To Hold? To Sell?
After the gains mining has seen year-to-date, a common question is: what to do now? That was the subject of the editorial in last week's Maven Letter, reprinted for you below.
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To Hold? To Sell?
Investors who are just joining the metals bull market now have it easy. There’s only one thing to do: buy. The question of what to buy is always there, but if you have limited exposure to this sector on the rise it’s simply a matter of establishing positions.
By contrast, those who entered earlier are facing a conundrum: what to do now? If gold major X is up 100%, mid-tier producer Y is up 250%, and explorer Z is up some amount in-between, what should a savvy investor do?
The answer starts broadly and ends specific to each situation.
On the broad front: the summer doldrums that barely existed are now officially over. All we had in terms of a summer slowdown was a slight volume decline and a July of mostly sideways movement. Now that we’re into August volumes have picked back up and prices are on the rise again.
The usual pattern (in a good mining market) is for volumes and activity to ramp up after Labour Day, but it’s happening early this year as investors who have been waiting five years for a fall like this work to position before September hits.
Investors aren’t the only ones getting active. Companies understand this playbook too, so lots of management teams are on the road right now trying to get their story out ahead of the September rush. September also brings about boatloads of drill results from summer work; since we just went through a few summers when barely anyone had the money to drill, the volume of news is going to feel big.
We’re in for a busy and positive fall. Broadly, mining stocks are going to gain.
That brings us to the specifics.
The early days of a bull market are blessed in being fairly free of failures. Companies spent the bear market poring over data and maps and dreaming of where and how they would spend money. Only recently did they gain access to that money and head out into the field. Some companies are generating results already – those that exited the bear in better stead – but many have yet to report back.
Don’t let the euphoria of the returning bull make you forget: not every hole will hit. Odds are up a touch because companies spent years contemplating what to do, but there will absolutely still be failures.
With that said, here is what I think investors should do with their mining positions.
These are leverage-to-gold holdings. On average they are up about 150% this year. Will they continue to rise? Absolutely.
If majors retake their 2011 highs we’re looking at a double from here. Of course they could do more if gold bests its last high water mark, but we’re way too early in the rally to know about that.
Most majors saw their share price gains slow over the last 2-3 months. Whether they will pick up again in the fall and replay the rapid rises we saw in the spring is impossible to know.
What I will say is that they will keep on rising. As such whether to hold or sell is a question of capital availability. If you do not need the capital to deploy into other opportunities, it makes sense to hold through September and October. At that point – right before the US election and with another quarter of US economic data in hand – we will have gold’s fall gains in hand and will be better suited to make a decision about whether majors or smaller companies make for better bets going forward.
This is a similar story to the majors, but with more upside. The GDX and GDXJ charts are pretty similar in terms of shape – but take note of the scales.
To retake its high the GDX has to double. The GDXJ peaked at 170 in 2011; to retake that represents a three-fold gain.
In other words, the argument for holding your mid-tiers is even stronger. Again, it’s a question of capital availability: if you are looking at a triple with your B2Gold, for example, and you need capital to buy a junior stock that you think could triple in the next year, selling BTO makes sense because it is unlikely to perform that well. If you have capital to fund the new opportunity and hold your BTO, do that because BTO will gain through the fall.
Near Developers, Developers, and New producers
This category is notable for its limited numbers – the bear market stopped so many projects in their tracks that there just aren’t many projects out there right now that are ready to be built, under construction, or newly operational.
There are a few, though, and they are all takeout targets. Majors and mid-tiers that want to increase their output during this cycle need to buy assets in operation or under construction. Producers will also buy assets that are construction ready, like Kaminak’s Coffee project, because companies often like to build their own mines their own way, even if it means production is still years out.
If you have portfolio exposure to that short list of companies with newly producing mines or projects that are nearing or under construction, keep it that way. Only strong management teams advanced their assets to this stage through that terrible bear market; now these teams are going to make sure they and their shareholders get rewarded for their efforts.
There are two paths. One is a takeout. As long as the price is right, this is a great outcome because a buyout provides an immediate premium that investors can use to fund other opportunities.
But none of these savvy management teams are waiting for a bid: all are well capable of building or operating their assets alone and could make significant progress during the next few years of bull market, achievements that the market would reward.
Either way, the future looks good for these companies that have earned a spot on the short list development ready or newly producing projects. These stocks are worth holding, despite sizeable gains already.
Here is where we have to be most careful to remember reality.
Explorers are rocking. After making money with majors and mid-tiers, investors are moving down to explorers. And so they should: exploration offers the biggest rewards.
But those rewards carry big risks. In your excitement over the opportunities of a new gold bull market, do not forget that a heck of a lot of exploration fails.
Right now explorers are in the field, doing the work they’ve wanted to do for several years. Results are coming. Not every hole or trench or survey will return the desired response.
That is especially true because the market can often get carried away in its own excitement. That generates expectations that even a good result can’t meet. Colorado Resources is a good example of this right now: the market fell in love with the story and when initial drill results weren’t phenomenal, folks started selling.
Here’s the good news: CXO shares are only down about 15%. That’s because (1) the results were still good and (2) the market remains hungry for exciting exploration stories, so there’s latent demand to absorb the selling.
This kind of situation will play out time and again over the next few months: companies will report results that don’t meet the market’s high bar and some investors will sell, but the growing crowd of mining speculators will absorb the selling as long as the results are still good.
At the end of the day, a rising mining market lifts all ships unless really bad news – a failed permit or a blank hole right where theory said there should be gold or a government coup or the like – completely derails the story. Amidst the rising tide, weak news will set a price back, to a degree and for a time that depends on how weak the news.
Exploration stocks are a speculator’s game. The market is supporting speculations more and more each day, but spec stories can only rise unless reality intervenes.
The goal is to identify exploration stories with better odds of success. And the good news is that early in the bull market there are more assets than usual offering good odds. Why? Because explorers and miners spent the last four years looking for good projects that got caught in the downturn or overshadowed by another asset in the last cycle and putting them in vehicles with the structure to succeed.
These ‘dusty but deserving’ projects now being advanced by strong teams represent much better odds of success than will the opportunities that will surface three years from now. So too do new discoveries.
Just remember: nothing is guaranteed in exploration, especially continued share price gains. The rising tide reduces risk, but it is absolutely still there. That’s why everyone should take money off the table when a speculation is up significantly and why we all need to remember that not every explorer will find what they seek. That’s just the nature of the business.
The Venture Exchange is now one of the best-performing stock indexes in the world, up a whopping 77% since mid-January. For an entire exchange to make that kind of move is impressive.
But let’s zoom out.
We have all been doing this with stock charts – zooming out to the five-year view – but it seemed the best way to wrap up this discussion of what to do with one’s mining portfolio right now.
There is a lot of ground left to gain. Right now we are in a precious metals rally, but as this cycle progresses I expect phases where zinc adds some fuel, where copper shines bright, where uranium rallies and runs, and where in all likelihood some other metal or mineral grows a big old bubble (and then bursts). Each will lift and extend the mining bull cycle. All told, it means we probably have a good couple years of opportunity ahead.
In those years the market will follow reliable seasonal patterns, which will mean chances to trade around the summer doldrums, gold’s strong fall, tax loss selling at year end, and the post-Christmas frenzy to book seasonal gains.
However, in the first year of a new bull cycle mining markets don’t follow the rules. For example, selling to take advantage of summer doldrums would have left you short this year: from early May to mid-August the GDXJ gained 38%.
This year there’s no pattern to the gains. There are just gains (and a lot of happy investors). Instead of timing your in’s and out’s, plan your trades around capital availability and relative appreciation potential.
In other words, sell a performing stock only if you need to free up capital to take advantage of another opportunity that you think offers bigger upside over the same timeframe. (Of course, you should also sell if the company reports or does something that invalidates your investment thesis.)