Showing posts with label GDXJ. Show all posts
Showing posts with label GDXJ. Show all posts

Sunday, December 19, 2010

The Year of the Golden Bunny!

The Year of the Golden Bunny!
December 19th, 2010
By:  Marco G.

The upcoming year 2011, in the Asian Zodiac, is the year of the "Metal Rabbit", or if you will, the year of the "Golden Bunny", in following the tradition, there is a 60 year Golden Cycle for these zodiac animals.  This new Asian lunar year is poised to begin on February 3, 2011.  We are looking forward to the "metals" aspect of the Rabbit year to help us obtain a bit of an edge in the equities markets for this upcoming Golden Bunny year. 

Fall of the Tiger Year

Looking backwards at the soon passing year of the Tiger, the author is thankful for the numerous messages from the many stoic supporters; never mind the exasperating events and the volatility of the irrational and maddening markets.  This year was a much memorable one in that we have seen many and varied changes in the evolving landscapes and horizons of the equities markets.  It was breath taking and challenging to be able to wade in and participate in and possibly profit a little in the markets' remarkable bull rise off the summer malaise. 
The general North American equities markets have enjoyed an amazing fall run, with a gain of about 17% for the S&P 500 since the FOMC announcement of August 27th, 2010 for equities market support.  This run was given a further jolt by the FOMC's injection of treasury support on November 3, 2010.  As the year ends, more and more economic and market indicators are turning positive while the myriad voices of the bear detractors are still calling for caution and uncertainty. 
In examining the performance this fall, the author has created a comparison chart following for the market items of interest:  (click to enlarge)
Figure 1:  Fall 2010 Action in the Markets.  The S&P 500 (^GSPC) has gained about 17%.
The base trace is that of the S&P 500's 17% move, illustrated above in red and green candlesticks.  The precious metals have moved forward with Gold (using GLD as proxy in green trace) moving upwards about 11% in the same time span.   The major Gold equities in the HUI index (red trace) of the 14 largest Gold companies has moved higher about 15%.  Note that beginning in December, the HUI has broken upwards leveraging the Gold price; we shall refer to this later in this posting.  The 30 large cap Gold equities in the GDX ETF (brown trace) has moved up about 13%.  The Gold price and major Gold equities have been moving higher together with the general equities, albeit underperforming the action of the S&P 500.  This is a bit unusual for Gold to be that closely correlated to the general equities markets, but then this is a year of change.  Also, the author was a bit surprised to see the S&P 500 outperform Gold and the Gold equities by up to 4%.  Again, this is against my preconceptions, of the precious metals being in a bull run rally mode and yet being outdone by the S&P 500 index.
Now looking at the upper traces on the chart, the GDXJ consisting of 60 varied Gold Junior equities (light green) shows an impressive 35% gain this fall.  The Gold Junior mining equities have roughly doubled the rise of the S&P 500 and have more than doubled the large Gold equities and the Gold price, which is as it should be in a precious metal bull run rally.  The Gold Junior equities should be generally the leaders in this rally.
The top two traces on the chart are quite intriguing with the Silver (SLV Silver ETF as proxy in yellow trace) price surging forwards over 50% this fall.  Again, this is generally accepted wisdom, for the Silver price to lead in a precious metal bull market.  The ultimate trace on top is the SIL ETF of the 30 Silver companies, which sports a spectacular 59% gain for the fall.  So, this is a prime example of the Silver equities leveraging the gains in the rise of the Silver metal.  For Silver going forward, Mr. Anathan Thangavel paints a very cohesive story as to why the demand of Silver is increasing. 
Readers who have been following the authors writings and others that have spotted the rising precious metal trend and who have entered the markets, should now be sitting on some gains for this fall season.  Correction, anyone at all, who has been in the equities markets this fall, should all be sitting on some pretty gains this fall.  Such is the power of the rising confidence tide in these equities markets;  the rising tide should have lifted all equities (boats), to give one a nice year end feeling of success.

Golden Bunny Outlook

The question then is what is the outlook now for next year, the year of the Golden Bunny?
The author found a marvellous quotation as to what is happening in the world equities markets given by an astute Seeking Alpha commentator,  "Venerability" who states:
Commodities are a positive GROWTH trade. The Commodities Bull Market is secular. And it is extremely long-term.

We are still in the very early stages of nothing less than the World's Second Industrial Revolution.

It is even bigger than the World's First Industrial Revolution, which brought the US, Europe, Japan, and a few other lucky countries and their populations into the modern world.
Yes, the author also believes, we are seeing the rise of the emerging markets, not just of China, India and BRIC, but also of Columbia, Bolivia, Mauritius, Oman, Latvia, Morocco and many other countries that you may not have heard from for years.  The whole world is in throes of change, driven by advances in information technology; everyone everywhere is seeking peace, health and the right to a modern fruitful life.  We in the modern world, truly have a lot to be thankful for.
These small steps taken towards the modern technological world, requires acquisition and consumption of a varied basket of metals and commodities.   The author has taken the 2010 fall performance of commodities (using the Jefferies TR/J CRB Global Commodity ETF as a proxy - CRBQ) and compared it to the S&P 500 and Gold in the chart following:  (click to enlarge)
As stated previously, and shown in the chart above, all the traces shown, everything has been uplifted by the rising confidence tide.  Again the red and green candlesticks are the motions of the S&P 500.  The red trace is the CRBQ commodities ETF and one can see that it has risen together with the S&P 500.  Then in November and again in December, the CRBQ starts trying to outpace the S&P 500.  The CRBQ has gained about 18% for this fall.
Figure 2:  Comparison of Commodities to the S&P 500.  Note the surprising action of the Copper price.
The yellow trace is for OIL, (iPath S&P GSCI Crude Oil TR Index ETN as proxy for oil price) is shown above as following along with the rising S&P 500 index.  OIL has gained about 14% for this fall.  Note that OIL, is more volatile, and the relative performance is vastly affected by the choice of the starting date for the comparison. 
The green trace the is for the JJC Copper, (iPath DJ-UBS Copper TR Sub-Idx ETN as proxy for copper price) which is the leader in gains for the fall with an exceptional 23% rise.  Does it surprise you that copper has gained more than twice as much as the Gold price this Fall? 
As first postulated by the author, earlier on August 27th, 2010, Copper with its industrial dependencies will be leading the markets forward this fall.  Then later on November 15th, 2010, the author again establishes a bullish case for mining, commodities and the general markets.  Finally, on December 12, 2010, the author forecasts a copper shortage forthcoming in 2011.  The industrial and investment demands are driving the copper price, while the production shortfall is resulting in a squeeze higher.  Therefore, lead by "Doctor Copper", the author's new year outlook is bullish for the general markets, for the commodities and for the continuation of the precious metals bull.

Positioning for the Golden Bunny

For the general markets going forward, I will make no recommendations as this is not the author's specialty, and besides, there is a plethora of information and opinions available on Seeking Alpha.
For the precious and base metals going forward, this is the author's specialty and following are some possible prospects for positioning.  I stay away from the large cap major Gold miners such as Barrick (ABX), Goldcorp (GG) and Newmont (NEM) but am invested instead in Junior mining equities.  Even though, from the first chart previously, the HUI large cap Gold index which the above 3 top Gold miners are part of, has broken upwards in December and is now showing some leverage to the Gold price.  This leverage breakout by the HUI is indicating the movement of large investors and institutions into the large cap Gold miners and bodes well for the continued advancement of the precious metals bull in the imminent Golden Bunny year.
In the following specific mining equities that I have a position in, I qualify them with two main criteria.  Firstly and most important is the quality and competence of the company management.  The management need to be focused upon creating value for the shareholders.  Secondly, the companies' specific stories of the value creation need to be very compelling and capable of driving and sustaining the share price even if the markets are uncertain and may pull back a little.
So to start off, in the precious metals space, my favorite Gold mining Junior is:
Great Basin Gold (GBG, TSX:GBG) - here is an exclusive interview with their CEO Mr. Ferdi Dippenaar.  Great Basin is a Gold miner that will leap from mine developer to mid-tier gold producer status by 2012, in producing close to 350k ounces of Gold per year.  Their Hollister Nevada mine is the highest grade production Gold mine in the world, with expected production of about 110k ounces of Gold equivalents per year.  They have just recently uncovered super bonanza grades above one of their existing ore veins at Hollister.  In addition, Great Basin's Burnstone, South African mine is starting ramping up to full production of 250k ounces of Gold per year.  This quarter or next, Great Basin will turn the corner to profitability and the markets will re-rate the stock price.  I believe out of all my stock selections, Great Basin Gold will give the most payback for the lowest risk.
In the Silver space, my favorite Silver mining Juniors are: 
Silvermex (GGCRF, TSX:SLX) - here is an exclusive interview with the former Genco CEO, Mr. James Anderson,  The new Silvermex is formed from the merger of the old Silvermex and Genco Resources.  The new management includes former and present executives of Hecla Mining (HL) and Silver Standard Resources (SSRI).  Silvermex has over 250 million ounces of Silver resources and they anticipate increasing their Guitarra Mexican high grade Silver/Gold mine output by multiples.  I believe that this Silvermex stock has the highest growth possibilities of any Silver Stock in the market.
Canadian Zinc (CZICF, TSX:CZN) - here is an exclusive interview with their COO, Mr. Alan Taylor.  Canadian Zinc owns the previous Hunt Brothers Prairie Creek Silver, Zinc, Lead mine in northern Canada.  The mining infrastructure is 90% complete and Canadian Zinc is awaiting environmental approval for water usage which is due in 1st or 2nd quarter of 2011.  I believe that with the environmental approval,  Canadian Zinc will be re-rated to a multiple of its existing share price.
US Silver (USSIF, TSX:USA) - is described here in a previous article.  US Silver operates the joint Galena, Coeur and Caladay mining areas in the Silver Valley of Idaho.  They are rehabilitating the Coeur mine shaft for increasing their Silver production.  I believe that US Silver is a much underrated production Silver miner and they will be acquired by Hecla Mining (HL) or Coeur d'Alene (CDE), who are situated nearby.
In the precious metals exploration space I am interested in the following:
Victoria Gold (VITFF, TSX:VIT) - which has shed 30%+ on the back of an error in resource definition for their Cove project.  Victoria Gold is busy drilling proving up both their Cove deposit in Nevada and their Dublin's Gulch multi-million ounces Gold deposit in the Yukon.  I believe that they will be acquired by Kinross (KGC) or Newmont (NEM) in the Golden Bunny year.
Tarsis Resources (TARSF, TSX:TCC) - is drilling their Erika epithermal Gold/Silver deposit in Mexico.  They are also active in many projects in the Yukon.  I believe that they will strike Gold in their drilling of the Erika project as the property is part of the Mezcala Gold skarn district, and it abuts the Torex Gold (TORXF, TSX:TXG) El Limon Gold deposit, and further in that their geological expertise is shared with Almaden Resources(AAU, TSX:AMM), which has already struck Gold.
Almaden Resources (AAU, TSX:AMM) - which are drill looking for the deeper high grade core to their Ixtaca epithermal Gold/Silver discovery in Mexico.  Almaden has over a score of properties joint ventured out and under exploration.  Of course, I believe that they will hit the high grade Gold/Silver motherlode in their present drilling.
Torex Gold (TORXF, TSX:TXG) - which is expanding their reserves and resources (4 million oz.) at their El Limon Gold deposit in Mexico.  They currently have 9 drills on site and expect to have 11 drills working in 2011.  I believe that Torex will be acquired by Goldcorp (GG) which operates Mexico's largest Gold mine, the Nukay/Los Filos in the adjacent property
Atac Resources (ATADF, TSX:ATC) - own the huge RAU project in the Yukon where they have discovered a large Nadaleen Trend which they compare to the Carlin Trend in Nevada.  Early prospecting and drilling has uncovered Gold in multiple locations along the Nadaleen Trend.  Atac expect to have 8 drills in operation in 2011.  I believe in the Atac Resources assessment of their Carlin Trend geologic cousin, as they are backed by the geological expertise of Archer, Cathro & Associates, renown Yukon geologists with many discoveries to their credit.
Caerus Resources (CAEUF, TSX:CA) - is negotiating for the Antioquia Gold project in Columbia which is adjacent to the Aragua Mine owned by Continental Gold (CGOOF, TSX:CNL).  I believe that Caerus will be successful in acquiring these prospective artisanal mining claims.
In the base metals mining space I am interested in the following:
Norsemont Mining (NOMFF, TSX:NOM) - is proving up their Constancia copper/Gold project in Peru.  They are presently drilling to increase the 43-101 resources in a new report due 1st quarter of 2011.  A 2009 feasibility study indicates a NPV (8%) of $931million, and an IRR of 27%.  I believe that Norsemont is an ideal copper/Gold takeover candidate.
Belvedere Mining (BLVDF, TSX:BEL) - is a Nickel, Gold, Cobalt miner operating the Hitura nickel mine in Finland.  They have an advanced Gold property in Kopsa, which is 15 km away.  Belvedere's plan is to develop the Gold property and run the ore through the Hitura mill.  I believe that the management of Belvedere will be able to create value with Gold mining, as they have been meeting all targets promised ahead of schedule.
Adex Mining (ADXDF, TSX:ADE) - is re-opening the Mount Pleasant tin, indium, tungsten and molybdenum mine in New Brunswick Canada.  Adex is partnered with a Chinese company, Great Harvest of Hong Kong.  Adex owns the world's largest and richest Indium resource and North America's largest tin deposit.  They also own significant resources in tungsten and molybdenum.  I believe that the re-start of the Mount Pleasant mine will generate considerable value in the scarce metals that they mine.
Zaruma Resources (TSX: ZMR.h) - is owner of the Luz del Cobre copper project with the adjacent San Antonio Gold project in Mexico.  They are focused on the re-start of the Luz del Cobre heap leach mine in 2011 with the financial support of Gravity Ltd.  I believe that the timing is right for Zaruma to bring this mine on-stream in 2011, the year of the Golden Bunny.
Finally, for an oil exploration story that I am interested in:
Westernzagros Resources (WZGRF, TSX:WZR) - is drilling in the Kurdistan region of Iraq with partners Talisman and the Kurdistan Regional Government.  Their exploration block of 2000 square kilometers is prospective for a super-giant type billion barrel oil field, similar to the Kirkuk field, which is 150 km distant.  Their present Kudamir 1 well has proven gas, natural gas liquids and prospective oil resources on the flanks of the anti-cline.  They will be re-entering their Sarqala 1 well which has previously encountered oil.  Westernzagros is also proposing to drill a shallower Mil Qasim well.  Here is the link to their latest corporate presentation.  I believe that further drilling in 2011 will prove the immense quantities of prospective oil on their claim block.
As a side note, the author posts his more developed writings here, but has more scattered ramblings and musing notes available for interested parties, that are sent out in an email distribution list.  To be added to the distribution, please just send me your email address.

Summation

So in examining the progress this fall and the prognosis for the future, we have interpreted the market indicators that are continuing to point towards a bullish outlook for the general markets.  The emerging world is ramping up their demands for commodities and this will serve to drive the equities markets.  On top of this, we are in the middle stages of a multi-year precious metals bull market.  We as investors are truly blessed and have a lot to be thankful for.   I am eagerly anticipating the arrival of the sixty year cycle of the Golden Bunny!
Disclosure: The author is long junior resource equities and may have positions in all the equities mentioned.
Important Disclaimer
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

Friday, October 8, 2010

Peak Gold or Andean Results Confirm Gold Corp Over-paying


Peak Gold or Andean Results Confirm Gold Corp Over-paying.

By: Marco G.

October 8th, 2010

http://goombarhsedge.blogspot.com/

Introduction

Andean Resources (ANDPF.PK, TSX:AND) issued a news release yesterday with results from their 72 drill holes since their previous July 19th release .  The results were interesting gold drilling wise but mundane in terms of adding spectacular value for Andean and only served to confirm what the author already expressed about Gold Corp (GG, TSX:G) over paying for this acquisition in this editorial here.
In my previous criticism, the author asserted that Gold Corp was paying $1619 per reserve ounce for Andean’s kitty of 2.1 million ounces and that was way too much. 
The author is not a geologist, and speculates that even if the new drill results will change all the previous NI 43-101 3.1 million compliant resources into minable reserves, the resulting price of $1096 per reserve Gold ounce is still too much.
The high price per reserve ounce that Gold Corp is willing to pay is indicative of the large gold companies operating environment presently and serves to underscore their desperate battle to maintain their market value in the face of mined out reserves and increasing mining costs.

Peak Gold or Mined Out Reserves

Aaron Regent, president of Barrick Gold (ABX, TSX:ABX) the world’s largest gold producer made a surprising announcement last fall regarding their Gold mining business.  He told an English audience in 2009  at a Gold Conference in London that:
“There is a strong case to be made that we are already at peak gold,” Regent said. “Production peaked around 2000 and it has been in decline ever since. And we forecast that decline to continue as it is increasingly difficult to find ore.”
Global Gold output has been in decline since 2000-2001.  The declines average 5% per year and is a factor in the Gold’s price quintupling since then.   For example the production output from North America has decline by an astonishing 60% over the last decade. 
The days of easy Gold discovery and cheap Gold production days are gone.

Peak Oil or Rising Production Costs

Mining with the moving and excavation of mountains of materials, is in itself is an extraordinarily energy intensive business.  Note the energy problems that surfaced in South Africa, last year, as Eskom their power utility, cut back their services and increased their service rates.  This caused the whole family of South African miners to suffer severe problems and reduced their market capitalization across the board.
Noted economist Dian Chu recently penned in her Seeking Alpha article a prediction of $100 per barrel of Oil:
But the longer term trend is clear as traders and fund managers want to be strategically exposed to Oil from this point forward, as the real upward move is just now starting, expect crude oil to hit $100 a barrel by January, and only going higher from there.
Oil prices factor directly into mining costs and indirectly into the infrastructure and material movement costs of these large mining projects. 
The only saving factor for the large Gold miners is that the market price of the Gold precious metal appears to be going up for the longer term.

Market Reception of Large Cap Golds

How has the market been valuing the share prices of these large Gold miners?  The author ran a performance chart for the gold ETF GLD, the large miners index HUI, the quality Gold miner Gold Corp, and the junior Gold miners ETF GDXJ as follows:  (click to enlarge)


In this year-to-date price performance comparison, the GLD ETF, the red trace has gained about 22%.  The surprising fact is that the blue trace, the HUI large gold miners index has only gained about the same 22% as the Gold price.  Then we see that the green trace, Gold Corp was fairly equal with both GLD and HUI until September, when it drops off to show a total year-to-date gain of about 15%.  The Gold miners Junior ETF the GDXJ has gained a chart leading 40% for the year.
Is this surprising to the reader?  Even with the higher Gold prices, and increased profits, the large miners, such as Newmont (NEM) are reporting increased operating costs, and their share prices are stagnating.
For a closer look at these miners during the recent Summer’s end run-up in the price of Gold, the author ran a second performance chart for the last six weeks as displayed following:  (click to enlarge)

During this shorter time period the performers were in the same sequence as in the previous chart.  During the last six weeks, Gold has increased in price about 7.5% together along with the HUI index’s increase of 7.5%.  Note that the blue HUI line is more volatile relative to the red GLD line.  The HUI both undershoots and overshoots the red GLD price line.
Gold Corp’s price went nowhere and stayed the same.  The market is showing uncertainty about the value of Gold Corp purchasing Andean Resources.
Finally though, look at the performance of the GDXJ ETF.  This collection of 60 junior Gold companies with market capitalizations of mostly under $1 Billion dollars shows a spectacular leverage to the price of Gold.  The GLDJ shows a 15+% increase relative to Gold’s GLD about 7% increase for a leverage of about 100% more gains. 
This second look serves to confirm the first chart’s observations. 

Conclusions

Peak Gold together with Peak Oil is upon us and may force investors to look at the precious metals markets differently.  The irrational or possibly rational market is not valuing major Gold producers as good investments presently.  The price charts evidence shows that investors might just as well just place their monies in the Gold metal itself, as the major caps are certainly providing no leverage at all to the metal price.   Investing in the gold equities would also bring on extra companies’ risk such as exhibited by Gold Corp with their acquisition of Andean and the resulting price decline. 
The second piece of price performance evidence is that the junior Gold producers are hot.  They as a group are providing investors with a doubled leverage to the underlying Gold price.  This should be noted by astute investors, as this junior Gold producer segment is where the market valuation changes are happening right now. 



Friday, October 1, 2010

Silver Stealth in Gold Bull Market

Silver’s Stealth in Gold Bull


By: Marco G.

September 30th , 2010

http://goombarhsedge.blogspot.com/


I’ll bet that you the reader thought that the Gold Bull was strong in September, didn’t you? Yes, Gold was strong gaining in price by 5% over the month and hitting a high of $1315 USD on September 30th before closing at $1308 for the end of the month. Well, would it surprise you to know that Silver made the stronger moves in September gaining 12.4% for the month and hitting a high of over $22.08 USD before closing at $21.78 for the end of the month.

Silver Stealth Bull

Silver is following the higher priced Gold in the Bull market for precious metals this fall. In the Google Trends chart following, the search term “Gold Price” turns out to be four times as popular as the search term “Silver Price”.

 
So, Silver is gaining more on a percentage basis, but in terms of popular awareness the Bull market for Silver is still operating in “Stealth” mode.

Silver versus Gold Gains for September

Continuing in my mode as a Silver enthusiast, the author decided to run some statistics on Silver stock gains for the month in comparison to Gold. Note that the author definitely said gains and did not use the word moves, so sure he is that there were gains across the board. In the chart following the author displays the surprising findings.

Using the GLD ETF as a proxy for the Gold price, the gain for Gold was 5.1% for the month from September 1st end of day to September 30th end of day prices. The source of the prices were from Yahoo Finance. The surprising thing is that the SLV ETF as a proxy for the Silver price gained more than twice as much as Gold coming in at a 12.4% gain. The usual explanations for the Silver strengths are two fold. Firstly, Silver being also an industrial metal as well as a precious metal collapsed more severely than Gold did during the 2008 economic crisis. Since then, Silver is only presently recovering to the highs reached since before the crisis. Therefore, Silver had a longer way to catch up percentage wise. The second reason, is that Silver is a much smaller market than for Gold and is therefore more volatile.

Gold Miners

The large Gold miners ETF, the GDX gained 5.8% for the month relative to the metal’s price gain of 5.1%. This would seem as if there was almost no leverage for owning the equities as opposed to owning just the metal. The author suspects that the market for large Gold mining equities may be saturated for lack of a better word. The Gold producers’ costs are higher due to the inflating energy and production costs plus the market just does not appreciate the large cap miners’ stories as much anymore. This is a trend that investors had better keep an eye upon. Large cap miners are just not providing any leverage to Gold presently.

Just for fun, the author decided to checked out the gain for the high quality stock Gold Corp (GG, TSX:G). Gold Corp’s gain for the month was a paltry .003%. Amazing! What is the story here? Well, if the reader recalls, Gold Corp is purchasing Andean Resources (ANDPF, TSX:AND) for $3.4 billion USD. The author expressed an opinion here that Gold Corp was paying too much. It appears that the market may agree with the author and is penalizing Gold Corp for this.

The smaller Gold miners in the GDXJ ETF gained a respectable 9% for the month. Juniors are providing a leverage of almost 80% more than gains made by the underlying Gold price. This is a trend that investors should be watching, as the author believes the market monies are presently moving to the smaller names in mining.

Silver Miners

Silver is where the big gains story is this month, with the shining metal sporting a 12.4% hike. The author is using the Silver ETF SLV as a proxy for the Silver price in the chart following.

The Silver miners are gaining even more by leveraging the Silver price. Under cover of the Gold bull market, the Silver producers as a group are enjoying their own “Stealth” Bull with double digit gains.



Silver Miners ETF SIL gains 15.1%.
 
SIL gained 15.1% and that is still a respectable leverage to Silver as the ETF is a mixed bag of large cap and junior Silver miners. The following four large Silver producers comprise over 50% of this fund: Silver Wheaton (SLW), Fresnillo PLC (FNLPF), Pan American Silver (PAAS), Industrias Penoles (IPOAF). The author reviewed the SIL ETF in a previous article here?


Silver Wheaton (SLW) gains 18.4%
 
Silver Wheaton (SLW), the author’s “crème de la crème” Silver royalty stock turned in a marvelous performance this month with a gain of 18.4%. Silver Wheaton buys into the operating mines production streams of the Silver metals. They supply needed capital early in the infrastructure build in return for a portion of the Silver production in following years. Silver Wheaton only has twenty plus employees and are highly leveraged to the rising Silver metals price. Here is the link to Silver Wheaton’s presentation at the 2010 Denver Gold Forum, last week.

Hecla Mining (HL) gained 10.9%.
 
Hecla is a mid-sized Americas based Silver miner with operations in the Silver Valley of Idaho and their large Greens Creek mine in Alaska. Hecla has turned around their debt issues in previous years and has bought complete ownership of Greens Creek. Hecla has two projects of San Juan in Colorado and San Sebastion in Mexico. Here is a link to Hecla’s presentation at the 2010 Denver Gold Forum of September 21st.

Silver Standard Resources (SSRI) gained 14%.
 
Silver Standard Resources is a mid-sized Silver miner with large development projects in Silver. Their Pirquitas mine in Argentina has just starting production early this year. Silver Standard has a long pipeline of projects including the huge Snowfield and Brucejack properties in northern British Columbia. Here is a link to their presentation at the Denver Gold Forum of September 21, 2010.

Again, the larger cap miners are displaying rather poor leverage to the underlying Silver price. The market is just not paying a higher leverage for large Silver miners with the exception of Silver Wheaton. The author suspects that possibly, some of the capital that would have been invested in these miners has shifted instead to the smaller cap junior miners.

Junior Silver Miners

Now this is where the real surprising story is, in the small junior Silver equities. The author’s selection of three Silver stocks has each turned in 30% to 50% gains for the month.

USA Silver Corp (USSIF, TSX:USA) gains 32.1%
US Silver Corp is a small Idaho Silver Valley based miner. The author has a previous article detailing their production and prospects here. There is much speculation about consolidation of the smaller miners in the rich Silver Valley and US Silver is one of the takeover candidates. The possible suitors include Hecla Mining (HL) and Coeur d’Alene Mines (CDE), both of whom have operations in the Silver Valley. US Silver has just completed a recent $6 Million financing with the aims of refurbishing a shaft and increasing Silver production.

Canadian Zinc (CZICF, TSX:CZN) gains 53.3%
 
Canadian Zinc is the Northern Canada Silver, Lead, Zinc mine built by the old Texas Hunt Brothers during the last Bull cycle of Silver in the early 1980’s. The Silver price crashed and the mine was abandoned when almost completed. Recently, Canadian Zinc has increased the resources by multiples and is at the stage of environmental permitting for water usage. Presently there is a deep drill program assessing the extent of the deeper stratas of the rich ore. A recent interview with Alan Taylor the COO and VP Exploration is posted here.

Genco Resources (GGCRF, TSX:GGC) gains 41.9%
 
Genco is a Mexican Silver miner turnaround story. This was previously a $4 stock, when a few years ago, it was mining Silver profitably. Because of politics and other issues, the stock has declined to where it is today. Recently with management changes, a new NI 43-101 compliant technical report and feasibility study completed the company’s fortunes are improving. On September 20, 2010, Silvermex Resources (SLVXF, TSX:SMR) offered a merger for Genco driving the depressed price up 30%. The author conducted an exclusive interview with the Chairman and CEO, James Anderson yesterday, discussing the merger and it is posted here.

Summary

The Gold Bull market for September was strong turning in a 5.1% gain for the month. Under the cover of the more visible Gold Bull market, the Silver metal gained 12.4% and Silver equities are turning in even larger and more surprising double digit gains. A select group of the smaller and more volatile junior Silver miners are turning spectacular gains of up to 50%.

Investing in this sector of the markets is not for everyone. The reader needs to understand that the Silver market is much smaller than Gold, especially for the smaller equities, and are much more illiquid causing much higher swings up as well as down.



Disclosure: The author is long Silver mining equities.



Important Disclaimer



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.

Thursday, September 23, 2010

Leverage the Precious Metals Bull!

Leverage the Precious Metals Bull!




By: Marco G.



September 23, 2010



http://goombarhsedge.blogspot.com/




Introduction

Today is Fall, the first day, and so it is befitting for us to look back and examine what has been happening to the precious metals markets. If you are a watcher of the markets, maybe you might be aware, that there seems to be a rise in the price of Gold recently.



Invisible reader: Well, how much has the precious metal risen recently?



Let us go to the charts and you may be a bit surprised.



Gold’s Rise

Of course, you are a student of the markets, and you are aware of Gold’s rise in price.



Invisible reader: Yes it is only a flash in the pan. The rise is insignificant, and Gold is volatile, and it will drop back soon.



Well, my rationale for the strength and duration of what is happening to the precious metals markets will have to wait for another day. The topic today is Gold’s rise, and how to leverage upon the trend. Following we chart the price of the largest Gold ETF – GLD, for the last three months. We are using the GLD as a proxy for the actual gold price.






Figure 1: GLD - Gold ETF in Summer 2010



It does not take very much astuteness to see that there seems to be a trend in place. The author has made it easier for the reader by placing a golden arrow following the GLD price upwards. This is an interesting chart. How much has the price of GLD gained in the last while? To keep things on a straight basis, we do some simple arithmetic starting with July 28th, the day of the first movement upwards for GLD and using today’s price we find that Gold’s rise amounts to about 12% (the figures are rounded and not exact).



Big Cap Gold

Invisible reader: All right then, how has the price movement of Gold, the metal, translated into the market valuation of the Gold miners.



Forget the large cap HUI, and let us take a look at GDX, the ETF that contains 30 odd large Gold miners. Following is the chart for the GDX this summer.






Figure 2: GDX - larger Gold miners performance in Summer 2010



Invisible reader: H..m..m, that yellow arrow upwards is interesting. What is the percentage movement upwards?



Using the same starting date, the movement upwards for this collection of miners is 20%. Wow, that is pretty good, so the miners are leveraged to the Gold price and magnifying the Gold price move by another two thirds times or 166%. Yes, this is a prime example of the leverage of mining equities to the underlying Gold price.



Junior Golds

Invisible reader: What about the smaller gold miners? Are they moving more, or less, or not moving at all?



We use the GDXJ ETF, the collection of about 60 smaller miners (mostly under $1Billion market capitalization) for this analysis and the chart is below.





Figure 3: GDXJ - Junior gold miners in Summer 2010.



Not surprisingly, or is it surprising to you? The smaller gold miners are also moving upwards and at a fast clip apparently. The price movement is up by 33% for this collection of Junior Gold miners. Wow, the Juniors are taking Gold’s price movement and adding another 21% move or taking the Gold’s move of 12% and multiplying by 275%!



The Lunar Metal’s Rise

Invisible reader: I wonder how the price of Silver is doing relative to Gold?



The author has penned a previous article pointing out that Silver may move more than Gold here. We use the large Silver ETF, SLV as a proxy for the Silver metals prices and the chart if below.





Figure 4: SLV - Silver metals ETF in Summer 2010.



Interestingly, looking at the above Silver chart, Silver seems to be a laggard and did not move upwards until the end of August, almost one month behind the movements of Gold. Well, to keep the comparison valid, we use the same starting date, July 28th and we will see what happens. Astonishment, the calculations show that Silver has moved 18% in price even when starting one month late!



Invisible reader: Wow! This is 50% more than Gold's move of 12%!









The Crème de la Crème of Silver Equities



Invisible reader: I can’t wait to see the results then for the Silver miners.



Unfortunately, there are no Silver miners ETF, that I am aware of. So, we use my favorite indicator of the health of the Silver market, the crème de la crème of Silver stocks, Silver Wheaton (SLW), the Silver royalty company to chart the gains made this Summer. The Silver Wheaton chart follows:





Figure 5: Silver Wheaton - SLW, large cap Silver Royalty company.



Surprisingly or not surprisingly, Silver Wheaton has turned in a gain of 47% from our calculations.



Invisible reader: Is something wrong here? SLW is a large cap and large cap miners are not supposed to leverage that much. They moved 47% while Silver only moved 18% in prices?





A Discarded Junior Silver



How about the smaller silver producers?



Genco Resources (GGCRF, TSX:GGC) was a previous silver producer, that had run into difficulties and management was trying to turn it around. In the chart following you can see the collapsing share price and then something happened this Summer to Genco.





Figure 6: Genco Resources (GGCRF, TSX:GGC) Silver Junior



On Sep 20th, Genco Resources received a merger offer from Silvermex Resources (SLVSF, TSXF:SMR) causing the share price to move by over 30%. Obviously, someone saw value in Genco. Silvermex is noted for having executives from Hecla (HL) and Silver Standard Resources (SSRI) (large Silver miners) in their management.



Using the same starting date of July 28th, the movement upwards for Genco was 59%.



Invisible reader: Well, you are being unfair again, that includes the takeover offer that juiced the price up!



The Hunt Brothers Forgotten Mine

Let’s take a look at another forgotten Silver security.



Canadian Zinc (CZICF, TSX:CZN) has the advantages of almost complete mining infrastructure and extremely high value ore for a pre-producer. A recent interview with CZN’s Chief Operating Officer is here.



This Summer’s performance of Canadian Zinc is displayed following.





Figure 7: Canadian Zinc (CZICF, TSX:CZN) Silver, Zinc, Lead mine in northern Canada



The price movement upwards for Canadian Zinc calculates to be 72% as of this writing.



Invisible reader: Sputter….Sputter……..but………but this can’t be happening! This is not making sense at all!



A Small Silver Producer

Finally, we look at a smaller Silver miner, based in the famous Silver Valley of Idaho. The chart for US Silver Corp (USSIF, TSXF:USA) is following.





Figure 8: US Silver Corp., (USSIF, TSX:USA) Silver producer in Silver Valley Idaho.



US Silver Corp is completing a $6Million private placement to refurbish a shaft to increase production abilities. The calculated price movement for US Silver this summer works out to be 102%.



Invisible reader: Now, this does it! The writer is obviously rigging the figures!



Leverage of Silver Juniors

The heading of this summary says it all. Silver is moving more than Gold in this run of the precious metals bull market. Miners leverage the underlying metals price. Juniors are leveraging the metals prices more. Good juniors will move quite spectacularly.



Invisible reader: This is all unfair! You are only choosing specific examples to skew the mathematical analysis and comparison!



Exactly, no further comment.




Disclosure: The author is long Silver mining equities.

Important Disclaimer


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.