Friday, August 27, 2010

Doctor Copper Tells the Tale

A recent Seeking Alpha article by Dr. Stephen Leeb describes an interesting way to look at today’s market. His main point was that there was burgeoning growth in the emerging economies and slowing growth in the developed world. However, he was optimistic as to the American leaders in maintaining support for growth and thereby giving rise to inflation.

As I am an investor in mainly mining and commodities driven equities, I wanted to ascertain for myself, what was up, and what is ahead. So I undertook a travel around the world, through stock charts (apologies for the European theatre, and other theatres that I have missed) and tried to correlate and assimilate what the market indicators were saying.

Figure 1: Doctor Copper Rising

Doctor Copper again tells the main story. Copper futures are indicating that the world economic growth is moving higher since the beginning of June. Yes, this is simplistic, but we are looking at the big picture with mainly a focus as to how it should impact my commodities investments.

Figure 2: Shanghai Stocks Surging Higher

A stop in the Far East in China to evaluate what is happening there. Now the Chinese Composite Index in Shanghai seems to confirms Doctor Copper by bottoming at the beginning of July and moving higher since. As the Chinese economy is the main consumer of commodities, this is good news.

Figure 3: Wilshire Indicates Indecision

Now back to North America, for a look at the Wilshire 5000 smaller cap equities index. I tend to trust the smaller cap equities as being more sensitive and more realistic as to what the real economic situation is. The Mainland US does not believe the growth story and is creeping lower since peaking at the beginning of August. Note that the big boys were accumulating throughout much of August and are now being indecisive. There is uncertainty here about the economy in the US moving forwards.

Figure 4: TSX Composite Buoyed by Resources

Now we stop north to peek at the northerly neighbour’s large cap index in Toronto. A glance at the resource based economy in Canada, at the TSX reveals the TSX still holding strong in August since moving higher in July. Notice that the CMF is still at a fairly high level, indicating accumulation and an optimistic outlook.

Figure 5: TSX Venture Showing Optimism

Now looking at the much smaller and maligned Canadian Venture exchange, where much of the world’s beginning resource companies start out, indicates there has been much optimism since mid July. The Venture marketplace is recovering from the large drop of May 2010. The sell in May and go away truly works for the Canadian Venture exchange. This index chart looks like it is readying itself for a robust up swing this fall.

Figure 6: MSCI Emerging Markets Growing

Finally a global look at the Emerging world economies through the eyes of the MSCI Emerging Markets ETF and one sees that the rise in June was tentative, and was followed by a second try in July which finally got the big boys involved in accumulating via the CMF indicator by the time August rolled around. This is further confirmation for Doctor Copper.

So in summary, there is a dichotomy in the world today. The emerging economies are gearing up for better times. They will be requiring more metals and commodities. Meanwhile there is much uncertainty afoot in the Mainland United States. The government supports for the economy will cause inflation which is good news for the precious metals. The author believes, the emerging economies should finally prevail and drag the US into a growth mode this fall.

Disclosure: Author long metals, commodities and precious metals, GBG

Monday, August 23, 2010

Analyzing Great Basin's Golden Long-Term Prospects

Great Basin Gold (GBG) has moved higher on significant volume after their August 11th, 2010 report on the 2nd quarter. The stock price has surpassed the previous 52 week high of $2.09 on Wednesday, August 18th. The operative phrase for this author is in their presentation for the 2nd quarter:

Positive cash flow from operations expected with both projects generating revenue.

The author has holdings of Great Basin and revisits his previous article and analyzes the existing price movements for evaluation of the strategy going forward.

Moving Higher After Breaking Out From the Wedge Pattern

The chart below is a follow up of the price movement of GBG after breakout from the indecisive wedge pattern. The catalyst for the breakout as noted in the earlier article was the expectation of a great 2nd quarter report due on August 11th, 2010. Note that the stock price had a large move upwards on August 9th, 2 days prior to the quarterly release. The market is forward looking and leads. It was only on August 11th itself, that the price broke through the wedge line. The volume was light and suspect as commented by a reader on Seeking Alpha.

Figure 1 - Great Basin Gold's Narrowing Wedge and Breakout

The large volume did not appear until Monday August 16th, in the following week. GBG has now enjoyed movements upwards with volumes of 7 million plus shares on two days with indications of a third occurring today. Note that GBG trades on three stock exchanges, Johannesburg, South Africa, Toronto, Canada and the Amex in the United States. As GBG volumes are the greatest on the TSX in Toronto, this article is focusing on the stock play there. The other indicators of Price Oscillator, Moving Averages and Chaikin Money Flows are all positive for GBG. The author is pondering upon price movements for the future.

Analysis of Breakout

From looking the longer term chart for Great Basin below, the reader can see that the stock price was held in a trading range since their large private placement in March 2009 of 115 million shares and 57.5 million warrants.

Figure 2 - Great Basin Gold 3-Year History

The author has long wondered about the GBG share price movement and is beginning to conclude that it is not the share overhang but the warrants overhang, that was preventing the stock from moving upwards earlier. The rationale is that the warrants exercise at the price of $1.60 Canadian. The warrants when exercised puts a further 57.5 million shares into diluting the capitalization. The warrants would add another 17% more shares to the existing 338 million shares that were outstanding then. Therefore, in order for the stock price to move higher permanently, there was this 17% more value capping that had to be overcome, before the stock price could have traction.

The market needed a catalyst that there was definitely strong value in the stock to come prior to moving. This catalyst was the 2nd quarter report that states positive cash flow is coming with two operating projects. Therefore the GBG stock price cycled up and down within a trading range and in the tightening wedge pattern from March 2009 until now, there was this positive news propelling the stock out of the stuck trading range.

With the breakout of Great Basin’s stock price on good volume, this is indicating that the market now views positively the prospects for Great Basin in adding value to support the stock price. GBG stock is now not hindered by the thought of the dilution impact of the warrants exercising. The plus to this is that the warrants when exercised in October will be adding $90 million Canadian to GBG’s coffers. This cash boost should help fund further initiatives such as exploration and improvements that will further boost the stock price.

Moving Higher Relative to the Pack

In trying to understand the breakout that Great Basin has performed, the author ran the performance chart following.

Figure 3 - Great Basin Gold vs. the Pack for 10 days

I compared GBG’s recent price performance to the Market Vectors’s Gold Miners GDX, the Market Vector’s Gold Junior Miners GDXJ, Gold Corp GG and the gold ETF GLD. Great Basin, in green leads the pack with an over 10% movement higher within the last ten days. The chart confirms that Great Basin Gold is now moving higher on its own prospects, distancing itself from other gold miners and price movements of gold itself. This is definitely good news, as this indicates the market is valuing the prospects of Great Basin becoming a gold producer that will generate positive cash flow.

Moving Up on a Gold Down Day, August 18, 2010

As I am writing today, August 18th, it is shaping up to be a minor down day for gold with the price losing 0.5%. Great Basin’s stock price never let up and showed green from the bell, and is now up 3%. Volume was also indicating a large volume day. This again bodes well for Great Basin in confirming that the stock price is moving up on its own story. The market participants are accumulating in the anticipation of the positive cash flow.

GBG's Focus for 3rd Quarter

The following chart was presented at the quarterly results conference:

Figure 4 - Great Basin Gold's Focus for 3rd Quarter

The information in the chart indicates that we may expect two new resource updates coming for both their Burnstone and Hollister mines, among their many other operation improvement efforts. Good news on increasing reserves and resources will help to support a rising stock price for Great Basin.

Looking Forward for Great Basin

Fellow Seeking Alpha contributor, “HardRock,” has blogged an interesting prediction for Great Basin’s stock price going forward here. The chart in his posting is so inimitable, that I am posting it following:

Figure 5 - HardRock's Remarkable Forecast for Great Basin Gold

Examine the remarkable tail in the chart above. HardRock calls for a double of GBG’s stock price in four months. HardRock’s forecast is:

The forecast calls for breaking $2.00 Cdn in Aug, 2010 and $3,00 in Oct, 2010

Well, the first part of his prediction has come to fruition, breaking $2.00 Canadian two days ago. It remains for the market to determine what will happen come October, 2010.

Strategy Going Forward

The author has held for so long now, as documented here, and he is finally seeing some fruits of his holding. In short, going forward, the author intends to see through the eventual reward that comes to a company entering production and the ensuing profitability.

Disclosure: Author long GBG

Friday, August 13, 2010

Great Basin Gold Breaks Out


Finally after a season of consolidation and the stock prices reflecting the uncertainty about the contruction progress at their South African Burnstone mine, Great Basin (GBG) broke out of the indecisive wedge pattern in anticpation of good results for the 2nd Quarter to be reported on August 11, 2010.

See the chart below for the wedge and the breakout from the wedge.

Figure 1 - GBG Chart for 2010: Note the break out from the wedge formation. Also note that the money flow subchart has been positive all this year. Big money (read institutions) are accumulating.

This breakout may mean a positive decision by the institutions that have been accumulating this stock all year. See the CMF subchart above indicating the money flows of accumulation. Management indicate that 80% of GBG stock is held by institutions.

GBG Results on August 11th

Great Basin reported great results …

Net revenue improved significantly to a quarterly record of CDN$34 million; 39,418 gold equivalent ounces(1) (Au eqv oz) were sold during the quarter (compared with 6,108 Au eqv oz in the quarter ended March 31, 2010). Revenue is net of toll milling charges.

and were upbeat about their future prospects.

President and CEO Ferdi Dippenaar commented:

The second quarter was marked as a milestone quarter in the existance of Great Basin with record revenue and cash flow from our Hollister project and construction at our Burnstone project nearing completion. Our Esmeralda mill is now ready to treat all of the ore recovered at Hollister and at Burnstone, we are about to see the commissioning of the mill and vertical shaft, which are part of the final steps in the successful delivery of this long life quality gold project.

The full news release is here “Great Basin Reports Much Improved Second Quarter”. A copy of the Management Discussion and Analysis is here. A copy of the quarterly financials is here. A copy of the presentation used during the conference call is here. For your own due diligence the author recommends listening to the August 11th , 2010 conference call. Here is the link to a replay of their webcast.

For previous articles about Great Basin by this author see the following links:

· Great Basin – A Golden Opportunity, June, 2010

· Great Basin – Jump to Mid-Tier Gold Producer , Nov, 2009

· Great Basin – Production Poised for Profit, Feb, 2010

Hollister Progress

The major portion, 30 K tons of the Hollister ore stockpile was trucked to the Midas mine and sold to Newmont (NMT) prior to June 30, 2010. Agreement was reached with Queenstake Resources ((TSX:YNG)) to mill 10 K tons with the revenue to be counted in the third quarter. A further 19K tons with 18 K gold ounces remains on the stockpile, with 15 K tons to be monetized in the third quarter and the residual as feed for the mill.

Following is a summary chart displaying mining statistics for the performance at Hollister.

Figure 2 – GBG Hollister Mining Statistics. Note the 16 K oz of Gold contained within the processes.

Note that there is 16 K ounces of gold equivalents that are contained in the milling processes.

The Esmeralda mill is now fully running and is capable of milling 350 tons per day. The recoveries are now optimized for over 90% with gold and 85% with silver. The author in projecting forward, estimates that the mill is capable of 20 K to 25 K tons per quarter and with grades around 1 ounce of gold per ton the expectation is possibly a further 40 to 45 K ounces produced by Esmeralda in the next six months.

Cash production costs from the Esmeralda mill for the quarter were $741 per ounce equivalent. Management expects the costs to decline to $600 to $650 range with increasing thoughput and optimized metals recovery.

Burnstone Progress

The delayed Eskom electrical tie to the power grid was performed on August 8, 2010. Then a serial list of electrical start ups through out the mining comlex will be completed by August end. The numbers of contractors on site now numbers 1425 people and the 388 staff will increase to 650 by the end of September 2010.

Following is a layout of the mining plan at Burnstone.

Figure 3 - GBG Burnstone Mine layout. Note the 145 K tons of ore stockpile.

Note that there is a stockpile of 145 k tons of ore to be used for commissioning the mill. The ore is mostly development low grade of about 1 gram of gold per ton. The production ore when used is in the range of 5 to 7 grams of gold per ton.

GBG expects the first gold pour to be in September 2010.

Providing the start up runs smoothly, management is expecting the production of 40 K to 50 K ounces of gold from the Burnstone mill in the next four months.

Company Outlook

Great Basin is now just on the cusp of bringing in their second and larger Burnstone gold mine into milling production. Their Hollister, Nevada mine is now competently mining (trial in name only) with their Esmeralda mill working to design.

This company is just becoming a mid-tier gold producer with a gold price that is now at $1215 as I am typing. The financial assumptions and forecasts used by Great Basin are based upon a $1000 USD gold price. There appears to be a 20% financial buffer presently, that may not be fully recognized by the market.

With the increasing production, Great Basin Gold will turn to profitability within the next half year. The breakout from the chart wedge pattern would seem to indicate this. The author anticipates serious upside for this stock as their Burnstone mine ramps up to design capacities of over 200 K ounces of gold production per year by 2012.

Disclosure: Author long GBG