Wednesday, October 25, 2017

Miners I'm Buying And Why - Part IX: Stocks Top? Shiny Metals; Bitcoin Vs. Gold; 3 B$ Plays; 5 Au Producers - Small-Cap Stock Observer

Captain Chaos Devolves Into Comrade Cuckoo

I sometimes opine on political and other macro market observations before going into specific stocks.

Earlier this year I explained why, "I'm trimming equity positions and not replacing them. My target is to be at least 50% in cash before this October's 30-year anniversary of the 1987 market crash. I hold no bonds or debt, and no banks other than via funds. The only positions I intend to increase in a Captain Chaos investing world are in commodities. Other than metals and miners, I keep telling myself to raise cash and wait for the crash!" Today, I believe 50% cash may be way too low.

I first penned "Captain Chaos" after Trump announced his run for president. Any critical investor who suffered through his co-authored/ghostwritten ego-driven books could have seen what's coming. Nine months in, my low expectations appear to be far too optimistic. Ironically, that moniker also refers to a moronic auto mechanic wearing a cape and mask in the 1980's Cannonball Run flicks. With the $20 trillion debt ceiling raise fast approaching, the real mechanics running the U.S. economy keep kicking the fiscal responsibility can down the road - no better than that fictional character in this movie clip.

Markets tend to underperform in the early years of a new presidency as they adjust to major policy changes. Midterm elections usually result in gridlock with stock indexes not perking up again until government spending accelerates going into the next election. Instead, November's surprise sparked ever higher stocks on anticipated tax cuts paid by healthcare cuts, with new roads, walls and war.

Other than war, nothing gets done by the GOP who now control all of congress, the presidency and the supreme court. After seven years of whining over what healthcare shouldn't be, the senate could not find a simple majority to pass anything, even whatever Skinny was. Averted twice in May and September and now set for December, republicans support government shut down to repurposing disaster relief funds unless the wall is funded - a pipe-dream Mexico will never pay for.

Republicans only hate spending money when it's not their turn to run things. Voters deserve their fate when myopic sound-bites of "tax cuts" matter more than details like adding $2.2 trillion to deficits, with only the richest benefiting. Let's hope this too shall not pass, as Bush's 2001 $1.6 trillion in tax cuts turned huge surpluses into deficits, leading to plummeting interest rates, a housing bubble and global debt crisis, with a lost decade for stocks. This time could be worse as 16-years later there are still no surpluses to take from. Learn to act before the markets get sick and tired of all this winning!

A new definition of incompetence should be having the only team on the field but still can't score. High expectations were empty promises, now priced as market bubbles. Ever wonder if the Donald thinks he's just on another so-called "reality show?" Who remains in his all-star WH cast to dread next TGIF's "you're fired?" It's not hard to imagine where this crazy administration is headed. That old fake-news label has become too mainstream, so I'm coining a new term - heil Comrade Cuckoo.

Shiny Metals - The Only Undervalued Investment

Gold is stealthily resuming its secular bull market. We can debate if this is a result of gold's fear trade over the points mentioned above, the USD's ~10% fall continuing which can bring high interest rates or inflation, or from impeachable Russia scandals expanding, to potential new wars in North Korea. Perhaps physical-gold buyers in Asia are showing paper-gold bugs how to overcome leveraged short-sellers' ability to suppress the market from discovering gold's true price. Possession may become 9/10th's of the game, or maybe gold's run is simply resuming after a normal period of consolidation.

The chart below indicates that gold's turnaround is still in the early innings. The fifth light-blue down arrow shows gold overpowering 3-years of down channel resistance early last year, which still holds. Pink down arrows show seven failed attempts to overcome gold's 6-year downtrend line from 2011's high. The pennant flag looks like a congestion pattern of clashing long-term trends, which gold bulls won again as the green arrows broke above ~$1,300/oz. in late August. If gold holds above $1,200/oz. at year's end, I believe more analysts and investors will recognize that its major up-trend has resumed.

China, India and Russia benefit from low paper-gold prices as they keep buying and taking delivery, drying up the physical supply that can be shorted. Markets eventually will realize the synthetic-gold and silver shorting emperor has no clothes, which many estimate at hundreds of ounces sold as futures per physical ounce held. China may soon advance a strategic plan to unload its $1+ trillion U.S. debt hoard, disrupt the petrodollar, and back the Yuan with gold as an alternative world reserve currency, all at the same time - see China Readies Yuan-Priced Crude Oil Benchmark Backed By Gold.

Few investors in the West hold any precious metals, then mostly (NYSE:GLD) or (NYSE:SLV) ETFs or bank certificates they think are as good as... gold. As usual, the trick is in the fine print. Actual metal bars are likely unallocated, meaning none are specifically yours, and you will never know until it's too late if there are claims for more gold than is held. Meanwhile, fees are charged to manage and hold your gold, which may not even be there. Your contract might say they can sell or lease out your gold, at their profit and your risk if the gold is not returned. These are the major funds and banks, not the small dealers of coins and bars that often go bankrupt holding millions in clients' gold and silver.

Ask your bank how long to get your gold or silver? Don't be surprised as they discourage taking delivery and to just to sell it. My bank, also one of the largest bullion dealers, told me they had no ounces in their vaults for months. So why do we pay storage fees? If things blow up they have a force majeure clause to get out of fraud jail free by calling an act of god or disaster to forfeit our bullion in return for whatever funny money exists then, exactly when we need physical precious metals most.

What now seems absolutely clear is that gold's 4+ year bear-market did bottom by mid-January 2016. Long-term technical downtrends since 2011 finally ended and reversed into uptrends, which confirm as prices break above each previous resistance level and turn into support. Strengthening copper, zinc and even iron ore also support a new long-term bull market for base metals and precious metals.

Silver prices should start outperforming gold and further confirm the bull is back. If the gold / silver ratio again falls sharply from today's 75 ($1,275 / $17) to 2011's apex at around 30, this may imply $67/oz. silver at $2,000/oz. gold. Governments used to fix this ratio at ~15, close to where markets traded it down to by 1980 as gold doubled again by then to $850/oz. as silver ran eightfold to $50/oz.

Some argue the ratio should be 9 or 10 to correlate with actual Au / Ag ounces mined. Others say it's not annual production that matters, but total above ground supply. If so, silver may be rarer as all gold ever mined still exists as fine jewellery or in vaults, while most silver has been consumed or disposed to landfills. Silver is highly conductive, light sensitive and anti-bacterial, with growing industrial uses in: alloys, batteries, dentistry, glass coatings, LED/RFID chips, reactors, medicine, water purification, wood preservatives etc., with 10% of the billion ounces mined each year needed for photovoltaic solar panels alone. I've always preferred silver, which offers value and leverage to exaggerate gold moves.

If you can't hold it, you don't own it, applies to bullion as financial foundation insurance. Portfolios then need some mining stocks for extraordinary growth potential. Summer 2015, I indicated a cycle bottom was near and started heavily buying and writing about producers and developers of all sizes, later adding select junior explorers. My filters looked for washed out market caps trading at a fraction of balance sheet equity, with high cash, low debt, large NPV, economic PFS etc. My bet was simply to find clearly undervalued miners with net positive current assets and big resources to build on, avoid junk and story plays with polluted share structures, patiently buy right, and just wait for gold to turn.

Bitcoins Are In No Way Like Gold Coins

Before someone asks, no I don't own any Bitcoin. In a major crisis I also won't need any tulips, chain letters or other greater fools Ponzi schemes. The only truly liquid asset trusted as fear and inflation insurance, accepted as real money worldwide for over 5,000 years, without any counterparty risk, is holding physical gold and silver. Cryptocurrencies, like all surrogate money ever devised, are totally faith based and backed by nothing tangible, and will eventually return to their intrinsic value of zero.

Unlike digital or paper money, governments can't devalue gold by over inflating its physical supply. Regardless of unrealistic election promises, Mother Nature only permits an extra 2%-3% to be mined each year. Look again if you think hyperinflation hasn't been a thing since WWI and the Weimar Republic. A decade ago prices were doubling daily in Zimbabwe until its dollar was retired in 2009 at 35-quadrillion to US$1. If you shrug this off as Africa with not much to sell, then why is Venezuela's currency so weak with the world's largest oil reserves? Five million Bolivar, exchangeable at 5:1 for US$1M in 2012, is now worth $227 bucks at today's 22,000:1. Some claim that World of Warcraft’s in-game virtual gold is now worth a lot more than the real-life Bolivar. Note: in reaction to Trump's recent sanctions, Venezuela just switched to pricing its oil in Chinese Yuan instead of U.S. dollars!

Don't confuse tangible stores of value with speculative demand, or brains with a bull market. Prices for cryptocoins are based on artificial supply, an open-source software protocol ledger. Blockchain faithful believe an illusion that Bitcoin's so-called "mineable" supply is unchangeable at 21 million. Then why wasn't the need for August's hard fork to create Bitcoin Cash known from the beginning? Crypto miners can't cover costs on miniscule transaction fees alone, so do you really think they won't act Fed-like and agree to add a zero to 21 million as needed, to keep their block rewards flowing? Digital anything is simply not rare and in any event, with ~1,000 cryptocurrencies, expect dilution!

Young, new investors are starting to believe that cryptocoin prices can only go up, while precious metals can only go down or sideways. Recently I read, "it's different this time, crypto's fun but gold is dead... for like six whole years." If you've been through a few market cycles you're probably grinning, knowing that gold's volatility will return. 1970's gold ran from $35/oz. to $850/oz., 24X or +2,329%. 1980-2001 gold fell to $252/oz. -70%. 24X that cycle low may still put gold at $6,000/oz; the high so far has been $1,920/oz. in 2011, 7.6X or +662%. 2015's low was $1,047/oz. -45%, now $1,275/oz. +22% and down only -33% from gold's all-time high. Cryptos have little price history to extrapolate.

At gold's next cycle peak, we could even see $8,500/oz. based simply on inflation. It's not hard to believe a 1979 house or car costs 5-10X today, so why didn't $850/oz. gold do the same? Fiat money will again derive its value from the gold backing it, not the other way around. The Fed tinkers with interest rates and performs a financial engineering symphony of exotic money printing magic acts from QE to the Twist. Instead of buying time for economic recovery with growth, debt bubbles inflate that never get repaid. Gold shines as the music stops when confidence is lost after waves of inflation!

Software does whatever programmers want! Another example might be online poker, which I doubt is happy collecting tiny rakes and tournament fees while knowing how easy it is to rig virtual cards and robot players to cream off the top prizes as well. The thing is that I do see value in how blockchain technology can be used. Processing power is needed to verify transactions and these servers get paid in crypto tokens which can be held or sold instantly for cash.

3 New Blockchain Plays

So while I don't drink the crapto-coin Kool-Aid, I might consider (TSXV:HIVE)(OTCBB:PRELF) Hive Blockchain Technologies, which owns two GPU-based cryptocoin data centres in cheap energy Iceland. Monday's news ups capacity 175% with its third data centre in Sweden. HIVE's partner and largest shareholder at 30% is Genesis Mining, the world's leading crypto mining hashrate provider.

I started watching HIVE at C$0.80 as it opened September 18th after being halted June 5 at $0.30, where a $16.5M 55M share private placement closed September 7. The P story's there, but how do we value it? Other than a line in June 14th's news about the first data centre, "... trailing 12 month EBITDA would have been approximately US$7 million", I can't find anything for current or expected asset values, revenues or earnings to justify today's C$828M market cap at $3.53 per share. October 11 another $37M ~24.7M share bought deal at $1.50 closed, so I'll keep watching for now with so much stock freeing up over the next few months to see where HIVE's price shakes out at year's end.

I sometimes buy crushed penny miners with tight share structures if they have no debt, filings are up to date, share rollbacks are likely done, and the market cap is equal to or less than cash. Notice I did not mention people or assets as they usually change in the new play. My bet is that RTOing with my clean shell is cheaper than doing a CPC IPO. The first sign of new life is an insiders and friends cheap private placement (PP). Shares then usually shoot higher on no news until a public reveal is ready.

I'm flying blind for a while but sometimes I catch ten or more baggers before I know the new name. This is high risk and opposite my usual value investing style but you can see how it makes sense for a tiny portion if you can research and have patience. For example, smashed miners after Bre-X could turn into dot-com plays. Recently, cobalt, lithium and weed stocks have had a few homeruns.

The hot RTO flavour of the month is anything blockchain. Based on HIVE's (formerly Leeta Gold) success, expect more until a few start blowing up. The question is always how much is too much to pay and how long will it last? Two new crypto plays this month are (TSXV:BLOC)(OTCBB:BLKCF) Global Blockchain Technologies and (TSXV:LTV)(OTCBB:LVNSF) LeoNovus. Both have much smaller market caps than HIVE, but other than software, some initiatives and a lot of name dropping, figuring out what they actually have is not easy. Do these three one-year charts seem similarly scary?

If a great story has no fundamental value to analyse, do yourself a favour and at least figure out how much PP paper will soon become free trading shares. If you see many millions recently placed at pennies, plus warrants, do you really want to be buying these shares for a few dollars? On the other hand my shell shares are not locked up, so hopefully one gets pumped up soon to join the blockchain party before people figure out what they're really worth. If not, there's always another next big thing.

Now let's update some of the real money miners I own or watch closely.

5 Major Producers - Tangible Resources, Sales, Earnings And Dividend Value Offers Less Risk

Brokerage analysts can provide better coverage on the majors. With multiple billion dollar producing mines they mostly trend with gold's price and sentiment, like banks trade as a herd around interest rates. However, mining assets tend to be concentrated in a few operations, often in challenging places, and company specific mine issues or financial stress can exaggerate volatility compared to the group.

(NYSE:ABX)(TSX:ABX) Barrick Gold was mentioned since Part I at US$7.51 in our "Miners I'm Buying and Why" series. Then ABX's market cap of $8.75B was 14% below shareholder's equity of $10.2B. I could find much deeper discounts to buy, and did, but that was a fair price to own a piece of the world's largest gold miner. ABX did better than expected in reducing debt by ~$3B and with gold's turnaround traded over $23, up 200%+ by July 2016. At today's $15.85, ABX has a market cap of $18.49B versus only $9.64B in equity. Not only is a 14% discount to equity much cheaper than today's 2X, also notice that equity actually fell 5.5% as ABX's share price and market cap more than doubled. Other than a sector performer, I can't see any alpha without looking into each mine's details.

(TSX:TECK.B)(NYSE:TECK) Teck Resources is one of the world's largest diversified miners, first added to our Top 30 Small-Caps at C$6.75 in March 2009, and dropped at $45.40 in April 2010, up $38.65 or 573%. Teck's long-term chart shows massive cycle swings and I told myself if it ever fell to around $5 again I would close my eyes, ignore the coal exposure, and just buy it. TECK.B was again made a Top 30 in February 2016 at $5.00, now $29.64 with a 52-week high of $35.67. TECK.B is still up 493% but, unlike ABX, its market cap at $16.91B is still cheaper than equity of $18.48B.

(NYSE:EGO)(TSX:ELD) Eldorado Gold is a mid-tier gold producer with ~19M/oz. of proven and probable reserves, with mines, development and exploration projects in Turkey, Greece, Romania, Brazil and Serbia. Equity shows as US$3.5B, almost triple its current market cap of $1.18B at $1.48 per share. EGO has mostly higher-grade gold, meaning lower-cost to produce, but geopolitical risk is higher which can produce extreme stock price swings. EGO's long-term chart shows a few roundtrips from under $2 to $10+, topping at $20+ in 2011. EGO didn't participate in last year's gold rally but instead broke 7-year lows largely on environmental and permitting issues at Skouries, Olympias and Stratoni. September 21 news, "Enters Constructive Dialogue with Greek Government" may be major catalysts as either workable situations, or lawsuits with these mines placed on care and maintenance.

July 10, EGO paid C$590M (C$129M cash plus 10% of its stock) for (TSXV:ICG)(OTCBB:ICGQF) Integra Gold and its Lamaque project and mill in Quebec, Canada. This diversifies into a safer mining jurisdiction, but I'm guessing many of those 77M+ EGO shares have already been dumped since that May deal when ELD was still ~C$5. EGO just broke decade lows, falling another -32% since Monday on guidance of production cuts with revised resources and costs from low leach pad recoveries at its Kisladag mine in Turkey. So I watch this falling knife wondering if EGO's high equity margin of safety will soon signal another cycle bottom? I'll wait for the market to digest Thursday's financial and operational results to see if EGO wants to bounce, or go even lower and test a buck in December.

If you like mega-caps which pay 4%-5%+ dividends, two of the world's largest multi-metal producers are (NYSE:BHP) BHP Billiton and (NYSE:RIO) Rio Tinto. Both doubled since mentioned last year at barely above decade lows, when they still traded at equity value instead of today's 2X equity. I would like to get another crack at those prices during the next general market blow off.

Next month, Part X updates about a dozen developers and explorers with new picks worth watching.

My calculations and observations are as an individual investor and are not recommendations. Data comes from financial reports, news releases, company websites and other public sources that may not be accurate, complete or up to date. There may be conflicts of interest as I own stock in some of these companies. I share these ideas in hopes that readers will comment on them and on other company stock boards at our website with your own insights, opinions and anything I may have missed.

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