Stock Selection Update #94 - May-08 2020

We are going to 'dip a toe' into the oil tanker trade that we first mentioned about 2.5 weeks ago. We were planning to wait for evidence that oil's short-term price rally was near its end before initiating this trade, but the quarterly financial results published by Euronav (NYSE: EURN) on 7th May have convinced us that it's time to act (EURN owns the world's largest independent tanker fleet). The risk/reward now appears to be very attractive.

EURN's results for the March-2020 quarter (Q1-2020) were excellent. Revenue was up 80% year-over-year (yoy) and 17% quarter-over-quarter (qoq). More significantly, earnings per share was up by about 1,000% yoy and 40% qoq. Most significantly, the company announced that next month it will pay a dividend of US$1.10/share, which comprises a final dividend of US$0.29 associated with 2019 and a dividend of US$0.81 associated with the first quarter of this year. The stock goes 'ex' the 0.29 dividend on 28th May and 'ex' the 0.81 dividend on 15th June, so buyers near the 7th May closing price of US$10.03 will obtain a dividend yield of 11% almost immediately.

During Q1 the company achieved an average spot rate for its VLCCs (Very Large Crude Carriers) of US$73K/day, but it advised that during Q2 to date it is averaging US$95K/day for these ships. This suggests that the Q2 financial performance will be even better than the Q1 performance.

After gaining about 4% on Thursday 7th May in reaction to its latest financial results, EURN is trading at only 2.5 times annualised Q1 earnings. This suggests that the market expects tanker rates to collapse during the second half of this year. One implication is that if it starts to look like tanker rates will remain elevated for another 2-3 quarters then there will be a substantial upward re-rating of the stock price. Another implication is that with the market having fully discounted a return to the much lower tanker rates that prevailed 12 months ago, the risk from here is low. That's why we say that the risk/reward looks very attractive.

Further to the above, we have added EURN to the TSI List at Thursday's closing price of US$10.03 as a trade with an expected duration of 3-9 months. Also, our aim is to add a second tanker stock (probably Frontline (NYSE: FRO), which reports its quarterly financial results on 29th May) to the TSI List within the next few weeks.

On a separate matter, in this week's Interim Update we wrote that we would add the IWM (Russell2000 ETF) October-2020 $100 put option to the TSI List if it traded at US$4.00. It traded as low as US$4.10 on Thursday and ended the day at $4.16-$4.25, which is close enough. We have added the option to the TSI List at roughly the mid-point of the aforementioned bid-ask spread ($4.21).

Stock Selection Update #93 - Mar-09 2020

Market volatility has become even more extreme and there will be a huge move -- initially to the downside -- in the US stock market today (Monday 9th March).

This is a very brief note to confirm that we still think it makes sense to take a trading position in Enable Midstream Partners (ENBL). However, due to the incredible volatility we will use the average price over the first 30 minutes of trading today as our entry price for record purposes. Also, we will add a long-term position in Trilogy Metals (TMQ), an exploration-stage copper miner that was discussed in the 26th February Interim Update, if it trades at US$1.10.

Lastly, today would be a reasonable time to exit the Deutsche Bank (DB) January-2021 US$5 put option added as a hedge in December. For TSI record purposes, the put will be exited if it trades at US$1.00.

Stock Selection Update #92 - Dec-20 2019

In the 16th December Weekly Update we wrote that Fortuna Silver Mines (FSM) would be added to the TSI List as a trade with an expected duration of less than three months if it became available at US$3.35 within the ensuing two weeks. It was trading at US$3.62 at the time and has since pulled back to US$3.41.

US$3.41 is within 2% of our targeted buy price, which is close enough. After all, it's not like we are trying to scalp a profit of a few cents. The short-term upside potential is, we think, 30%-50%, so if the trade is going to work then paying an extra 2% to get in won't make a significant difference.

Therefore, we have added FSM to the TSI List as a short-term trade with an initial daily-closing stop at US$3.15.

FSM has a potential stock-specific rally catalyst in the form of the Lindero gold project going into production. However, this trade probably will sink or swim based on how the current price patterns for gold, silver and the gold-mining indices/ETFs are resolved. Upside breakouts or downward reversals should happen very soon, so the FSM trade should either start working or get stopped out within the next several days.

Stock Selection Update #91 - Jul-23 2019

After the close of trading on Monday, Golden Arrow Resources (GRG.V) announced that it has sold its 25% stake in the Pirquitas-Chinchillas silver-lead-zinc project in Argentina to its JV partner, SSR Mining (SSRM). The amount to be paid by SSR comprises:

- C$3M in cash payable upon closing.

- Cancellation of the outstanding principal and accrued interest on the US$10M non-revolving term loan provided by SSR to GRG.

- C$26M in shares of SSR Mining determined by the 20-day volume weighted average price of SSR's shares on the TSX ending on the last trading day prior to the closing date of the Transaction.

- Payment of GRG's portion of any cash calls made by the JV under the shareholders agreement until the closing of the transaction.

- Transfer to Golden Arrow for cancellation of the 4.3M GRG shares currently held by SSR Mining.

The value of the above is about C$44M.

Upon completion of the asset sale GRG will have no debt, about C$3M of cash, C$26M of SSR shares and some exploration-stage projects in Argentina and Chile.

We have never taken a close look at the portfolio of exploration-stage assets owned by GRG, because our sole interest was the 25% stake in Pirquitas-Chinchillas. We don't know how much these assets are worth, but the current market value would not be substantial. Our guess is no more than C$10M. However, the GRG team has had a lot of exploration success in the past and could repeat that success in the future via the discovery of another economic mineral deposit.

Cutting to the chase, this deal greatly de-risks GRG and underpins the stock price, but it also removes all leverage to the silver price and eliminates our reason for including the stock (both the short-term position added last week and the long-term position) in the TSI List. We therefore will be looking for a near-term opportunity to exit.

We don't know how the stock market will react to the deal, but, for very rough indicative purposes, we view the stock as a hold at C$0.25-C$0.30 and a sell at C$0.35-C$0.40 (GRG last traded at C$0.28). Unless advised otherwise, the stock (both positions) will be removed from the TSI List if it trades at C$0.40.

Stock Selection Update #90 - Jun-11 2019

In the Weekly Update published on Sunday we noted that the gold market was short-term 'overbought' and at resistance, implying a high risk of some corrective activity over the coming 1-2 weeks. We also noted that the suspension of the tariff threat against Mexico over the weekend could be the catalyst for a significant pullback in the gold price. A gold-market correction that we suspect will last 1-2 weeks began on Monday.

At the end of last week the silver market was yet to show much strength and wasn't close to being 'overbought', but silver has followed gold into correction mode. As is the case with the leading market (gold), the lagging market (silver) probably will correct/consolidate for 1-2 weeks.

At this stage the evidence that the silver price has bottomed is tentative. Consequently, there is still a realistic chance of the silver price dropping to test major support at $13.50-$14.00 before a strong intermediate-term rally gets underway. However, the risk of that happening will all but disappear if the gold price breaks above long-term resistance in the $1350-$1380 range, which could happen as soon as next month and probably will happen within the next few months.

We are keen to add a silver-related trading position to the TSI Stocks List that takes into account the possibility that a substantial rally will begin soon as well as the possibility that the price will chop around for several more months and test major support prior to the start of a substantial rally. The SLV (Silver ETF) January-2021 $18.00 Call Option fits the bill. This option ended Monday's trading session at US$0.45-$0.49.

Long-dated options are often underpriced, but they are also often illiquid and therefore difficult to trade. In this case, however, the long-dated option of interest has reasonable liquidity.

We have added the above-mentioned SLV call option to the TSI List at the midpoint of Monday's closing bid-offer spread in anticipation of a substantial silver rally getting underway sometime within the next 12 months.

Stock Selection Update #89 - May-16 2019

The price of platinum has pulled back from an early-April high of US$920 to $833, meaning that it has 'corrected' by almost 10% in a little more than a month. Over the same period the price of the Physical Platinum ETF (PPLT) has dropped from around US$86 to US$78.79. Both platinum and PPLT are now trading very close to their respective 200-day moving averages. This has created another good opportunity to buy platinum.

We have decided to add PPLT to the TSI Stocks List at Thursday's closing price of US$78.79. It is being added as a trading (as opposed to a long-term) position, although buyers should be prepared to hold for up to two years. We expect that within this period platinum will trade at least 50% above its current price.

Unlike a company that produces a useful commodity, the commodity itself can't go bankrupt. Consequently, there is a lot less risk involved in buying physical platinum than there is in buying the shares of any platinum mining company. For example, if you obtain exposure to platinum by purchasing the shares of Sibanye (SBGL) or Platinum Group Metals (PLG) then your maximum possible loss is 100%, regardless of how cheap the shares appear to be. However, if you buy physical platinum at today's depressed level then your maximum possible loss will be less than 20% (we think the worst-case realistic scenario is a test of last year's low, which implies downside risk of about 10%). To put it another way, platinum could get a bit cheaper but it ain't going to zero! As a result, averaging down can be a very low-risk strategy for patient buyers of physical metal.

We suspect that platinum's correction has almost run its course, but, further to the above comments, buyers near today's price in the $830s should be prepared to average down if given the opportunity to do so near long-term support in the $780s.

By the way, an equivalent fund to PPLT trades on the ASX under the symbol ETPMPT. This fund is a reasonable way to gain exposure to platinum, but it is very illiquid and therefore can be difficult to trade. It traded earlier today at A$114.78.

Stock Selection Update #88 - Apr-24 2019

The gold mining sector continued its downward trend over the first two days of this week. As a result, the Junior Gold Miners ETF (GDXJ) has fallen for nine days in a row and is now at its lowest level of the year. To state the obvious: it is short-term oversold.

At least a 1-2 week rebound should begin soon, but the short-term risk/reward still doesn't look bullish. This is because the recent weakness of both the HUI/gold ratio and the GDX Advance-Decline Line suggests that the coming rebound will be followed by a drop to new lows for the year.

Due to the lack of evidence that a sustainable low is in place or close at hand it doesn't make sense to buy gold-mining stocks for short-term trades at this time, but many of these stocks are at very attractive levels for longer-term accumulation. A good example is Sabina Gold and Silver (SBB.TO). SBB is not the cheapest junior gold-mining stock out there, but due to its relatively low risk it has one of the best risk/reward ratios.

SBB has about 292M shares outstanding, which means that its market cap is a little less than C$300M at Tuesday's closing share price of C$1.01. The company's main asset is its 100% ownership of the fully-permitted Back River gold project in Nunavut, Canada. This project has a total gold resource of 7.2M ounces at an average grade of around 6-g/t.

According to the Feasibility Study completed in 2015, at a gold price of US$1250/oz the Back River project's post-tax NPV(5%) and IRR are C$606M and 28.3%, resp. Furthermore, the economics are robust down to a gold price of US$1000/oz.

The company also owns a silver royalty associated with Glencore's Hackett River zinc project. The royalty is being assigned very little value at the moment, but if Glencore were to move Hackett River into the construction phase then the royalty probably would be worth more than SBB's current market cap.

Importantly, SBB's C$41M budget for this year's work program (resource expansion and construction preparation at Back River) is fully funded by the company's existing cash. This should mean that there will be no need to tap the equity market for additional funds over the coming 6 months unless the company moves Back River into the construction phase, which it probably won't do unless there is a substantial improvement in the market for gold-mining stocks.

There is a decent chance that SBB will be taken over by a much larger mining company within the coming 12 months, but ideally a bid won't come until after the share price has rebounded to at least C$2.00.

SBB is already included in the "Trading Positions" section of the TSI List. We will look for an opportunity to exit this 'short-term' position within the next three months (the way things are going it most likely will be exited at a loss), because it has been held beyond its originally-planned 6-9 month duration. However, SBB has all the attributes to be a long-term position and will be immediately added to the "Gold and Silver" section of the List.

Taking into account SBB's chart and the current market environment for gold mining stocks there is a risk that SBB will trade as low as the mid-C$0.80s before bottoming out, but the intermediate-term upside potential is much greater than this downside risk. We added to our own SBB position in the low-C$1 area on Tuesday and plan to make another purchase if the stock drops into the C$0.80s.

Stock Selection Update #87 - Apr-03 2019

The purpose of this email is to highlight a speculative opportunity in a junior resource stock.

eCobalt Solutions (ECS.TO) owns the Feasibility-stage, environmentally-permitted Idaho Cobalt Project (ICP) located near Salmon in Idaho, United States. The ICP has the largest NI 43-101-compliant cobalt resource in the US, with 45.7 million pounds Co in measured and indicated resources. According to a Feasibility Study (FS) completed in 2017, the project could be developed into a mine with annual cobalt production of 2.4M pounds, an after-tax NPV(7.5%) of $136M and an IRR of 21.3% assuming a cobalt price of $26.65/pound. It is reasonable to assume that the project would NOT be economically viable at the current cobalt price of $14/pound, but the asset has significant value due to its US location and the potential for the cobalt price to move much higher over the next few years.

ECS peaked at C$2.10/share in early 2018, but it has been downhill ever since. The share price bottomed a few weeks ago at only C$0.25.

Prior to the start of trading on Monday 1st April it was announced that ECS had agreed to be taken over by the Australia-listed Jervois Mining (JRV.AX) in an all-stock transaction, with each ECS share to be exchanged for 1.65 JRV shares.

JRV's flagship asset is the Nico Young nickel-cobalt project in New South Wales, Australia. The company is close to finalising an economic study based on a JORC-compliant inferred mineral resource of 167.8 million tonnes at 0.59 per cent Ni and 0.06 per cent Co, meaning that the project economics have not yet been estimated. Also, the current resource indicates that Nico Young is a nickel project with a cobalt byproduct, not a cobalt project.

Based on JRV's price of A$0.23 at the time of the takeover announcement, the implied value of the offer for ECS was C$0.36/share. Since ECS had ended the preceding trading session at C$0.34, it was a very slim takeover premium.

The stock market was unimpressed and ECS shares closed down 1.5c at C$0.325 on Monday.

In Australian trading on Tuesday JRV shares rose to A$0.28, implying a value of C$0.44/share for ECS. We thought that this would lift ECS to at least C$0.40/share, but in Canadian trading on Tuesday the ECS price only rose to C$0.34.

JRV shares closed unchanged at A$0.28 in Australian trading on Wednesday, leaving the large discount in place.

Even at the current low price we wouldn't be interested in ECS in the absence of the JRV bid. There are better ways to gain exposure to cobalt, chief among them being Cobalt 27 (KBLT.V). However, the JRV bid makes ECS a good speculation at around C$0.34.

A likely reason for ECS's current large discount to the implied value of JRV's offer is that JRV is listed in Australia. JRV will seek a listing on the TSXV, but right now the shares only trade in Australia.

Stock Selection Update #86 - Nov-07 2018

The overall result of the US Midterm Election was in line with the polls, in that the Republican Party has lost control of the House and retained control of the Senate. Because this is the outcome that was generally expected, the impact on the financial markets should be relatively small. The stock market rebound that got underway (as expected) early last week probably isn't over.

In any case, the purpose of this email is not to discuss the US elections; it's to note that we are removing the bearish oil speculation (USO January-2019 $13 put options) from the TSI List. The oil price will have to drop another 10% to reach our short-term downside target of $55, but the risk/reward is no longer skewed in the bears' favour.

Based on the current option price of US$0.62 and the price of $0.39 at which the position was added to the List in late-August, the profit on the trade is only about 60%. However, anyone who averaged into a position could have fared much better. For example, in our own account the final purchase of these options was made at $0.12 and the average cost was around $0.20.

For your information, one-third of the USO put-option position in our own account was exited late last week and another third was exited on Tuesday of this week. Our current plan is sell the balance if the oil price drops to around $58.

Stock Selection Update #85 - May-08 2018

There was important news after the close of trading on Monday 7th May that affects two members of the TSI Stocks List. The news is that Lundin Mining (LUN.TO) has joined with TSI stock Euro Sun Mining (ESM.TO) to bid for TSI stock Nevsun Resources (NSU). The bid values NSU at C$5.00/share.

The bid is structured as follows:

1) LUN will pay C$2.00/share in cash plus C$2.00/share in stock for NSU's stake in the Timok project in Serbia. NSU owns 100% of the Timok Upper Zone (TUZ) and will end up with 46% of the Timok Lower Zone (TLZ) after JV partner Freeport McMoran (FCX) completes its earn-in.

2) ESM will pay C$1.00/share in stock for NSU's 60% stake in the Bisha project and NSU's cash.

NSU shares ended Monday's session at C$3.82, so the bid constitutes a 30% premium to the current market price. Although this is a decent premium, the bid has been rejected by NSU's management.

The rejection of the bid is reasonable, because a good argument can be made that the stock is worth a lot more than the offered price. For example, if we assume that at this stage of its development the TUZ is worth 50% of its US$1311M NPV, that NSU's TLZ stake is worth US$200M (it's probably worth a lot more) and that Bisha is worth about 1-times annual revenue, then adding US$188M of working capital gives us a back-of-the-envelope value estimate of US$1350M for the entire company. This equates to about US$4.50/share (C$5.80/share), based on fairly conservative assumptions.

In our opinion the bid has almost no chance of success at its current level, but it means that NSU is now in play. There's a strong possibility of a higher bid, either from the current bidders or from FCX (it would make a lot of sense for FCX to consolidate ownership of Timok, especially given the problems it is encountering at its Grasberg mine in Indonesia).

In the unlikely event that the current bid achieves success it would be an excellent deal for ESM (taking into account the cash, we reckon that ESM would be buying Bisha for about half of what it is worth) and an OK deal for NSU shareholders. However, a better deal for NSU shareholders is potentially on the cards.

Our suggestion is that if you own NSU shares, continue to hold in anticipation of a better offer.

Stock Selection Update #84 - Feb-19 2018

This email covers changes to the TSI Stocks List and the Small Stocks Watch List.

1) Changes to the TSI Stocks List

In the 1st January 2018 Weekly Update, we wrote:

"To make the TSI Stocks List less unwieldy and to thus ensure that we are able to provide adequate coverage of each listed stock, we are going to impose a limit on the number of stocks in the List.

...We think that 15 is a reasonable maximum for the TSI List.

It will be a rigid limit, meaning that if there are already 15 stocks in the List then a new stock cannot be added unless an existing stock is removed. As well as making the List less cumbersome from a commentary-writing perspective, this will impose some additional discipline by forcing us to regularly review the risk/reward of all existing stocks.

We will, however, retain some flexibility in that the limit will only apply to long-term positions (LIST #1 and LIST #2 on the stock selections page). In other words, warrants, options and shorter-term trading positions won't be counted.

There are presently 19 long-term positions in the TSI List, so we will have to remove at least four stocks."

We have since removed two stocks and added one stock, so there are presently 18 long-term positions in the List. A net deletion of three stocks must therefore happen.

The process of reducing the size of the TSI Stocks List continues today, with the removal of two stocks that we've been following since 2006-2007. The two stocks are Evolution Mining (EVN.AX) and Energy Fuels (EFR.TO, UUUU).

When a stock has been in the TSI List for a very long time, as is the case with both of today's removals, we will have highlighted a large number of buying and selling opportunities at different prices over the years. The difference between the prices at which the stock entered and exited the List therefore may not be representative of performance. However, since the TSI Stocks List is not designed to be and is not managed like a portfolio, the difference between the original and final prices is all we have to go on when recording performance.

For EVN the result was a gain of about 300% and for EFR the result was a loss of about 98%.

We have selected EVN, a mid-tier gold producer, for removal because it is now a relatively conservative stock that does not offer substantial leverage to changes in the gold price. This should cause it to be relatively strong during periods of lethargy or weakness in the bullion market and relatively weak during strong intermediate-term rallies in the bullion market. We are expecting gold and gold-mining weakness over the coming month, so in the short-term we expect EVN to hold up relatively well. However, it is likely to underperform once the next tradable rally gets underway.

For your information, our own account will continue to have exposure to EVN. We have reduced the size of the position from large to medium, but with the yield on cash deposits being almost non-existent we like the fact that EVN offers a significant dividend yield, and with gold not being in a bull market we don't mind EVN's lack of gold-price leverage.

We have selected EFR for removal because it is a leveraged play on a commodity that has a relatively low probability of commencing a substantial and sustainable advance in the foreseeable future. The commodity is uranium.

We expect to return EFR to the TSI List as a short-term trade later this year to take advantage of the next bout of short-lived enthusiasm for uranium, but due to the self-imposed new restriction on the TSI List size we would prefer that long-term positions were focused on commodities with superior long-term upside potential. The "EV metals" are the commodities with the most bullish long-term risk/reward ratios.

As is the case with EVN, our own account will retain some exposure to EFR. Specifically, we have a small-to-medium position in EFR purchased at an average cost of C$2.40 (about 20% above the current market price) that we have no immediate plan to sell. This position is being retained because it provides our only exposure to uranium and because holding the shares forces us to follow the company and the uranium market more closely than we otherwise would.

2) Change to the TSI Small Stocks Watch List (SSWL)

Emmerson Resources (ERM.AX), a microcap gold explorer, was added to the SSWL in 2016 due to our expectation that the extremely high-grade gold intercepts achieved in the drilling of the Tennant Creek Mineral Field (TCMF) would prompt Evolution Mining (EVN.AX), ERM's JV partner, to make a takeover bid.

It seems that a takeover of ERM by EVN is not going to happen. Instead, ERM and EVN have come to a new arrangement that involves EVN taking 100% ownership of a small part of the TCMF and ERM taking 100% ownership of the rest. This appears to be a reasonable deal for ERM and the stock continues to have large exploration-related upside potential, but the same could be said for many other junior mining stocks. From our perspective, the important differentiator for ERM was the support it was getting from a mid-tier producer. Due to the removal of this support, we have removed ERM from the SSWL.

ERM was priced at A$0.05 when it was added to the SSWL and subsequently traded as high as A$0.19. It is currently trading at A$0.08.

That's it for now.

Stock Selection Update #83 - Feb-06 2018

There was a spectacular volatility spike in the US stock market during the first two trading days of this week. We will be discussing the implications in the Interim Update, but suffice to say right now that a) the correction probably will continue for a few more weeks, with a rebound followed by a decline to a new low, and b) the bulk of the correction's price decline was probably out of the way when the March S&P500 futures contract traded at 2529 prior to the opening of the stock market on 6th February.

The reason for this email isn't to discuss the general stock market drama, but to confirm the addition of Cobalt 27 Capital Corp. (TSXV: KBLT) to the TSI Stocks List at C$11.00. This change to the TSI List is further to the cobalt discussion included in the 15th January Weekly Update. For ease of reference, here is the relevant bit:

"Investors can participate in the cobalt bull market without taking exploration or country risk (almost all of the world's high-margin cobalt deposits are in the DRC) by purchasing the shares of Cobalt 27 Capital Corp. (TSXV: KBLT). KBLT currently owns 2,983 tonnes of physical cobalt stored in LME warehouses and some royalties on early-stage cobalt projects. It also plans to do cobalt streaming deals at mines where the cobalt byproduct is small relative to the mine's total revenue.

KBLT has only existed for about 7 months. It has 34M shares outstanding and ended Friday's session at C$12.45/share.

Based solely on its cash and physical cobalt, that is, assigning no value to its royalties, we estimate that KBLT's current net asset value (NAV) is about C$9.00/share. This means that KBLT is trading at about a 38% premium to NAV.

Taking into account the paucity of choices when it comes to cobalt-focused investments and KBLT's plan to do streaming deals, this is not an unreasonable premium. It could therefore make sense to take an initial position near the current price, although we are hoping that a better buying opportunity will arrive within the next couple of months.

A much better buying opportunity is not likely, because a stock such as this usually will trade at a significant premium to NAV and there probably won't be a large decline in the cobalt price. Consequently, we think that the current NAV defines the downside risk.

KBLT will be added to the TSI Stocks List if it trades at C$11.00."

Since we wrote the above the cobalt price has moved up from around US$75,000/t to around $80,000/t, so KBLT's NAV has risen a little. At the same time, the mini panic in the stock market caused KBLT to trade as low as C$10.91 on Tuesday 6th February. This created the opportunity we were hoping for.

Stock Selection Update #82 - Nov-20 2017

We are adding Resolute Mining (ASX: RSG) to the TSI Stocks List as a short-to-intermediate-term trading position, although the stock has the right attributes to be a longer-term holding.

RSG's most important assets are the Syama gold mine in Mali (West Africa) and the Ravenswood gold mine in Queensland, Australia. Syama is currently producing gold at the rate of 220K-ounces/year and Ravenswood is currently producing gold at the rate of 80K-ounces/year, but in-progress development plans are expected to increase the production rates to 240K-ounces/year and 120K-ounces/year, respectively. RSG also owns the Bibiani gold project in Ghana. It is expected that Bibiani will be brought into production within the next year or so and will produce gold at the rate of 100K ounces/year over an initial 5-year life.

With 741M shares outstanding and estimated net cash of A$187M, at the current share price (A$1.025) RSG has an enterprise value of A$573M (US$435M). This is low for a profitable gold miner with 300K-ounces/year of current production (at an AISC of US$960/oz), a 12-13 year mine life at its two most important assets, and built-in growth to a production rate of 460K-ounces/year over the coming two years. The current valuation suggests the potential for at least a 50% increase in the stock price with no increase in the gold price, although it's likely that an upward-trending gold price will be required to push the share price up to the A$1.50-$2.00 range that we have in mind as a target for this trade.

There are two other points worth mentioning, the first being that RSG has a policy to pay 2% of its annual gold production as a dividend that shareholders can choose to receive in cash or gold. At the current production rate and stock price this amounts to a dividend yield of 2%, which is a reasonable yield for a mid-tier gold miner in today's market.

The second point worth mentioning is that RSG has hedged (forward sold) 96K ounces of gold at US$1330/oz. This was a sensible move by the management. It provides some downside protection as the company invests heavily in its expansion projects but maintains plenty of gold-price leverage (the hedging covers about 25% of production through to December-2018).

It's possible that the recent gold rebound will fizzle out within the coming two weeks and give way to a sharp decline into early next year. It's also possible that the rebound will gather steam and extend into early next year. Both of these short-term possibilities can be accounted for by purchasing half of an RSG position now (in the low-A$1.00 area) with the aim of purchasing the other half if the more bearish of the aforementioned short-term scenarios plays out.

Stock Selection Update #81 - Oct-02 2017

We previously wrote that we would remove the Nevsun Resources (NSU) trading position from the TSI List if the stock price rebounded to US$2.40, but this is no longer the case. Instead, we'll make a decision on this position based on the Timok project PEA and the company's Q3 financial/operating results, both of which are scheduled to be released on 26th October.

Note that in the long-term NSU is primarily a copper play, but in the short-term it is primarily a zinc play. The company benefits directly and immediately from gains in the zinc price, which is significant because in response to the bullish fundamentals discussed in TSI commentaries over the past year the zinc price just made a new 9-year high.

On a different matter, we exited (took profits on) half of our GLD October put options on Monday and will exit the remainder of this insurance position before the end of the week. There is no evidence yet that a multi-week price bottom is in place for gold, but we should be close (at least in terms of time). As previously advised, it's likely that the price bottom will coincide with the daily RSI(14) dropping to 30. It was 35.9 at the end of Monday's session.

Based on the deterioration of gold's true fundamentals and the non-supportive sentiment backdrop, at this stage we are expecting the gold price to rebound from an early-October low and then decline to below the October low. However, we'll take the evidence as it comes.

Stock Selection Update #80 - Sep-18 2017

In the Weekly Update posted on Sunday we wrote that despite its attractive valuation we were thinking about removing Ramelius Resources (RMS.AX) from the TSI List. As the result of a deal announced a couple of hours ago in Australia, this is no longer the case.

RMS is buying the Edna May gold mine in Western Australia from Evolution Mining (EVN.AX). Edna May is a marginal operation with a fairly short (4 years, currently) mine life. It therefore isn't a high-quality asset, which is why EVN is selling. However, due to the low purchase price (an initial payment of A$40M plus up to A$50M of additional payments down the track) this is a very positive deal for RMS. It immediately boosts RMS's production rate from about 120K ounces/year to at least 200K ounces/year while leaving the company with net cash of about A$50M.

The stock market has reacted to the news with a yawn, so it doesn't seem that the deal will have a significant short-term effect on the stock price. However, it's likely to have a substantial positive effect on the stock price over the next 6-12 months IF gold performs well in A$ terms.

We will have more to say about this deal in the next Weekly Update. We just wanted to point out that it changes, in a positive way, our perception of RMS's intermediate-term risk/reward.

Stock Selection Update #79 - Aug-01 2016

Resolute Mining (RSG.AX) is up sharply this morning in trading on the Australian stock market. The cause of the price surge is positive drilling results from the company's Syama project in Mali.

RSG still offers reasonable long-term value in absolute terms and good value relative to the stocks of most other 300K-oz/year gold producers, so it could make sense to maintain some exposure to the stock. However, the TSI Stocks List is not run like a portfolio and therefore doesn't reflect standard money-management techniques such as scaling in/out of positions. A stock is either 100% in the List or 100% out of the List.

With RSG up by about 650% since the start of this year and about 600% since our September-2015 entry, it is time to realise the gain. We are therefore removing RSG from the TSI List at the current price of A$1.89.

Stock Selection Update #78 - Jul-05 2016

Further to recent comments in TSI reports, we are adding the stocks of two industrial-metal-mining companies to the TSI Stocks List. This email is a brief introduction to the stocks in question, with more detail to be provided in the coming Interim and Weekly Updates.

The first stock is Taseko Mines (TGB, TKO.TO), a junior miner that has current copper production of around 100M pounds/year from its 75% stake in the Gibraltar mine in British Columbia, Canada. It also owns some exploration/development-stage copper projects.

We traded TGB very successfully during 2003-2007, but have since ignored it because it didn't offer sufficient value and because we generally weren't interested in having leveraged exposure to copper. We are returning to it because it now offers reasonable -- albeit not exceptional -- value and because we are now intermediate-term bullish on copper.

TGB's management is mediocre and its balance sheet is not in great shape, but the company's survival is not in doubt and, as mentioned above, the valuation looks reasonable. Perhaps most importantly, TGB is a stock that speculators invariably bid up when they become more optimistic about copper.

We plan to talk more about TGB in this week's Interim Update.

The second stock is Solitario Exploration and Royalty (XPL, SLR.TO), an exploration-stage miner that owns 30% of the high-grade Bongara zinc project in northern Peru. Although it is a much smaller company and is not remotely close to being in production, XPL is less risky than TGB by virtue of its strong balance sheet and conservative management. At the same time, it doesn't provide anywhere near as much leverage as TGB to changes in metal prices.

Whereas TGB is sufficiently leveraged to metal prices and sufficiently liquid to be used as a trading vehicle, it is more appropriate to view XPL as a stock to be gradually accumulated with the aim of holding for at least a couple of years. This is because a) it is more thinly traded, b) the development of Bongara will probably not occur quickly, and c) Bongara is high-enough in grade and big-enough in size that it could be economically viable at a relatively low zinc price.

We plan to talk more about XPL in the next Weekly Update.

The most recent closing prices for Taseko and Solitario in the US were US$0.51 and US$0.59, respectively. These were the closing prices on Friday 1st July. On Monday 4th July the US markets were closed, but the stocks traded in Canada and ended the day at the equivalent of US$0.54 (for Taseko) and US$0.57 (for Solitario). These are the entry prices we'll use for TSI record purposes.

A bull market hasn't yet been signaled for the industrial metals, but based on gold's performance it's likely that the industrial metals will signal the beginning of at least a 1-2 year rally within the next few months. For copper, such a signal would be a weekly close above US$2.30.

Stock Selection Update #77 - Feb-10 2015

We are adding McEwen Mining (MUX), a junior gold/silver/copper miner with assets in Mexico, Argentina and the US (Nevada), to the TSI Stocks List at Tuesday's closing price of US$1.03. The company's share count is 300M (305M on a fully diluted basis). Rob McEwen, the founder and CEO, owns about 25% of the company.

MUX's most important assets are the ones that are currently in production: The 100%-owned El Gallo gold-silver project in Mexico and the 49%-owned San Jose gold-silver project in Argentina. In 2015, MUX's share of production from these two projects is expected to be about 140K gold-equivalent ounces (using a gold/silver ratio of 70).

At its current share price MUX's enterprise value (market cap plus net debt, or market cap minus working capital for a company that doesn't have any long-term debt) is about US$280M. Considering its current production and the potential offered by its exploration/development-stage assets, this constitutes a reasonable, but not a great, deal for value-oriented speculators. However, the fact that MUX now offers reasonable value is a huge change, as the company was very expensive (at US$3/share) as recently as 6 months ago. Furthermore, back in the heady days of early-2011, when Rob McEwen was viewed by many gold-stock investors as a messiah, MUX briefly traded as high as US$10/share. How times have changed!

It's the nature of the commodity-producing sector that equity valuations often look better near the top than near the bottom. Near the bottom hardly anyone is making a decent profit, which means that ratios involving earnings and cash flow are generally high, whereas near the top the valuation ratios look attractive due to high but unsustainable profits and cash flows. Consequently, given its current production and its growth potential we are comfortable taking an initial position in MUX at a price (the low-US$1 area) where it offers reasonable, but not great, value. If gold bottomed last November and copper and silver bottom during the first half of this year, then 12 months from now MUX could be trading at more than double its current price and look cheaper than it does today.

Having bought about one-third of what we consider to be a full position in the stock on Tuesday 10th February near its current price, our tentative plan is to buy an additional one-third if the stock drops back to near last year's low of US$0.90 within the coming few weeks and to then just wait and see.

We'll provide some more information on MUX's projects and valuation in this week's Interim Update.
 

Stock Selection Update #76 - Jan-20 2015

The gold-mining sector is not yet short-term 'overbought', but the HUI has reached its 200-day MA. This means that it has reached the minimum objective we had in mind for the rally of the past several weeks. It could move higher as the markets anticipate and then react to the outcomes of this Thursday's ECB meeting and Sunday's elections in Greece, but we aren't expecting a sustained rise above the 200-day MA to happen in the near future.

The upshot is that it's time for investors with substantial exposure to the gold-mining sector to START taking some money off the table. Bear in mind that a short-term selling opportunity is a short-term selling opportunity, regardless of your cost.

The TSI Stocks List is not run like a portfolio and therefore doesn't reflect prudent money-management techniques. For example, there is no scaling into positions during periods of weakness and scaling out of positions during periods of strength, and there is no trading around core positions. A stock is either in or out of the List. Currently there is no reason to take any of the existing longer-term positions out of the List, because they all have attractive intermediate-term risk/reward ratios. However, the List contains some short-term trading positions that will be exited if certain targets are met. Targets for the short-term trading positions in AKG, EVN.AX and TGD were mentioned in the latest Weekly Update.

The trading position in EVN.AX, which ended up having a much longer duration than originally expected (it was added to the List in June of last year), just hit its short-term target of A$0.97 during Australian trading and has been removed from the List. The result was a profit of 31%.

On a related matter, Dalradian Resources (DNA.TO) is a major beneficiary of the recent sharp rise in the euro-denominated gold price, in that gold's large gain in euro terms will greatly improve the economics of DNA's Ireland-based development-stage gold project (note: the economics already looked good, but now they look even better). Gold/euro is likely to soon begin a multi-month consolidation, but the long-term trend has probably turned up. Consequently, we expect that DNA will build on its sizeable recent gains over the quarters ahead and are very comfortable with the long-term DNA exposure in the TSI List. However, the TSI List also has short-term exposure to DNA via the C$0.90 warrants (TSX: DNA.WT). This warrant position has become very short-term because the warrants are due to expire on the 19th of next month.

The stock chart suggests the potential for DNA to move up to C$1.05-C$1.10 within the next several weeks. If it does, the warrants, which closed at C$0.06 on Tuesday 20th January, will be worth C$0.15-C$0.20. However, the market price of the warrants will fall to zero if DNA's stock price fails to make additional headway between now and 19th February. From a money-management perspective it's therefore a toss-up as to whether it is better to exit now at a loss (for TSI record purposes the loss would be 45%) or take the risk of seeing the loss increase to 100% based on the potential for up to a 200% price gain over the weeks ahead.

In our opinion the right decision would depend on total exposure to DNA. In particular, it could make sense for a speculator with exposure to the stock and the warrants to exit the warrants now and for a speculator with exposure to only the warrants to continue holding.

Since the TSI List contains the stock and the warrants, for TSI record purposes the warrants have been exited.
 

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