Our Mid-Year Precious Metals Update And What's Next
July 16, 2012 | 2 comments | includes: AUNFF.PK, BAA, CEF, EXLLF.PK, FCX, HL, ORVMF.PK, RVM, SNDXF.PK
We have arrived at the midpoint of 2012, and it is an appropriate time to reevaluate the stocks that have been featured in our articles during the first six months. This article will focus on our precious metal investments, and we will determine if they deserve to stay in the portfolio. We will also reevaluate our projections for the metals market and if those should be modified.
This is the second installment in this series of three portfolio updates. The first update evaluated our High-dividend Portfoilio, and our next article in this series will update our Growth Stock Portfolio.
The general performance of the Precious Metals Portfolio mirrors the performance of the metals, although some stocks outshine others. We need to determine how many of the losses are the effect of the general market and how many are attributable to the stocks themselves. The table below lists the precious metal stocks we have featured on Seeking Alpha, their price performance and our current investment rating for each. Below we will elaborate in more detail about the prospects for each company.
| STOCK | TICKER | COST | JUL 14 | % CHNGE | RATING (shrt-long) | | Revett Minerals | ( RVM) | $ 4.40 | $ 3.42 | -22% | BUY - BUY | | Hecla Mining | ( HL) | $ 4.95 | $ 4.35 | -12% | HOLD - BUY | | Excellon Resources | ( EXLLF.PK) | $ 0.58 | $ 0.58 | 0% | BUY - BUY | | Aurcana Corp. | ( AUNFF.PK) | $ 0.83 | $ 0.88 | 7% | BUY - BUY | | Banro Corp. | ( BAA) | $ 5.19 | $ 3.56 | -31% | HOLD - BUY | | Central Fund of Canada | ( CEF) | $ 22.84 | $ 19.48 | -15% | BUY - BUY | | Sandstorm Gold | ( SNDXF.PK) | $ 8.75 | $ 8.57 | -2% | HOLD - BUY | | Freeport - McMoRan | ( FCX) | $ 39.11 | $ 33.23 | -15% | HOLD - BUY | | Orvana Minerals | ( ORVMF.PK) | $ 0.89 | $ 0.81 | -9% | BUY - BUY |
The average change to these stocks since featured in our articles is an 11% loss. This is predominately due to the general decline in the price of the metals that these miners produce. Gold, silver and copper declined 7%, 18% and 10%, respectively, during the comparable periods. In the past six weeks, the Metals and Miners Sector in the Investors Business Daily ranked 193 out of 197. On average, our Precious Metal portfolio performed only slightly better than the metals themselves.
The gains and losses in individual stocks were primarily event-driven by developments within those particular companies. We will describe those events for both the silver and the gold stocks in the portfolio, and we will decide if changes warrant a modified short-term investment thesis. Over the long-term, we continue to consider all these stocks as BUY candidates.
Silver Stocks.
Our article on silver featured the first four stocks in the above table. Due to the success of the two Canadian junior miners, the silver portion of the portfolio was limited to a 6% average loss, although silver declined 18% since that article on February 14.
Revett Minerals was a big loser in the portfolio. We consider there are two reasons for this: production short of guidance and exposure to copper, which reacts to the slowing global economies. We were not particularly surprised or concerned about the guidance, as in our article I warned:
"Although I think it is an appropriate long-term investment, traders should be advised that RVM may take time to be recognized. Their latest guidance for 2012 is solid but also implies that they are more focused on investing in development than pumping their numbers."
The company management states that the 8% miss on production will be recouped during the year. The production was impacted by "retrofitting of equipment as we move towards higher bio-fuel usage and meeting revised DPM (diesel particulate matter) emission standards. Lower than planned copper grades were encountered as we advanced top slicing in the C Bed area and as a result of increased lower grade production from the South Ore Body."
Despite those challenges, RVM produced 50% revenue growth and record cash flow for the quarter. Processing the overburden seems like a reasonable way to avoid wasting reserves, even if that contributed to a short-term guidance miss. The near-term future for copper is less exciting than when we originally featured RVM, due to considerable slowing in global economies. We should mention that RVM does have 25% of the 2012 copper production hedged at $4.00 per pound. Copper is currently at $3.45. We think that the drop in RVM has created a short-term buying opportunity, despite the exposure to copper.
Our other U.S. silver miner, Hecla Mining Co. declined 12%, but less than the price of silver itself. The company announced that it is slightly ahead of schedule in its year-long cleanup project at the Lucky Friday mine. We think that HL is a solid value at the current price for the long-term, and certainly will continue to hold it in the portfolio. However, the potential for delays in the approval to reopen the Lucky Friday in an unpredictable regulatory environment prevents us from doubling-down at this time. We also see some other silver miners as better short-term bets.
One Canadian silver miner that we remain excited about it is Excellon Resources. Trading was halted earlier this week on an announcement that drill results indicated an extensive area of very high grade ore (10+ ounces/ton). Obviously this may allow the company to justify a higher reserve calculation, but more important is the possibility that the exploration is starting to zero-in on the "source." Although this is touted as the "highest grade silver mine in Mexico," the actual mother lode has been elusive.
While we are not ready to evaluate Excellon as if they had hit the bonanza vein, we are quite satisfied with the production, which is more than 50% higher than last year. This is a very consistent silver producer, and exploration results indicate a bright future. We consider Excellon a short-term and long-term BUY.
Our other intriguing Canadian silver miner, Aurcana Corporation , also announced outstanding results of exploration with 14 feet of 36 ounce/ton ore near the surface at its Shafter Mine in Texas, and 40 feet with 23 ounces/ton. The Shafter mine is in commissioning, and the company reports that it is two months ahead of schedule, with commercial production in Q3. In the meantime, its La Negra Mine in Mexico registered record production in Q1, providing cash flow to finance the start-up of the Texas mine, which will triple Aurcana's annual silver production.
The company issued 6MM stock options to management and directors, with a $1.02 exercise price, and S&P and Market Vectors have announced the addition of Aurcana to the GDXJ Index effective June 15, 2012. We are not crazy about the potential dilution, but also think the added $6MM may be useful given the production opportunities. At any rate, we expect management will see to it that the stock rises beyond the $1.02 price, and the added exposure may make that happen sooner than later. We consider Aurcana a BUY for both the short and long term.
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