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Hyperinflation
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Analyst & Contributor @ The Morgan Report ( Silver-investor.com) ,
My company:
Stone Investment Group
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  • Miners Climbing The Productive Capacity Ladder & They Are Ripe For The Pickin
     I wish to briefly mention what I consider the premier emerging juniors ( in the 100-700k oz range), as their are a few standouts that should outperform their peers over the coming years. In no paticular order.....


    Sino evil -(OTC:SIOGF) - I have looked at Sino Gold now and again but until recently had been  reluctant to put any money there. I am half gold bug / half silver bug but I first saw Sino as a way to play China (China is the largest producer of gold now). My intuition paid off when the announced they would be doubling production by 2012. Reading deeper into some comments, I imagine the will move past 500k oz per annum by 2012 or 2013. Even more impressing to me is the little capital investment needs going forward coupled with declining cash costs as follows 2008: $442/oz, 2009E $422/oz, 2010E $401/oz, 2011E $379 , 2012E $371. 152k GEO oz in 2008 will rise sharply to their estimate between 420-450k oz, while I think 500k can be achieved. They are capable of this because they currently have 1 mine at full capacity (Jinfeng) and a small deposit in White Mountain. The next big project expected to reach commercial production will be the Eastern Dragon Mine in 2011, reaching full capacity by 2013. They also have the Beyinhar Mine, which will come online either in 2012 or 2013. I also think they will be able to easily reach 600k by 2014-2015 through organic growth, though I doubt things will play out like that as they are well capitalized and likely on the prowl.



    RIding The RedBack (OTC:RBIFF) - This was actually my speculative mining play back in Nov, when I first got my feet wet with redback. I didn't put on my full position until February, as I had my concerns of it being in Africa. But people generalize Africa to a harsh degree, I mean South Africa is completely different that such places as Ghana, but the fact is most people associate Africa with the stories coming out of there. RedBack though has had a great record of production that will see dramtic increases over the next 3 years. Gold Production in 2008 was a mere 261k oz at cash costs of $428/oz while 2009-2013 should see production going to 383k this year, 500 , 540, 575, 600k. While Cash Costs drop to $393 in 2009, $387 in 2010, $383 in 2011 & 395 in 2012. These figures are estrimated via organic growth with relying on their two flagship mines and expansion projects. They are net cash positive and will likely pick up a few exploration companies possibly in other countries to negate some political risk but I think they will stick with has worked in west africa and buy an exploration company around there. Of course they could make another bid for Moto Mines (if it's not to late).


    I would like to go in depth about my favorite emerging junior but I have already written an article on them. By them I mean Jaguar Mining. The Following is copied and pasted from a past article

    Yes that's a jaguar, but not the car. Rather, it's the best in class emerging Junior Miner with a unique set of attributes among its peers. I think of Jaguar Mining (JAG) as a junior hybrid of Agnico-Eagle (AEM) (due to the extraordinary production growth over the next 3 years or so) and Yamana Gold (AUY) (due to the location of their flagship mines in South America, not to mention their low cash cost profile). Jaguar has been around for a while but instead of the explosive growth it has set itself up for (2009-2013), it has displayed remarkable execution growing production at a consistent steady rate. Before I go into the details of why this is such a value among the junior mining industry, I will give a brief overview of its current mines and those which will come-on line in the not too distant future.

    Mines in Operation:

    1. The largest mine currently producing is Turmalina which produced about 19,000 oz in Q1 with cash costs below $350/oz. A ramp up in production is expected in its entire mining portfolio, so this will increase quarter after quarter.
    2. Coming in at a close second is the Paciencia mine which came on-line Q2 of 2008. It is expected to past Turmalina in 2010 in regards to production. It currently has much higher cash costs of $490/oz, but that will decline to around $400-$425/oz next year.
    3. The Sabara mine is the last currently producing mine, but relatively small to the first two. It also has high cash costs which are expected to moderate, but will still have the highest average cost per ounce of all their mines. It was also not in operation in the first quarter due to weather.
    4. Finally, its Caete Mine will be a nice addition to the portfolio as it begins production in about a year (possibly Q3/2010).

    It is nice to find an emerging miner that doesn't have all its eggs in one basket. Jaguar's Turmalina + Sabara make up about 1/3 of its NAV as well, and the other two mines account for another 1/3 give or take. It is very unique for a growing capital intensive company to have an extremely low debt of $70m and $55m in cash.

                           

    As mentioned previously, a meager 110k of production in 2008 will catapult to nearly 700k oz by 2014 assuming no additional reserves are found. A long term production growth rate of 35-40% is amazing on its own. But it also has low cash costs around $400-420/oz, and if you're in the inflation boat I'm in, this is extremely bullish for the company. I think gold will double during the next leg of the commodity bull market, mostly propelled by inflation (both in the U.S and around the world). If you aren't familiar with the term free cash flow, I will explain it very briefly.

    Free cash flow is basically the real profit of the company to the shareholder, because in order for a company to keep operations going, a certain amount of capital has to be reinvested. That being said, because the value of any asset of the present value of all future cash flows, free cash flow is the real profit. It is calculated as Net Income (although I make sure no extraordinary items are mixed in) -+Depreciation (which was taken out as a non-cash charge) - Capital Expenditures (both increase in PPE and acquisitions if any occurred) - change in non-cash working capital (Non cash current assets in year T - current liabilities in year T).

    Below is a chart of Jaguar's capital expenditures going forward:

                              

    These are extremely low reinvestment needs for such strong growth, the likes of which I have yet to come upon for a miner with similar attributes. In other words this means Jaguar is well capitalized, has strong long term growth and needing little reinvestment to support that growth making it a huge free cash flow machine. I think instead it will be bought.

    Jaguar Valuation Model

    Above is an open for editing link to a Valuation I made for Jaguar, so you can change the projected gold price around. It also includes a sensitivity analysis.

    So What Separates These Juniors From The Rest.

    • Others with strong growth profiles, such as Randgold and El Dorado will require large capital requirements for some years to come, Thus lower free cash flow (the true profits). While Sino will require a little above 100m for 2009 and 2010, the following years will be under 75k. The same goes for Jaguar as they will only require 100k of capital expenditures 1 time in the next 5 to 6 years (assuming no aquisitions).
    Long: Jag, Siogf.pk, rbiff.pk


     


     
    Tags: GF, SIOGF, RBIFF
    Aug 05 4:22 AM | Link | Comment!
  • What You Don't Know About Silver....

     Like Gold, most people dismiss silver mostly because their is a stigma among the mainstream that label those who embrace this metal as having some type of fetish. This comes out of sheer ignorance - as silver is the metal of the future. Silver plays two roles, of which both are of great importance. To avoid the much talked about inflationary hedge aspect, I will write just a few sentences for those unaware of this charateristic.

        Silver as a store of value - Like Gold, Silver is seen to be a store of value and for good reason. It too has been been used as a worldwide currency for well over 5,000 years. This is because it has always been chosen by the people as an ideal medium of exchange. (Gold for larger purchases and Silver for smaller denomination transactions). This was due the physical charatersitics of these metals i.e durability , inability to replicate , a adequate level of scarcity, etc. So as we embark into the era a unprecendented inflation, silver will be right next to gold as the ideal protectors of REAL WEALTH.

        Silver For Industrial Use- Now and In the Future - what most people don't realize is that silver has become an essential metal in our everyday lives. this trend will continue but at an accerlerating rate. Most people think of the common industrial uses, photograhic uses, silverware, jewelry and coinage as capturing all that is silver and these uses will see little to no impact in the demand for them. On the Contrary, as silver has recently caught the attention of the medical community for its ability to fight off bateria growth and promote healing. Without getting into in depth terminology, silver interrupts bacteria's to form chemical bonds, without which the bacteria has no choice but to die. To avoid going off on a whole discussion about the numerous other applications that are being looked into amongst the medical community, I will leave it at that.

           Before I get to the imporant development and the biggest catalyst for silver going forward, it is also worth mentionining silver lenses have proved superior in fighting off harmful rays in addition to conducting light transmission in such a way that people don't need to change glasses when moving from outdoors to indoors or vice versa. This is a rather new trend but is being used more and more, currently just under 15% of total production. One last note before i get into the really exciting applications, is silvers use as a component in solar panels ( which I believe is bogus, but the green movement will have solar at the forefront).

           Silver is starting to become a neccessity in water purification, much for the same reason mentioned above (the ability to fight off bacteria). Silver is replacing harsh chemicals i.e Bromine, Cholorine which are inferior for obvious reasons. Although the previously mentioned chemicals will continue to be used, the shift has slowly begun favoring silver, especially in building new water supply systems. Silver destroyies legionnaires disease, which is cause via a buildup of bacteria in the piping of these systems. Not to mention the superiority it will have in personal water filters which currently used charcoal among other things.

    Now for what I believe will be the an enormous catalyst for Silver. I am referring to the new Silver-Oxide batteries (which have been developed and tested already) and will soon hit the market, most likely in Q4 09'. 

    Duracell has already developed basic everyday batteries while companies such as intel capital have developed thoese batteries used in laptops. Anyone who uses the computer hours a day have likely noticed the vast shortcoming in the currently used lithium-ion batteries. For example, they tend not to hold a charge as the life of the battery increases which even in my personal expirience has led to the complete death of the battery. The Silver- Oxide batteries, however, do not share these charateristics and last 40% longer. They are also recyclable, which should draw attention of the green fanatics out there. 

    Imagine the implications of this fact, as they are incredibly telling for the future prices ( more on the supply later). One just needds to imagine the widespread use it will have, especially as those society's in emerging countries begin to use battery intensive electronics such as laptops or just your everyday cheap and simple electronics.

    The Supply Side: Instead of going into an in depth analysis, I will instead just briefly summarize the results of a U.S geological survey concerninig silver. Well first off, no one knows how much silver is below ground! But there is a huge deficit when they measured the amount that would be feasible to sell at $15/oz. When I say huge, I mean a quantity that will prove unsustainable for the immediate future. Of course this does not take into account the stockpiles above ground, but that has been dwindling as silver mining has been neglible the last 1.5 years. Now don't get confused with me saying we are running out of silver or something absurd like that. The previously mentioned survey determined there was ample amounts of silver but one big problem. This silver lie so far down in the earth, that even conservative estimates are projecting a selling price of $30/oz for this to be feasible. ( This is not a well hidden fact, as it is very to easy to find numerous surveys like this from a number of credible sources). I have also seen estimates nearly double that of the conservative projections.

    Conclusion: Silver should not only be looked as an inflationary hedge rather through fundamental supply and demand measures. The non-inflationist can merely look at this as a bonus and focus on the fundamentals, which is something you can't do with gold. As for The Silver Miners, I think they are possible the best way to play this, should you believe in the silver story (barring futures). 

    Jul 22 7:43 PM | Link | Comment!
  • How To Determine if it's a value trap instead of a value stock

     Investors often underperform their expected returns. In particular, this is common among so called "value investors". Whatever method they used to determine the value (Relative valuation, discounted-cash flow, p/e, pe/g.pb, etc) may prove worthless if the company does conduct efficient operations. There are two key measures which any "value investor" should employ against those in the industry and the market as a whole.

     1) Earnings Yield- Many people familiar with this but don't employ it correctly. The quality of earnings is the first step, in other words remove any one time items and either remove reoccurring income from other sources or normalize it. In essence this will reveal the quality of earnings from operations which are more likely to exist in the future. The adjustment is determining the earnings yield by dividing enterprise value to Eps (EV/EPS). EV = Current share price * shares outstanding - cash and marketable securities + debt.  After you compute this ratio you merely take the reciprocal.. 1/(EV/EPS). A quick example: Company A earned 40 million from operations. It has 120 million in debt and 15million in cash. They have 75 million shares outstanding and the current price is 4$/share.EV=4*75million+120million-15million = 405 million.  Earnings Yield: 405/40= 9.87%Using the reciprocal of the Pe would give an artificially high EY = 300/40= 13.33% 

    2) Measuring the efficiency of a company's operation: This is done by taking Pre-tax Return on capital. There multiple firms who look like a deal but have low return on capital. This is very easy to calculate: EBT/Net PPE+ Depreciation (from the statement of cash flows because of GAAP accounting which you are forced to depreciate certain assets over a fixed time frame).

     Conclusion:   When comparing what you determine "values" put the earnings yield in one column and return on capital in another. Do this for other players in the industry or other equities. Obviously there are exceptions. But you can negate some of this by using forward measures of these going out as long as you think you can accurately project growth. Joel Greenblatt wrote about this is a very small book with a bad title but it is very telling. When you have a group of equities pick the one which is relatively high in both categories as opposed to high in one and poor in another. 

    Jul 07 9:28 PM | Link | 3 Comments
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