- Interim Update 5th April 2017

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TSI Schedule Change

We will be travelling over the next week-and-a-bit. Consequently, although a Weekly Update will be posted at around the usual time this Sunday (9th April), it will be a barebones edition. Specifically, it will contain only brief comments on the recent price action and discuss the company news associated with TSI stocks (a few of our stocks had important news over the first three days of this week). Also, there won't be an Interim Update next week, but we will send out a quick update via email if something unexpectedly dramatic happens or we think that urgent action is appropriate.

Normal programming will resume with the Weekly Update scheduled to be published on Sunday 16th April.

Important breakouts or reversals will happen in the next few days

The currency, bond and gold markets are tightly inter-linked, meaning that a change in any one market will usually be associated with a change in the other two markets. This is most clearly illustrated by the chart-based comparison of the gold price and the bond/dollar ratio that we show from time to time.

Each of these markets ended Wednesday's trading session near significant resistance levels, so each one is set to either break out to the upside or reverse downward within the coming few days. Whether any one of these markets breaks out or reverses will likely either determine what happens or be a consequence of what happens to the other markets.

For example, a break above resistance at $122 by TLT (the 20+ Year Treasury ETF, a proxy for the long end of the US government bond market) would likely be associated with a downward reversal in the Dollar Index and a break above resistance at $1265 by gold. For another example, a break by the Dollar Index above its 50-day MA would likely be associated with downward reversals in TLT and the US$ gold price.

Here are the relevant charts.

The Stock Market

The US

The S&P500 Index (SPX) has substantial downside potential, but having experienced only a minor correction following the sharp rise to the 1st March peak there is a realistic chance of another multi-week upside blow-off. The same applies to the Dow Industrials Index, which did no more than pull back to its 50-day MA following its 1st March blow-off top.

For the Dow, a daily close above 20,800 would point to the multi-week upside blow-off scenario whereas a daily close below 20,500 would open the door to a significant multi-week decline. Interestingly, early in Wednesday's trading session it looked like the Dow was going to break out to the upside and signal the near-term bullish scenario, but it then reversed course and ended the day with a small loss.

The NASDAQ100 Index (NDX), the other senior US stock index and the home of the most overpriced and overbought large-cap stocks, has already traded above its March high, although it hasn't yet broken out to the upside.



At the same time, the Russell2000 SmallCap Index (RUT) remains in a precarious position. The senior stock indices probably won't be in imminent danger of suffering large declines until RUT breaks below support at 1340, but at the close of trading on Wednesday 5th April RUT was within 1% of this support.



In the latest Weekly Update, we wrote:

"We haven't yet exited the short-term US-stock-market-related bearish speculations in our account, but we plan to do so over the coming few days and will then await a new set-up."

And:

"...we are maintaining all commodity-related bearish option positions, because there is evidence that commodity-related equities are rolling over to the downside and because these options are hedging our long exposure. In fact, if XME (the Metals and Mining ETF) strengthens over the days ahead then we might take the opportunity to add to our existing insurance via some June-2017 XME put options."

This is to confirm that over the first three days of this week we exited the short-term US-stock-market-related bearish speculations (VIX call options, to be specific) in our account and added to our commodity-related insurance via the purchase of June-2017 $27 XME put options. These XME put options and our EEM put options serve a dual purpose in that they are hedges against short-term downside risk in commodity-related equities and would also likely gain a lot of value if the senior US stock indices were to tumble within the next several weeks.

Gold and the Dollar

Gold

In the latest Weekly Update, we wrote:

"A rise to new highs for the year is a realistic near-term possibility and will remain so as long as pullbacks hold above $1220, but a rise to new highs for the year will almost certainly prove to be short-lived unless it is confirmed by the gold-mining sector."

Gold traded in a narrow range slightly below its February peak during the first three days of this week, so there is no change worth mentioning.

Gold Stocks

GDX (the Gold Miners ETF) has risen for four days in a row and has achieved two marginal closes above its 50-day MA, but it hasn't yet broken out to the upside. Instead, it has just risen from the bottom to the top of the 'box' in which it has been confined for the past 15 trading days. A solid daily close above $23.50 would constitute an upside breakout.



We mentioned in the latest Weekly Update that greater volatility lies around the next corner. With regard to GDX, the greater volatility is expected to take one of these forms:

1) A break above $23.50 followed by a quick move up to near the February peak and then a multi-week decline to the December-2016 low (or lower).

2) The same as above, except skipping the quick move up to near the February peak.

That's what we expect, but it's important not to be married to any particular short-term outlook. For example, if GDX breaks above the top of 'the box' in the near future we won't blindly assume that the up-move will fail at or below the February peak. That's what we perceive to be the most likely outcome at this time, but we acknowledge the possibility that the overall financial-market backdrop could quickly become very supportive for gold and the associated mining stocks. We will therefore remain open to evidence that our current gold-mining-related cautiousness is unwarranted.

The Currency Market

Although we didn't think it had significant additional upside potential, after the Australian Dollar (A$) rose to near resistance at 77.5 in March we thought that it would break out to the upside. Instead, the aforementioned resistance survived yet another challenge and the A$ has since pulled back to near support at 75. If support at 75 gives way then the May and December-2016 lows in the 71-72 range will become reasonable short-term targets.

Our guess is that support in the 71-72 range will be tested this quarter.



Updates on Stock Selections

Notes: 1) To review the complete list of current TSI stock selections, logon at http://www.speculative-investor.com/new/market_logon.asp and then click on "Stock Selections" in the menu. When at the Stock Selections page, click on a stock's symbol to bring-up an archive of our comments on the stock in question. 2) The Small Stock Watch List is located at http://www.speculative-investor.com/new/smallstockwatch.html

Company news/developments:

[Note: AISC = All-In Sustaining Cost, FS = Feasibility Study, FY = Financial Year, IRR = Internal Rate of Return, ISR = In-Situ Recovery, MD&A = Management Discussion and Analysis, M&I = Measured and Indicated, NAV = Net Asset Value, NPV(X%) = Net Present Value using a discount rate of X%, P&P = Proven and Probable, PEA = Preliminary Economic Assessment, PFS = Pre-Feasibility Study]

  *After the close of trading on Monday, Almaden Minerals (AAU) published the much-anticipated (by us) results of the PFS for the Ixtaca (a.k.a. Tuligtic) gold-silver project in Puebla State, Mexico. Due to expected time constraints later this week and the importance of the news we are covering the PFS now rather than waiting for the Weekly Update.

The table inserted below outlines the most salient details of the PFS, but it's worth highlighting the following:

1. At gold and silver prices of $1250/oz and $18/oz, resp., the after-tax NPV(5%) is US$310M and the after-tax IRR is 41%. This means that the economics of the project are robust at current metal prices.

2. At gold and silver prices of $1150/oz and $16/oz, resp., the after-tax IRR is still a healthy 28%.

3. The production, resource and reserve figures quoted in the table are gold-equivalent using a gold/silver ratio of 70, but the reserves and production are roughly 50% silver and 50% gold. In other words, this is a silver project as much as a gold project.

4. The bottom line of the table shows our favourite measure of the extent to which a single-project exploration-stage mining company is over/under-valued. It is the EVCC/NPV ratio, or the company's enterprise value plus the estimated cost of building a mine divided by the mine's estimated net present value. The lower the EVCC/NPV ratio, the better the value.

What we consider to be attractive value is indicated by an EVCC/NPV ratio of 1.0 or lower. In AAU's case, based on the figures in the just-released PFS and the current stock price the ratio is 0.74. This is extremely low in the current market environment, especially for a stock listed in North America (junior and mid-tier mining companies listed in Canada and/or the US tend to be expensive relative to similar companies listed in Australia).

That AAU is very under-valued is evidenced by the fact that its stock price would have to rise to US$2.20 just to get the EVCC/NPV ratio up to 1.0. In other words, AAU would still offer good value at the current gold price at 70% above its current stock price.

Almaden Minerals (AAU)
Project Name	Ixtaca
Location	Mexico
Engineering Study / Date	PFS, Apr-2017
Planned Mine Type	Open Pit
M&I Resource (oz)	3.5M
Avg Resource Grade	1.2g/t Au-eq
P&P Reserve (oz)	2.4M Au-eq
Metallurgical Recovery	90%
Strip Ratio	2:1
Avg Annual Production (oz)	168K Au-eq, first 9 years
Cash Cost (per oz)	$706
All-In Cost (per oz)	$862
Mine Life	13 years
Initial Capital Cost ($M)	117
Assumed Gold Price (US$)	1250 for gold, 18 for silver
After-Tax NPV5% ($M)	310
IRR	41.0%
Capital Payback Period	2.2 years
Project Ownership Percent	100%
NPV of Company Stake ($M)	310
Current Stock Price (US$)	1.29
Share Count (M)	90
Current Market Cap ($M)	116
Net Cash ($M)	5
Current Enterprise Value ($M)	111
EV/NPV	36%
Current Discount to NPV	64%
EV + Capital Cost (EVCC)	228
EVCC/NPV	0.74

AAU will soon begin work on the Ixtaca project's FS, but it's a near-certainty that the FS will confirm the positive economics indicated by the PFS. The main risk now is permitting.

Applications for the mine permits are presently scheduled to be submitted during the third quarter of this year. AAU's management is quietly confident of getting the necessary approvals, but the government authorities in charge of such matters can be fickle. Mine permitting should therefore never be taken for granted, even when the environmental engineering has been completed to a high standard and the local community is in favour of a mine being built.

We are confident that the long-term plan for AAU does NOT involve putting the Ixtaca project into production. AAU's senior managers are explorers and prospect generators, not mine builders and operators. Instead, the long-term plan for AAU would involve a sale of the company to a mid-tier gold or silver miner such as Fortuna Silver (FVI.TO), First Majestic Silver (FR.TO), Endeavour Silver (EXK) or Coeur Mining (CDE).

The most likely time for a takeover bid is shortly after the mine permits have been granted.



  *Blackham Resources (BLK.AX) reported on Monday the bad news that had been flagged by last week's trading halt. The news was very bad and will be covered in the Weekly Update. In today's report we just wanted to quickly address the question: Is BLK a buy at its newly-discounted price?

There's no definitive answer, because it depends on your existing exposure to the gold-mining sector in general and BLK in particular. It also depends on your risk tolerance. BLK is significantly cheaper than it was a week ago, but it's also riskier. The result is that both the risk and the potential reward have increased, making the stock more speculative than it was.

We made a small addition to our BLK position at A$0.40 on Wednesday 5th April, but those with a lower risk tolerance should probably postpone new buying pending evidence that the company's gold production is moving into line with its mine plan.

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html