Great Basin Gold: Follow the Flood for Fortune

Great Basin Gold: Follow the Flood for Fortune

Introduction
Timing is critical for making investment decisions. Sometimes the timing seems so fortuitous as many factors coalesce into a critical juncture. Such is the case for emerging gold producer, Great Basin Gold (GBG), to be commencing production during this run up of the precious metals bull market.

Situation Analysis
GBG undertook a $145 million dollar financing in March 2009, right in the midst of a major dip of confidence in the stock market. The fact that Great Basin Gold was able to finance during the downturn speaks volumes about the credibility of the company, but never-the-less this financing added 115 million shares that caused an overhang in the stock price. So the GBG stock price has experienced great volatility this summer and fall, churning up and down without a consistent direction or pattern.
The stage for GBG has been set as shown in this years chart of their stock price following.

Figure 1: Chart of GBG.to showing the trading within the symmetrical triangle. Source: Cdnbeau posting on TradingChief.com.

Note the up and down movements in the stock price describing the upper and lower bounds of a symmetrical triangle, heading towards an apex solution in December of this year. The gyrations certainly looks similar to a coiled spring that is about to be released. On Tuesday, December 2, 2009, GBG exhibited a breakout of the bounding triangle and shot up for a 7% gain on high supporting volume. This chart is signaling that an opportunity is available here.

Trend and Timing
Before going further, let us step back and examine some environmental and other timing factors:
1. Is the general market in an up trend?
Yes, one can say that the general markets are buoyant and are still in a continuing up trend recovery from 2008. The general markets need to be trending upwards for supporting a movement upwards.

2. Is the precious metals market in an up trend?
Yes, the precious metals market are certainly bullish. The price of Gold has recently crossed the $1000 USD barrier and has successively breached $1100 USD and just surmounted $1200 USD on December 1, 2009. Great Basin Gold is a producer that will announce increases in new Gold production.

3. Are the seasonal tendencies right for a movement upwards?
Yes, the timing is exactly coincident for the year end pruning and adjustment of institutional portfolios. Institutions should look favorably upon Great Basin Gold’s prospects as they add to or increase their portfolio. The markets are ready for a “Santa Claus” rally.

4. Is Great Basin Gold ready for a movement upwards?
For a more detailed answer to this, I refer the reader to my previous report on Great Basin Gold accessible here. Yes, Great Basin Gold is just turning the corner into becoming a viable mid-tier gold producer. They are test mining at their Hollister mine in Nevada and are on track to produce 110 k ounces this year. Their Burnstone mine in the Witwatersrand Basin in South Africa has completed their underground development work and is constructing the surface plant to be ready to commence milling operations in June 2010.
Great Basin Gold is entering production at a confluence of positive trends and timing.

Great Basin Gold Opportunity
Next is how to capitalize upon this perceived opportunity. The basic play would be to invest in some shares of GBG. An interesting and possibly more lucrative way to leverage this situation is with tradable warrants for GBG. They were issued at the same time as the $145 Million financing. A copy of the TSX bulletin announcing the trading of Great Basin Gold warrants is posted here. See the table below for the specific warrant details.


Great Basin Gold - Warrants

Figure 2: Great Basin Gold Warrant Details. Note that the life of the warrant expires on October 15, 2010; that is beyond that date, the warrant becomes useless.

These GBG warrants are especially appealing presently, as they are in the money, the GBG shares being above the $1.60 (Cdn) exercise price. The GBG.wt.a warrants were bargain priced at 40 cents (Cdn) on December 2, 2009. As the GBG shares closed at $1.80 on that date, the warrants have an intrinsic value of 20 cents (Cdn) and provide the investor with a 4.5 to 1 leverage. The writer does not expect this value situation to remain this way for long.
A further attraction of leveraging with GBG warrants is that the company Great Basin Gold is an extremely attractive takeover candidate. The writer wrote an opinion on GBG being an acquisition candidate posted here. Using the warrants for leverage gives the investor control of more shares with less initial capital outlay. This would play to the investor’s advantage should a takeover situation appear.

Warrant Quotation
A delayed quotation for the warrants is available from the TSX site.


Figure 3: Quotation for GBG.wt.a from TSX site.

Also, a delayed quotation may be obtained from the Advanced Financial Network site as follows.



Figure 4: Quotation for GBG.wt.a from Advanced Financial Network site.

Warrant Trading
Should you be new to warrants, the following are two sites that have warrant information for your perusal.
1. Precious Metals Warrants
This is a site run by Mr. Dudley Pierce Baker that has a free section and a pay section. There is a useful educational section that describes the various aspects of trading warrants.
2. Canadian Warrants
This is a Canadian free site that provides various tables of tradable investment warrants.
The warrants trade in Canada on the TSX exchange. For American investors, TD Ameritrade is reported to facilitate your trade seamlessly with their counterparts in Canada. If you use other trading facilities, you may have to trade via telephone. Do not ask your broker if they can do it, just be assertive and state the Warrant Cusip number along with other details of the warrant that you wish to trade.

Conclusion
To sum this opportunity up, a sage writer once penned many centuries ago:

There is a tide in the affairs of men, which, taken at the flood, leads on to fortune.
- William Shakespeare.

The timing for Great Basin Gold to be entering serious Gold production seems very fortunate; as all the discussed factors are pointing to a significant upswing in price for the shares of Great Basin Gold. An appealing way to leverage this situation would be by buying warrants to control more shares of Great Basin Gold in the possible upside coming.

Disclosure: The writer holds a long position in Great Basin Gold (GBG)


Marco G. December 2, 2009 http://goombarhsedge.blogspot.com/
Important Disclosure
The information and opinions contained within this document reflect the personal views of the author and should be viewed as food for thought and amusement only. The author may from time to time have a position in any of the securities mentioned. There are no guarantees of the accuracy, reliability or completeness of the information contained herein. Independent due diligence and discussions with one’s own investment and business advisor is strongly recommended. These writings are not to be construed as an offer or solicitation with respect to the purchase or sale of any security or as an endorsement of any product or service. We do not request or receive compensation in any form in order to feature companies in this publication. It is prohibited to copy or redistribute this document to any type of third party without the express permission of the author. This document may be quoted, in context, provided proper credit is given.

Natural Gas – U-Turn Follow-up

Natural Gas – U-Turn Follow-up

The writer elaborated on his thoughts about the trend for Natural Gas in a previous article for Seeking Alpha posted November 23, 2009. The volume of interest and comments that this article generated surprised the writer. It appears that natural gas is a very hot topic and that there is no shortage of opinions about which direction natural gas will take from here. Also the Horizons Beta Pro Nymex Natural Gas Bull ETF (HNU:ca) appears to be a hot search topic on Stockcharts.com as depicted on a snapshot of the search cloud below.



Figure 1: Search Cloud for Stockcharts on Nov 25. Interest in HNU ETF was extremely high.

If the market participant was bullish about the natural gas price prospects, the double leveraged HNU ETF would be one of the choices available.

As chance would have it, Tuesday November 24th, 2009 was a hot day for the markets generally and for natural gas in particular. See the three charts below depicting the daily, weekly and the point and figure aspects for NYMEX Natural Gas Futures.

Daily View



Figure 2: Natural Gas Futures at NYMEX. Note the bottom set on September 4th, 2009. A gain of 6% was registered on November 25th, 2009.

Weekly View



Figure 3: Natural Gas Futures at NYMEX in a weekly view.

Point & Figure View



Figure 4: Point and Figure Chart for Natural Gas Futures. Note the target objective of $11.25.

Natural Gas gained 6% for the day while the HNU ETF gained a remarkable 15%. The last chart gives the writer the most telling information. The algorithms are predicting a target price for Natural Gas of $11.25. It appears the bottom set in early September is still valid, and until the trend upwards is invalidated sufficiently, the price target is still standing.

What should one make of this? There are many opinions as to the sagging state of natural gas pricing; the low prices are caused by the surplus supplies, spanking new shale gas finds, the sagging financial systems or a combination of all three. For the writer, he believes all this information is already priced in, and the market is looking forward, as always. For all the criticism of the market being irrational, the market is the great dispassionate assembler of all known information and spits it out for a bottom line in the price. The point and figure chart has already dispassionately spitted out a target price of $11.25. The writer will stay and enjoy the ride.

Disclosure: The writer holds a long position in HNU.

Marco G. November 26, 2009 goombarhsedge.blogspot.com/

Important Disclosure

The information and opinions contained within this document reflect the personal opinions and views of the author and should be view as information for thought and entertainment only. The author may from time to time have a position in any of the securities mentioned. Any material within should not be construed as accurate or reliable or be utilized as advice for investment or business purposes. Independent due diligence and discussions with one’s own investment and business advisor is strongly recommended. There are no guarantees of the accuracy or completeness of the information contained herein. These writing are not to be construed as an offer or solicitation with respect to the purchase or sale of any security or as an endorsement of any product or service. We do not receive or request compensation in any form in order to feature companies in this publication. It is prohibited to copy or redistribute this document to any type of third party without the express permission of the author. This document may be quoted, in context, provided proper credit is given.

GBG –Prime Gold Acquisition Candidate

GBG –Prime Gold Acquisition Candidate
Introduction
This is the second part of a two part article on Gold mining acquisition. In the first part, we explored some ideas of Gold production and the replacement of reserve ounces that were mined. For the large capital gold stocks (referred to as “Big Gold”), the most viable route is the acquisition of Gold Juniors to replenish their gold ore reserves. In this concluding part, we will examine a Great Basin Gold as a prime candidate for acquisition.
Prime Acquisition Candidates
Following is a compiled list of Emerging Gold Producers circa 2007, from the Gold Stock Strategist website. These soon to be producers are the most viable and least risky candidates for Big Gold to acquire.
Emerging Gold Producers
1. Alexis Minerals Corp. (TSX:AMC; OTC:AMSMF)
2. Anatolia Minerals Development Ltd. (OTC:ALIAF)
3. Apollo Gold Corp. (TSX:ATG: AMEX:AGT)
4. Atna Resources Ltd. (TSX:ATN; OTC:ATNAF)
5. ATW Venture Corp. (TSX:ATW: OTC:ATWVF)
6. Aurelian Resources (TSX:ARU, OTC:AUREF)
7. Aurizon (TSX:ARZ; AMEX:AZK)
8. Axmin Inc. (TSX:AXM; OTC:AXMIF)
9. CGA Mining Ltd. (TSX:CGA; OTC:CGAFF)
10. Crystallex International Corp.(TSX:KRY; AMEX:KRY)
11. Dynasty Metals & Mining Inc. (TSX:DMM; OTC:DMMIF)
12. European Goldfields Ltd.(TSX:EGU)
13. European Minerals, Inc.(TSX:EPM; OTC:EPMCF)
14. Gabriel Resources Ltd. (TSX:GBU; OTC:GBRRF)
15. Jaguar Mining, Inc. (TSX:JAG; NYSE:JAG)
16. Gold Reserve Inc. (TSX:GRZ; AMEX:GRZ)
17. Gold-Ore Resources Ltd. (TSX:GOZ; OTC:GREXF)
18. Gold Resource Corp.(OTC: GORO)
19. Golden Queen Mining Comp. (TSX:GQM; OTC:GQMNF)
20. Great Basin Gold Ltd. (TSX:GBG; AMEX:GBN)
21. Hawthorne Gold (TSX:HGC; OTC:HWTHF)
22. International Minerals Corp. (TSX:IMZ; OTC:IMZLF)
23. Jinshan Gold Mines Inc. (TSX:JIN; OTC:JINFF)
24. Kinbauri Gold (TSX:KNB; OTC:KINBF)
25. Lake Shore Gold Corp. (TSX:LSG; OTC:LSGGF)
26. La Mancha Res. (TSX:LMA; OTC :LACHF)
27. Luna Gold (TSX:LGC : OTC:LGCU)
28. Metanor Res. Inc. (TSX:MTO; OTC:MEAOF)
29. Minco Gold (TSX:MMM: AMEX:MGH)
30. Minefinders Corp. Ltd. (TSX:MFL; AMEX:MFN)
31. Moto Goldmines Ltd. (TSX:MGL; OTC:MTOGF)
32. Nevsun Resources Ltd. (TSX:NSU; AMEX:NSU)
33. New Guinea Gold (TSX: NGG: OTC:NGUGF)
34. NovaGold Resources Inc. (TSX:NG; AMEX:NG)
35. Orezone Resources Inc. (TSX:OZN; AMEX:OZN)
36. Pacific Rim Mining Corp. (TSX:PMU; AMEX:PMU)
37. Petaquilla Minerals Ltd. (TSX:PTQ; OTC:PTQMF)
38. Rusoro Mining Ltd (TSX:RML; OTC:RMLFF)
39. San Gold Resources Corp. (TSX:SGR; OTC:SGRCF)
40. Starcore International (TSX:SAM: OTC:SHVLF))
41. Tara Gold (OTC:TRGD)
42. Timmins Gold Corp. (TSX:TMM; OTC:TMGOF)
43. Western Goldfields (TSX:WGI; AMEX:WGW)
Source: http://www.goldstockstrategist.com/search/label/Emerging%20Gold%20Producer%20List
In the two years since the list was compiled many names on this list have been acquired. Kinross has purchased Aurelian Resources in summer of 2008. Kinbauri Gold has been acquired by Orvana Minerals in August 2009. Anglogold Ashanti and Randgold fought off Redback Mining to takeover Moto Goldmines October 16, 2009. Lake Shore Gold and West Timmins Mining completed their business combination on November 6, 2009. The writer considers Great Basin Gold (GBG), #20 on this list as a star candidate that fits a typical takeover profile.
Recent Gold Acquisitions
Goldcorp acquires Canplats for $227Million USD
Goldcorp (GG) on November 16, 2009 announced their acquisition of Canplats Resources Corporation (CPQ, trading on the TSX Venture). Goldcorp will assume ownership of Canplats' Camino Rojo Project, located approximately 30 miles southeast of Goldcorp's existing Penasquito mine in Mexico. The deal valued at $227 USD Million will add 1.7 million ounces of reserves to Goldcorp’s resource base. The calculated value for this transaction is $133 USD per gold ounce of reserve for Canplat’s property.
Eldorado merger with Sino Gold valued at $1.8 Billion USD
Eldorado Gold (EGO) on August 2009 announced a friendly merger with Sino Gold that would create a $6.4 Billion dollar top mid tier gold miner. The deal values Sino Gold at $1.8 Billion USD. Sino Gold has their flagship Jinfeng mine and three smaller properties in China. This transaction is expected to close in December 2009. The value for this transaction is calculated to be $352 per gold ounce of reserve for Sino Gold’s mines.
Company Make Over
In another life the writer was consulting for a startup telecom technology company. There was much feverish work in the days prior to a team from Nortel coming to visit. Extra people such as I were brought in to round out the staffing. Empty crates were brought into the warehouse and stacked as if production was in high gear. Telecom test gear was brought in and setup in the labs so as to appear quite busy. Overall the company was given a quick makeover for the possible suitor. Eventually the telecom company was purchased by UT-Starcom.
Great Basin Gold as a Takeover Candidate
This writer completed a recent report on Great Basin Gold that is displayed on Seeking Alpha. Great Basin has two new mines that are just starting up production. Hollister in the Carlin Trend in Nevada is a high grade underground epithermal type deposit. Burnstone is a Kimberley Reef underground mine in the Witwatersrand Basin in South Africa. Great Basin shares a lot of similar attributes with Sino Gold, which was in the business combination with Eldorado Gold described earlier. A comparison of some key statistics are in the table following.
Great Basin Gold with Sino Gold Comparison




Table 2: Comparison of Great Basin Gold with Sino Gold. Note the similar production levels and Reserves and Resources.
Great Basin is very similar in size of operations to Sino Gold. The reserves and resources are similar sized and their projected production levels are closely matched.
Great Basin Gold (GBG) just completed an offering announced on November 1, 2009, $110 Million convertible debenture. As Ferdi Dippenaar, President and CEO, stated: “The sale of convertible debentures is the preferred option with fewer encumbrances on Great Basin Gold's balance sheet, no requirements to hedge gold production and, on a relative basis, comes at a lower cost of capital in a rising gold price environment.” Reading between the lines, this is code talk for cleaning financial house, in order to provide a neat and clean package for Big Gold’s consideration when they come calling.
Conclusion
The timing is right for Big Gold to bolster their depleting reserves. World markets are pushing the precious metal prices ever higher. Big Gold is flush with the high valuation of their stock prices. Their mined out reserves need to be replaced. Their own exploration will not be able to replenish the stock of minable ore bodies. The Big Gold companies are opening their Gold pouches and have their financial minions furiously calculating Gold Junior companies’ valuations. The bull market for precious metals has created a window of opportunity for astute investors. There are large and quick gains to be had, if you can find the right companies that are being targeted by Big Gold.
One company that is a target and favored by the writer is Great Basin Gold (GBG). Goldcorp established a benchmark of $133USD per Gold reserve ounce in their acquisition of Canplats. This was for Gold reserves on a property that only has a Preliminary Assessment completed for a possible open pit mine. Great Basin’s 5.3 Million ounces of reserves are in two ready to go mines that has infrastructure built with $334 Million in capital expenditures. Using the same valuation figure of $133 USD per reserve ounce times 5.3 Million reserve ounces gives $704 Million USD in value. Adding the $334 Million in mine infrastructure expenditures, the total becomes $1038 Million USD for the valuation of Great Basin. The current fully diluted shares outstanding is 437 million. Great Basin’s current stock price is $1.57 giving a market capitalization of $686 Million USD fully diluted. That means there is a possible 50% upside for Great Basin’s shares in this scenario.
For a second scenario, from Table 1, Great Basin is comparable with Sino Gold in valuation metrics. Should a business proposal appear, for valuation purposes, one may consider the $1.8 Billion valuation of Sino Gold as being applicable to Great Basin. If one considers the current debentures increasing the share float to 500 million, then the value per share would work out to be $3.60. Again there is a significant 100% + upside for Great Basin’s shares in this second scenario.

So Gold Junior, get your financial house in order, the “Gold Sugar Daddy” is coming!

Disclosure: The writer holds a long position in Great Basin Gold (GBG)


Marco G. November 22, 2009 http://goombarhsedge.blogspot.com/

Important Disclosure
The information and opinions contained within this document reflect the personal opinions and views of the author and should be view as information for thought and entertainment only. The author may from time to time have a position in any of the securities mentioned. Any material within should not be construed as accurate or reliable or be utilized as advice for investment or business purposes. Independent due diligence and discussions with one’s own investment and business advisor is strongly recommended. There are no guarantees of the accuracy or completeness of the information contained herein. These writing are not to be construed as an offer or solicitation with respect to the purchase or sale of any security or as an endorsement of any product or service. We do not receive or request compensation in any form in order to feature companies in this publication. It is prohibited to copy or redistribute this document to any type of third party without the express permission of the author. This document may be quoted, in context, provided proper credit is given.

Big Gold: Acquire or Acquiesce
Introduction
In the Gold mining world as in life, Darwin’s law of survival of the fittest holds true. The large Gold mining companies (which we shall refer to as “Big Gold” hereinafter) need to continue growth in order to survive. Big Gold needs to replace their mined out resources in order to continue their existence and to grow.
Bull Market for Precious Metals
The up trend for the precious metals has accelerated recently with a spat of supportive news. In September 2009, the gold bugs were buzzing with the news that China was pushing their citizens to invest in precious metals as detailed here. Then on November 4th, 2009, the Indian central bank reveals a surprise purchase of 250 metric tons of Gold bullion from the International Monetary Fund as related here. Finally on November 12, 2009 in Vietnam, which had restricted imports of Gold in mid 2008, the local price had climbed to a $60 premium from the global spot price, before the government relented. All these events are indicators that the marketplace fervour for Gold is hot and getting hotter. It is interesting that these events are all happening on the Asian side of the world, but that is another tale to be told at another time.
These events are a few of the drivers behind the precious metal prices climbing higher. Supported by the rising gold price, the valuations of the Big Gold companies are rising close to their record highs. The time draws nigh for Big Gold to make some moves, armed with the valuations of their stock price.
Gold Production Reduces Reserves
For the average investor, it is a little known fact that acquisitions for Big Gold are a way of life. As the mines of the Big Gold companies extract the gold from the ground, the reserves or amount left to be mine, has to be replenished. For example, the world’s largest gold miner, Barrick (ABX), extracted 7.8 Million ounces of the precious metal in 2008. This is a very large figure, and for an idea of the size, this could represent 7 smaller gold companies, each with 1 million ounces of Gold reserves each. For the Big Gold companies the task of replenishing their mined reserves, is a lot more difficult than you can imagine.
Depleting Resources
As Big Gold extracts the gold from their mines, they need to replace them with an equivalent amount in reserves. In order to maintain the support of their investor public, Big Gold needs new reserves to shore up their financial ratios such as their market capitalization per gold reserve ounce. This need drives the Big Gold companies in their search for acquisition of smaller rivals with good reserve ounces in order to add the numbers back into their balance sheet.
Peak Gold
Similar to the idea of “Peak Oil”, there is a slow realization of “Peak Gold”. Worldwide production of the precious metal has been on a downtrend since 2003 as described by analyst Scott Wright. Some factors driving this downtrend are the depletion of resources at existing mines, mining production expenses climbing higher and just plain expensive access to new mining resources. The low-hanging fruit of easily discovered, easily accessible and low cost mines are gone. See the chart below for the graphic display of the trend downwards.

Figure 1: Global Gold Production in Downtrend. Note the peak in 2003 and the trend downwards since. Source: www.ZealLLC.com
Other factors such as mine operating expenses have climbed drastically. Eskom, the South African power utility have announced a 150% price increase in electricity for South African mines. The Gold companies reactions are the closure of their uneconomic mines. For example, Harmony just announced the planned closure of some of their high cost and low productivity mines.
Just on November 16th 2009, a research scientist announced the startling finding that 90% of South Africa’s Gold reserves, just are not available for mining. The president of Barrick Gold, Aaron Regent, the world’s largest producer, publicly stated on November 11, 2009 "There is a strong case to be made that we are already at 'peak gold. Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore.
Gold Exploration
Big Gold companies are not the right organizations to discover new prospective mines. They are too large and too focused on production details just to keep their investors happy. The job of finding new gold deposits is best left to the small and nimble junior exploration companies. The acquisition of newly discovered and profitably mined deposits is a much better and lower risk route for the Big Gold companies.
The Big Gold Suitors
Following is a table listing of an odd bakers dozen of the world’s largest pure precious metal miners ranked by market capitalization. They are valued by the share price as of November 20, 2009.

* Source: http://www.goldval.com/reserves-resources/
Table 1: Largest Gold Miners in the World. They are listed by Market Capitalization. Note Newmont does not give Resources information.
This table of the largest Gold miners in the world is quite an eclectic collection as the valuations given by the markets are not directly attributable to a standardized metric, it is merely a snapshot at a particular time in an irrational marketplace. Note the relative high valuations for Goldcorp and Agnico-Eagle for their mines in politically safe Western hemisphere jurisdictions. Note also, the penalties given for Gold Fields and Harmony for their expensive mines in risky South Africa.
The most pressured Big Gold companies are those that have high production numbers that they need to replace in their reserves. From this listing, one conclusion that may be drawn is that the most driven suitors are the three Big Gold companies of Barrick (ABX), Goldcorp (GG) and Newmont (NEM). A fourth company is Kinross (KGC), which has a history of multiple acquisitions for growth.
The Magic of Accretive Ounces
On November 16, 2009, Goldcorp announced a friendly acquisition, “Goldcorp buys Canplats for $238-million”. The main target of the buyout was Canplats’ Camino Rojo Gold project, which is only 30 miles southeast of Goldcorp’s Penasquito mine in Mexico. Analyzing this simplistically by only considering the Gold reserve ounces available, the $227 Million USD is paying for 1.7 Million ounces of gold reserves (ignoring the inferred resources), which works out to $133 USD per ounce.
Then with the magic of accretive values, Goldcorp is valued at a market capitalization of $32 Billion based upon the 46 million ounces of reserves that it owns, which works out to $695 USD per Gold reserve ounce. Goldcorp just purchased Gold reserve ounces at $133 USD each and by just owning them, they become worth over five times more! Granted there are more variables to the calculations such as Silver resources and capital costs to bring the mine to fruition. However, the main point is that the reserve ounces belonging to Canplats are worth five times more in Goldcorp’s pocket.
Acquisition Frenzy Coming
Fortunately for the Big Gold companies the timing is just right presently, as the recent precious metals bull market has endowed Big Gold with a hefty war chest. So armed by their soaring stock price, the Big Gold Walruses are going shopping for Junior Gold Oysters.
“The time has come,” the Walrus said, “To talk of many things … Now if you're ready, Junior dear, We can begin to feed.” *

* apologies to Lewis Carroll, “Through the Looking-Glass and What Alice Found There”, 1872
Disclosure: The writer does not hold any positions in Barrick (ABX), Goldcorp (GG), Newmont (NEM) or Kinross (KGC).


Marco G. November 15, 2009 http://goombarhsedge.blogspot.com/
Important Disclosure
The information and opinions contained within this document reflect the personal opinions and views of the author and should be view as information for thought and entertainment only. The author may from time to time have a position in any of the securities mentioned. Any material within should not be construed as accurate or reliable or be utilized as advice for investment or business purposes. Independent due diligence and discussions with one’s own investment and business advisor is strongly recommended. There are no guarantees of the accuracy or completeness of the information contained herein. These writing are not to be construed as an offer or solicitation with respect to the purchase or sale of any security or as an endorsement of any product or service. We do not receive or request compensation in any form in order to feature companies in this publication. It is prohibited to copy or redistribute this document to any type of third party without the express permission of the author. This document may be quoted, in context, provided proper credit is given.

Natural Gas: Ride the U-Turn Up!




Introduction

The writer being always interested in Natural Gas was watching with amazement as the pricing of this commodity tumbled over the course of 2008 to 2009. See the following chart for the precipitous drop:

Figure 1: Natural Gas Pricing in Past 3 Years. Note the drop from the peak of $13.69 in July 2008. Also note the sharp price reversal that started in September 2009. Source: http://www.stockcharts.com/.


In the above chart, notice the highs in Summer of 2008 of $13 for Natural Gas. The chart shows the New York Merchantile Exchange (NYMEX) spot pricing at the Henry Hub in Louisiana. Approximately 50% of the US consumption passes close by to this centralized distribution point, so the pricing here sets a standard price for trading markets. The Natural Gas spot price slid uninterrupted until March 2009, when I started watching. Then the price churned sideways in Spring and Summer of 2009. From my tediousness in watching the churning, the writer missed the start of the run up at the beginning of September 2009. This trend reversion appeared to be part of the Gold, metals and commodities bull push up that began this fall at the beginning of September.


Then recently, on November 18, 2009, the writer caught the article by Sol Palha describing how Natural Gas may make a good long term play and I decided to capitalized upon this trend.


Situation Analysis


New Sources of Supply

Natural gas pricing is burdened with the tales of new discoveries of Natural Gas in shale rock formations. The stories relate that supplies with this new technology of sideways drilling will supply vast amounts of the neglected energy fuel for decades into the future. Also, there are other unconventional sources that new technology is bringing to the forefront such as Deep Natural Gas, Tight Natural Gas, Coal Bed Methane, Methane Hydrates and Geopressurized Zones. For a primer on these new sources see this Natural Gas Organization link.

Analysts are divided about the cheap gas potentials. At the Peak Oil Conference in Denver on October 13th, 2009, Energy Analyst Randy Udall stated, “The U.S. gas production peaked 35 years ago, and the roughly 10 percent jump in production over the last four years required doubling the drilling rate.”


Whatever the case may be, the writer believes the markets have already priced in all the theories of Natural Gas boom or bust into the pricing.


Economic Support for Higher Pricing
Though there is still wide spread concern about the robustness of the economic recovery and criticism about the recovery without jobs, the stock markets have clearly made a strong move up from March of 2009.


A leading indicator for the recovery is the pricing performance of the commodities upon which the economy is based. Examining the Continuous Commodities Index (CCI) gives one a good proxy for the leading edge of the economy’s behaviour as the index is composed of 19 raw materials used in industry. See the chart below for the calamitous drop of the CCI index in Summer of 2008 and the slow climb back this year.

Figure 2: The Commodities Research Bureau (CRB) Continuous Commodity Index (CCI) of 19 key commodities. Note the peak in July 2008, similar to Natural Gas (Natural Gas is 6% of this Index). Note that recovery for CCI started in December of 2008, while Natural Gas waited for Fall of 2009 to make any moves.

Comparing the Natural Gas NYMEX price chart to the above CCI chart, we see that the Commodities led the way, and that Natural Gas only started to move this Fall. This may stand to reason, as gas demand is cyclical annually and the demand season is just beginning to start with the onset of winter.

For further confirmation of the economy recovering, we examine the Baltic Dry Index. This is a shipping price index out of London, England which tracks the cost of international shipping of bulk cargoes. This is the follow on to the CCI as the cost of delivery of the commodities to the end users. The chart of the Baltic Dry Index below shows a bottom at the end of September 2009, with a sharp rise into October and November.

Figure 3: Baltic Dry Index of Shipping Costs. Note the bottom set at the end of September and the sharp rise into October and November.

From the commodities pricing behaviour and the rise in the Baltic Dry Index, the writer concludes that there are good supports for the idea that the recession has ended and that the recovery is on the way.

Annual Cycles for Domestic Natural Gas
Historically the gas prices are higher during the winter heating season as shown on the chart below.

Figure 4: NYMEX Natural Gas Price - 12 previous months. Note the Winter and Summer Pricing Cycles. Source: http://www.oilnergy.com/1gnymex.htm#year

The US Natural Gas distribution authorities purchase and store the gas underground in the Summer months and withdraw the gas for usage in the Winter months. The date for stopping the injection storage and for starting withdrawals for sales is creeping up on us; the start date may be during the week of November 23rd, 2009, dependent upon the weather. This annual pricing cycle for the winter heating season just adds further confidence to the trend reversal.

Natural Gas Bottoming and Trend Reversal
From the chart displayed in Figure 1, the Natural Gas price bottom was hit on September 4th , 2009at $2.62 and a sharp reversal happened. The price rocketed up to $5.83, reached on October 21st, 2009. Since then the price has eased off, settling just about the $4.50 range, presently.

This writer actively seeks value situations where a trend bottoms and a reversal is due. For Natural Gas, the bottom may have been reached in September already, and this November correction is merely a small pullback before a resumption in the up trend. This previous bottom, in the writer’s opinion makes the risks smaller, as the bottom has already been placed for Natural Gas.

For a second opinion, here is an interview with Robert Cooper, Acumen Captital Finance Partner, captured by Arjun Rudra, another Seeking Alpha contributor titled, “Cooper, Turnaround Happening for Natural Gas”.

Playing the Trend
There are many ways to play this trend. The Natural Gas industry has been battered by the year long slide in the commodity price, and one can pick through the litter for value. The writer is partial to large pipeline companies such as Enbridge (ENB) and Kinder Morgan (KMP), though they encompass more than just natural gas.

For further background and understanding about Natural Gas, a good Triology about Natural Gas was written by Joseph L. Shaefer, starting with “Natural Gas: America’s Energy Salvation”. For a discussion on the merits of some Natural Gas companies see “The Nine Best Natural Gas Oil Pipelines” and three top Natural Gas stocks “ Natural Gas Stocks: The Ultimate Form of Stored Solar Energy”.

Other methods of reaping gains in natural gas prices would be tracking ETFs. The most popular ETF, the United States Natural Gas Fund (UNG) has swelled their assets to over $4 Billion and causing distortions in the markets. UNG has also encountered issues with costs involved in rolling over their futures contracts. Here is a Seeking Alpha article by Lara Crigger explaining the differences between UNG and UNL, the newly launched ETF version intended to spread out the Natural Gas futures rollovers. Finally here is a guide to Natural Gas ETFs.

Leveraging the Trend for the Risk Amenable
Since the writer has a certain degree of confidence in the analysis and the possible U-turn coming, he is looking to maximize the possible gain. There is a leveraged two times fund named the Horizons BetaPro NYMEX Natural Gas Bull Plus ETF (HNU in Canada and HNUzf in the US) managed by Horizons BetaPro Exchange Traded Funds. As described by their originator:
“The HBP Bull+ ETFs and HBP Bear+ ETFs are designed to provide daily investment results, before fees and expenses, that correspond to double the daily performance, or double the inverse daily performance, respectively, of their specified underlying index or benchmark.”

The writer’s understanding of leveraged ETF’s is that the fund should perform satisfactorily if the trend is right, and moves directionally without much churning. The costs generated daily during the price churning will eat away at the gains. Also during a counter movement, the potential exists for a doubling of the leverage during the counter move, and thereby losses may be more than doubled.

Therefore, a heavy note of caution here is warranted as leveraged ETF’s are risky and come with a whole slew of these issues such as tracking errors, significantly higher expenses and daily returns not long term returns. Here is an older Seeking Alpha article detailing “The Case Against Leveraged ETFs”.

The HNU fund only tracks the domestic NYMEX spot price at the Henry Hub location. This limits the effects of other drivers of natural gas pricing and concentrates solely upon the supply and demand equation at the distribution point. See the chart following for the recent price action of the HNU ETF.

Figure 5: Horizons BetaPro NYMEX Natural Gas Bull Plus ETF. Note the Dolji at the end. Source http://www.incrediblecharts.com/

From examining the above chart, the bottom for HNU appears to be firming up with the two blue days ending on November 20, 2009.



Conclusion
The general economic climate is in the beginning stages of recovery. The recovery in commodities prices and the Dry Baltic shipping index gives support to the idea of recovery. Natural Gas pricing fell with everything else and was slower to recover having being impacted with a glut of new supplies and the summer season of lower demand. The bottom for Natural Gas prices was already set in September, 2009. Now that winter is looming, the seasonal demand and price adjustments should soon be having an impact. Whether the pricing moves up this week or later, the trend should be upwards for Natural Gas from here.





The writer holds a long position in HNU.





Marco G. November 20, 2009 http://goombarhsedge.blogspot.com/





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