Develop A Winning System To Identify Value And Track Prices-Long Before Acting
Science and art, or if you prefer skill and luck, are both needed for consistent success in short-term trading to long-term investing. Some deny this and say it's all math, claiming that markets always represent fair value. If so, high-frequency trading algo-bot scalpers will always win, meaning people can never outsmart to beat the market as all opportunities and risks are fully discounted into prices.
Conversely, I believe markets rarely price things right as human behaviour is irrational. Instead of proactive buy-low sell-high value, we react on fear and greed psychology. Fear overcomes logic and forces selling, making lower lows in crashes, just as FOMO "fear of missing out" pushes higher highs in bubbles. Like lemmings on a cliff, most stay fully invested in history's longest bull market with prices now overstretched by any metrics. The real skill is acting on the obvious before luck runs out!
Many years ago, I learned the hard way that it's always better to get out of the way before market trends move against you, usually as stock prices start telling you a different story than fundamentals indicate-and what hurts even more than owning a falling knife of a stock is to keep buying it on the way down. Easier said than done, especially for volatile high risk/reward metals and mining markets.
I patiently track many stocks of interest but almost never buy on news, when trading is active and speculators exaggerate prices. However, this is when I usually add them to a list, or if already owned start selling into the extra up volume. I prefer buying long after they crash, when previously excited punters have fully exited, but only if fundamentals still pass my investment value filters.
My value thesis starts with the story which must be validated by the balance sheet. Unless the story is very early and near cash cheap, I'm not interested in overpaying for shares in any company selling hopes and dreams of finding a big score while already trading at hundreds of millions of dollars in market cap valuation with no real revenue, earnings, or assets other than a few million in cash.
Today's Dot-Com Boom / Bust-FAANG, Cannabis, And Bitcoin / Blockchain
Reading 10 big dot.com flops recalls roller coasters I watched in the late 1990's: Pets.com, Webvan, eToys, GeoCities, theGlobe.com, Go.com, Flooz, DrKoop, Kozmo, and Garden.com. Back then free CDs stuffed snail mailboxes everywhere as America Online's market share and brand grew. Those without a clue about the internet or world wide web just called it all "AOL." A few years after its $11.50 IPO, AOL still didn't make money but traded triple digits with a $200B+ market cap. AOL's eventual merger with Time Warner nearly blew up both companies-who knew dial-up could lose out to DSL, cable, satellite and fibre. In 2015 Verizon (NYSE:VZ) paid $4.4B or 2% of $200B for AOL.
In Y2K, Yahoo! led in search and was the most valuable company in the world at $475 per share pre-split. A year later Google had eaten YHOO's lunch down to ~$7 per share, recovering mostly since 2013 as its $1B 30% stake in Alibaba (NYSE:BABA) grew a new name: Altaba (NASDAQ:AABA). Today's FAANG stocks: Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), and Alphabet (NASDAQ:GOOG) should also survive. Sounds crazy right?-like saying AOL and YHOO will sell off -98%. So, tell me why it's different this time?
I don't like fickle social media or ad based models like FB and GOOG-especially going into a recession when the first expense cut by businesses is advertising. I'm not much of a gamer or LOLer, but Facebook is a dream spy tool for nosy exes, employers, police and propagandists. What value is constantly emailing new profile pictures, or birthday reminders for long ago friends, and why don't preferences stay off? To be fair, Google search is amazing, as was YouTube prior to ad saturation.
I fall asleep to Netflix which doesn't yet have loud infomercials to wake me up; but I spend more time searching menus than getting programmed. NFLX might be acquired someday, but other than some proprietary content what do they have that a Disney (NYSE:DIS) couldn't steal away? AMZN's secret sauce is to press bets every time it gets close to breakeven. All streaks end and so far AMZN has lost over half its value four times-down -95% after the first dot-com bomb from $113 to $6 a share.
I'm still in awe of the addictive, time wasting power of dumbing smartphones. Glance at crowds and notice how many continuously bow in subservience. How do they survive crosswalks with drivers just as distracted? Could texting and porn resolve overpopulation, at crosswalks and from less intercourse? I believe always-on texting clearly reduces attention spans, grammar, to overall intelligence. I'm just saying turn it off once in a while and do something productive like read, think, dream, or meditate.
My interest in AAPL goes back to the 1980's when Apple II computers were the best PC. Lisa was overpriced and early Mac's couldn't do anything. Late 1990's transparent Jello coloured iMac G3s seemed a possible comeback, and the first iPods started selling gangbusters. The best part was that after the dot-com crash AAPL was ~$10 a share, and this was pre-split meaning each share became 14 shares after stock splits of 2 for 1 in 2005 and 7 for 1 in 2014. Steve Jobs sold most of his stock after being ousted in 1985 and I read somewhere he had just dumped more. That's why I didn't load the boat back in the early 2000's and probably why Jobs wasn't the world's richest man when he died.
Apple did not invent the mobile device and BlackBerry (NYSE:BB)-then called "Research In Motion"-dominated in the early 2000's. AAPL's style and innovations stole this away in 2007, despite dropped calls, security issues and faulty batteries. Today, iPhone represents 56%+ of AAPL's sales and profits. Can they out innovate forever, maintain top market share, keep us buying every 2-years, and paying double at over $1k per device compared to rivals? They have but for how long? All iThings tell time, compute and connect, but redundant iPods, iPads and iWatches still sell anyway.
I recommend all serious investors read/watch everything you can get your hands on about Warren Buffett. He must have good value reasons for making AAPL Berkshire Hathaway's (NYSE:BRK.A)(NYSE:BRK.B) largest position, but it still seems strange after frequently saying he avoids tech and airlines that he's now buying both this late in the cycle with reckless abandon. Another classic Coca-Cola moment or IBM dud, either way works when sitting on a ~$120B cash war chest ready for the next market crash?
What I'm really saying is that FAANGs are today's top brands that lead their industries. I would like to own some of them and would consider all of them at the right price. But there is no value in paying a P/E of 171 for NFLX at $374 per share, or 159 P/E for AMZN at $2,003-over a century and a half worth of current earnings? Why invite anyone to pay you back in ~200 years? I'll be there after this bull market crashes, -50% to -90% lower-like after 2008's mortgage crisis and 2001's dot-com crash.
Cannabis and medical marijuana is an emerging growth business. However, the problem again for longer-term investors is overvaluation. Our Hot Sheets filter many pot stocks as potential short-term technical trades, with Canopy Growth (OTC:CGC) posted since August 8 at C$35.66 to the September 5 $74.45 high +109%-now $62.75. Nice trade, but was this latest double justified?
As of October 17, even recreational pot becomes legal and mainstream throughout Canada. Forgive the puns but now that WEED is a legit business, recent highs were on M&A speculation to potential THC infusion deals with alcohol, pharmaceutical and soft drink companies. Wednesday, Constellation Brands (NYSE:STZ) received enough AGM votes to up its WEED stash by C$5B for 104.5M more shares at C$48.60, plus ~140M warrants, to hold 38% of the company. But none of this was really a surprise to anyone following the space, and it will take at least a year before pot in food is legal.
We puffed on WEED six times since $3.59 in 2014 on a strong buzz of momentum, but with no real sales or profits I didn't invest at a $1B market cap-so how can I rationalize $17B recently? WEED is just one company in today's $5B to $6B industry. So I'll trade WEED, I just won't get caught holding.
Same for Aphria (APHQF), inhaled five times since C$3.03 in 2016-year high $24.75 or 8X-now $18.00. I'm tongue tied over tulip marijuana mania Tilray's (NASDAQ:TLRY) July 18 IPO priced at $17 with shares hitting $300 last week, +1,665% or 18X to $28B market cap in only two months. The faster and bigger they grow, the harder they fall-in TLRY's case timmmberrr.
Part of my October 25 newsletter was "Bitcoins Are In No Way Like Gold Coins." You can imagine how that went over if you've ever debated devoted cryptocurrency junkies. I try, but there's no winning against sage arguments like, "buy crypto, won't regret it, trust me" or "HODL $B party at a million." Bitcoin hit its ~$19k top in less than two months. My reasons stand why there's still no value even at today's one third of that. I'll even say, while gold/silver are real money and I don't trust any unbacked fiat currency, major advantages over crypto are that only governments decree legal tender and can tax.
Blockchain business models have potential but again where's the value? I cautioned on 3 hot plays: Hive Blockchain Technologies (OTCPK:HVBTF), Global Blockchain Technologies (OTCPK:BLKCF), and LeoNovus (OTC:LVNSF). After almost a year let's see how they did-left green is in that article, right red shows then until now. HIVE was C$3.53, topped at $6.75, now $0.60 -91%; BLOC was $2.80, high $3.55, now $0.15 -96%; and LTV was $0.38, high $0.70, now $0.25 -64%. Back to Buffett: rule #1 don't lose money, #2 don't forget rule #1.
Miners Are Cheap, Just Be Wary Of Their Achilles' Heel-Excessive Share Dilution
Funded exploration IR guys always tout lots of cash and no debt. This is not the same as knowing the net cash value per share, which can be critical in estimating how bad things can get, especially in crappy markets like we have now when even good miners find it hard to raise money. Exploration plays have no debt only because nobody is crazy enough to lend against zero cash flow, nor assets.
I simply value grassroots exploration as cash with a lottery ticket. Shares trading at $1 with only $0.10 per share in cash, and will burn half of this drilling, means the lottery ticket represents 95% of the value. Recognize and avoid lose-lose situations: if they hit, the value may already be priced in, but if assays and the project turns into a bust, the remaining share value is a nickel. This is not an extreme scenario, so keep your cash value per share up to date, which I rely on as my worst case downside.
There are hundreds of explorers, many with large and exciting projects, some with very cheap lottery tickets. I sometimes find active explorers, although more often developers, which actually trade below net cash. Even some inactive penny shells I have found at less than cash have NI 43-101 balance sheet qualified resources, with interesting growth potential to develop, joint venture or sell a deposit. The catch is you have to look for these ignored speculative value plays yourself as they are rarely found in other newsletters, analysts reports, or mining conferences, until already priced up hundreds of percent.
Before someone says it, of course cash is not everything; not even close. I'm just demonstrating an objective way to identify tangible value and potential loss, which starts by knowing cash values. When the other subjective factors like management experience, jurisdiction, property appeal and action plans all look similarly good, I tend to go with the cheapest based on high net cash per share.
Use per share price versus value as a BS detector. Miners promote overall value created as they grow resources, market cap and even cash raised, but rarely show these values on a per share basis-which reveals how much value has really been diluted. The company and its employees may be doing well, but share dilution is the main culprit why owners (shareholders) often can't win even in good times.
So when someone tips you to a hot explorer, the first question you should ask is how much cheaper paper has been printed over the past several months? You will likely find many millions of shares issued at a fraction of the current price, with free warrants attached to buy many more millions of cheap shares. Private placement shares can't be sold for four months, which is why you are hearing about the hot play now instead of then. In short, most are high risk trading vehicles, not investments.
Winning With Stocks-Especially Mining-Comes Down To Finding Value And Timing Cycles
I've been writing about small-cap stocks since our website and newsletters started 23-years ago in 1995. Summer 2015 I started heavily buying miners of all sizes, sharing my reasons why the upturn in precious metals was close. Timing was excellent as miners could be had at decade lows, leading to a stellar 2016 on Brexit with many multi-X baggers. Nobody trades perfect or I would have sold them all that year, however even with this year's carnage my remaining shares are mostly still above water.
I don't read too much into gold's technical damage this year. If you follow COT reports and agree spot prices are manipulated, it's not a stretch that chart patterns are managed to suppress/magnify emotions by revealing only whatever they want to show. To avoid whipsaws, TA helps me fine tune "where" but not "how" to trade, as chartists are more post-dictors than predictors. They buy up and sell down, the opposite of buy-low sell-high and why I view short-term chart analysts as contrary indicators.
I pay more attention to longer-term charts, where most gold bugs mark the turnaround at $1,062/oz. late in 2015. By summer 2016 gold was +$299 or +28% to $1,361, then -$227 or -17% to $1,134 by Christmas, +$216 or +19% to $1,350 by fall 2017, and -$158 or -12% to $1,192 today. If seasonal gold swings of 20% or $200+ are commonplace, why are so many chartists freaking out over broken short-term charts and declaring gold is doomed to retest the 2015 low? More important, who cares?
I'm watching 2016's $1,178 resistance (now support) and don't think gold retests its low, but maybe this long-term chart says I want it to. In 1999 gold fell to $252 and two years later double bottomed in 2001. Chartists were screaming "sell" back then, before gold's 7X+ decade run to $1,920/oz. in 2011!
Our Crazytown world is drowning in debt, with bonds and stocks ready to pop everything bubbles. Currencies from Zimbabwe, Venezuela, Argentina, South Africa, Ukraine, Brazil, to Turkey and 20 others have hyper-inflated or risk collapse. Black/orange swan events like war or financial contagions tend to happen at worst times and spread overnight, so keep an eye on Deutsche Bank's (NYSE:DB) derivatives book. If it's wise to diversify and hedge, then holding some inversely correlated precious metals and miners makes perfect sense-more so now with prices down to AISC production costs.
I'm strategically stepping back in and selectively adding more miners as values are as good to even better than when gold was last just above $1k an ounce. My below-market stink bids will remain open for a few more days hoping for more of the usual knee jerk gold price reaction to the Fed raising interest rates another quarter point on Wednesday-as if absolutely everyone didn't already know this was coming. Then I'll have to decide whether to sit, kill or raise my bids on any unfilled buy orders.
Below are snapshots of 7+ miners on our Top 30 Small Caps which may offer outstanding value, with cheap to free lottery tickets attached. While it's next to impossible to pick absolute bottoms, deeply discounted market caps versus shareholders equity, with many at high net cash per share, both incentivize contrarian value investors like me-especially as sellers seem exhausted and seasonality tends to provide at least a bounce until year end tax loss selling season returns. As 2018 so far was not kind to most metals and miners, 2019's pendulum might swing more like 2016 or even 2002-2011.
7+ Asset Rich Miners I Missed Buying Or Want More, Still Watch, And Are Very Cheap Again:
1. I have been posting about Minco Silver (TSX:MSV) (OTCQX:MISVF) since December 2015 at C$0.35. On May 16, 2016 I profiled several cheap developers, including Minco, which all more than doubled within a few months. MSV traded to $2+ but is now back to around half of $1. The market is saying Minco's 200Moz. Fuwan silver deposit, plus its half of a one million ounce gold deposit-both high-grade, low cost and with lots of exploration growth potential-are worth less than nothing! BS!
MSV's June balance sheet shows ~$99.5M or $1.64 per share in shareholders equity, versus a market cap of only ~$35M at today's $0.57 per share. It also shows ~$47M in cash and marketable securities, or ~$0.77 per share in cash with no debt. Yes Minco's deposits are in China and they get low marks on communication with few news releases, but I'm still betting that $20 per ounce silver will revitalize everything. Until then, I quite like paying only 74 cents for dollar bills ($0.57 / $0.77 = 74%), with free lottery tickets on robust feasibility studies based on tangible NI 43-101 silver and gold resources.
Maybe this value sleeper is finally tired of waiting, with September 13 news of MSV's preliminary agreement to acquire 70% of a producing gold mine in China for C$28M to $32M. Longwangshan is a fully permitted 1k tpd open pit operation with a mill and smelter on site. MSV's due diligence is expected within three months and will include a drill program to verify reserves and resources.
2. Bonterra Resources (OTCQX:BONXF)(TSXV:BTR) was first profiled on April 4, 2017 at C$0.40. BTR raised ~C$65M since last year in private placements from $0.28 to $0.35 per unit. Major shareholders include Eric Sprott, Van Eck Funds, and Kirkland Lake Gold (NYSE:KL). BTR continues to consolidate and drill its Gladiator project, billed as one of the highest grade gold developments in Canada, located in Quebec's Abitibi gold belt. I liked BTR in the low $0.30's back then, which traded to $0.72 in November, back to $0.30 last month, which I still hold now at $0.34.
I'm pleased with BTR's grade and thickness continuity even at depth, with too many new zones and excellent holes to highlight. Metallurgy so far shows an awesome 99%+ gold recovery. For me BTR's story was growing resources of a few hundred Koz. to over a million, when nearby producers needing feedstock often start salivating over all those likely economic ounces. The only downer and why I still have only a half position is the fully diluted share count, now up to 252.5M. This shows my point above how companies may do well-BTR's market cap has more than doubled-while share prices and shareholders tread water. I still love this play, just watch the cash burn and dilution like a hawk.
2B. An interesting summer twist is BTR buying (TSXV:MTO)(OTCPK:MEAOF) Metanor Resources. MTO is one of the miners I bought in 2015, a producer up the road from BTR in the Urban Barry gold camp. MTO's balance sheet showed net assets several times its ~C$15M market cap at under a nickel per share. A mill alone can cost hundreds of millions and MTO's Bachelor Mine has one, upgradeable to I think ~2K tpd. Grades are high like BTR's and remaining resources are a few hundred K ounces, plus over a million lower-grade ounces at its previously mined Barry open pit, plus lots of exploration potential at new zones like Moroy-south of Osisko Mining's (TSX:OSK) Windfall Lake gold project.
My bet was MTO could again be profitable at $1,300+ gold, pay off its few million in debt, expand its resources and mill, restart Barry production, buy back Au streams, and stop issuing so much cheap stock. Most of this came except the important part as dilution ballooned from ~400M to 700M shares. Instead of attracting a nice buyout, shareholders got the usual 1 for 10 rollback. The printing press hasn't slowed yet as today's ~102M shares times 10 works out to over a billion shares pre-rollback.
MTO at half a buck is even money. I still hope to capture unrealized value under the merger which provides 1.6039 BTR shares for each MTO share. Arbs might say why buy BTR at $0.35 when you can buy MTO at $0.50 and end up with 1.6 x $0.35 = $0.56 in BTR value. However, the September 18 deal has a catch in that BTR shareholders also get 1 new Gatling Exploration share for every 7 BTR shares, but only for prior merger BTR shares-MTO shareholders don't get any spinout shares.
So MTO shareholders get 42%-excluding any of Larder Lake's 960Koz. The merger gets MTO's producing mine and mill, plus all resources and potential. Fair? When cash is king and management is key, MTO's last act seems like a tired pauper at a locked gate. A moot point now, the deal is done.
3. Balmoral Resources (OTCQX:BALMF)[TSX:BAR] is still on my watchlists after cycling from about a penny in 2009 to ~C$2 in 2011, and from ~$0.28 in 2013 to again ~$2 in 2014. In 2015 I considered getting in at ~$0.60 but passed with so many cheap miners around and BAR still in a downtrend, which didn't end until January 2016 at $0.33. By August BAR quadrupled to $1.28.
Like most explorer/developers, BAR cycles on busy/quiet drilling periods. Not just a one trick pony play on expected results that flop, BAR has huge property packages, mainly in Quebec's Abitibi, and has made significant discoveries they continue to develop. BAR ran in 2014 on the discovery of its Grasset Ni-Cu-Co-PGE deposit, and in 2016 drilling its Martiniere West and Bug Lake gold trends.
As nickel prices tarnished, BAR developed its Detour Trend gold resources-600K+oz. as of March. BAR has much to follow up on, plus eight other large projects to explore. As Au has softened and Ni prices started rising, Ni may become sexy again-especially e-vehicle battery quality Ni like BAR's high grade 3.5Mt. 1.56% Ni, 0.17% Cu, 0.03% Co, 0.34 g/t Pt and 0.84 g/t Pd 2016 initial Grasset resource. I look forward to BAR's 7.5K+ meter summer-fall drill program results, and plans for the Gargoyle sulphide Ni-Cu-Co discovery property in Ontario it recently optioned into and grew 16X.
Until April, BAR seemed to have strong support at the $0.40 level, which I thought might be a fair value entry point. But remember I like to watch, and I need to see how BAR's downtrend resolves as undervalued stocks can always become more so. To my delight, and I hope I'm not missing something critical, BAR is now trading at $0.15 a share. June's balance sheet shows over $6M cash or $0.044 cash per share with no debt, with shareholders equity of ~$61M or triple its market cap of ~$21M.
Miners often burn cash with nothing to show for many millions of shares issued. BAR's price suffered with these stocks, even though it's done a first-rate job of finding and growing various multi-metal deposits. To me, BAR's ~138M share count at this stage is reasonable, however my enthusiasm and respect for management could sour instantly if an overly dilutive financing happened at these levels.
4. Eldorado Gold (NYSE:EGO) was first profiled on October 25, 2017 at $1.48 as a deep value mid-tier gold producer. Still in a downtrend, I indicated EGO might test a buck in December during tax loss selling season. EGO hit $0.90 three weeks later before bouncing above $1 again. I thought EGO's Q1 and Q2 financials this year were good, plus they won the arbitration case against the Greek State. None of this was a surprise, nor that it might not matter in a soft gold market.
I have two thoughts on EGO right now. The March 27, $0.80 low could be the long-term bottom I have been waiting for. I just initiated a small position on recent dips below $0.90, but I'm not adding unless EGO falls significantly below its low, or until Kisladag's gold recovery issues and any funding needs are more clear. My commitment hesitation comes from deep in April's Q1 where permission was asked, and at June's AGM received, to consolidate shares on a 1 for 5 basis if needed-to regain NYSE $1 minimum share price compliance. Shorts will do their worst to keep EGO below a buck.
Other than some tightly structured shells, after dozens of rollbacks I can't recall a single stock going higher. Prices usually drift significantly lower after consolidation, when cheap share financings are arranged. Guess who the buyers are?-often the same short-sellers who knocked the stock down there. Watch EGO bounce if the NYSE announces that the company has regained compliance.
Then again, maybe we should ignore technical games as noise and focus on July's Q2: "This was an excellent quarter for us. Production was strong, driven by better-than-expected ounces from the heap leach pad at Kisladag," said George Burns, Eldorado's President and Chief Executive Officer. "We achieved lower costs at Olympias, reflecting mill and filter press optimizations. With production and costs continuing to trend positively, we have increased full-year guidance to 330,000-340,000 ounces of gold at $580-$630 per ounce. Development continues ahead of schedule at Lamaque and we are on track to complete the feasibility study for a mill at Kisladag in the third quarter of this year. Our cash position remains solid and in light of the positive performance in the first half of 2018, we continue to refine our views on capital and potential funding requirements to meet the medium to long-term needs of the organization and re-establish annual production of 600,000 ounces per year by 2021."
Gold's 2011 highs pushed EGO over $20 a share. EGO has more catalysts this cycle, from Greek permitting (or pay €750M in damages requested last week), to mine development and production in Turkey, Greece, Romania, Brazil, Serbia, and Canada. EGO's Financials tab at our site shows June shareholder's equity of $3.6B versus only ~$0.7B market cap at $0.88 per share. EGO remains cheap but we have to stay up to date and be careful it doesn't turn into a dilution value trap as events change.
5. Northern Dynasty Minerals (TSX:NDM)(AMEX:NAK) was first profiled on May 16, 2016 at C$0.45. The risks and value proposition seem fairly clear; it owns 100% of Alaska's Pebble Project. Verbatim from NDM's presentation, "Pebble is the World's Largest Undeveloped Copper And Gold Resource." I call it the 81 billion pound gorilla-copper that is, plus 107M ounces of gold, 5.6B pounds of molybdenum, 514M ounces of silver, plus other precious, PGE, rare earths and base metals.
NDM needs two things to develop one of the largest, longest lasting mines in the world, some permits and a few billion dollars. Any major miner would want this resource, so raising cash or doing a joint venture may be the easy part. The tricky part is that Pebble is near sockeye salmon watersheds and to get permitted NDM needs to convince natives and government regulators that the mine won't pollute.
Sounds reasonable, so NDM's 50% partner spent $750M advancing the project. Then gold prices peaked, miners eyed cost cuts, and celebrities to the WH joined the sockeye cause. With no permit in sight, Anglo American pulled out in 2013. NDM had half of Pebble and traded as high as C$21.50 in 2011. Mega free work was done, NDM owns 100% again, but now trades at $0.72.
NDM prepared to sue the EPA over an unfair process, then Pebble was restored to normal course permitting in May 2017. Anticipation had driven NDM to a C$4.54 high in January, before getting cut in half on a short and distort scheme. Some still claim the mine never gets built, even last December as First Quantum Minerals (OTCPK:FQVLF)[TSX:FM] entered a framework agreement with an option to acquire 50% of Pebble for US$1.5B. Staged option payments total US$150M over four years, then the balance. The deal terminated in May, but I believe NDM keeps the US$37.5M first payment made. June's balance sheet shows ~C$50M in cash, no debt, and permitting continues with an EIS update on September 4. NDM works on as its shares wait to rise, like all that copper and gold.
6. Perseus Mining (OTCPK:PMNXF)[TSX:PRU] was first profiled on November 2, 2015 at C$0.33. An Australian gold miner in West Africa, Edikan's open pits in Ghana produced ~212Koz. per year with many nearby targets to explore. The Ausi dollar and costs were falling, providing record profits and ~A$132M in cash and bullion in the till. Shareholder's equity was three times PRU's market cap, which was only its ~A$178M in working capital. PRU was essentially floating in cash per share near its market price, with millions of free ounces, plus a processing plant worth nine digits with no debt.
PRU was also developing its Sissingue gold mine in the Ivory Coast, which should bump total ounces per year to 300k. Costing $116M, I thought PRU might be able to fund it all from cash or short-term debt without any share dilution. Maybe even prudently reward patient shareholders and buy back some of those 500M+ cheap shares, or pay a dividend. PRU was our top mining stock back then.
I avoid companies that pursue growth at any cost, and I rarely trade Ausi miners as they tend to issue gazillions of shares. PRU seemed more mature, shareholder friendly, focused on profits and no debt. I can tolerate months of production issues, construction delays, and lower profits due to gold prices, but doubling the share count to over a billion shares just to buy a few million more ounces was a shock.
Sissingue started producing in Q1 this year. PRU is now focused on its third mine called Yaoure, also in Cote d'Ivoire. In a couple years PRU expects total gold production of over 500Koz. per year. After holding PRU from near today's price to double and back twice, I hope management's big boy dreams are worth another round of financing to production risks. Edikan and Sissingue will produce for many more years, but with Yaoure may soon provide job security for decades-or until owners wake up.
While I would have preferred a tighter share structure and milking our already derisked two-mine golden cows for a while, Yaoure is large, high-grade and you have to seize growth opportunities when you can. Also, acquiring a half million ounce producer like PRU can move the needle for even the biggest majors, with big premiums especially as gold prices rise. Even at 1.035B shares outstanding, PRU's C$357M market cap at today's C$0.345 is only half of its C$704M in shareholder's equity.
7. Alderon Iron Ore (TSX:IRON)(OTC:AXXDF) was first profiled on November 17, 2016 at C$0.25. Precious, base, and other metal prices bounced earlier that year but iron ore remained in the doldrums at $40 per tonne. IRON-ticker ADV back then-barely traded at a dime, or about one third of cash and less than cash even after deducting all debt. Shareholder's equity was 14 times market cap. IRON was cheap but needed over $60 per tonne to finance/develop an economical mine.
I didn't mind waiting as iron ore had hit almost $200 per tonne in 2011, when ADV traded at ~C$4. Timing was good as iron ore doubled to ~$80 by November-$69 today. IRON shot up to C$0.80 or 8X, also on news like Wednesday's feasibility study which now shows: ~8M tonnes per year at 65.2% iron, $982M capital cost, $30.72 per tonne operating cost, 24.6% pre-tax IRR, $1.7B NPV 8%, 4-year payback on a 23-year mine with 517Mt P&P reserves, 1.093Bt M&I and 523Mt Inferred.
IRON owns 75% of the Kamistiatusset Iron Ore Project in the Labrador Trough, Canada's premier iron ore district. The other 25% is owned by HBIS Group, IRON's strategic partner and China's second largest steel producer. Kami's 2B tonne high-grade Rose deposit is next to two producing iron ore mines with established infrastructure from common carrier rail to deep-sea year-round port access.
IRON's financing reboot replaced old debt with a US$14M Sprott resource loan in July. IRON has also re-established a Montreal office, made several key board hires such as reappointing Tayfun Eldum as CEO, and Altius Minerals (TSX:ALS)(OTCPK:ATUSF) added more shares at C$0.27 to own 39% of IRON. Next is a bankable FS to fund mine construction. And you thought gold was sexy!
Lastly, I see FAANG, cannabis and cryptos as overvalued but haven't crashed yet due to easy money bull markets at very low interest rates, with momentum now in extra innings from a temporary sugar high of tax cuts for the wealthy as FOMO greater fools still chase higher highs. The economy might seem great, even as annual budget deficits explode over $1T, inflation and interest rates keep rising, and quantitative tightening and trade wars start-think again, already tariffs cost Ford $1B in profits.
On the other hand, metals and miners are cheap by any value metrics, but remain unloved and under owned even though gold outperformed stocks, bonds, and real-estate for over a decade after the first dot-com crash. Most portfolios hold less than 1% in metals and mining, if any, but may need 10% to 20% to be well balanced. Insuring against extreme bad events starts with some gold/silver bars/coins.
Then, for growth and income some major miners still pay decent dividends. ETFs (NYSE:GLD) and (NYSE:SLV) are good for holding, and liquid for trading, paper gold/silver. I also build positions and trade higher risk/reward junior miners, like those detailed above. But I'm not a fan of gold miner ETF (NYSE:GDX) or for juniors (NYSE:GDXJ), with market cap rules dictating when they buy and sell. GDX/GDXJ charge management fees, and are so big they can disrupt markets and under perform. Patient, contrarian value investors who research and can anticipate next trends have huge advantages.
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.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.