Alacer Gold Stock Analysis – Why I bought and why I sold

 

  • I sold Alacer because it is not a value play anymore, it is more of an exploration play now.
  • What the market didn’t see last year was positive growth, what the market is missing now, might be a negative in the form of lower future ore grades.
  • However, there are still 3 catalysts that could push the stock price higher; a dividend, more exploration success at Aldrich and, as always, higher gold prices.

In 2018 I did a comprehensive analysis of gold miners, I spent more than a month on them and deeply researched about 40. I wasn’t pleased with what I found but Alacer Gold (ALIAF) (ALACF) looked good. We can say it was my favorite gold miner in 2018 as it was not just a bet on gold, but a value play with a nice business proposition thanks to the Copler sulfide project.

Since then things have changed, most significantly the stock price increased as the market noticed what ALIAF has been doing.

alacer.PNG
As the exploration results led to a new resource that will feed the old oxide plant, the management increased guidance and said ALIAF could become a 300k to 400k ounces producer.

alacer management

Source: SA Transcript

However, the path towards such high production levels is long and the ore grades of the sulfide ore aren’t really indicative of higher, sustainable future production. But this doesn’t mean there are no catalysts for ALIAF or that it now is a bad investment. The catalysts that could push it higher in 2019 are a dividend or buybacks, new successful exploration results and higher gold prices.

For me, when the stock price increases and reaches my intrinsic value, the risks are higher and the rewards lower so I prefer to find other, less risky value investments with a margin of safety.

You can hear more about why I sold in my video discussion.

0:43 My Alacer Ownership

1:57 Why did I buy Alacer

3:35 Sum of parts value

4:28 What changed recently for ASR

5:28 Stockpile and ore grade difference

6:33 Ardich expansion and exploration

7:30 Cash flow model

7:58 3 future catalysts

Receive a weekly overview of published articles, videos and research reports straight to your inbox for boring long-term investing knowledge!

Stock Market Crash, Economic Collapse, Rigged Markets? How to invest rationally!

Good day fellow investors,

Last week I made the news on the topic how one should focus on the businesses he invests in and not so much on the macroeconomics.

I’ve got this interesting email discussing how I am missing many points:

Underlying factors that affect the metrics you used in your article:

  1. The role of the ESF in market ‘rigging’. – U.S. Treasury’s Exchange Stabilization Fund
  2. Stock buybacks from the new tax code (fudging the numbers you are working with).
  3. The key role the central banks are playing by keeping interest rates artificially depressed, thus not exposing the true cost of debt servicing.
  4. The sheer number of Zombie companies and historic high levels of BBB bonds.

Plus, how I should contact Peter Schiff, Gregory Mannerino and I would get quickly to 100k subscribers!

All the above is all correct, if I make a business analysis, I get 2k views, if I put stock market crash in the title, I get 4 times more views.

1 views

And in this article, I really want to put the topics of market rigging, buybacks, low interest rates, zombie companies into an investing perspective because I think there is a big difference between investing and protecting yourself from something that might happen but doesn’t have to happen.

2 keynes

When it comes to investing, the key is to achieve the best risk reward return and always remain solvent, no matter how irrational the market might seem.

Contents

Stock Market Fear and Irrationality

THE MAIN QUESTION IS HOW TO INVEST?

Market rigging!

Stock buybacks from the new tax code (fudging the numbers you are working with)

Artificially depressed interest rates

Corporate credit, zombie companies, government debt

How to invest keeping the risks in mind

THE MAIN QUESTION IS HOW TO INVEST?

One should think about HOW TO GET BOTH; good returns from businesses and protection from what might happen while taking advantage of possible market rigging. That is what I focus on and the message of this article is to try to give more balance to the possibly predominant message on YouTube regarding Stock market Crashes and Economic collapses etc.

We as investors have to focus on how to get the best risk reward return to reach our financial goals. Let’s say that gold explodes in 2034, I bet you that 98% of all those invested in gold at the moment, would not have the patience to wait till then to realize profits. That is one, plus, by 2034, if you have $1k now and you get a 15% return because you understand the market;

You know it is rigged,

You know buybacks are strong,

You know interest rates will remain low, or inflationary due to the huge debt,

You stay away from zombie companies, buy those that will do even better when the competition dissolves!

Your 1k become 8k thanks to the power of compounding, earnings and dividends that you don’t get if you buy insurance. Actually, insurance is a cost.

Let me put the things into perspective!

Market rigging!

The market has been rigged since ever – it is in the interest of most politicians, policy makers and people that stocks go up, pensions go up, everybody has more money, more confidence, spends more and even wages go up a bit – so it is in the interest of the current economies that markets go up, collaterals go down, and everybody is pushing for it to go up.

Take advantage of it.

On silver markets, gold markets, there are many speculators that make it look crazy and rigged because there is no rationality there. You can’t eat gold; no dividend and it doesn’t grow. In the 1980-s the Hunt brothers tried to rig the silver market. They owned 30% of global silver but regulations broke them.

Silver price:

silver price

Stock buybacks from the new tax code (fudging the numbers you are working with)

4 smart

Source: Reuters

$940 billion of buybacks expected in 2019, that is 3% of the market.

There will be ups and downs, but some buybacks are smart if made below book value, or replacement value or intrinsic value, and those values are in the eye of the beholder.

5 bubyacks

Source: Yardeni

Try to find buybacks that increase your value, your ownership and avoid those that destroy shareholder value. Compare many stocks and you will find the difference.

Artificially depressed interest rates

As long as it works, it does good in the short term while it is uncertain for the long term – again, as an investor you have to understand the game and play it wisely. The tide could change with a big inflation, but that is why I invest in businesses that would do well if there is inflation but that also do well in this environment. I get dividends, I get growth, expansion etc.

6 rate

Source: FRED

Corporate credit, zombie companies, government debt

Governments and corporations have increased their leverage as low interest rates allowed for lower borrowing costs. US government debt quadrupled in the last 20 years.

government debt

Source: FRED

However, this situation can be solved with inflation for the government and with bailouts for corporations. Plus, when zombie corporations finally fail, the environment will be healhier for good businesses. I’ll talk more about that in the next article discussing Archer Daniel Midlands (NYSE: ADM) where the CEO actually hopes for higher rates to limit the competition.

How to invest keeping the risks in mind

Now, what I just said, doesn’t mean I completely disregard it, I’m not stupid, I am not invested in companies that would go bankrupt in case interest rates go up, I am looking for both, both good businesses, that offer business returns and protection in case of any kind of crisis.

You have three options to invest your money!

The first option is to focus on protection: gold, put options, Treasuries (if you can call them protection). The second option is to focus on businesses, growth, business returns and investments.

Your $1k becomes $8k in 15 years with a 15% yearly return. If you own gold, and the dollar loses 50% of its value, you are at $2k, no dividends, no business, a lot of stress because you depend on what others are willing to pay, not on actual value.

I must say I did a lot of research on macro, especially when I was writing articles on a daily basis three years ago as that was my job, but my conclusion is, that one should be smart and take advantage of what is going on and not bet on something happening because it is logical to happen.

The situation was crazy in 2009, and many sold what they had fearing the macro voices, I was buying businesses in 2009, nice 5 baggers for me.

2 gdx

I took a loan 4 years ago, bought a house, and it was probably the best risk reward investment in my life. Fearing a crash would have me being without huge gains over the last 10 years.

The third investing option is to have it both. For example, a company I was heavily invested in 2018 was Nevsun Resources, a copper miner with a promising project in Serbia. However, what the market disregarded was that 30% of revenue from the project were from gold, not just copper. So, you can buy investments that give you a business return but also protection just in case some of the above mentioned risks materialize. I am now exposed to silver with my portfolio, but if you would take a look at my portfolio, you would never imagine it has a silver call option in it. That is because I like it both; give me business growth and give me the insurance part for free.

Think about it, although so rational, I reiterate my question, is it and will it actually be profitable to be scared or you should simply see how to get the best out of it all?

To put things into perspective, don’t focus on what should rationally happen due to text books or chicken littles, but put probabilities onto every conclusion. What will happen in the future is probably something unknown, be ready for it by investing in both.

Receive a weekly overview of published articles, videos and research reports straight to your inbox for boring long-term investing knowledge!

 

Aurelia Metals Stock Analysis – a Bet on Exploration Going Well For Now!

Summary:

  • Australian miner producing gold but exploring zinc and lead
  • Net cash position but with short mine live (4 years)
  • However, great new exploration intersections counter the low reserves
  • I conclude by putting Aurelia into a global mining investing perspective

Content

Company overview

Current operations

Fundamentals

Conclusion

 Company overview

Aurelia Metals is an Australian miner that produces mostly gold for now but has exploration interest with zinc and lead. It has a net cash position. When it comes to whatever related to investing, the key differentiator between the bad and the good is always cash. However, let’s dig deeper. (Slides source: Aurelia)

1 aurelia

They own and operate gold, zinc, copper and lead mines.

2 gold zinc led copper

They expect 115 to 130 thousand gold ounces of production with costs of A$1,000 ($720) and what is very important, they expect to spend between $35 and $48 million on growth. Growth spending is always uncertain. This leaves about $35 million of operating cash flows. After taxes and other general expenses, there will not be much left.

4 mine life

The mine life is just 4 years.

The short mine life is forcing the company to invest heavily into exploration, which when it comes to Australia, usually means deeper and more expensive. Most of their targets are previously mined mines that are open at depth. As for the surface prospects, keep in mind that only 1 in 3000 surface prospects eventually becomes a mine.

Plus, the ore grades of the current resources are significantly lower than those of the reserves. This means that to turn the resources into reserves, one should see much higher metal prices.

5 resources

6 reservesThe short mine life and lower grade resources lead me to believe, it all depends on exploration with Aurelia. And when the exploration is deeper, it also means more expensive. Before looking at their exploration efforts more in depth, let’s look at the current operations.

Current operations

Mining costs are going up as they go deeper. One should now look at the sequence of the ore they will mine in the future. The volatile costs increase the uncertainty as we don’t know what to expect next qua costs.

8 mining costs

Further, the exploration results are mixed, 7 meters of copper at 1%? Nevsun at Timok had interceptions of 700 meters above 1% copper.

9 exploration

The following slide shows how complex is what they are doing. I would call it ‘deep and thin’.

10 nymeegee

However, their recent update shows nice and significant zinc and lead intersections. But, now the company depends on the price of zinc going forward and you can read my analysis of the zinc sector here.

12 new exploration

The most recent exploration data shown above includes pretty good intersections but we are still talking about a few trucks of ore.

13 herea

Plus, more drilling needs to be done to bring this to reserve level. The management will do that but then again, it will further depend on the price of zinc and lead and more future exploration.

Fundamentals

When it comes to fundamentals, they are showing a net cash position of A$105 million, but they have also raised equity for the same amount in the year and a half.

7 equity

Book value is A$0.27 per share. Cash flows have been high in the last reported year but most of that went for the acquisition, growth and exploration.

Conclusion

Aurelia is a small, underground junior miner and you never know what can happen there. The intersections are not stellar, definitely not large, and not something that would make me say WOW. It is simply to risky for any kind of investment in my opinion, like most junior miners are.

When it comes to investing in miners, given the market’s volatility, you can often by what is there at a discount and get what might be there for free. With Aurelia, you are, at the current market capitalization, paying for what might be there, which is something I am not comfortable with. To each his own personal strategy.

However, given the low coverage junior miners have, one has to simply keep digging until you find the miner with great intersections, high potential and low risk. Sounds impossible, but that is what I am looking and I find it here and there. As for Aurelia, it simply doesn’t fit the description unfortunately.

For current Aurelia investors, the market cap is A$795 million and even if they continue to make $150 million in free cash flow over the next 4 years, what is included in the reserves, the reserves don’t cover for the price. So, as it is the case with many miners, it is a bet on exploration and prices. Good luck!

Sven Carlin is an independent stock market researcher running the Sven Carlin Stock Market Research Platform.

Receive a weekly overview of published articles, videos and research reports straight to your inbox for boring long-term investing knowledge!

 

7 Things To Watch Before Investing In Gold Miners

 

  • Investing is about risk and reward. I feel many miss the risk part when it comes to investing, especially in the mining environment.
  • I discuss 7 risk factors that will help you avoid investing in the wrong miners.
  • ETFs, with their mindless investing strategy, are increasing the danger of investing in the mining environment.

Miners, especially gold miners (GDX) (GDXJ), don’t have a great reputation in the investing world. Unfortunately for them, that is rightfully so. It is often the case that the management is more focused on the stock market, than on business performance. A quote from the 19th century explains it very well!

Gold mining stocksIn such an environment, one must be very careful. The key is to understand the risk and not do stupid things like investing on hope or going after a good story.

An investment in a miner has to be founded on a real business analysis of its fundamentals and a careful assessment of the risks and rewards. On top of that, one should know the miner’s sensitivity to the respective metal’s cycle.

Investing while excluding the above, cannot even be called speculation, it is pure betting and you know what are the odds when it comes to betting.

In this video I share 7 things to analyze when investing in miners, or at least to take into consideration when analyzing the risk and reward of a specific investment. The things to watch are the following:

(0:39) – ETF ownership and business value

(1:47) – A general valuation of miners

(3:40) – Book values are often misleading

(6:05) – Advertising your own stock with Google ads

(7:09) – Example of operational risks in the mining industry

(7:53) – Dividends and cash flows

(9:00) – The value within junior miners and the Van Eck Junior miners ETF

Enjoy the video.