Metals are getting hammered again.
The hits are coming from all sides. Expectations of a mid-December rate raise are pushing against gold, which is down almost 10% from where it was trading before the Fed opened the door to December tightening in mid-October. In response, futures traders – expecting a rate increase to lift the dollar and depress gold – have dumped the equivalent of 368 tonnes of gold in just three weeks.
Rate moves and resulting dollar strength hit hardest against gold, but these forces don’t spare other metals. Copper traded as low as US$2.05 per lb. this morning, down from US$3 per lb. a year ago.
As the PhD of metals, copper is supposed to reflect expectations for the world's economies. Clearly expectations are low, which you would think at some point would manifest in a US market slowdown. Instead it just keeps climbing. However, many indicators suggest the ascent is limited, from falling appetites for leveraged loans (a yielding investment that usually mirrors stock market performance) to limited market breadth to a dollar so strong it will soon strangle manufacturing and exports.
As for copper itself, prices are now at a point where many mines are unprofitable. Standard Chartered Bank estimates that 15% of global copper production is currently unprofitable. In some areas it’s worse: the president of Chile’s mining industry group, Corminco, says the majority of his group’s members cannot make a profit. Nevertheless most major copper producers are making only marginal production cuts because the costs to suspend and then reopen a mine are substantial.
I wish I could point to reasons for near-term optimism, but I cannot. The only light I see on the horizon comes from seasonality, which is why I dedicated last week’s On The Macro column to tax loss buying. Yes, you read that right: there is real opportunity to lock in gains by buying the dips that tax loss selling deepen, in anticipation of improving sentiment going forward, especially for select equities.
Read on for more on that idea. I also included two of last week’s In The News bits and a plug for chat.ceo.ca, a site I peruse many times a day.
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In The News…
Barrick Gold sold a few more assets, marking another step forward in the major’s debt reduction effort, but the interesting part was who bought. Waterton Global Resource Management stepped forward with US$110 million for 100% of the Ruby Hill mine and 70% of the Spring Valley project while Kinross Gold parted with US$610 million to get the Bald Mountain mine and the other 50% of the Round Mountain mine.
Kinross hasn’t sealed a big deal since 2010, when it spent $7.1 billion for Red Back Mining, a deal that turned disastrous. Cautioned by that, the company has since been collecting cash. As the bear market dragged on speculation had mounted over when Kinross would finally deploy the more than $1 billion in its bank account and on what.
Now it has and patience has paid off, as this does seem an ideal deal for Kinross. The company has wanted to own the other half of Round Mountain for years, a mine that is expected to churn out 340,000 to 430,000 gold equivalent ounces annually over the next three years, with AISC in the US$850 to US$1,000 per oz. range. In announcing the deal Kinross described Round Mountain as “one of the company’s best mines”. And Bald Mountain fits the bill as an open pit, heap leach mine with a significant resource base in Nevada.
Great for Kinross – but also great for the sector to see a cautious, cashed-up company decide that now is the time to buy. Kinross must feel that prices have bottomed. Thank goodness for that.
Waterton is also an interesting player, but for different reason. Waterton is a private equity firm, but one distinguished by a deep technical team on the mining side and a long investment time frame. Those two attributes, combined with the $2 billion it raised to fund two precious metals funds, have made the firm a significant buyer in the gold mining space, particularly in Nevada.
Waterton has already been making deals left and right. Chief investment officer Isser Elishis said Waterton now has almost 20 projects in the late stages of development and 70 at earlier stages, while negotiations are ongoing around another six to eight assets. Most of Waterton’s assets are in Nevada.
Ruby Hill will be Waterton’s first operating mine. It sits on the Battle Mountain/Eureka gold trend and in 2014 produced 33,000 oz. gold at a reported AISC of US$713 per oz. The other property Waterton bought, Spring Valley, is a heap leach gold project at the preliminary economic assessment stage.
So Waterton is leading the way among private equity firms interested in making money mining, with this Barrick deal its biggest to date. Kinross is signaling that prices are as good as they’re going to get. Both suggest these experienced technical teams think the worst is over.
When listing what influences the price of gold, the supply-demand balance is pretty far down my list. Above it are currency strength perceptions, global economic and socio-political stability, debt and leverage questions, stock market performance, and movements in other metal prices.
That being said, supply and demand is a factor, which is one reason why the latest report from the World Gold Council is interesting. The other reason is that the topic of the report – that central banks around the world remain hungry for gold – combines demand with several of those other factors in that central banks buy gold as a hedge against inflation, monetary instability, and debt exposure.
That combination means I find central bank gold purchases pretty interesting. And lo and behold, they are buying.
In the third quarter, net central bank purchases climbed to 175 tonnes, representing the second-highest level on record and almost matching the all-time high of 179.5 tonnes, recorded in the same quarter last year.
Russia and China once again were the top buyers, but it was interesting to see a few banks buying that have not held gold for some time. The United Arab Emirates was one, its 5-tonne purchase representing its first gold holding since 2003.
On The Macro: Tax Loss Selling? How Bout Buying??
Ah, tax loss season. The time to take a deep look at the dogs in your portfolio and decide whether it’s time to turf.
By that, I mean you should always be assessing your dogs. And the question should always be: would you buy more today?
If the answer is no, it’s time to sell.
If the answer is yes, you can hold.
That perspective clarifies situations that can seem complicated. It erases the notion of ‘content to hold’ – because if you wouldn’t buy more today, why are you content to hold?
The reasons for buying more can range from seeing more upside in a rising stock to seeing increasing value in a sliding stock, but whether the stock is rising or falling the would-you-buy-more question remains valid.
If a stock is rising and you’d still buy more, you clearly see continued upside. If you wouldn’t buy more, you think the upside is limited – in which case it’s time to get out.
If a stock is falling and you’d still buy more, you think the market is missing something and are happy to pick up more before the tide turns. If you wouldn’t buy more, you see weakness in the story that the market is also catching – in which case it’s time to get out.
The other advantage to thinking this way is that every day your portfolio is essentially a blank slate, a new chance to assess opportunities and make moves. It’s a perspective that I think could help you bank some bucks over the next two months.
I’m talking about the other side of tax loss selling – the buying side.
In its recent tax loss selling report, Canaccord crunched the numbers (saving me the trouble): in the last five years, stocks on the TSX Composite Index down more than 15% year-to-date as of mid-November have underperformed the index by almost 4% over the month to mid-December and then, in the subsequent month (mid-Dec to mid-Jan) these same stocks have outperformed the index by 3.6%.
That outperformance is on top of gains the TSX reliably generates over that time frame.
So instead of only seeing tax loss selling as a time to generate tax credits by dumping dogs, let’s look at the opportunity to profit.
What I want to do it outline how I look at tax loss opportunities and then highlight some companies I am thinking about playing for profit this time around.
This process will take some time but that’s ok because tax loss selling will continue for the next month, so we have time.
Today, let’s look at two examples of companies that are down notably year-to-date and therefore are vulnerable to further tax loss selling pressure…but that deserve better and therefore are among the tax loss losers that are more likely to achieve outsized gains once the selling subsides and the strong season gets going.
The first is Tahoe Resources (TSX: THO).
Not a great 52-week chart. Before getting into why, let’s set the stage.
Tahoe owns and operates the Escobal silver mine in Guatemala and the La Arena gold mine in Peru. The company is also building the Shahuindo gold mine in Peru, which will be an open pit oxide heap leach operation.
This year the company is on track to produce 18 to 21 million oz. silver and 200,000 to 220,000 oz. gold. The silver comes from Escobal, where an expansion just boosted mill throughput to 4,500 tonnes per day (tpd) from 3,500 tpd and the ore averages better than 500 g/t silver.
Those numbers matter – the biggest and best silver mines in the world share several attributes, including large tonnage, high grades, and strong byproduct credits. At Escobal, those attributes enabled all-in sustaining costs of $9.72 per oz., net of byproduct credits, in the last quarter (versus a silver price of US$14.33 per oz.).
At La Arena, in Peru, AISC averaged US$729 per oz. in the third quarter (net of byproduct credits) and have come in significantly below guidance of US$900 to $950 per oz. all year.
The under-construction Shahuindo mine will be a big operation, moving 10,000 tonnes of ore per day from the mine to the heap leach pad. The effort will produce 100,000 oz. gold annually, but mine capital costs are just $132 million and the asset should generate a 38% internal rate of return. First gold is expected in January; prior to that Tahoe will update Shahuindo’s reserve count, which will likely double based on a lower cut-off grade made possible because of good recoveries and limited crushing requirements.
Tahoe has $110.6 million in cash, against $35 million in debt, and pays a US$0.02 monthly dividend.
So why the poor share price performance this year?
Weak silver prices haven’t helped, but there’s more to the story than that. Specifically, Escobal is in Guatemala. In late 2014 the Guatemalan Congress passed a bill implementing a 10% mining royalty, representing a major jump from the 1% royalty that had been in place since 1996. The news hit Guatemalan operators hard: in the second half of 2014 Tahoe’s share price was cut in half (the company did not at that time own La Arena, so Escobal was everything).
The royalty change was challenged in court and, on November 5th, the court clarified a mid-September opinion that the 1% royalty was still in place because Congress did not have authority to change mining law via a budget bill. The official ruling has yet to be published.
The key point is that Tahoe got hammered for a royalty change that looks like it will never actually happen, especially now that a new president with a more pro-mining outlook has been elected. The required royalty rate will likely increase but Tahoe had already been paying 5.5% voluntarily, in part because the voluntary structure had the funds going to local communities.
The company also floundered a little as it worked through its acquisition of Rio Alto Mining, announced in February and completed in April. Well, the company did not flounder so much as its share price did, as the market came to terms with the ‘new’ Tahoe Resources.
The new company is inarguably better, yet cheaper. Tahoe has an exceptional management team. The company was one of few miners that produced good stand-alone third quarter results, with total revenues from metal sales of US$145.7 million and total operating costs of US$105.6 million. Acknowledging depreciation of the Rio Alto acquisition price, covering some costs around corporate reorganization, and accounting for currencies and dividends, net earnings amounted to US$13.3 million. That is laudable.
The company has a strong balance sheet, an inexpensive new gold mine about to come onstream, and a proven history of positive social relations, efficient mine management, capital prudence, and dividends. Because of all these attributes Tahoe has historically traded at a 40%-plus premium to precious metal producer peers. Today it is getting a mere 3.5% premium.
Guatemala could well start to emerge from its royalty-hike discount in the coming months, as the new president is sworn in, the court publishes its ruling, clarity emerges around royalties going forward and, hopefully, the exploration moratorium is lifted.
The stock is down more than 15% year-to-date, which makes it a likely target of tax loss selling. Yet there are company-specific catalysts ahead and Tahoe is fundamentally a good company, with well-run assets, a solid balance sheet, and reliable dividends.
The second company is Primero Mining (TSX: P).
Another ugly chart. Again, let’s start with the story.
Primero has two underground mines: the San Dimas gold-silver mine in Mexico and the Black Fox gold mine in Ontario.
San Dimas produces more metal, its 2015 guidance standing at 155,000 oz. gold and 7.5 to 8 million oz. silver. Using silver as a credit, San Dimas produces gold at an AISC of US$740 to $770 per oz.
Investments made at San Dimas of late should soon start to pay off. Primero is currently expanding the mine to process 3,000 tpd instead of 2,500 tpd, a goal that should be achieved within six months, and a new mine connection tunnel has reduced haulage distances by several kilometres. A tailings washing system was also added recently to boost recoveries and the mine is moving from a 5.5-day week to a 7-day week.
Moreover, exploration successes bode well for San Dimas’ future. The Jessica vein, for example, generated drill intercepts of 47.2 g/t gold and 5,994 g/t silver over 4.6 metres in the third quarter – and Jessica is already in production. Even better is that Jessica proved gold-bearing veins can exist under an upper volcanic post-mineralizing event layer that was previously thought to limit mineralization.
Black Fox should produce 70,000 to 80,000 oz. gold this year. AISC are expected to come in between US$1,150 and US$1,200 per oz. Black Fox has been transitioning from an open pit operation to an underground mine for several years and the open pit provided its last ore in September. It has taken longer than expected to ramp up the underground operation completely, but the operation will still likely meet its guidance numbers and beat its cost estimates.
The drag on Primero shares are partly because of the slow Black Fox ramp up, partly because of uncertainty around a Mexican tax question, and partly because the costs to expand San Dimas and transition Black Fox have eaten up profits in recent quarters. But it costs money to keep mines going, and investments made yesterday should pay off tomorrow.
Looking ahead, Primero will be busy in the first half of 2016. The company will update reserves and resources, incorporating more than 200,000 metres of drilling at its two operations; it will commission the expansion of San Dimas to 3,000 tpd; it will ramp up underground operations at Black Fox to 1,000 tpd; and it will likely get resolution to the tax question in Mexico.
With its share price down 36% year-to-date, tax loss selling pressure is likely. But, like Tahoe, this is a company that reliably controls costs and creates good margins. With company-specific catalysts also pending, it looks like a good candidate for tax loss buying – when the downside pressure abate.
That question – when – is what I’ll talk about next week. We’ll look at how to identify buy and sell targets for potential tax loss buying candidates and how to use those ranges to help you decide what to buy, how much to pay, and when to get out.
A place to talk shop. All day, every day. With a really knowledgeable crowd.
There’s a very cool website you should all check out. It’s a chat room, actually, but one where the chat is totally focused on mining and exploration.
Check it out. I keep it open all day and check in on the conversation every time my brain surfaces from whatever I’m working on.
I’ll pop in as I get to work at 6:30 or 7 and see a list of news releases from the mining and exploration world, with comments on the announcements that caught attention. In fact, it’s the first place I go now to see what news has surfaced in the sector overnight.
I’ll swing back through at 8:30 and a debate will be raging about how Rubicon got it so wrong at Phoenix, with input from several Qualified Person geologists and engineers.
At 11 two longtime mining investors will be comparing uranium picks, while several technical analyst types talk about certain stocks showing signs of a breakout.
Mid-afternoon might bring a lively debate over the price of copper with stats around stockpiles, costs, and demand that morphs into a discussion about China. Later I might see a few good book recommendations (I’ve bought at least three books recommended by fellow chatters, and truly enjoyed them all).
All the while news releases are continually posted and those of interest are discussed, while the more familiar chatters poke fun at themselves and each other.
It’s honestly a fantastic forum, a constant conversation about mining, exploration, global economics, metal prices, and the people of this sector, carried on by a high caliber group.
You sign up and can post anonymously or under your chosen username. I’m resourcemaven, not surprisingly. Eric Coffin is regularly on the site, under HRA_Coffin. The other night Brent Cook showed up for a while. Brent’s right-hand man, mining engineer Tim Oliver, is a regular. An impressive list of other geologists, engineers, technical analysts, and economists also frequent the site.
You can search by company to see what people have been saying about a particular stock. Even better: by signing up to follow a particular stock you will get notified not only when it is being discussed, but also whenever an insider of the stock makes a trade, via SEDI.
It’s information, expert opinion, ideas, networking, and some fun, available 24-7. And there are apps for iPhones and Android devices (CEO.ca in apps stores), so you can carry chat around in your pocket. I hang out there when I’m riding the bus and I’ve dealt with all my email tasks. Or at least most of them ;)
In her letter, Resource Maven explains what she is buying and selling, and why. Maven has bought into several of the markets best - performing stocks well ahead of the curve. She regularly identifies exciting new exploration opportunities and manages the inherent risk by selling some into speculative gains. And the mine builder and operator stocks that form the basis of the portfolio give strong, ongoing leverage to the rising prices of gold and silver. She has your precious metal bases covered.
As a recent subscriber to your newsletter, I wanted to say thank you for all the amazing information and detailed analysis regarding the many companies you're invested in. I cannot begin to imagine how much time you put into your work. I am very new to investing in the mining sector and did quite a bit of research before selecting your newsletter over the many others available. I was nervous about signing up to anyone's newsletter as there is so much negativity on the internet about newsletter writers (e.g. pump and dumpers). Anyways, I'm feeling good about being aligned with you.
BTW - I really enjoy reading your newsletter - very comprehensive and you do an excellent job of integrating a macro perspective into your analysis.