- Bull markets in precious metals.
- A bear market in GPL shares.
- Brazilian production costs should benefit the shares.
- The stock is a trading sardine.
- An example of why a diversified approach in junior miners makes sense.
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Gold has been moving aggressively higher since breaking to the upside above the July 2016 high at $1377.50 last June. The most recent high in the yellow metal came on Sunday night, March 8, at $1704.30 per ounce as gold touched a level that was $326.80 or 23.7% above its level of critical technical resistance. Silver has also moved higher over the past months, but it has not managed to challenge its resistance level, which stands at $21.095, the July 2016 high. Silver only made it up to a peak of $19.54 last September. While gold was trading at the $1657 level on the nearby futures contract on March 10, silver was at $16.85 per ounce. Silver has been trending higher since late May but shares of Great Panther Mining Limited (GPL) have moved lower. Silver underperformed gold, and GPL shares have not followed silver higher. The company has silver and precious metals projects in Mexico, Brazil, and Canada. If GPL cannot move higher in the current environment, there may be no hope for the company.
Bull markets in precious metals
The prices of the four precious metals that trade on the COMEX and NYMEX divisions of the Chicago Mercantile Exchange have been trending higher.
Since reaching a low of $1161.40 per ounce in August 2018, gold has moved over 42% higher as of March 10. The yellow metal rose above its July 2016 high and level of critical technical resistance in June 2019 at $1377.50 per ounce. The latest high took the price above the $1700 level for the first time since 2012.
Silver fell to a low of $13.86 in November 2018. While the silver market has yet to challenge its 2016 high and level of technical resistance at $21.095 per ounce, the price was over 21% higher at just over the $16.80 per ounce level on March 10. Gold and silver never fell below their respective late 2015 lows at $1046.20 and $13.635 per ounce, but platinum made a lower low than its early 2016 bottom at $812.20 in 2018.
The weekly chart illustrates that the price of nearby platinum futures fell to a low of $755.70 per ounce in August 2018. At around the $870 level at the end of the first week of March, the price was over 15% higher.
Finally, palladium has been a bullish beast. The platinum group metal rose from a low of $451.50 in January 2016 and never looked back. The most recent high came in February 2020 at $2815.50. With June NYMEX futures at $2380 on March 10, the price was 5.27 times higher than the early 2016 bottom.
All of the precious metals have experienced significant gains over the past years. Gold and silver have been in bull markets since 2018.
A Bear market in GPL shares
Great Panther Mining Limited has a market cap of $121.956 million and trades an average of over 1.3 million shares each day at just over 40 cents per share. The company explores for silver, gold, lead, and zinc ores. Silver is a byproduct of those ores. GPL operates three mines including, the Tuscano gold mine in Amapa State, Brazil, and two silver mines in Mexico. It has exploration properties in Mexico, Brazil, and Canada. GPL is not a newcomer to the mining business; the company has been around since 1965 with its headquarters in Vancouver, Canada. In March 2019, the company changed its name from Great Panther Silver Limited to Great Panther Mining Limited.
The chart shows that in 2018 when gold and silver prices reached their most recent significant lows, GPL shares traded in a range from 54 cents to $1.45 per share. After a 42% rise in the price of gold and an over 21% increase in the price of silver, GPL shares were trading at 40 cents, more than a disappointment for any investor sitting long the shares of the junior mining company.
Brazilian production costs should benefit the shares
GPL has exposure in Brazil, which should have helped the company based on the value of the Brazilian real versus the US dollar. Since local production costs are in Brazilian currency terms and gold trades in US dollars, the decline in the value of the real versus the dollar and rise in the dollar-based price of gold should have had an exponential impact on earnings for the company.
The weekly chart of the Brazilian real versus the US dollar currency pair illustrates the sharp decline in the value of the Brazilian currency. The falling real should have reduced production and exploration costs for GPL leading the shares high, but it did not.
The stock is a trading sardine
There is an old story about a time when sardines suddenly disappeared from their traditional waters in Monterey, California. Commodity traders, sensing the shortage, began to bid up the price of cans of sardines, and the price soared. One day, a buyer sitting on a profitable long position decided to treat himself to a can of the valuable prize. He immediately fell violently ill and told the trader that sold him the canned fish; they were no good. The seller said, "You don't understand. These are not eating sardines; they are trading sardines."
The price action in Great Panther Mining Limited does not reflect the price action in silver, gold, or any other precious metal. GPL is little more than a trading sardine that has made investors ill as the prices of the two precious metals rose. However, GPL is a lesson that a diversified approach to junior mining companies in gold and silver mitigates idiosyncratic or trading sardine risk.
An example of why a diversified approach in junior miners makes sense
The VanEck Vectors Junior Gold Miners ETF product (GDXJ) and the ETFMG Prime Junior Silver Miners ETF product (SILJ) hold shares in the top junior mining companies in gold and silver that are not trading sardines. Even if an occasional spoiled fish finds its way into the portfolio, diversification mitigates the impact on the products. GDXJ is a liquid product with $4.42 billion in net assets and an average daily trading volume of over 16.6 million shares. GDXJ charges a 0.54% expense ratio. The most recent top holdings include:
Source: Yahoo Finance
SILJ is also a liquid product with $131.22 million in net assets and an average daily trading volume of over 570,000 shares. SILJ charges a 0.69% expense ratio. The most recent top holdings include:
Source: Yahoo Finance
Gold rose by around 42% from its low in 2018 as of March 10.
In 2018, GDXJ hit a low of $25.91 per share. On March 10, the ETF was 40.5% higher at $36.40 per share.
Silver rose by around 21% from its low in 2018 as of March 10.
In 2018, SILJ hit a low of $7.42 per share. On March 10, the ETF closed 9.4% higher at $8.12 per share.
The bottom line is that diversified products like GDXJ and SILJ are eating sardines, but GPL is a trading sardine.
Based on its miserable price action, GPL is not a stock to buy if you are bullish on the price of silver.
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This article was written by
Andrew Hecht is a 35-year Wall Street veteran covering commodities and precious metals.He runs the investing group The Hecht Commodity Report, one of the most comprehensive commodities services available. It covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. Learn more.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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