Gold stocks are (still) pretty much in negative territory for the year. How comes is not clear to me, as gold is up for the year. Yes, we are below the peak of 1,900 plus something USD, but at 1.660 USD many mining companies are printing money. Some of them have started to pay dividends - a few even do since a longer time.
Two of my recent favorites performed quite different during the last days: Agnico-Eagle (AEM) up 20 % - Goldcorp (GG) down 7 %. Whats the difference?
Well, this is earnings season.
AEM was beaten down a lot lately - being more than cut in half since end of 2010 was the reason I entered a position here. The cut was due to large operational problems of AEM, leading to a shut down of Goldex mine in Quebec (water entered he mine) and profitability problems at its Meadowbank gold mine (leading to an asset write-down). Looking at some investor presentations, I found GoldEx reserves being below 10 % of the whole company. Meadowbank was more like 20 % of the total, but its not a total write-off. A share price cut of 50 % seemed unwarranted, especially as gold stocks have been depressed to the metal anyways.
AEM Q1 came in strong, with gold production up 19 % qoq, USD 196 mn cashflow and the ability to repay USD 90 mn in debt. Dividends are 0.20 USD a quarter - around 2 % pa. even after the latest rise in stock price. Gold production was up at LaRonde (+17 %), at Kittila (+16 %), and in Mexico (+11 %). Costs in Meadowbank were still high - USD 1.000 an ounce. This is ugly compared to 300 to 650 USD on the other sites. But deduct it from current gold price - you can do the math!
GG is a different kind of cake.Stock performance over the last couple of quarters was sideways - I collect a monthly dividend on that one since quite a time, roughly 1.25 % pa. Over 5 years the stock doubled, but dropped back from above 50 to just 38 CAD recently.
Recent Q1 earnings have been 0.49 USD only instead of market consensus of 0.53 USD. Major operations set-back was produciton at Red Lake, being down 40 % qoq due to poor ground conditions and lower than expected grades. Taking that into consideration, overall production was roughly 525.000 ounces (vs. 637.000 a year ago) at cash costs of 250 USD - and realized price of 1.700 USD per ounce. With cash costs up 60 USD per ounce, selling price was up 300 USD per ounce. When i do the math, volume times (selling price less cash costs) is roughly the same as in last years quarter. But the stock dropped almost 10 %.
So, what are the lessons to learn here?
1) Both companies are solid plays. Good balance sheet. No financing problems. Low cash costs on average - far below current Gold price. Solid management. Paying dividends. Recent issues are either in the past, or seem to be not permanent. Why should I change the long term bearish view?
2) These are mining stocks. Both have several projects in operation - still you have to expect issues here and there over time. Even the best management cannot ensure there will be no set-back on grades, a quarter with production difficulties, or even a close-to-catastrophic event like water pouring into an under-ground mine.
3) Current cash-flows of gold producers are high, and this is not reflected in the stock prices. Gold is up for the year - for every of the last 8 years. Gold stocks are not. The market is missing something here - part of the explanation being the ETFs, who attract money that does not flow into precious metal stocks. (Its the same money, that would avoid to buy the physical metal because of the hassle included with that. But now it does not enter a stock ticker symbol, but just GLD - avoiding the due diligence on single companies, too.)
4) Given 1 + 2 + 3 you would like to invest in gold producers. You would like to avoid some risk - doing so by not buying the single mine producer (that goes under if its mine is under water), by not buying the south-American or African producer, by not going long the may-be take-over candidate having no current production at all but just a prospect. And you would like to invest in more than one.
5) Limiting your risk, you still have to stand strange market movements. See AEM dropping like a stone and coming back after a single good quarter. See GG, being hammered after Q1 when the long-term outlook has not changed.
The way to do it is this:
- Create a short list of companies you like to own, maybe 5 (all of them with good cash costs, producing in stable jurisdictions, several production places, maybe a dividend, good balance sheet making them independent form outside financing, history of little stock-dilution, good management)
- If you are not into gold or precious metal stock at all so far, start your due diligence with the two companies mentioned here. Putting in some 4 to 10 hours a week will make you knowledgeable till the end of next month.
- Enter a small position with each of your short list candidates once you have identified them over the next 5 weeks. Maybe allocate 25 % of you gold-stock-capital to this first entry. So if you start with 25.000 USD , invest 1.000 USD or 4 % each. This may sound stupid, as fees are high percentage-wise compared to a larger investment. But it will a) bring you into the market, b) get you involved with those 5 companies, and c) avoid the risk of entering on a particularly bad day/week with all your initial money. And as daily movements can be 5, 10 or even 15 %, what difference does a 1 or even 2 % fee make? Not much, if you play right!
- Follow the development of your 5 picks now, and once you feel the market is not getting the big picture (like for AEM over the last year or for GG over the last week) add to your position. Maybe a 2.000 USD or 8 % on the next entry. Your goal is to stay invested with each of the 5 plays for those 2 initial entries or 12 % over the long run. Always stay invested with the 4 % initial entry.
- If the prices still drop after your second entry in a position, and you still think the big picture is with you and the market does not get it: raise your stakes by the remaining 2.000 USD or 8 % you allocated to this share initially. But be careful here: can you really out-smart the market, or is there something wrong with your stock?
- Once one of your stocks picks up speed, moves ahead compared to the others, once the chart shows an exponential rise - this is when you might want to take some money from the table. If you are in your full 4 + 8 + 8 = 20 % this level might be reached sooner then when you are in only 4 + 8 = 12 %. But you never want to go below your initial 4 % (with one exception - see below). You do this, when you think the stock might come back - either because it over-performed, or if you expect the whole market to come down. The goal is to re-enter with the money you take of the table later on. With prices dropped, you will be able to buy more shares of the same company this time. You hold for (almost) ever with your initial 4 %. But the mining / precious metal market is volatile. You will only put in an extraordinary performance when you learn to trade the waves.
- Doubling down does not work in casinos. It does not work with stock markets, either. When I tell you to enter your initial position, and to triple up when you see a good opportunity, and to add more if the stock still falls: be aware! The lowest price a stock can go is zero. You do not want to hold on that long or bet more of you capital. You should really check and check and check again on the evaluation you did. Maybe the stock price if falling for a valid reason. This will hardly be something you cannot find out, just secret to the insiders. If there is a flaw, you can and will see it. Just keep an open mind, be willing to challenge your position, follow the ones suggesting to short your stock. Stay alert.
I would love to read your comments on this.
Disclosure: I am long AEM and GG.
No comments:
Post a Comment