaGold is the expectation that the company will be re-evaluated once the Didipio project begins to produce ounces. Because of the by-product credits from copper production, Didipio will produce gold at negative cash costs for the first few years and over the life of the mine cash costs will be substantially lower than the existing New Zealand operations. This is going to dramatically bring down corporate cash costs. I expect that analysts will be more inclined to give OceanaGold an average mid-tier multiple once their cash costs settle in-line with other mid-tier producers.

In the table below I have estimated the impact of Didipio on corporate cash costs in 2013 and 2014.

By way of analogy, consider Agnico Eagle. In the first quarter (again I wrote most of this post before second quarter numbers were out) Agnico recorded cash costs of $594/oz. Agnico’s largest mine in terms of gold production for the quarter was Meadowbank, which produced 79,000 ounces for the quarter. Meadowbank produced those ounces at costs of $1,020 per ounce. Taken alone, Meadowbank would be a high cost producer and receive a low multiple. But Agnico offsets the high costs at Meadowbank with costs of $278/oz at Pinos Altos and $216/oz at LaRonde.

Looking at the latest BMO report on Agnico Eagle, I note that the company gets a cash flow multiple of 10x. This compares to OceanaGold at 4x cash flow excluding Didipio and 2x cash flow including it.

Clearly, there is room for an upside re-evaluation.

Gold Price

The last factor that is going to determine the future direction of the share price is the price of gold. I have some thoughts there, but I am not going to go into them in detail here. Suffice it to say that this is the piece of the puzzle that I am least confident about. Its unfortunate that I am so uncertain about whether gold will continue to rise or whether it will stall out and potentially fall. Because given the other factors at hand, OceanaGold would seem to be a good place to build a large position at today’s prices.

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).

Below is my spreadsheet comparison.

May 10

Gold Stock Reversal

I am not a technician or a chartist and as a general rule I don’t pay much attention to that sort of thing. However I have learned to respect intraday reversals, and I have especially learned to respect them for gold stocks.

For whatever reason, I have seen more gold stock rallies fail after an intra-day reversal to the downside, and I likewise have seen more gold stock pummellings end after one to the upside.

Yesterday we had a very nice reversal in the price of many gold stocks. Morevoer, the reversal was led by the leader of the gold stocks, Newmont Mining. Newmont traded almost as low as $44 before breaking out to the upside and closing at $46.50.

Newmont was not the only gold stock to reverse. Of particular note for me was that Atna Resources had a hue reversal on the day, getting as low as $0.95 cents before closing at $1.10. Another stock that has shown the resilience of a leader, Argonaut Gold reversed from a low of $6.80 to close at $7.52.

It still remains to be seen whether this reversal holds. If it cannot hold through today and tomorrow its nothing more than a fake out. But given the level of selling that has overwhelmed the sector, it feels right to me for a change. Investors who have remained heavily into gold stocks have been absolutely pummelled, and yesterday, with the price of gold breaking down below $1600 per oz and with gold stocks opening down big in most cases, it feels a like a capitulation moment to me.

I have owned Atna Resources through the slaughter and ithas held up relatively well. I added to that position yesterday after it became clear it was reversing from its lows. I also added a position in Newmont. This could be considered to be a trade. Newmont at $44 does not seem like a terribly risky endeavour to me. Finally I added to my position in Golden Minerals and I added a position in Lydian International. Of interest, Lydian did not reverse higher as strongly as many of the other juniors. I suspect this is just a short term anomoly. At any rate I will be monitoring all of these positions closely and if the reversal fails I will likely be bailing out of Newmont, Lydian and probably Golden Minerals (though at $5.30 its hard to see this stock getting very much cheaper).