Shiny metal in a box
That is the limit
Showing posts with label gold. Show all posts
Showing posts with label gold. Show all posts
Monday, July 27, 2020
Thursday, March 31, 2016
Richmont Mines Hangs In For Long Haul
I am impressed with Richmont Mines (US ticker RIC). Their longevity and profitability in 2015 were rare in a junior resource producer. The main challenge ahead is to replace mined reserves, either with new discoveries or with better engineering to make discovered resources viable.
The management team must be doing something correctly. Their mining engineer CEO has been around other producing companies. It's nice for once to see actual mine operators running a mining company instead handing the place over to former consultants or investment bankers. Their other key people have been around the block in the mining sector for a while.
The company has two active mines in Canada, plus other properties in various stages of exploration and development. The PEA for the Island Gold mine and the latest 43-101 for the Beaufor mine are on Richmont's website. My problem is that the PEA is abbreviated and the 43-101 is in French. Someone in charge over there needs to show me the long forms in my own language. I prefer to examine complete primary source documents in English. I am going to take the company's word that independent parties have verified its 2P reserves and ore grades.
Results in recent years aren't stellar compared to the larger world economy, but are probably better than countless mining companies facing bottomless financial holes during a bear market for metals. Profit margin at 4.72% (from Yahoo Finance today) isn't great, but plenty of resource sector investors would like to see that kind of money after holding other beaten-down mining stocks. Check out Richmont's numbers at Reuters. Its five-year EPS growth rate of -18.39% shows that even solid operations can't hold back a bear market in metal prices. Its five-year ROE and ROA are both below one percent, which are also below their industry averages.
Richmont Mines is somehow surviving when its larger competitors are struggling and the sector's juniors are cratering. Someone has to occupy the middle of the market.
Full disclosure: No position in Richmont Mines at this time.
The management team must be doing something correctly. Their mining engineer CEO has been around other producing companies. It's nice for once to see actual mine operators running a mining company instead handing the place over to former consultants or investment bankers. Their other key people have been around the block in the mining sector for a while.
The company has two active mines in Canada, plus other properties in various stages of exploration and development. The PEA for the Island Gold mine and the latest 43-101 for the Beaufor mine are on Richmont's website. My problem is that the PEA is abbreviated and the 43-101 is in French. Someone in charge over there needs to show me the long forms in my own language. I prefer to examine complete primary source documents in English. I am going to take the company's word that independent parties have verified its 2P reserves and ore grades.
Results in recent years aren't stellar compared to the larger world economy, but are probably better than countless mining companies facing bottomless financial holes during a bear market for metals. Profit margin at 4.72% (from Yahoo Finance today) isn't great, but plenty of resource sector investors would like to see that kind of money after holding other beaten-down mining stocks. Check out Richmont's numbers at Reuters. Its five-year EPS growth rate of -18.39% shows that even solid operations can't hold back a bear market in metal prices. Its five-year ROE and ROA are both below one percent, which are also below their industry averages.
Richmont Mines is somehow surviving when its larger competitors are struggling and the sector's juniors are cratering. Someone has to occupy the middle of the market.
Full disclosure: No position in Richmont Mines at this time.
Wednesday, February 10, 2016
The Haiku of Finance for 02/10/16
Gold back on the rise
Dollar tension lights up price
Bricks flow back to vaults
Dollar tension lights up price
Bricks flow back to vaults
Financial Sarcasm Roundup for 02/10/16
Today is Ash Wednesday in the Roman Catholic Church. I am no longer a member of any religion so I don't need to attend church services. My sarcasm never went over well during prayers anyway.
Europe wants the G20 to target growth. Got it. One continent's finance people want the world's leading finance people to decouple global growth from China as quickly as possible. Panic is not yet in the air. The real panic comes when the world's bifurcated economies - one for financial flows, one for real goods - trend down together. The rest of the world (ROW, in money manager parlance) can't get China off its balance sheet fast enough.
Coal power plant cleanliness gets a breather, so to speak. The charred, hard carbon miners have taken a beating for years thanks to the world's zeal for lower emissions. I don't see how the world can substitute for metallurgical coal and coke in making steel. China's crashing demand has put the lid on steel demand anyway, so even coal's industrial use faces dark days. It would take a lot more backyard barbecues for charcoal demand to make up for declining coal power.
Gold prices respond positively to the Federal Reserve's interest rate hints. Gold traders and retail investors view the Fed's experiment as a mistake, proving they are a reactive audience. The Fed's "layer cake" message tastes bitter to gold bugs stuck in old views of monetary tightening. The new era of a ginormous Fed balance sheet that constricts traditional stimulus means gold traders missed the news about what normal interest rates now mean. A normal situation is where the FOMC makes any change, in any direction other to zero.
Tesla Motors lost money again but its shares kept rising. The more cars they sell, the more money they lose. Investors are really stupid to think that a money-losing car company will be worth more. There is something very wrong with Tesla's inability to control both its fixed costs and variable costs. Software entrepreneurs need a whole new set of skills before jumping over to hardware.
I would like to start a religion that celebrates Cash Wednesday. It would be an opportunity for me to stand up and wave cash around to the applause of my congregation.
Europe wants the G20 to target growth. Got it. One continent's finance people want the world's leading finance people to decouple global growth from China as quickly as possible. Panic is not yet in the air. The real panic comes when the world's bifurcated economies - one for financial flows, one for real goods - trend down together. The rest of the world (ROW, in money manager parlance) can't get China off its balance sheet fast enough.
Coal power plant cleanliness gets a breather, so to speak. The charred, hard carbon miners have taken a beating for years thanks to the world's zeal for lower emissions. I don't see how the world can substitute for metallurgical coal and coke in making steel. China's crashing demand has put the lid on steel demand anyway, so even coal's industrial use faces dark days. It would take a lot more backyard barbecues for charcoal demand to make up for declining coal power.
Gold prices respond positively to the Federal Reserve's interest rate hints. Gold traders and retail investors view the Fed's experiment as a mistake, proving they are a reactive audience. The Fed's "layer cake" message tastes bitter to gold bugs stuck in old views of monetary tightening. The new era of a ginormous Fed balance sheet that constricts traditional stimulus means gold traders missed the news about what normal interest rates now mean. A normal situation is where the FOMC makes any change, in any direction other to zero.
Tesla Motors lost money again but its shares kept rising. The more cars they sell, the more money they lose. Investors are really stupid to think that a money-losing car company will be worth more. There is something very wrong with Tesla's inability to control both its fixed costs and variable costs. Software entrepreneurs need a whole new set of skills before jumping over to hardware.
I would like to start a religion that celebrates Cash Wednesday. It would be an opportunity for me to stand up and wave cash around to the applause of my congregation.
Tuesday, September 01, 2015
Seabridge Gold Has A Bridge To Two Projects
Seabridge Gold leaves me puzzled. It has been around for many years, long enough to have discovered and developed significant mines by now. The stock's profile page on Yahoo Finance shows the top executives making serious six figures. Executive pay is not a marker of enterprise success. It is nice to see that the CEO is a trained mining engineer and that the rest of the team has been around the block with other mining companies.
They have two serious projects now. The Kerr-Sulphurets-Mitchell (KSM) project in Canada has several iterations of NI 43-101 reports. I read the preliminary feasibility study (PFS) for 2012, and the reserves are not much to crow about without the deposit's size. Consider how low the 2P reserves grade of 0.55 Au g/t would be without the 38.2M oz of metal to make it interesting. It is notable that the 2P reserves grade is about the same as the measured and indicated resource grade, a positive sign given the tendency of reserve grades to be lower after more engineering work. The project's estimated IRR is only 11.5%, less than half what Sprott's Rick Rule uses as a rule of thumb for viability. It's good that their assumed total operating cost of $597.60/oz is so low, even lower than gold's long-term average historic price. They must still raise the $5.3B initial capital cost.
The Courageous Lake project also has a PFS from 2012. This project looks a lot more desirable than KSM due to its 2P reserves grade of 2.2 Au g/t, but it only has 6.5M oz of metal. They only have to raise $1.52B in capital to make it work, but the estimated 7.3% IRR is even lower than the KSM project. The total operating cost of $1123/oz is also higher than KSM, and higher than gold's long-term price. Priority funding for Courageous Lake would make more sense in healthier economic times. The hard times in mining worldwide now make KSM the more attractive candidate for initial development.
Check out Seabridge's Q2 10-Q report dated June 30, 2015. They had cash and short-term deposits of almost $CAD14.7M. That should be enough to operate for over one year given their present burn rate, once they have paid their current liabilities. Their fundraising success in April 2015 of $16.3M is very noteworthy. It is also noteworthy that the financing was executed at a share price of $10.17. Shares of Seabridge closed today at $6.22. General market conditions are dragging down many companies but Seabridge's private investors continue to have sufficient faith that their investment is worth the premium they pay.
Seabridge is viable if a major partner wants to contribute billions of dollars to starting its two major projects. The market is bidding up this company's share price based on its ore body estimates rather than its operating history. These kinds of lower-grade projects make sense now that high-grade ores are running out worldwide. The mining sector will have to adjust to a new era of permanently lower IRRs with companies like Seabridge Gold.
Full disclosure: No position in Seabridge Gold (ticker SA) at this time.
They have two serious projects now. The Kerr-Sulphurets-Mitchell (KSM) project in Canada has several iterations of NI 43-101 reports. I read the preliminary feasibility study (PFS) for 2012, and the reserves are not much to crow about without the deposit's size. Consider how low the 2P reserves grade of 0.55 Au g/t would be without the 38.2M oz of metal to make it interesting. It is notable that the 2P reserves grade is about the same as the measured and indicated resource grade, a positive sign given the tendency of reserve grades to be lower after more engineering work. The project's estimated IRR is only 11.5%, less than half what Sprott's Rick Rule uses as a rule of thumb for viability. It's good that their assumed total operating cost of $597.60/oz is so low, even lower than gold's long-term average historic price. They must still raise the $5.3B initial capital cost.
The Courageous Lake project also has a PFS from 2012. This project looks a lot more desirable than KSM due to its 2P reserves grade of 2.2 Au g/t, but it only has 6.5M oz of metal. They only have to raise $1.52B in capital to make it work, but the estimated 7.3% IRR is even lower than the KSM project. The total operating cost of $1123/oz is also higher than KSM, and higher than gold's long-term price. Priority funding for Courageous Lake would make more sense in healthier economic times. The hard times in mining worldwide now make KSM the more attractive candidate for initial development.
Check out Seabridge's Q2 10-Q report dated June 30, 2015. They had cash and short-term deposits of almost $CAD14.7M. That should be enough to operate for over one year given their present burn rate, once they have paid their current liabilities. Their fundraising success in April 2015 of $16.3M is very noteworthy. It is also noteworthy that the financing was executed at a share price of $10.17. Shares of Seabridge closed today at $6.22. General market conditions are dragging down many companies but Seabridge's private investors continue to have sufficient faith that their investment is worth the premium they pay.
Seabridge is viable if a major partner wants to contribute billions of dollars to starting its two major projects. The market is bidding up this company's share price based on its ore body estimates rather than its operating history. These kinds of lower-grade projects make sense now that high-grade ores are running out worldwide. The mining sector will have to adjust to a new era of permanently lower IRRs with companies like Seabridge Gold.
Full disclosure: No position in Seabridge Gold (ticker SA) at this time.
Friday, August 28, 2015
Vista Gold Is A Disappointment
Vista Gold (ticker VGZ) has a management team
with obvious experience in mining operations. It's always good to see
geologists and engineers running a junior mining company. I would have
more confidence in this company's potential if their operational results
matched the C-suite's pedigree. A producing mine would justify their high
salaries. Check their pay yourself on the ticker's Yahoo Finance listing.
One Mt. Todd, Australia
gold project is their primary live option at this time,
with other projects that may pay royalties if other partners have their acts
together. The Mt. Todd site's most recent NI 43-101 report is dated July
7, 2014. Its key findings are disappointing. The 2P reserve
estimate is 0.84 Au g/ton for the Batman deposit and 0.54 g/ton for the heap
leach pad. Those are very low ore grades compared to profitable mines
worldwide. The MII resource estimates for Mt. Todd aren't any better.
The initial capex estimate of almost US$1.05B means they need a large
mining company as a serious partner. Their base case assumption of
$1450/oz as the gold price is too optimistic because gold closed at $1133/oz
today. I looked at their base case scenario of operating costs at
$756.11/oz and capex (presumably spread over the mine's life) at $292.33.
Adding those up to $1048.44/oz gives us the minimum gold price that makes
this mine economically viable. Gold's long-term average price is far
below that level, and a lot can happen over this mine's projected 13-year life.
Financial statements matter. I reviewed Vista's latest 10-Q
dated July 31, 2015. They had US$3.8M in cash on hand at the end of June,
plus $11.1M in short-term investments. That would ordinarily be a mother
lode of cash for a junior mining company. I have to wonder why they are
representing positive net income with zero operating revenue. Their
research and development grants from the Australian government (mentioned in
note 10 of the 10-Q) are no substitute for a live mine, so it's more
appropriate to doubt these grants' usefulness as recurring revenue.
Consider Vista's negative retained earnings of -$410M to
know how much investor capital has disappeared down dry holes.
This stock has traded below one dollar since the summer of 2013.
Since it now trades around $0.29, anyone who bought it in the past decade
is severely underwater. I see these kinds of companies all the time on
the investor relations circuit, clamoring for attention and waving term sheets
at private investors. Whatever potential that may have appeared in Mt.
Todd's earliest 43-101 reports has never materialized. That is why Vista
Gold does not belong in my portfolio.
Full disclosure: No position in VGZ at this time.
Monday, November 17, 2014
Financial Sarcasm Roundup for 11/17/14
A month of nothing but haiku and limericks needs some sarcasm to bring the old routine back.
Halliburton and Baker Hughes are getting hitched. The longstanding independence of Howard Hughes' business legacy is ending. One legendary drill bit sure had long legs. Halliburton can now busy itself with the weekly US oil and gas rig count. Political campaign contributions sometimes determine the outcome of antitrust scrutiny.
High speed traders are playing with fire in the Treasury market. One fat fingered trading error could easily give the bond market a flash crash that would jeopardize the solvency of several major banks holding government bonds. A lot of hedge fund managers are going to have their rear ends handed to them on a silver platter because they can't adjust their portfolios to new "regimes" in volatility. It serves them right. It also serves the Fed right for digging itself a hole by becoming the world's largest bond hedge fund, and the emergency gates they plan to slam shut will catch a lot of individual bond investors with illiquid securities.
Other hedge funds are cutting their long bets on gold. It's like they couldn't have messed up more if they had planned to fail. Exiting long positions in a commodity with a falling price won't look good in their annual reports to shareholders, but hedge fund investors are too dumb to read those reports anyway. I wonder what hedge funds consider to be a safe haven asset if they are so easily spooked out of precious metals. Oh BTW, bullion redemptions from gold ETFs haven't broken those instruments' paper hedges just yet, so the retail investor has more breathing room before being locked out of trading this instrument too.
Lots of people won't be able to catch a break when things start breaking down. I'll watch the multi-lane pileup from the roadside cafe, someplace where a Halliburton truck is mounting a Baker Hughes rig.
Full disclosure: No positions in any companies mentioned. Long GDX, not gold bullion or bullion instruments.
Halliburton and Baker Hughes are getting hitched. The longstanding independence of Howard Hughes' business legacy is ending. One legendary drill bit sure had long legs. Halliburton can now busy itself with the weekly US oil and gas rig count. Political campaign contributions sometimes determine the outcome of antitrust scrutiny.
High speed traders are playing with fire in the Treasury market. One fat fingered trading error could easily give the bond market a flash crash that would jeopardize the solvency of several major banks holding government bonds. A lot of hedge fund managers are going to have their rear ends handed to them on a silver platter because they can't adjust their portfolios to new "regimes" in volatility. It serves them right. It also serves the Fed right for digging itself a hole by becoming the world's largest bond hedge fund, and the emergency gates they plan to slam shut will catch a lot of individual bond investors with illiquid securities.
Other hedge funds are cutting their long bets on gold. It's like they couldn't have messed up more if they had planned to fail. Exiting long positions in a commodity with a falling price won't look good in their annual reports to shareholders, but hedge fund investors are too dumb to read those reports anyway. I wonder what hedge funds consider to be a safe haven asset if they are so easily spooked out of precious metals. Oh BTW, bullion redemptions from gold ETFs haven't broken those instruments' paper hedges just yet, so the retail investor has more breathing room before being locked out of trading this instrument too.
Lots of people won't be able to catch a break when things start breaking down. I'll watch the multi-lane pileup from the roadside cafe, someplace where a Halliburton truck is mounting a Baker Hughes rig.
Full disclosure: No positions in any companies mentioned. Long GDX, not gold bullion or bullion instruments.
Monday, August 18, 2014
California Gold Mining Pokes the Mother Lode
Today I noticed California Gold Mining (CGM.V / CFGMF) making its way across the financial landscape. It is based in Canada but explores projects both in Canada and the central California Mother Lode. It is good that the management team is qualified in geology and mining engineering but it's hard to tell from their bios just how much time they spent away from mining when they worked in finance. Adding value in mining means bringing projects to maturity, not just raising capital.
The Canada project has a 43-101 mineral estimate and PEA. The technical report's indicated resource grades at less than 1g/t Au are not all that attractive. The PEA from 2013 concludes that the negative cash flow of -$43.3M from an expected five-year mine life makes the project uneconomical. They would need a gold price over $1800/oz to make it attractive. That's a long way for the spot price to climb from here.
The California project has some legacy exploratory data but I do not see a 43-101 report for this property on their website. I also have doubts about the distance of the site from water sources (specifically the Merced River), assuming they plan to separate ore with heap leaching. Finally, the photos of hilly topography make me wonder whether there is room on site for a mill and tailings area. Those elements need flat terrain to be viable; changing the topography through engineering will add cost to the project.
I don't think I even need to look at the financial statements for this one. The stock trades at about a nickel given the uncertainty of the above projects. I track junior mining companies because someday I'll find one that deserves to be in my portfolio. California Gold Mining isn't there yet because I need to see development of a mine plan and not some idle poking around the Mother Lode.
Full disclosure: No position in California Gold Mining at this time.
The Canada project has a 43-101 mineral estimate and PEA. The technical report's indicated resource grades at less than 1g/t Au are not all that attractive. The PEA from 2013 concludes that the negative cash flow of -$43.3M from an expected five-year mine life makes the project uneconomical. They would need a gold price over $1800/oz to make it attractive. That's a long way for the spot price to climb from here.
The California project has some legacy exploratory data but I do not see a 43-101 report for this property on their website. I also have doubts about the distance of the site from water sources (specifically the Merced River), assuming they plan to separate ore with heap leaching. Finally, the photos of hilly topography make me wonder whether there is room on site for a mill and tailings area. Those elements need flat terrain to be viable; changing the topography through engineering will add cost to the project.
I don't think I even need to look at the financial statements for this one. The stock trades at about a nickel given the uncertainty of the above projects. I track junior mining companies because someday I'll find one that deserves to be in my portfolio. California Gold Mining isn't there yet because I need to see development of a mine plan and not some idle poking around the Mother Lode.
Full disclosure: No position in California Gold Mining at this time.
Thursday, August 14, 2014
Tyhee Gold Takes Risk on Sutter to Leverage Into Canada
Tyhee Gold (TDC.V) is a junior gold mining company with a property in Canada that they obviously really like. Their stated strategy is to operate another property that will enable them to "leverage" their way to success with their favored Canadian property. That's a pretty unique approach. Most junior gold companies would try to sell their more attractive property to a major mining company and use the proceeds to move on with other exploration projects.
The Yellowknife gold project in Canada has a completed 43-101 prefeasibility study. The property has 2P reserves at decent grades, although its remote location adds to the cost of transporting mined metal to market. I think their base case IRR assumptions are too optimistic given the low discount rate they apply. I would set the discount rate higher given the financing concerns I will discuss below.
The CEO is a professional mining engineer, and the rest of the team has deep experience in mining. It is always encouraging to see a junior mining company get serious about operating a project by hiring people who have actually operated projects. The company's news feed shows that they have settled on acquiring most of Sutter Mining after their attempted merger with Santa Fe Gold fell through. The financing for Sutter exposes Tyhee to a significant amount of debt and a US$4M cash payment up front, along with another payment of almost CAD$1.2M to acquire much of Sutter's common stock. The details don't include any immediate assumption of new debt, but Tyhee is committing to guarantee Sutter's existing debt payments and raise more financing to operate Sutter's mine.
Examining Tyhee's financial reports illustrates the risk in this transaction. Tyhee had a net loss of almost CAD$1.5M in the second quarter ending May 31, 2014. They had barely CAD$533K in cash on hand, so completing this transaction means they must raise a significant amount of capital. That's tough to do with almost CAD$7.3M in current liabilities. Any high-debt, money-losing company that raises money from equity investments will have to seriously dilute existing shareholders. They may get some breathing room if they can recover the outstanding balance of the bridge loan they granted to Sante Fe Gold (folks, please read the notes in that second quarterly report for 2014).
I will not include Tyhee in my own portfolio. Their high-risk financing of Sutter Mining's existing operations is more difficult than simply selling their Canadian property and moving on to greener pastures.
Full disclosure: No position in Tyhee Gold, or any other company mentioned, at this time.
The Yellowknife gold project in Canada has a completed 43-101 prefeasibility study. The property has 2P reserves at decent grades, although its remote location adds to the cost of transporting mined metal to market. I think their base case IRR assumptions are too optimistic given the low discount rate they apply. I would set the discount rate higher given the financing concerns I will discuss below.
The CEO is a professional mining engineer, and the rest of the team has deep experience in mining. It is always encouraging to see a junior mining company get serious about operating a project by hiring people who have actually operated projects. The company's news feed shows that they have settled on acquiring most of Sutter Mining after their attempted merger with Santa Fe Gold fell through. The financing for Sutter exposes Tyhee to a significant amount of debt and a US$4M cash payment up front, along with another payment of almost CAD$1.2M to acquire much of Sutter's common stock. The details don't include any immediate assumption of new debt, but Tyhee is committing to guarantee Sutter's existing debt payments and raise more financing to operate Sutter's mine.
Examining Tyhee's financial reports illustrates the risk in this transaction. Tyhee had a net loss of almost CAD$1.5M in the second quarter ending May 31, 2014. They had barely CAD$533K in cash on hand, so completing this transaction means they must raise a significant amount of capital. That's tough to do with almost CAD$7.3M in current liabilities. Any high-debt, money-losing company that raises money from equity investments will have to seriously dilute existing shareholders. They may get some breathing room if they can recover the outstanding balance of the bridge loan they granted to Sante Fe Gold (folks, please read the notes in that second quarterly report for 2014).
I will not include Tyhee in my own portfolio. Their high-risk financing of Sutter Mining's existing operations is more difficult than simply selling their Canadian property and moving on to greener pastures.
Full disclosure: No position in Tyhee Gold, or any other company mentioned, at this time.
Thursday, July 17, 2014
Gold Price Responds to Disaster News
Gold is a really old metal. It's been around longer than any of us and it has a mind of its own in the markets. Forget for a moment the recent news about bankers fixing the daily spot price of gold. Daily spots can't suppress market pressures forever. Headline news is still a demand factor when something happens to spook traders.
Today's shoot-down of a Malaysian airliner over the Russia-Ukraine conflict zone was bad news. Some idiots with too much firepower and not enough brainpower have just escalated a local conflict into a global incident. Forbes noted that the airliner incident drove up the spot price of gold. In a similar vein, CNN notes that Israel's ground attack in Gaza made the VIX volatility indicator move up. Escalating conflicts in more than one global hot-spot drive investors away from risky equities and towards hard assets, at least for the short term.
Real-world drivers of sharp moves in commodity prices make me discount other commentators' claims of ongoing gold price conspiracies. Paul Craig Roberts wrote yesterday about how big banks supposedly collude to drive down the gold price with COMEX futures contracts. I'd like to see how he explains today's rising gold price in light of his conspiracy theory. GATA also has some explaining to do.
A real conspiracy would be able to smack down the gold price immediately. The contract volume on COMEX would have to rise appreciably to indicate this counteraction was in the works. Come on, gold bugs, there's more to price action than paper claims on COMEX traders' bullion repositories. Surprises in the real world count for much more than hedging.
Monday, June 02, 2014
Financial Sarcasm Roundup for 06/02/14
Read my words and discover the contempt I have for humanity. Stupid losers are everywhere. They deserve nothing but my sarcasm.
Pimco's Total Return Fund is watching investor withdrawals whittle away its flagship product. The trickles will turn to a deluge as investors realize the air is leaking out of the bond market bubble. Chair Yellen can keep the plates spinning a while longer if the Fed has to restart QE purchases. Everyone in the fixed income universe forgot about mean reversion while the fixed income party was going full steam.
The Administration's emission rules are going to put the coal sector in a world of hurt. Climate change advocates have a religious fervor for reengineering our society, with or without a scientific basis. The only thing dumber than blind faith in weak science is forcing others to pay for those beliefs. Renewable energy stocks may get a small push from new rules on power plant emissions. I doubt the Administration's push to convince other polluting countries in the developed world will bear fruit. US coal companies will just export to China and India if the coal can't be burned domestically, and those nations will have no incentive to cooperate with US climate goals if they would otherwise lose access to our coal. Way to go, Washington.
Ecuador is swapping gold for liquid assets, presumably some instruments denominated in US dollars. Goldman Sachs took them to the cleaners and all the Ecuadoreans can do is lie about the deal. It's obviously an asset swap but Ecuador's finance ministry and central bank both refer to it as an investment. They must think the global financial community is as stupid as their own citizenry. This swap only works for them if the US dollar retains its value for three years, a highly doubtful prospect if the US experiences hyperinflation. A dollar devaluation means they'll only get back a fraction of the gold they're swapping out. Goldman and other banks now have a case study they can use to liberate hard assets from other dollar-dependent countries before the party ends. I'll remember that the next time I'm stocking up on stuff.
Humans run around like chickens with their heads cut off. I exist to collect up the headless chickens and cook them for supper. The brainless losers who don't read my blog might as well be headless.
Pimco's Total Return Fund is watching investor withdrawals whittle away its flagship product. The trickles will turn to a deluge as investors realize the air is leaking out of the bond market bubble. Chair Yellen can keep the plates spinning a while longer if the Fed has to restart QE purchases. Everyone in the fixed income universe forgot about mean reversion while the fixed income party was going full steam.
The Administration's emission rules are going to put the coal sector in a world of hurt. Climate change advocates have a religious fervor for reengineering our society, with or without a scientific basis. The only thing dumber than blind faith in weak science is forcing others to pay for those beliefs. Renewable energy stocks may get a small push from new rules on power plant emissions. I doubt the Administration's push to convince other polluting countries in the developed world will bear fruit. US coal companies will just export to China and India if the coal can't be burned domestically, and those nations will have no incentive to cooperate with US climate goals if they would otherwise lose access to our coal. Way to go, Washington.
Ecuador is swapping gold for liquid assets, presumably some instruments denominated in US dollars. Goldman Sachs took them to the cleaners and all the Ecuadoreans can do is lie about the deal. It's obviously an asset swap but Ecuador's finance ministry and central bank both refer to it as an investment. They must think the global financial community is as stupid as their own citizenry. This swap only works for them if the US dollar retains its value for three years, a highly doubtful prospect if the US experiences hyperinflation. A dollar devaluation means they'll only get back a fraction of the gold they're swapping out. Goldman and other banks now have a case study they can use to liberate hard assets from other dollar-dependent countries before the party ends. I'll remember that the next time I'm stocking up on stuff.
Humans run around like chickens with their heads cut off. I exist to collect up the headless chickens and cook them for supper. The brainless losers who don't read my blog might as well be headless.
Tuesday, May 06, 2014
Friday, April 25, 2014
Castle Mountain Mining Wants To Dig San Bernardino
Castle Mountain Mining (CMM.V) has a plan to reopen an older San Bernardino open pit gold mine. San Bernardino County isn't the first place I would look for a junior gold play unless its geology is like the Carlin Trend in Nevada. Their CEO has a pretty serious track record in mining. I had to look up Baffinland Iron Mines, his past project, just to see if it was the real deal. The team does not need to be distracted by holding outside director positions in Probe Mines and Touchstone Gold. I do cock my head quizzically when I see junior mining executives who are also directors in other junior exploration companies. I prefer that a startup team stay focused on its own business model.
This company's San Bernardino project is still in the early stage of restarting a previously producing mine. The NI 43-101 report dated December 6, 2013 reveals a large but low-grade resource estimate. The reported average Au grades, both indicated and inferred, are far below typical discoveries that later prove economical. The size of an ore body can make up for lack of grade if the market price of a metal remains high. Assuming a long term gold price of $1300/oz is a far higher estimate than gold's long term historical average price. That is a serious risk.
The 43-101 report estimates a drill program for further exploration will cost CAD$3.32M. Always remember that a company has to fully fund its estimated drill program to have any chance of establishing an enterprise valuation. Searching SEDAR reveals Castle Mountain Mining's annual financial report for the years ended December 31, 2013 and 2012 (publication date April 17, 2014). That report showed they had cash on hand of CAD$4.76M at the end of 2013. How about that, they had the cash to fund the program, even after subtracting current liabilities. The bad news is that their annual loss in 2013 was -CAD$9.4M. I'm guessing that burn rate can sustain their drill program for less than half a year; they will need to stay focused and keep other expenses down to further de-risk their project. This means no side projects or financial engineering.
The company's stock has been trading on the Toronto exchange for almost four years. Anyone who bought in at $0.45 back in April 2010 is still ahead, with the shares trading at $0.86 today. I cannot rule out the possibility that they will have to raise more capital and dilute existing shareholders. It is too early in the life of Castle Mountain Mining for me to invest but their chances for success will increase if they focus their burn on their Phase I drill program.
Full disclosure: No position in CMM.V at this time.
This company's San Bernardino project is still in the early stage of restarting a previously producing mine. The NI 43-101 report dated December 6, 2013 reveals a large but low-grade resource estimate. The reported average Au grades, both indicated and inferred, are far below typical discoveries that later prove economical. The size of an ore body can make up for lack of grade if the market price of a metal remains high. Assuming a long term gold price of $1300/oz is a far higher estimate than gold's long term historical average price. That is a serious risk.
The 43-101 report estimates a drill program for further exploration will cost CAD$3.32M. Always remember that a company has to fully fund its estimated drill program to have any chance of establishing an enterprise valuation. Searching SEDAR reveals Castle Mountain Mining's annual financial report for the years ended December 31, 2013 and 2012 (publication date April 17, 2014). That report showed they had cash on hand of CAD$4.76M at the end of 2013. How about that, they had the cash to fund the program, even after subtracting current liabilities. The bad news is that their annual loss in 2013 was -CAD$9.4M. I'm guessing that burn rate can sustain their drill program for less than half a year; they will need to stay focused and keep other expenses down to further de-risk their project. This means no side projects or financial engineering.
The company's stock has been trading on the Toronto exchange for almost four years. Anyone who bought in at $0.45 back in April 2010 is still ahead, with the shares trading at $0.86 today. I cannot rule out the possibility that they will have to raise more capital and dilute existing shareholders. It is too early in the life of Castle Mountain Mining for me to invest but their chances for success will increase if they focus their burn on their Phase I drill program.
Full disclosure: No position in CMM.V at this time.
Sunday, January 19, 2014
Victoria Gold Is Making Progress In The Yukon
I first noticed Victoria Gold (VIT.V / VITFF) back in 2010 but I must have forgotten about them. I'll revisit them now to see if I missed anything in the intervening years. Their current CEO is different from the one they had when I first noticed the company. That's good because at least this guy is a mining engineer.
Their Eagle gold project up in the Yukon has 2P reserves. That's good; they've made progress on this project even though the 0.78 g/t Au grade isn't stellar. Their estimated operating cost is just below the long-term average historical price of gold, so the project should remain viable as long as the cost doesn't rise. They estimate an initial capital cost of C$382.8M. Remember that figure. I won't evaluate their other Yukon properties because they're still in the exploration stage with no 43-101 reports.
Their Nevada project is the only one remaining from several they were exploring in the state back in 2010. This site used to be a productive open pit mine for gold and silver but I need to see a 43-101 report that covers more than just a few initial drill holes.
Now, back to that initial capital cost I mentioned above. I looked at their financial statement for the quarter ending August 31, 2013, the most recent one available. They had over C$14M in cash on hand and their burn rate is over C$300K/month. They'll have to raise another C$368M to start operations at Eagle. Photos of the site show a road network and mining camp, so some of the infrastructure is in place.
It's too early for me to invest in Victoria Gold but I am pleased that they have made progress on their most promising project. I'll revisit this one later once they have secured sufficient financing.
Full disclosure: No position in Victoria Gold at this time.
Their Eagle gold project up in the Yukon has 2P reserves. That's good; they've made progress on this project even though the 0.78 g/t Au grade isn't stellar. Their estimated operating cost is just below the long-term average historical price of gold, so the project should remain viable as long as the cost doesn't rise. They estimate an initial capital cost of C$382.8M. Remember that figure. I won't evaluate their other Yukon properties because they're still in the exploration stage with no 43-101 reports.
Their Nevada project is the only one remaining from several they were exploring in the state back in 2010. This site used to be a productive open pit mine for gold and silver but I need to see a 43-101 report that covers more than just a few initial drill holes.
Now, back to that initial capital cost I mentioned above. I looked at their financial statement for the quarter ending August 31, 2013, the most recent one available. They had over C$14M in cash on hand and their burn rate is over C$300K/month. They'll have to raise another C$368M to start operations at Eagle. Photos of the site show a road network and mining camp, so some of the infrastructure is in place.
It's too early for me to invest in Victoria Gold but I am pleased that they have made progress on their most promising project. I'll revisit this one later once they have secured sufficient financing.
Full disclosure: No position in Victoria Gold at this time.
Sunday, December 22, 2013
The Limerick of Finance for 12/22/13
Hedge funds are abandoning gold
Big bullish positions were sold
Metal price heading down
Investors must frown
Buying in at the bottom is bold
Monday, December 02, 2013
Summary of Metals and Minerals Investment Conference San Francisco 2013
The Metals and Minerals Investment Conference that took place last week in San Francisco is the latest name for the Hard Assets Conference (and before that, the Gold Conference) that I've been attending for many years. This is the one annual event on my very busy calendar that I cannot ever miss.
Things started off right with a morning workshop from Benjamin Cox of Oreninc. I was very impressed with this company's due diligence methods at a previous Hard Assets Conference and I was eager to hear their updates. I like analysis that combines fundamentals with money flows because that's how you find bargains in any market. Oreninc applies the wisdom of picking entry points in depressed markets, just like Warren Buffett used to do. It was interesting to hear Benjamin's prediction that junior mining companies may survive this bear market only to fail in the recovery when creditors demand repayment. His approach to investing in juniors also resembles one of the Buffett PIPE strategies that combines a private offer for equity with warrants. His view on the market for lithium deflated my theory that lithium producers are underestimating demand from IoT devices, mainly because the lithium and graphite requirements for wearables are so small.
The keynote from US Global Investors is always interesting at these shows. The firm is impressed with the "Chindia" market but I'm staying away from that region due to China's and India's huge internal problems and potential for conflict. I do not agree with that firm's thesis that contrarian plays abound in today's markets. Some sectors in the US and Europe may have declined but that does not mean they are undervalued. I also disagree with the firm's thesis that high-speed rail stations in China will be retail anchors for US brand names. More China analysts need to use the Keqiang Index instead of China's self-reported GDP figures. The audience loved the photo slideshow of Thailand's Prime Minister Yingluck Shinawatra leading our President through a diplomatic event with a come-hither look, followed by a photo of our stern-looking First Lady subtitled "COMPLIANCE." Every corporate presentation should be that hilarious.
Leading lights in mining company research held their panel on economic trends. These conference panels have been saying for years that the world's bond markets will reject Treasuries and that US hyperinflation is imminent. I agree but none of us can time this cataclysm precisely, so it continues to roll in slow motion. Rick Rule opined that the low attendance at this conference was a contrarian indicator for the metals sector. I'd like to see investor capitulation too at some point so I can get back in after selling most of my GDX holdings near the top. The panelists were aware that HFT hedge funds are manipulating markets by paying for advance notice of quotes in split seconds. I wish people would calm down about short-term swings from manipulation and use them to uncover mispriced securities. The current market bubble is more than just the effects of HFT manipulation and tax incentives for using debt in share buybacks. The Fed's easy liquidity has incentivized banks to extend easy prime brokerage credit to hedge funds and private equity firms. This is not a fun game to play and a lot of people are going to be hurt when the music stops.
Adrian Day Asset Management weighed the relative attractiveness of bullion versus mining shares. I note with chagrin Adrian's observation that mining costs have risen dramatically while large discoveries are declining in number. That's why a lot of junior miners are going to fail before any bull market in the resource sector returns. Adrian thinks raising capital is not accretive if companies use it to overpay for acquisitions. I say juniors shouldn't be acquiring at all because their business is to develop good deposits. Measuring purely on P/B value, as Adrian does, to show that gold stocks are cheap risks ignoring the quality of a company's earnings and deposits. I was lucky to score a free copy of Adrian's book Investing in Resources at one of the exhibitor booths. Perhaps that's a contrarian indicator that my lucky streak in the resource sector is about to begin again.
Rick Rule's keynote was about the fun of preparing a portfolio for recovery. He offered more confirmation that the mining sector is priced cheaply. Stories of executives squandering the capital they raised during the hard asset bull market from 2009-10 are common. Rick thinks the mining sector bifurcated this past June and that about 70% of the sector is worthless. That's a lot of small stocks headed for zero. No wonder the exhibitor floor is so small this year. Rick is one of the few investment professionals who recognizes the natural human tendency of confirmation bias that ignores information contradicting strongly held beliefs. That's why most people make many poor investment decisions.
Dr. Ron Paul was the featured keynoter. It's telling that he didn't use the permanent honorific "Congressman" which our nation's laws and political tradition entitle him to claim. He'd rather be a doctor in retirement. That shows humility. My very first impressions from the original Gold Conference years ago included the huge following for Ron Paul among the gold bug crowd. Their enthusiasm for his views has not dimmed and he was by far the most well-attended speaker. I staked out a front row seat.
Dr. Paul talked at length about how his study of Austrian School economic philosophy led him to the discovery that bad monetary policy is a threat to personal liberty. He was as critical as ever of the Federal Reserve, the dollar's reserve status, and the US's interventionist foreign policy. The Fed's QE reminds him of the Founding Fathers' hatred of counterfeiting. Dr. Paul's tour-de-force anecdotes through the Fed's modern history are worth repeating. He liked Paul Volcker but thought Alan Greenspan should add disclaimers to his old Ayn Rand writings, and Arthur Burns admitted to him that the Fed isn't really independent of the President's policies. He lauded the Occupy movement's diagnosis of America's social inequality but dislikes their preference for wealth redistribution to solve it.
I do not agree with Dr. Paul's stance on non-intervention in Iran's nuclear weapons program. Tehran has clearly stated its intent to develop and use nuclear weapons against its neighbors and it is not at all a Western-style republic. Dr. Paul is very intelligent but he is not a geopolitical analyst. His naive non-interventionist writings in the 1970s and '80s lead me to believe he would have let Fascism take over Europe. I also think he's delusional if he believes that young people want more freedom. I did a Google search of "millennials trust government" and found plenty of polling results showing that young people want more government intervention and regulation even though they have little trust in government! I used to sympathize with libertarian philosophies until I learned more about how real humans behave. People never know what they want and will trust anyone with a slick sales pitch. That's why Millennials and other generational cohorts are ready to be led around by their noses. I've got some more bad news for Dr. Paul. The Constitution's preamble says "promote the general welfare" and Article One's "Necessary and Proper Clause" gives the federal government a tremendous amount of leeway. The government's promotion of canals, railways, land grant colleges, and westward expansion made this country prosperous and immune from foreign domination.
The audience questions for Dr. Paul ranged from intelligent to nutty. I wish I could find active links to the US Gold Commission from the early 1980s because Ron Paul served on it and one of his fellow former commissioners showed up to ask whether Fort Knox's gold deposit has been audited. Dr. Paul thinks there is actual gold in the US Bullion Depository but its ownership status may be in question, which is why it needs an audit. Some other dude asked whether smart meters could feed data to the NSA. Hello? What planet is he on? Smart meters read machine data and the NSA monitors human-generated data. Get a clue. Oh yeah, local gadfly "Starchild" showed up to advocate common cause between the Tea Party and the Occupy movement. Good luck with that one. Dr. Paul totally lost me when he said liberals and conservatives should both support personal liberty and oppose wars. That is just not going to happen but people like "Starchild" will take it as gospel. I've read enough Leo Strauss and Carroll Quigley to know that the Anglo-West's hereditary ruling elite simply won't allow such a confluence of political forces. One final supplicant asked Dr. Paul whether a Cyprus-style bank solution could happen here. He avoided a straight answer but I don't think he's aware of the joint US-UK plan titled "Resolving Globally Active, Systemically Important, Financial Institutions." Yes, it really can and will happen here. It's too bad Dr. Paul will be a footnote in our country's history, maybe a notch below other forgotten advocates like William Jennings Bryan. I tried to meet him after his keynote but he was pretty much constantly mobbed as he made his way across the expo floor to the Korelin Economic Report booth for an interview. Even James Dines' booth babes followed him around. This guy had no idea that he was in the presence of greatness that day, namely Yours Truly from Alfidi Capital.
The next panel on precious metals brought forth more sector analysts. The theory that big banks can manipulate gold prices or that central banks can hold them down morphs a lot in the imagination of many commentators. I'll believe that when I see smoking gun evidence that no one can debunk. One of the better explanations of gold's behavior came when a panelist said it can drop in value during inflation even if the early onset of inflation is a blowout stage for metals. I don't listen to commentators who use the word "consolidation" because that is a technical term with no statistical validity, but people at these conferences like to throw it around. We can always count on Indian retail demand for gold to stay strong because Indians buy it for religious reasons and bury it in temples. We all saw gold rise after the 2008 financial crisis but US investors tend to have a herd mentality and sell gold when it drops in price. The bombshell of this panel came from none other than Oreninc's Benjamin Cox. Ben revealed that hedge funds hold a big chunk of US gold and a future crisis will force institutions to sell gold just to meet margin calls. This will force the price of gold down. Inflation will then force it back up, at least initially. Ben also noted that the supply of metals cannot possibly keep up with population growth and therefore cannot substitute for a fiat currency in a modern economy. He is one of the few people watching this sector who understands history. Others who say "there's enough gold for everyone" are clueless.
Jay Taylor's workshop on deflationary forces inside an inflationary monetary regime closed out my first day at this show. I share Jay's disdain for CNBC's cheerleading of Keynesian cultists while government agencies worldwide churn out false economic statistics. He cited FRED data on rising excess bank reserves (series EXCSRESNS on Excess Reserves of Depository Institutions). I won't spoil Jay's report by repeating his citations of stats on declining consumer confidence, a lower money multiplier, lower M2 monetary velocity, and other deflationary drivers. Read his writings yourself and check out Mike Hodges' Grandfather Economic Report for more depressing data.
The conference's first day of knowledge deserves my own special reflection. IMHO the last few months of FOMC minutes make it clear that some Fedsters doubt QE, but the Fed isn't truly independent of executive branch policy. The Fed will likely go along with accommodative QE if a deflationary market crash leads to a government policy response that forces hyperinflation. The time lag between the asset crash and the hyperinflationary effects of the combined Federal Reserve / executive branch policy response matter very much. The Fed's treatment of bank reserves also matters. If the Fed raises reserve requirements for banks, but then charges banks to hold reserves at the Fed, banks will be immediately forced to seek income. Banks may then immediately charge fees to their own depositors (a deflationary lever) or immediately make riskier loans ( a hyperinflationary lever, forcing up the money multiplier). I'd like to see historical evidence for hyperinflation in the economy of the world's reserve currency. I suspect deflation is more likely in a world reserve currency's home economy, up until the point that currency loses its world reserve status when foreigners refuse en masse to hold it. The status of that reserve currency may very well be the tipping point between deflation and hyperinflation in the home economy. Many things could open a path to hyperinflation in the US once the dollar loses its reserve status. Foremost in my mind is the end of petrodollar recycling but there are other possible triggers.
The second day started off with Rick Rule's boot camp on private placements. These PPs are typically restricted to accredited investors. Rick considers the company's amount of SGA expenditures versus its project expenditures, its stated purpose for a capital raise, and the deal's terms. The warrants in a PP deal are key because a portfolio of private placements with warrants minimizes the expected failure of most of the companies, much like a venture capital portfolio. Some frequent investors do "warrant stripping" if they have huge volumes of deal flow. Rick thinks that's lucrative with the right expertise. He likes full warrants better than fractions and longer durations (past two years) better than short ones. I think his praise for debt PPs is more valid in riskier juniors because the debtholders will end up owning the company in bankruptcy. He likes the rewards of bridge/mezzanine financing that include fees, regular coupons that beat booking of accruals, and upside participation. That upside sweetener can be in the form of warrants, a royalty that the issuer can buy back, or a note convertible to equity. Rick warned against companies that raise insufficient capital to complete their exploration program; that sets up failure and indicates a management team that isn't serious about a project. I disagree with Rick's stated preference for political risk over technical risk because I'm not convinced that the best deposits lie in unstable countries.
The morning keynote from Casey Research described the next big investment bubbles. The dude displayed a Photoshop merge of Janet Yellen with Ben Bernanke, just to illustrate that Calamity Jane at the Fed will be no different from Helicopter Ben. I have a hard time believing the keynote's thesis that central banks are suppressing the gold price. Some of the data on gold supply is selective and the claim that central bank gold leasing constitutes "missing supply" is difficult to discover through Mosaic theory analysis. An argument for a supply shortage makes no sense to me if the price of gold has dropped significantly from its all-time highs. Citing numbers from the depository warehouse for the SPDR Gold Shares ETF (GLD) means little if GLD also holds futures contracts on gold. I cannot buy the argument that JPMorgan acts as the Fed's agent for suppressing the gold price because . . . JPM sold its gold warehouse! It makes no sense for a SIFI bank to depart a scheme that holds forth guaranteed profits unless of course such a scheme never really existed. I think a lot of gold analysts are misreading the "eligible" line on COMEX reports of gold deliveries. I also think analysts are misreading the CFTC rules for trading organizations and the CFTC Bank Participation Reports.
I need to take a time out just to respond to the conspiracy mongers in the gold sector. I just can't believe all this stuff about gold price manipulation. Physical delivery satisfies real demand. There is no point in risking a margin call on a big futures position just to manipulate the price of gold if you still have to make good on a physical delivery. Where is the motive, means, and opportunity for SIFIs to suppress the gold price on behalf of central banks? Why would they suddenly sell their trading warehouses and switch to long positions if central banks still have gold leases outstanding?! The central banks would have to cover those outstanding leases at higher prices and book huge balance sheet losses. One of the alleged motives for banks to suppress gold is to keep interest rates down so they can keep borrowing at zero and buy treasuries for the easy carry trade. If that's so, why suddenly switch to long gold positions if that would place banks' bond holdings at risk of paper losses? Is the Fed lined up to buy back their Treasuries? Come on, people. Conspiracy theories are less compelling than supply/demand fundamentals.
Everbank gave their traditional rundown of the global markets and the implications for currencies. The PIIGS are obviously still sovereign debt risks and the poorer countries of southern Europe want to continue to borrow at Germany's preferential interest rates indefinitely. That's my take, anyway. It boggles my mind that homebuyers and college students are the only real loan demand sources in the US economy right now and the suckers are still lining up. I've blogged before about how marginal increases in debt no longer drive comparable GDP growth and Everbank has noticed the same trend. I will lay out Everbank's stated currency valuation factors: GDP growth, high current account balance, low government budget as % of GDP, low debt as % of GDP, high real interest rates. Gee, it looks like the US dollar fails on all counts. Everbank likes the Swedish krona, Chinese renminbi, Brazilian real, and Mexican peso. I don't like any of those currencies. I have no need to keep money at Everbank.
The panel on exploration trends featured two speakers I recognized from my first ever stint as a panelist two years ago. The TSX Venture Exchange is the best proxy for the exploration sector. One panelist opined that year-end tax loss selling and fund redemptions will further depress shares in the exploration sector. Hmmm, that means I'll wait until January to buy anything I'm watching now. The panel's conventional wisdom is that prospect generator models are candidates for longevity but I've always viewed them as black holes for invested capital. I'd like someone to name one great producing project that came out of a generator and made it to either stand-alone viability or acquisition by a major producer. The panel thinks survivors have lots of working capital and royalty interests. Well, I've looked at lots of balance sheets and NI 43-101 reports this year and those two things rarely go together. They noted that resource nationalism is rising. That's why I like the US, Canada, Australia, and New Zealand for their Anglo-Saxon common law traditions. My worst picks for resource nationalism risk are Venezuela and Argentina for their collectivist responses to stagflation. I'll also throw in North Korea as the worst place to invest because they kidnap and kill investors there. The DPRK has untapped high-grade deposits of tungsten and rare earths, if drill samples from Chinese companies have credibility. The panel did reveal some good red flags to watch in a troubled company. The biggest warning is flow-through funding that progressively dilutes shareholders in subsequent rounds, which indicates rising risk of the company's projects. They also noted red flags in environmental issues and fatal accidents.
A bunch of exploration company CEOs held a panel on making the grade in an investment strategy. They claimed that owning large districts increases the chance of a big discovery but IMHO competent geologists can reduce exploration to a focused area. They did reveal that different jurisdictions require different cutoff grades to be economically worthwhile. They liked Visual Capitalist and I think its infographics follow the trend in Big Data towards convenient representations.
CPM Group gave its gold market outlook. I was grateful for this data-driven analysis as an antidote to conspiracy theories about gold. I did learn that the premia on US Mint coins is a proxy for investor demand for gold. The COMEX Gold Futures and Options weekly data on net fund positions indicate changes in demand for gold, as do changes in gold ETF holdings. Many things affect gold supply. Look at annual production and new gold mine capacity for indications of changes. This sharp guy noted that gold and inflation are unlikely to surge while the US and other developed economies have high unemployment and excess manufacturing capacity. I take that to mean that gold's best days are ahead, maybe, at some point. Any Fed tapering that raises real interest rates would cause the gold price to drop.
I'll say one thing about something I heard from another self-styled gold expert at this show. I'm tired of hearing stories about how some stock that trades for less than the cash on its balance sheet is some kind of screaming buy. I consider that cash to be a depleting asset that is supposed to be used in a productive exploration program. It will go to zero if it funds a drill program that doesn't work.
I liked Dudley Baker's talk on his Common Stock Warrants platform. The site looks good and Dudley advised us to perform leverage calculations on warrants to determine their likely ROI. He also thinks warrants are useful in combination with traditional stock options. I'd like to see someone run a platform that makes contingent value rights (CVRs) just as transparent and easy to use in combination with other instruments.
The conference concluded with the traditional bulls and bears debate among Rick Rule, Jim Dines, Adrian Day, Al Korelin, and Jay Taylor. The lineup changes a little each year but it's always lively. They couldn't reach a consensus on whether the junior resource sector has bottomed but Jim sure likes the 3D printing sector. The question of whether there's really gold at Fort Knox was in keeping with the "audit the Fed, audit Fort Knox" meme that's symbolic of a general distrust in government. Jim thinks the gold has been audited but that Americans just don't care. I would really like to know whether foreign intelligence services are feeding this auditing debate by seeding "information operations" elements among the libertarian fringe. Rick asked his panelists about their most important lesson from the junior mining sector's downturn. Well, now it gets interesting. Jim told a bizarre story about the Clintons that made no sense. Al wants us to stay diversified, just as I recall him saying many times over the years of this conference. Want my most important lesson? Here it is. I learned that there's more to hard assets than gold bullion and gold stocks! A basket of hard assets includes precious metals, base metals, energy, timber, REITs, and sectors like pipelines and railroads that service them all. Jim also snapped out of his daydream about the Clintons to remark that the low attendance at this conference indicates a low for the sector's valuation. Rick had a special zinger question just for Jim about what was interesting in the many conversations at his booth. Jim said he noticed fear among his attendees, another market bottom anecdote. He wandered off into his geopolitical theories but I was left reminded of Warren Buffett's advice to be greedy when others are fearful.
I noticed the low attendance too. I've been at this conference series through all of its name changes since 2005. The decline in attendance and exhibitors has been noticeable. This was the first time since then that all of the exhibitors and workshops fit on the same floor of the SF Marriott Marquis and the expo floor only took up about half of the available concourse space. Several paid exhibitors didn't even show up at their booths, namely Equities.com, Mining Leaders, and the Financial Survival Network. I know darn well how expensive those booths are because I manned one myself in 2006. The depressed junior mining sector isn't the only thing hurting attendance. Investor relations promoters are now able to hold webinars and virtual roadshows over social media broadcast tools. Traveling to a trade show is hard for people who can get the same content over the Web. I like this particular show and I will attend for as long as it exists, regardless of how many times they change their name. I'm all about booth babes, free knowledge, and hard assets.
Things started off right with a morning workshop from Benjamin Cox of Oreninc. I was very impressed with this company's due diligence methods at a previous Hard Assets Conference and I was eager to hear their updates. I like analysis that combines fundamentals with money flows because that's how you find bargains in any market. Oreninc applies the wisdom of picking entry points in depressed markets, just like Warren Buffett used to do. It was interesting to hear Benjamin's prediction that junior mining companies may survive this bear market only to fail in the recovery when creditors demand repayment. His approach to investing in juniors also resembles one of the Buffett PIPE strategies that combines a private offer for equity with warrants. His view on the market for lithium deflated my theory that lithium producers are underestimating demand from IoT devices, mainly because the lithium and graphite requirements for wearables are so small.
The keynote from US Global Investors is always interesting at these shows. The firm is impressed with the "Chindia" market but I'm staying away from that region due to China's and India's huge internal problems and potential for conflict. I do not agree with that firm's thesis that contrarian plays abound in today's markets. Some sectors in the US and Europe may have declined but that does not mean they are undervalued. I also disagree with the firm's thesis that high-speed rail stations in China will be retail anchors for US brand names. More China analysts need to use the Keqiang Index instead of China's self-reported GDP figures. The audience loved the photo slideshow of Thailand's Prime Minister Yingluck Shinawatra leading our President through a diplomatic event with a come-hither look, followed by a photo of our stern-looking First Lady subtitled "COMPLIANCE." Every corporate presentation should be that hilarious.
Leading lights in mining company research held their panel on economic trends. These conference panels have been saying for years that the world's bond markets will reject Treasuries and that US hyperinflation is imminent. I agree but none of us can time this cataclysm precisely, so it continues to roll in slow motion. Rick Rule opined that the low attendance at this conference was a contrarian indicator for the metals sector. I'd like to see investor capitulation too at some point so I can get back in after selling most of my GDX holdings near the top. The panelists were aware that HFT hedge funds are manipulating markets by paying for advance notice of quotes in split seconds. I wish people would calm down about short-term swings from manipulation and use them to uncover mispriced securities. The current market bubble is more than just the effects of HFT manipulation and tax incentives for using debt in share buybacks. The Fed's easy liquidity has incentivized banks to extend easy prime brokerage credit to hedge funds and private equity firms. This is not a fun game to play and a lot of people are going to be hurt when the music stops.
Adrian Day Asset Management weighed the relative attractiveness of bullion versus mining shares. I note with chagrin Adrian's observation that mining costs have risen dramatically while large discoveries are declining in number. That's why a lot of junior miners are going to fail before any bull market in the resource sector returns. Adrian thinks raising capital is not accretive if companies use it to overpay for acquisitions. I say juniors shouldn't be acquiring at all because their business is to develop good deposits. Measuring purely on P/B value, as Adrian does, to show that gold stocks are cheap risks ignoring the quality of a company's earnings and deposits. I was lucky to score a free copy of Adrian's book Investing in Resources at one of the exhibitor booths. Perhaps that's a contrarian indicator that my lucky streak in the resource sector is about to begin again.
Rick Rule's keynote was about the fun of preparing a portfolio for recovery. He offered more confirmation that the mining sector is priced cheaply. Stories of executives squandering the capital they raised during the hard asset bull market from 2009-10 are common. Rick thinks the mining sector bifurcated this past June and that about 70% of the sector is worthless. That's a lot of small stocks headed for zero. No wonder the exhibitor floor is so small this year. Rick is one of the few investment professionals who recognizes the natural human tendency of confirmation bias that ignores information contradicting strongly held beliefs. That's why most people make many poor investment decisions.
Dr. Ron Paul was the featured keynoter. It's telling that he didn't use the permanent honorific "Congressman" which our nation's laws and political tradition entitle him to claim. He'd rather be a doctor in retirement. That shows humility. My very first impressions from the original Gold Conference years ago included the huge following for Ron Paul among the gold bug crowd. Their enthusiasm for his views has not dimmed and he was by far the most well-attended speaker. I staked out a front row seat.
Dr. Paul talked at length about how his study of Austrian School economic philosophy led him to the discovery that bad monetary policy is a threat to personal liberty. He was as critical as ever of the Federal Reserve, the dollar's reserve status, and the US's interventionist foreign policy. The Fed's QE reminds him of the Founding Fathers' hatred of counterfeiting. Dr. Paul's tour-de-force anecdotes through the Fed's modern history are worth repeating. He liked Paul Volcker but thought Alan Greenspan should add disclaimers to his old Ayn Rand writings, and Arthur Burns admitted to him that the Fed isn't really independent of the President's policies. He lauded the Occupy movement's diagnosis of America's social inequality but dislikes their preference for wealth redistribution to solve it.
I do not agree with Dr. Paul's stance on non-intervention in Iran's nuclear weapons program. Tehran has clearly stated its intent to develop and use nuclear weapons against its neighbors and it is not at all a Western-style republic. Dr. Paul is very intelligent but he is not a geopolitical analyst. His naive non-interventionist writings in the 1970s and '80s lead me to believe he would have let Fascism take over Europe. I also think he's delusional if he believes that young people want more freedom. I did a Google search of "millennials trust government" and found plenty of polling results showing that young people want more government intervention and regulation even though they have little trust in government! I used to sympathize with libertarian philosophies until I learned more about how real humans behave. People never know what they want and will trust anyone with a slick sales pitch. That's why Millennials and other generational cohorts are ready to be led around by their noses. I've got some more bad news for Dr. Paul. The Constitution's preamble says "promote the general welfare" and Article One's "Necessary and Proper Clause" gives the federal government a tremendous amount of leeway. The government's promotion of canals, railways, land grant colleges, and westward expansion made this country prosperous and immune from foreign domination.
The audience questions for Dr. Paul ranged from intelligent to nutty. I wish I could find active links to the US Gold Commission from the early 1980s because Ron Paul served on it and one of his fellow former commissioners showed up to ask whether Fort Knox's gold deposit has been audited. Dr. Paul thinks there is actual gold in the US Bullion Depository but its ownership status may be in question, which is why it needs an audit. Some other dude asked whether smart meters could feed data to the NSA. Hello? What planet is he on? Smart meters read machine data and the NSA monitors human-generated data. Get a clue. Oh yeah, local gadfly "Starchild" showed up to advocate common cause between the Tea Party and the Occupy movement. Good luck with that one. Dr. Paul totally lost me when he said liberals and conservatives should both support personal liberty and oppose wars. That is just not going to happen but people like "Starchild" will take it as gospel. I've read enough Leo Strauss and Carroll Quigley to know that the Anglo-West's hereditary ruling elite simply won't allow such a confluence of political forces. One final supplicant asked Dr. Paul whether a Cyprus-style bank solution could happen here. He avoided a straight answer but I don't think he's aware of the joint US-UK plan titled "Resolving Globally Active, Systemically Important, Financial Institutions." Yes, it really can and will happen here. It's too bad Dr. Paul will be a footnote in our country's history, maybe a notch below other forgotten advocates like William Jennings Bryan. I tried to meet him after his keynote but he was pretty much constantly mobbed as he made his way across the expo floor to the Korelin Economic Report booth for an interview. Even James Dines' booth babes followed him around. This guy had no idea that he was in the presence of greatness that day, namely Yours Truly from Alfidi Capital.
The next panel on precious metals brought forth more sector analysts. The theory that big banks can manipulate gold prices or that central banks can hold them down morphs a lot in the imagination of many commentators. I'll believe that when I see smoking gun evidence that no one can debunk. One of the better explanations of gold's behavior came when a panelist said it can drop in value during inflation even if the early onset of inflation is a blowout stage for metals. I don't listen to commentators who use the word "consolidation" because that is a technical term with no statistical validity, but people at these conferences like to throw it around. We can always count on Indian retail demand for gold to stay strong because Indians buy it for religious reasons and bury it in temples. We all saw gold rise after the 2008 financial crisis but US investors tend to have a herd mentality and sell gold when it drops in price. The bombshell of this panel came from none other than Oreninc's Benjamin Cox. Ben revealed that hedge funds hold a big chunk of US gold and a future crisis will force institutions to sell gold just to meet margin calls. This will force the price of gold down. Inflation will then force it back up, at least initially. Ben also noted that the supply of metals cannot possibly keep up with population growth and therefore cannot substitute for a fiat currency in a modern economy. He is one of the few people watching this sector who understands history. Others who say "there's enough gold for everyone" are clueless.
Jay Taylor's workshop on deflationary forces inside an inflationary monetary regime closed out my first day at this show. I share Jay's disdain for CNBC's cheerleading of Keynesian cultists while government agencies worldwide churn out false economic statistics. He cited FRED data on rising excess bank reserves (series EXCSRESNS on Excess Reserves of Depository Institutions). I won't spoil Jay's report by repeating his citations of stats on declining consumer confidence, a lower money multiplier, lower M2 monetary velocity, and other deflationary drivers. Read his writings yourself and check out Mike Hodges' Grandfather Economic Report for more depressing data.
The conference's first day of knowledge deserves my own special reflection. IMHO the last few months of FOMC minutes make it clear that some Fedsters doubt QE, but the Fed isn't truly independent of executive branch policy. The Fed will likely go along with accommodative QE if a deflationary market crash leads to a government policy response that forces hyperinflation. The time lag between the asset crash and the hyperinflationary effects of the combined Federal Reserve / executive branch policy response matter very much. The Fed's treatment of bank reserves also matters. If the Fed raises reserve requirements for banks, but then charges banks to hold reserves at the Fed, banks will be immediately forced to seek income. Banks may then immediately charge fees to their own depositors (a deflationary lever) or immediately make riskier loans ( a hyperinflationary lever, forcing up the money multiplier). I'd like to see historical evidence for hyperinflation in the economy of the world's reserve currency. I suspect deflation is more likely in a world reserve currency's home economy, up until the point that currency loses its world reserve status when foreigners refuse en masse to hold it. The status of that reserve currency may very well be the tipping point between deflation and hyperinflation in the home economy. Many things could open a path to hyperinflation in the US once the dollar loses its reserve status. Foremost in my mind is the end of petrodollar recycling but there are other possible triggers.
The second day started off with Rick Rule's boot camp on private placements. These PPs are typically restricted to accredited investors. Rick considers the company's amount of SGA expenditures versus its project expenditures, its stated purpose for a capital raise, and the deal's terms. The warrants in a PP deal are key because a portfolio of private placements with warrants minimizes the expected failure of most of the companies, much like a venture capital portfolio. Some frequent investors do "warrant stripping" if they have huge volumes of deal flow. Rick thinks that's lucrative with the right expertise. He likes full warrants better than fractions and longer durations (past two years) better than short ones. I think his praise for debt PPs is more valid in riskier juniors because the debtholders will end up owning the company in bankruptcy. He likes the rewards of bridge/mezzanine financing that include fees, regular coupons that beat booking of accruals, and upside participation. That upside sweetener can be in the form of warrants, a royalty that the issuer can buy back, or a note convertible to equity. Rick warned against companies that raise insufficient capital to complete their exploration program; that sets up failure and indicates a management team that isn't serious about a project. I disagree with Rick's stated preference for political risk over technical risk because I'm not convinced that the best deposits lie in unstable countries.
The morning keynote from Casey Research described the next big investment bubbles. The dude displayed a Photoshop merge of Janet Yellen with Ben Bernanke, just to illustrate that Calamity Jane at the Fed will be no different from Helicopter Ben. I have a hard time believing the keynote's thesis that central banks are suppressing the gold price. Some of the data on gold supply is selective and the claim that central bank gold leasing constitutes "missing supply" is difficult to discover through Mosaic theory analysis. An argument for a supply shortage makes no sense to me if the price of gold has dropped significantly from its all-time highs. Citing numbers from the depository warehouse for the SPDR Gold Shares ETF (GLD) means little if GLD also holds futures contracts on gold. I cannot buy the argument that JPMorgan acts as the Fed's agent for suppressing the gold price because . . . JPM sold its gold warehouse! It makes no sense for a SIFI bank to depart a scheme that holds forth guaranteed profits unless of course such a scheme never really existed. I think a lot of gold analysts are misreading the "eligible" line on COMEX reports of gold deliveries. I also think analysts are misreading the CFTC rules for trading organizations and the CFTC Bank Participation Reports.
I need to take a time out just to respond to the conspiracy mongers in the gold sector. I just can't believe all this stuff about gold price manipulation. Physical delivery satisfies real demand. There is no point in risking a margin call on a big futures position just to manipulate the price of gold if you still have to make good on a physical delivery. Where is the motive, means, and opportunity for SIFIs to suppress the gold price on behalf of central banks? Why would they suddenly sell their trading warehouses and switch to long positions if central banks still have gold leases outstanding?! The central banks would have to cover those outstanding leases at higher prices and book huge balance sheet losses. One of the alleged motives for banks to suppress gold is to keep interest rates down so they can keep borrowing at zero and buy treasuries for the easy carry trade. If that's so, why suddenly switch to long gold positions if that would place banks' bond holdings at risk of paper losses? Is the Fed lined up to buy back their Treasuries? Come on, people. Conspiracy theories are less compelling than supply/demand fundamentals.
Everbank gave their traditional rundown of the global markets and the implications for currencies. The PIIGS are obviously still sovereign debt risks and the poorer countries of southern Europe want to continue to borrow at Germany's preferential interest rates indefinitely. That's my take, anyway. It boggles my mind that homebuyers and college students are the only real loan demand sources in the US economy right now and the suckers are still lining up. I've blogged before about how marginal increases in debt no longer drive comparable GDP growth and Everbank has noticed the same trend. I will lay out Everbank's stated currency valuation factors: GDP growth, high current account balance, low government budget as % of GDP, low debt as % of GDP, high real interest rates. Gee, it looks like the US dollar fails on all counts. Everbank likes the Swedish krona, Chinese renminbi, Brazilian real, and Mexican peso. I don't like any of those currencies. I have no need to keep money at Everbank.
The panel on exploration trends featured two speakers I recognized from my first ever stint as a panelist two years ago. The TSX Venture Exchange is the best proxy for the exploration sector. One panelist opined that year-end tax loss selling and fund redemptions will further depress shares in the exploration sector. Hmmm, that means I'll wait until January to buy anything I'm watching now. The panel's conventional wisdom is that prospect generator models are candidates for longevity but I've always viewed them as black holes for invested capital. I'd like someone to name one great producing project that came out of a generator and made it to either stand-alone viability or acquisition by a major producer. The panel thinks survivors have lots of working capital and royalty interests. Well, I've looked at lots of balance sheets and NI 43-101 reports this year and those two things rarely go together. They noted that resource nationalism is rising. That's why I like the US, Canada, Australia, and New Zealand for their Anglo-Saxon common law traditions. My worst picks for resource nationalism risk are Venezuela and Argentina for their collectivist responses to stagflation. I'll also throw in North Korea as the worst place to invest because they kidnap and kill investors there. The DPRK has untapped high-grade deposits of tungsten and rare earths, if drill samples from Chinese companies have credibility. The panel did reveal some good red flags to watch in a troubled company. The biggest warning is flow-through funding that progressively dilutes shareholders in subsequent rounds, which indicates rising risk of the company's projects. They also noted red flags in environmental issues and fatal accidents.
A bunch of exploration company CEOs held a panel on making the grade in an investment strategy. They claimed that owning large districts increases the chance of a big discovery but IMHO competent geologists can reduce exploration to a focused area. They did reveal that different jurisdictions require different cutoff grades to be economically worthwhile. They liked Visual Capitalist and I think its infographics follow the trend in Big Data towards convenient representations.
CPM Group gave its gold market outlook. I was grateful for this data-driven analysis as an antidote to conspiracy theories about gold. I did learn that the premia on US Mint coins is a proxy for investor demand for gold. The COMEX Gold Futures and Options weekly data on net fund positions indicate changes in demand for gold, as do changes in gold ETF holdings. Many things affect gold supply. Look at annual production and new gold mine capacity for indications of changes. This sharp guy noted that gold and inflation are unlikely to surge while the US and other developed economies have high unemployment and excess manufacturing capacity. I take that to mean that gold's best days are ahead, maybe, at some point. Any Fed tapering that raises real interest rates would cause the gold price to drop.
I'll say one thing about something I heard from another self-styled gold expert at this show. I'm tired of hearing stories about how some stock that trades for less than the cash on its balance sheet is some kind of screaming buy. I consider that cash to be a depleting asset that is supposed to be used in a productive exploration program. It will go to zero if it funds a drill program that doesn't work.
I liked Dudley Baker's talk on his Common Stock Warrants platform. The site looks good and Dudley advised us to perform leverage calculations on warrants to determine their likely ROI. He also thinks warrants are useful in combination with traditional stock options. I'd like to see someone run a platform that makes contingent value rights (CVRs) just as transparent and easy to use in combination with other instruments.
The conference concluded with the traditional bulls and bears debate among Rick Rule, Jim Dines, Adrian Day, Al Korelin, and Jay Taylor. The lineup changes a little each year but it's always lively. They couldn't reach a consensus on whether the junior resource sector has bottomed but Jim sure likes the 3D printing sector. The question of whether there's really gold at Fort Knox was in keeping with the "audit the Fed, audit Fort Knox" meme that's symbolic of a general distrust in government. Jim thinks the gold has been audited but that Americans just don't care. I would really like to know whether foreign intelligence services are feeding this auditing debate by seeding "information operations" elements among the libertarian fringe. Rick asked his panelists about their most important lesson from the junior mining sector's downturn. Well, now it gets interesting. Jim told a bizarre story about the Clintons that made no sense. Al wants us to stay diversified, just as I recall him saying many times over the years of this conference. Want my most important lesson? Here it is. I learned that there's more to hard assets than gold bullion and gold stocks! A basket of hard assets includes precious metals, base metals, energy, timber, REITs, and sectors like pipelines and railroads that service them all. Jim also snapped out of his daydream about the Clintons to remark that the low attendance at this conference indicates a low for the sector's valuation. Rick had a special zinger question just for Jim about what was interesting in the many conversations at his booth. Jim said he noticed fear among his attendees, another market bottom anecdote. He wandered off into his geopolitical theories but I was left reminded of Warren Buffett's advice to be greedy when others are fearful.
I noticed the low attendance too. I've been at this conference series through all of its name changes since 2005. The decline in attendance and exhibitors has been noticeable. This was the first time since then that all of the exhibitors and workshops fit on the same floor of the SF Marriott Marquis and the expo floor only took up about half of the available concourse space. Several paid exhibitors didn't even show up at their booths, namely Equities.com, Mining Leaders, and the Financial Survival Network. I know darn well how expensive those booths are because I manned one myself in 2006. The depressed junior mining sector isn't the only thing hurting attendance. Investor relations promoters are now able to hold webinars and virtual roadshows over social media broadcast tools. Traveling to a trade show is hard for people who can get the same content over the Web. I like this particular show and I will attend for as long as it exists, regardless of how many times they change their name. I'm all about booth babes, free knowledge, and hard assets.
Saturday, November 30, 2013
Scorpio Gold Still in Penny Stock Territory
I noticed Scorpio Gold Corp. (SGN.V / SRCRF) is currently priced below a buck even though it has property in production. What's up with that? The CEO and president are both geologists and the other directors all have mining backgrounds, so the company isn't suffering from lack of experience. The company had losses in the first part of 2013 but earnings turned positive in Q3 2013, according to their quarterly report dated September 30. If this company had truly turned a corner, the share price would have responded positively since the date of that report. The stock is still near its 52-week low.
Mineral Ridge is in production but just look at the grades . . . 0.062oz/ton at the main pits with only a three year mine life. The satellite deposits' grade average grade of 0.078 oz/ton isn't much better. Goldwedge is not yet in production and awaits a 43-101 estimate. Pinon also awaits further development.
I'm not a gambler. Betting on management isn't a sufficient justification for me to put my money into a low-grade, short-life producing property with only the possibility of expansion at other properties. Scorpio will have to significantly extend that mine life and discover higher grades if it wants to be in my portfolio.
Full disclosure: No position in Scorpio Gold, ever.
Mineral Ridge is in production but just look at the grades . . . 0.062oz/ton at the main pits with only a three year mine life. The satellite deposits' grade average grade of 0.078 oz/ton isn't much better. Goldwedge is not yet in production and awaits a 43-101 estimate. Pinon also awaits further development.
I'm not a gambler. Betting on management isn't a sufficient justification for me to put my money into a low-grade, short-life producing property with only the possibility of expansion at other properties. Scorpio will have to significantly extend that mine life and discover higher grades if it wants to be in my portfolio.
Full disclosure: No position in Scorpio Gold, ever.
Friday, October 04, 2013
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