Amine Bouchentouf

Amine Bouchentouf
Contributor since: 2011
Company: Commodities Investors LLC
Hi Amine, I like to say that silver is a schizophrenic commodity, because it's part industrial metal and part monetary asset. This makes it a very tricky metal to trade because you have strong undercurrents at play at all times, that's why you see such sudden volatility spikes in the silver markets (ex: May and September of this year). That said long term fundamentals are sounds; I like SLW as a proxy for silver and also AUQ as a gold/silver hybrid. (I own both)
Hi Richard, Which one of the VIX products do you prefer: Ishares (VXX) or ProFunds (VIXY)? If you expect further extreme price deviations from the mean would you still go long VXX/VIXY Q4?
Good post. I like AUQ and NGD. I think the market is underestimating Young-Davidson.
I'm using a base-case of $1500/oz AU and $30/oz AG byproduct, so $30 is the target. You're absolutely right regarding the A Warrants--that's a great way to play NGD, and gives you a 6-year call option on gold. The Cs are also good although they expire much earlier. Also, some of the 2012 call options are worth looking at.
The 2008-09 period was rebuilding time at NGD as management took time to clean up the balance sheet, cut costs and ramp up production. We started seeing the benefits of that reorganization in 2010 with positive net income of $74.17M (NGD became profitable in 3Q10 and hasn't had a losing quarter since).
In fact, net income for Q1 and Q2 this year alone is $103.32M--that's a 39% increase over ALL of 2010! Also, keep in mind that the third and especially fourth quarters are usually the strongest for gold sales.
Cash costs are some of the lowest in the industry: this quarter its cash costs in Mexico were a ridiculous $7/oz (due to silver by-product).
Also the company has $500M in cash sitting on the balance sheet and a debt/equity ratio of 0.12 (compared to ABX's 0.54). Throw in 3 fully-funded projects that will be coming online from now until 2017 and you quickly see why this is a terrific asset to own. It got caught up in the gold selling frenzy last week which now makes it a screaming buy in my opinion.
Absolutely terrific analysis on hedging your gold positions--a must-read for anyone who's in the gold markets.
Cleeray. Your assumption is that central banks only buy/sell bullion from each other--that assumption is incorrect. Most central banks purchase gold on the open market, just like any other actor. Central banks buy gold directly from mining companies, physical bullion dealers (the London dealers market is very active with central banks) and--in some cases--from private individuals.
Also, take the case of Kazakhastan which recently exercised its right to purchase all gold mined inside the country: that's less gold available in the open market and, everything else constant, prices should increase since the Kazakh central bank just took 27 tons of gold off the market. http://bit.ly/oYDUxv
It all boils down to supply and demand: There's approximately 140,000 tons of gold above ground. Of that gold, central banks own about 30,000 tons. Global gold production is about 2500 tons per year, meaning that gold supplies are increasing at a snail-paced 2% per year. With central bank demand increasing, ETF demand increasing, private investment demand increasing there simply isn't enough above-ground gold to go around--hence the dramatic price increases we're seeing.
The main point of my analysis is that central banks are a much bigger actor than private individuals--once they become more active in acquiring gold assets, expect to see lots of price action.
For the sake of simplicity: Fixed Supply (140K tons + 2% annual increase) + Increasing Demand (Central banks + ETFs + Investors) = Higher Prices.
As for whether a central bank belongs to a creditor or debtor state is immaterial in the gold markets--either you have the cash to buy the gold or you don't.
I think KGN is a good add since it adds some geographic diversity concentration to an up-and-coming gold region: West Africa. What's your perspective on KGN?
These seem fairly priced at the moment; will consider after a dip.
good point.
Couldn't agree more, especially re management.
Also, if you're a US person buying the warrants on the TSX via a US b/d they'll hold the shares for you in USD but buy the warrants in CAD. So you're getting currency exposure too. If you're bearish on the USD (as Bernanke is) then that's an extra kicker for your position.
pdtor and clint007. I took a look at the warrants; they're not cheap at these levels but I like the As and Cs.
Also, if you're a US person you can own the warrants in Canada but you can't exercise them. Regulators allow US persons to trade warrants on Canadian companies but prohibit them from converting them into the underlying security. A bizarre but important rule to know.
Good luck to all NGD longs.
I agree with Marc Faber's assessment. As far as political risk is concerned, NGD is exposed to extremely mining-friendly jurisdictions: 2 mines in Canada, 1 in Australia, 1 in Chile, 1 in Mexico and 1 in the US. They did have some issues with the Mexican mine but that was more labor-related than regulatory interference. That said, there's always risk whenever you're extracting resources from a foreign country, so you should definitely price that into your model. When you compare it to other companies, it has a pretty good exposure profile.
Hi. NGD has a ZERO HEDGING POLICY, so you're literally getting gold spot market exposure. (They do have some legacy exposure from the Metallica days but those are so small that they're not material, less than 1%).
I think NGD is doing a terrific job of managing its operating cash flow. The company may not be paying out regular dividends but it's built a sizable war chest of $500M; that figure becomes even more impressive when you consider that's the equivalent of all its 2010 gross revenues ($530M). And even more so when you consider the company was bleeding money in 2008 and 2009 (-0.69 and -0.64 EPS respectively), and is now spitting out loads of cash: 0.45 EPS in 2010, and a whopping 0.74 EPS YTD. Yes gold prices have helped, but management has done some terrific acquisitions and kept cash costs extremely low. (Did I mention that its extraction costs in Mexico are $18/oz!)
As far as debt is concerned, I also like its debt profile. It has a net debt/equity ratio of 0.12, way below the industry average (Barrick's debt/equity ratio is 0.54).
In short, NGD is now a certifiable cash cow and management has shown it's prudent in managing its cash through a series of tactical acquisitions and operational improvements. You may not be getting a dividend but that's trivial compared to all the value that's being unlocked and transferred to shareholders via an increasing share price.
Thanks pdtor for the comments, well done for getting in early. I'll take a look at the A warrants. I'm expecting lots of good things from NGD between now and 2017.
Thanks Richard. I recommended going long gold in 2006 when it was at $550/ounce. I actually profiled GLD in the first edition of my book "Commodities For Dummies" (yes, part of the series published by Wiley). When I first covered GLD, it was trading at $60/share with a volume of 15M; compare that to today where 08/26/2011 volume was more than 10x that at 235M. The trend is your friend and I still see more upside for gold.
I'll be writing more about gold, metals and energy on SA; please feel free to follow me to keep track of my articles. Cheers
These are all valid issues: inefficient government, currency, inflation. That's why I included ProShares Ultrashort MSCI Brazil (BZQ) in my analysis. If you're bearish on Brazil I'm showing you a way to go short. Long-term I'm bullish on Brazil although there are issues that need to be sorted out first.
I like ABV and BRF; but why are you long GGB since they're exposed to all the issues you're mentioning: export-market, strong currency, China?
Thanks for your note Power Hedge. SDRL is another good name
What's your price target? Does it still have room to grow at $40/share?
Are SLW ($40) and RGLD ($79) fairly valued at these prices?
Terrific article, thanks for your analysis. I like GLD and other ETFs although I prefer junior gold equities for my gold exposure.
I agree that the fees are currently negligible but it's important to be aware of any fee changes. I like the ETFs but there are plenty of other ways to invest in gold--junior gold equities like NGD have had a much better run than GLD. NGD is up 113% vs GLD's 47% during the last year. That performance is not negligible.
Hi Jeb, NGD is one of my favorite names right now. I'm expecting a lot of impressive growth over the next few quarters. Combine increasing gold spot prices with management's ability to keep operating costs low, and it's no wonder the stock has doubled in the last year. Has anyone traded the options?
Hi Faisal, I like NEM and the gold miners in general although I have a preference for junior gold equities. An NGD for example is posting cash flow growth of 131% yoy; has cash costs of $350/oz; and 3 major new mines coming online between now and 2015: el morro in chile with goldcorp, new afton and blackwater in canada. NGD is up 114% since a year ago and, like NEM, they have a zero hedging policy so they're taking full advantage of this price rally.
Great graphics. I too agree that we have yet to experience the real gold mania. So what's gold's equivalent of the tech bubble's 250p/e? $5000/ounce, $7000/ounce? At what price point will we know we've reached the mania?
The jury is still out on HERO; lot more developments to follow before you can count it out. Let's see how GoM permitting goes, and how fast they can develop their fleet and move internationally. NE is one of the blue-chips of the industry.
From a value-investment perspective, HERO is a more interesting company. We both agree that NE is a well-managed company with a diversified revenue stream and strong earnings history--therefore catalysts for major growth are somewhat limited. HERO has good assets and if they can get their act together and start increasing EPS, that'll boost the stock price in a major way. I like NE's stable base of EPS but more excited about HERO's earnings potential.
I'm long NGD: I'm a big fan of Oliphant and his leadership--they're growing the co into one of the next big gold companies. Also, if you're looking for gold exposure in Africa, check out Banro Corp (BAA).
@ bikerron1: that's exactly where the value of this co can be unlocked. 1) They're upgrading their fleet and have 4 high-spec jackups in the pipeline; also they're keeping the best assets from their Seahawk purchase while selling the rest.
2) Utilization rates are low because of lack of visibility on permitting; we're starting to see increased permitting in the GoM which will increase utilization.
These are two catalysts that'll help unlock value and boost the stock price.