Various Asset Protection Strategies with a directed focus on Precious metals, Energy and Agriculture. Three Model Portfolios and valuation models can be found on the upper left hand side.
Apr 25, 2009
Gold Equities: Next Nasdaq Bubble?
Although I planned to add an update to my previous post on this subject, I refrain from talking or writing about any stocks while I'm buying, just so I feel like I’m pushing anything. I will copy and paste 1 or 2 discussions from my previous posts for those who didn't read it. So don't be annoyed if it seems repetitious.
Senior and Mid Tier ProducersS- They have become hard to quantify so don't take the category to literally.
T-1) Agnico-Eagle: If anyone has read my previous post, I had Yamana Gold as my favorite pick, but now Agnico Eagle has earned a place with Yamana and Silver Wheaton (I kept royalty equities aside previously). TMFSINCHURA and I have written about all three of these multiple time so I will get straight to the point on why I have moved AEM up. Agnico had currently been trading at a rather rich premium, which is fair due to its unparralled growth coupled with the fact it is taking place at the perfect time in the cycle. They also deserve a lower cost of equity due to the political safety of their mine locations, most notably their LaRonde mine in Quebec. I also am very impressed with the Lapa, Pinos Altos and Meadowland mines, which are expected to come online in mid-2009 and the latter in Q1 2010. I expect them to increase reserves fast than the consensus estimates. In addition I think 2m/oz annual production will happen extremely fast from their expected 600k oz in 2009. I have similar feelings about Yamana and their 2m/oz annual production, but the odds favor agnico in my opinion.
T-1) Yamana: , however will has more than adequate growth in 2009 and again in 2011 or 2014 (in terms of y/y production growth). This company dissapointed investors last year with some operating concerns, such as holding on to some mined gold (feeling they could get a better price in the future) which they likely sold at a much higher price in Q1. The market also looked at them like a free-port because a rather larger portion of total revenue derived from copper, whose price dropped like a rock in 08. On average copper contributed approx 28-35% of total revenue for 08. Investors fail to realize it wall to 17-19%, 12-14% in 2009 and 2010. These numbers are before the most recent upgrade in reserves annouced yesterday as well as a higher than expected grade ore(3/1-5g/t) for the Jordino mine, which holds a lot of promise for future increases. Their reserves are now around 20.4m/oz as the drilling at the Jordino mine was much better than expected.
(silver) 1 Silver Wheaton, I have to put in top ranking to SLW but it hard to compare to the aforementioned miners, as their model is a dynamic in this industry (with the exception of Royal gold and Franco-Nevada). Before A description of their flagship streams, I wish to point out once again the brilliant aquisition of Silverstone (expected to close in may), will bring 3 more streams online immediately. This takes away significant risk in terms of debt convenance as it was paid through the issuance of equity. 11/m oz of silver production is not much to write home about but here are the adjusted estimated (silverstone streams start in may): 2009: Production for this year was 15m/oz but it will now produce between 18.5-19m/oz. 2010: 28-29.2m/oz, 2011: 34.5-35.4m/oz, 2012 36-36.4m/oz and 2013: 37-37.5moz. I think the silvestone acquisition will add more than 4m/oz per annum by 2011-2012 and therefore think SLW can reach 40/m oz by 2013(barring any more acquisitions which mgmt has made clear they will be aggressive should the right deal come about. The longevity of these mines can be shown through their two flagships Penasquito and Lusmin mines which have 17+ and 25+ mine life’s respectfully. Lusmin has a 25 year contract with 9-12m annual production and Penasquito's contract is the entire life of the mine and capped at 10m oz a year.
2) Franco-Nevada: I have removed Kinross from my rankings as having to worry about their potential "Russian problems" is just not worth it. Though many American investors can only buy on US exchanges or Pink sheets, Franco-Nevada is my no.2 but is just a small notch above no.3. Since most people don't know much about this company, i will provide an overview. It is a Gold and Oil royalty company with small royalties in fertilizers,platinum and base metals. It is very well capitalized, drooling for aquisitions: 125m in cash, 25m shares of Newmont Mining(last time I checked, though it may have changed), and 160-175m of available debt if desired. I mention this only because this may allow them to outbid Royal Gold should a royalty be up for sale. Barring acquisitions the revenue structure is as follows: 26% oil, 68% Gold and 6% other. They have 135 streams currently online, 18-20 more expected come online in 2009 and 2010 and 333 streams at various stages of exploration. As the name says these revenues are from Nevada, Canada and Australia. Franco Nevada’s gold royalty will jump from approx 230k-250k oz in 2009 to a range between 375-400k in 2009. The price has been suppressed because the drop in oil prices, but that gives investors with their head on straight a great opportunity to buy.
3) TMFSinchura has discussed Royal Gold in depth to a point where I have nothing new to say. Although I thought their last royalty purchase was a steal, I question Teck Conmico to deliver based on their current financial position. I think they will get out of it, but they have to delay some operations for various reasons. This, however, is not a big problem whatsoever, but is adds to a number of small reasons that separate FNV from Royal Gold. That being said, after the recent depreciation in the share price, I have become very attracted to it. Like Agnico, I was able to load up on RGLD, as this is the first entry point after my initial purchase which was rather small. It currently has 24 streams online with plenty more to come, 9 of them in rather soon.
4) Although the premium is rather rich, Newmont is attractive because of the future flagship mine in Australia, production reaching 2m/oz per annum in 2010.
Mid/ Small Producers-
1) Redback Mining: has taken no.1 in this category, mostly because I think it will become an 800k/oz or possibly 1m/oz producer(dependent on data that will be released sometime this year) by 2012-2013. I consider this the Agnico of the small-mid tier, trading at 10x CF and about 2x NAV. Production will go from 280k in 08 to about 550-575 in 2010.
2) Lihir Gold- I placed this in low-mid-tier because it is a turnaround story and would rather be cautious and wait until two years of successful operations. It executed, Lihir will pass the 1.1m/oz in 2009.* lihir island - is expected to produce 775k-840k oz in 2009 and reach 1m/oz yr by 2011. The remaining mine life based on current reserves is 18-20 years. But there sucess with lihir in terms of converting m&i to reserves, leads me to the conclusion they should convert an additional 10m of the 36m oz of net resources to reserves.
*Bonikro mine - 125k 155k oz in 2009 in addition to to other operating mines expected to produce 100-150 combined. The first year of production began in 2008, therefore production will accelerate over the next few years. There are some caveats: the upside could be substancial and it is highly likely the mines not in production in addition to Bonikro wiill lead to a mid to large increase in reserves over the coming years. The downside, however, lies in the fact these mines are located in west africa go obviously political risk may pose a problem.
In Short, Lihir is trading at a fairly big discount to its peers, yet production will ramp up dramatically up from 2008. The overall risk has declined in operations, both in continuous production of their mines and the transformation of their balance sheet. Cash costs will be between 400-425/oz for the next 4-5 years. It is also a pure play on gold when compared the number 1 miner in australia (newcrest) which gets more or less 80% of total revenue from gold. I mention this in light over the hype going on with teck conmico which is a great story as well.
3) Silver Standard Resources- extremely large resource base with P&P increase rapidly. Silver miners is a small universe In my mind with this and SLW as core holdings. CDE and Silvercorp are speculative and mediocre at best in my opinion.
Small-But profitable and Viable
1) Jaguar Mining-"My top pick among the junior at current valuations, which is rarely mentioned. Production will ramp up from 155k oz in 2008 to nearly 200k in 2009. Production is expected to more double from 2009-2012, at which time the range is currenly between 420-460m oz. "
2) Minefinders-Though the mine has been disappointingly slow coming to fruition, and a commercial level of production is not anticipated before 2Q09, Minefinders is working a very rich property. Once Dolores is fully up to speed, it should be an excellent earner for years to come. Dolores is off to the races!
3) Aurizon- "It has a 160k oz mine which is 100% owned, and advanced stage mine, and an exploration. it also has a royalty agreement on the the perron and Beaufor mine which produced 258k in 2008, while the Perron mine has yet to begin production. This holds enormous upside potential for this copmany at the current valuation. 3) There are many worth mentioning such as NGD etc, but others have done so in the past. "
· *My valuations are both very qualitative and quantitative. For example I think Gold will peak somewhere between 2012-2014 (who knows???), So I am attracted to those who produced under 1m/oz in 2008 but are ramping up to 1m/oz to 2m/oz per year. I consider this the sweet spot of the Industry. I also try to pick those most geopolitically safe ( I consider Australia and Canada Ideal due to their good relationships with the government).