A half-year review of IKN's position as regards silver
No specific mining stock again this week, instead a shorter note as I coast lazily through the summ...sorry, as I carefully consider options for investments during this quiet market period (see 'Market Watching' below for a little more on those). You know IKN likes gold miners more than any other right now (check the main places in which we're invested right now if that's not clear), you know I'm leery of industrial metals exposure (first up copper, but zinc, lead, alu, nickel moly etc all count too) but what about the one that causes the headaches, the Jekyll and Hyde metal, silver?
I've spent at least a chunk of time in the past seven days checking over my thesis on silver and why I prefer gold exposure in my mining stocks to that of silver, stress-testing if you like. The upshot is that I'm happy with my preference for gold over silver. Let's start by opening myself up to accusations of cherrypicking with a January 21st 2015 Bloomberg report, "Silver Poised for Bull Market as Economic Woes Boost Demand" (4). Yes it suits my argument against silver to pick an example of what's gone wrong in the pro-silver camp but believe me folks, after spending a while wading through the hype-laden silverbug material and what passes for analysis (total guff) that's out there I could have chosen something that looks plain stupid instead of just wrong. Anyway, to the example and here's a quote:
“Silver will benefit from all the stimulus measures and rate cuts being announced aggressively by the central banks,” Caroline Bain, a commodity economist at Capital Economics Ltd. in London, said in a telephone interview. “The stimulus measures will at some point boost usage of the metal.” Bain said she expects the price to rise to $20 by the end of the year.
On January 21st, the date of that report, silver closed at $18.22/oz on the London Fix. This weekend we're at $15.83, a drop of $2.39 or 13.1%. And before you say anything that same day had gold at $1,199/oz, which is a tad higher than today's close but still under U$1,200/oz and in the at-or-abouts range with which your author is trying to model investments in the gold space. So okay, long story short some analyst at a desk made a bad call, not the first time and not the last but I'll bet you a large amount of my money to a small amount of your money that calling badly to the upside only gets remembered by irritating little guys such as myself who snuffle around the web and dig up forgotten news reports. Dare to call silver lower (dare to call anything shiny lower) in public, get the call wrong in your timeframe and you never hear the end of it. I can promise on that one, I have the scars and the mails to prove it.
Next up, I also spent some of my Friday reading Jim Sinclair's views on silver. Yes seriously, that Jim Sinclair the "Dear Comrades In Golden Arms" Sinclair, via this post on his website (5) dated Friday June 26th and entitled "Don’t Push A Bad Position" which seems to be either co-authored or authored with Sinclair's tacit approval by one Bill Holter (I'm not sure of the protocols in silverbugland and can't be bothered to find out). Anyway, there was a lot of the usual "it's a fix!" and "it's not fair!" stuff so go read it if you like, but along the way a point made in this paragraph caught my eye and I've highlighted the bit that matters:
To finish this section, there is NO market anywhere on the planet where the amounts of futures dwarf the physical product so overwhelmingly than in silver. Why is silver so important? Why has it been bludgeoned so badly and even priced below the cost of production? You must understand how small the silver market is. Total global production is less than $15 billion per year …"but", silver cannot be left alone because high silver prices do not jibe with low gold prices. …And gold MUST be kept down and out of the limelight because high gold prices do not fit with low interest rates …which are an absolute must in an effort of reflation. You see, in no way can interest rates be allowed to rise with the amount of global debt outstanding. Higher interest rates will crush the debt outstanding, the silver market is at the VERY BEGINNING of the "food chain" that keeps the lid on interest rates. I believe the Chinese hold this market in their back pocket paid for with "pocket change", they will use is it at their own discretion!
And in that bold-typed and underlined section there are three points with which I agree:
1) Total global production is less than U$15Bn per year. In fact, if we take 2014's production number and a U$16/oz price for 2015 and it would be under U$14Bn.
2) Yes, it makes sense to use silver as a "handle" to keep a cap on gold. We all know about the gold/silver ratio and how it's moved up to towards 75/1 recently. We also know about the 15/1 legends and the 50/1 averages since the US dropped the gold standard, there's any number of numbers with which one can feed.
3) It helps the "mainstream financial world" (an ugly phrase, but it'll do in a pinch and you at least know what i'm talking about) to keep gold out the limelight or under control.
However, this very paragraph also points to how and why this horrible naughty unfair stomp-your-feet silver manipulation isn't going away anytime soon. Something Mr. Sinclair ignores.
· Yes, silver's a "handle" on gold but by no means completely effective, else the gold/silver ratio would not have drifted to where it is today, North of 70X for for over half a year.
· Yes, silver's a small market in absolute terms and that makes it easy enough to control, as all the articles pointing to the large JP Morgan position in silver will attest.
· But why is there this assumption, or at the very least implication, that just by pointing to out the manipulation it's going to go away?
We've witnessed metals market manipulation on a far greater scale recently in the copper market and that only saw action taken against it because end-users we're complaining that the price they were paying was artificially high (and as a result threatened the LME which in turn changed its rules on warehousing, bringing all the fun to an end). So tell, me, what end user (rather than end-hoarder, big difference) is going to kick up a fuss and complain about artificially low silver prices? The masochist end of the silver market, perhaps? Silver is nominally "precious" but it's still an industrial metal and more than half of annual production goes to industrial uses. It's not gold, never has been, never will be.
The fact is, this silver manipulation by the big bad nasty JPM and its friends shows no signs of going away soon, none at all. We've even seen the bank successfully defend its position in courts, which annoys the manip-callers no end but that's the way it is. Call it legit market device, call it immoral, call it illegal, your opinion counts as much as mine (i.e. zero) but if we assume 1) the runners of this silver market are making their profit and 2) there are no rules being broken and 3) it's small money in comparative terms and 4) it at least helps the bigger game of gold control, I see no reason why it should suddenly stop just because Keith Neumeyer sends a mail to the CTFC. "Not fair" you say? Well f__k fair, since when has 'fair' been a part of capital markets?
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"Lost at sea: the man who vanished for 14 months". Salvador Alvarenga, this weekend's longread must-read
A great piece in The Graun today, here's the subhead blurb.
In November 2012, Salvador Alvarenga went fishing off the coast of Mexico. Two days later, a storm hit and he made a desperate SOS. It was the last anyone heard from him – for 438 days. This is his story.
Go read it all here, wonderful stuff.
From 1978, a killer tune that (to many people's surprise) was never released as a single. It's aged well:
And to know where it came from, here's Bob Dylan (and possibly the greatest music video of all time, certainly one of the oldest). Compare and contrast.
This from an interview with Eric Sprott dated October 20th 2014, a little over one year ago:
The Gold Report: How will an explosion in the number of Ebola cases impact the global economy?Eric Sprott: Fear of travel and business disruption is definitely going to have an impact on a fragile economy already weakened by recessions in Europe and Japan. An event like this could have serious negative repercussions because it changes people's behaviors. If people worried about the security of bank deposits start pulling their money out, they would logically want to shift to gold and silver. All of a sudden, investors would come back into these markets and push the price up. No one is considering that. The natural Armageddon of disease could cause a financial Armageddon and precious metals are the natural comfort play.
Never mind, there's always the next Armageddon.
PS: Holy crap. Imagine that wave hitting your town.
UPDATE: Here's footage of the disaster zone (shot from a drone and then a helicopter, it seems). This is highly unfunny for the locals, for the companies and for the mining industry as a whole.
Eric Olson, Chief Operating Officer Minera would like to confirm that Eric Olson, Chief Operating Officer, has not had permission to enter Peru revoked by the Peruvian immigration authorities as speculated, nor has he broken any immigration rules. In common with most expatriates who work in the global mining industry, Mr. Olson works on a rotation system which includes 6 weeks in Peru, and 2 weeks outside Peru.
Then there's this, what they write about Daryl Hodges' payments from IRL, direct quotes
The Company and Mr. Hodges have agreed to the following payments in settlement of all obligations due to him: $15,000 a month from November 2015 to April 2017 followed by a payment of $10,000 in May 2017. The Company would like to reiterate that subsequent to the August 27, 2015 AGM, Mr. Hodges has not provided any services to Minera IRL Limited, and is not involved in any matters related to the Company's current situation.
Does anyone else see the glaringly obvious in those two statements? One about getting paid, the other about not doing a scrap of work? You'll also note that not a word is said about the $500,000 golden parachute payment aside from "it was triggered" and "change of control" because, as noted above, what these fork-tongue merchants don't say is every bit as interesting as what they do say. So is there still a bonus in place, Daryl?
Anyway, go have a look at the spindoctoring yourself. There's going to be so much more to get from this work of art.
PS: And one thing that's really really interesting is the way they haven't mentioned the name Brad Boland, not in this NR and not in the previous one, either. Oh what fun to come.
UPDATE: Here's what London-based Shore Capital and its analyst, Yuen Low, had to say about the linked NR today. Interesting how he's noted the Hodges pay stuff too.
MINERA IRL^ (MIRL, NR, CNP) – Minera soap opera: ex-Executive Chairman Daryl Hodges will get US$280k payoff, rather than US$680k. We continue to put aside our Dallas analogy while we consider the matter of former Executive Chairman Daryl Hodges financial arrangements with Minera. Earlier this month, we called on the company to fully disclose the details and the company today obliged.
· It emerges that Mr Hodges was indeed paid US$15k/month over March to September 2015 (US$105k total), which we view as fine on the basis that his basic salary was US$180k/year.
· However, it also turns out that there really was a gobsmacking US$0.5m ‘change of control’ clause (i.e. ‘golden parachute’) which was deemed “triggered” (along with a full year’s pay as a lump sum) as a result of his being voted of Minera’s board.
· Minera is attempting to justify this by comparison with Mr Chamberlain’s terms, which included a similar provision – but we see this as inappropriate given that Mr Chamberlain built up the company over many years, whereas Mr Hodges only joined in 2014.
Minera’s and Mr Hodges’ legal counsels have since concluded discussions on the termination of his contract.
· Mr Hodges is now to be paid US$280k, comprising US$15k/month from November 2015 to April 2017 and US$10k in May 2017.
· We are encouraged that this is significantly less than the aforementioned US$680k, although we still view US$280k as excessive under the circumstances.
Minera also reiterated that Mr Hodges “has not provided any services” to it nor been involved “in any matters related to [Minera’s] current situation” since being voted of the board.
Meanwhile, Minera is still “in the process” of dismissing former interim CEO Diego Benavides from his positions in the company’s operating subsidiaries, which could take several months. Minera reiterated that the principal cause for dismissal was Mr Benavides failure to co-operate with Mr Hodges as Executive Chairman, and his “resistance to changes” that Mr Hodges and Minera’s board wanted to implement. In a press interview, one of Minera’s directors also claimed that Mr Chamberlain “never saw fit” to propose Mr Benavides for a board position, and that it was Mr Hodges who elevated him to position of interim CEO “to try him out”.
We understand that Mr Benavides has a very different story, and we call on Minera to release the minutes of its meetings to put this issue to bed. We understand also that Minera has to be registered in Peru in order to be able to properly call for a shareholder meeting of its subsidiaries, and that this apparently isn’t the case. We therefore also call on the company to clarify this issue.
UPDATE: Here's the direct link to the Global Mining Observer piece on Minera IRL.
UPDATE 2: I've double re-read it and my stars, GMO's piece is just wonderful and the best thing I've read on the whole IRL saga to date. Not only is it packed with information, but the prose is a pleasure to read too. Make it your must-read of the day.
UPDATE: Reader 'RK' writes in with this, for which we thank him:
IRL Voting -much easier to do online...just sayingUPDATE 2: An excellent mail from reader "R", which anyone about to vote using the phone option should read carefully. Here are the necessary extracts:
just ask the broker for the control # and go to this website and voila:
The...important reason for writing you this message is that there could easily be a potential situation in which voters who are in support of Team Benavides, mistakenly vote against them. The reason I say this is because when I called in to vote, the very first thing I was prompted to answer was the question regarding whether I wanted to vote for the recommendations. The thing is, I can't recall the exact wording they used and that's what worries me. Because if for example the words were "Do you want to vote along with managements recommendations? If yes, press 1", does pressing 1 mean that you're voting for Benavides, or are you actually recording a vote according to management's (team arsehole) recommendation, which actually means you're siding with them and voting against Benavides? ... when the first question asked 'Do you want to vote along with the resolutions set out in the circular?', I can't help but wonder if going along with that means you might actually be voting in accordance with what team Hodges wants us to do, which is all votes AGAINST the 10 resolutions.Myself, I didn't trust that I might mistakenly be giving my votes to the wrong team, so I went instead to the second option of "To vote for each resolution seperately, press 2", and that way there was no doubt that I was voting "FOR" each of the 10 resolutions. Also, after voting for all 10 individually, the prompter confirms the votes by telling you what you voted and asks you to confirm. I can tell you that in my 22 years of speculating on junior mining stocks and always voting on every and any resolutions that came up, THIS TIME was the first and only time I've ever truly relished punching all those buttons and recording each and every one of my (number redacted) shares.
" gold and silver miners are some of the dumbest money on the planet with respect to their hedging history"
"Gold miners are not traditionally the brightest lights in the constellation of corporate entities"
Here's a question received from reader 'DB' this morning:
I'm really not sure why it's such a big deal that companies are not including depreciation in their cost reporting.
If I'm comparing a potential investment into two companies and wish to compare the cost base of those two companies, does it matter if the mine cost US$1bn to build or US$100m to build (and that capital is depreciated accordingly)? Surely what matters is what it is doing today.
It's now a three cent stock, down 93% on that chart. His "largest position" is probably not that any longer, not in cash terms at least.
It was the right way to play the odds at the time, but given subsequent price action, it's a pity we got stopped out of our latest GLD "gold insurance" recommendation. I won't dwell on this too much, other than to remind readers that such volatility is normal in our sector, and it's providing some excellent buying opportunities on picks we missed earlier, such as our most recent pick, Roxgold. More on this next week.
Meanwhile, I've been out kicking rocks again, and I'm writing to you from British Columbia, where I just had a follow-up visit with the subject of many questions lately: the Yellow Giant gold mine recently built by Banks Island Gold (BOZ.V, C$0.44, 42.9M SO, 55.9M FD, C$18.9M MCap, www.banksislandgold.com).
I'll have more details in the forthcoming issue of the International Speculator, but want to go ahead and share the gist of it with Casey Investment Alert subscribers now: I'm convinced Banks Island Gold (affectionately known to its 60 or so employees as BIG) is a cash cow in the making and is deeply undervalued.
First, however, I want to remind readers that both Doug Casey and I own shares in Banks. Personally, it remains my largest position. If you believe this may bias me, or my perceptions of the project, please feel free to discount what I'm about to say or, indeed, to stop reading now. I will not be offended. (But I'll also remind readers that as per Casey policy, I'm not allowed to sell any of my shares until giving readers a chance to do so first.)
Now, if a picture is worth a thousand words, let me save us all a few thousand and show you why I'm so optimistic about Banks.
The aerial shot above shows the main mine site, where there was nothing but moose moss last time I was on Banks Island. The whole camp was a cargo pair of containers—now, there are roads, buildings, and a floating residential facility to house the 30-odd people working where not so long ago, there was naught but wolves and wind.
Above is the nondescript villain of the day: the barren garnet "contamination" that just happens to weigh the same as Yellow Giant's gold-bearing pyrite. This little surprise resulted in a large amount of garnet being included in the initial batches of gold concentrate from Yellow Giant, reducing their grade—and causing all the other problems we've reported on.
Next, the solution:
This shot of Yellow Giant's dense media separation (DMS) plant, the heart of the operation, shows a red and yellow spiral separator on the upper-left deck. What was not clear to me before my visit, but is now, is that this new component to the circuit already addresses the garnet problem, even though we're still a few weeks away from the installation of the flotation cells that will improve recoveries and concentrate grades even more.
You see, Banks' contract requires it to produce a concentrate roughly grading two ounces per tonne (2.0 opt), but the garnets were diluting the concentrate down to a bit over 1.0 opt. The spiral circuit recovers fine material that would have been lost as waste, and it grades about 3.0 opt. This is critical, because lab tests had predicted that about 15% of the gold-bearing sulfides would be crushed to this fine size, but the reality is closer to 50%. So, if you add the concentrate from the spiral to the DMS concentrate contaminated with garnet, you end up with an average above the 2.0 opt required—even without the flotation circuit. Voilà.
Note the second set of spirals to the lower-left. Banks plans to run its previous tailings through that set to recover the gold from fine material produced before the garnet problem was identified. In other words, gold already "lost" to waste will be recovered.
This long-hole drill rig is used to blast large amounts of ore at once, greatly reducing the mining cost per tonne. This is one of the keys to profitability at Yellow Giant; not only does the Bob zone currently being mined grade over an ounce per tonne, it does so in areas over 10 meters thick in places. Currently, this can result in rock with $1 million worth of gold being broken in a single round at Bob. And while in many vein deposits, you can only use long-hole stoping here and there, at Yellow Giant, it's the primary method of mining.
Another key advantage that may not be immediately evident from the photos above is that all the plant equipment is modular, brought in on trucks, and simply parked or planted on the ground. This required minimal surface disturbance, minimal civil engineering, no actual plant building to be constructed, and gives the company the flexibility to add to the circuits, and even move them around, as needed.
This is why the whole thing cost only about $10 million to build.
Note that we do not have cash cost figures yet; the company's accountants are working on those, and with Banks' fiscal year ended on February 28 (conveniently after the start-up teething pains), this first full quarter of production only started this month. That said, the math is not too difficult to sketch out; the mine cost $10 million, the Bob zone can produce $1 million of ore with a single blast… and that two-tonne fine material concentrate bag in the third picture above was mounted as I arrived on-site, and was half full by the time I toured the plant. When Banks starts reporting financial results from regular commercial production, I think the market will be greatly surprised by just how much money a little mine can crank out.
As for making this little rich mine into a BIG cash cow (sorry, pun intended), consider that the single boulder under my elbow in this picture has about $20,000 worth of gold in it at today's spot price. There were several of these being hauled out of Bob while I was there, and much more in smaller broken rock. More to the point: material like this has been discovered by the company's exploration drilling below the current 43-101-compliant resources at the Bob and Tell zones. The Kim zone has also been significantly expanded, and new zones will be tested this year. With Banks' new, larger mining permit in hand, a little more exploration success could easily scale Yellow Giant up to a level that could attract the interest of a larger mining company.
Banks is not, however, looking for a takeover; management wants to generate millions in net earnings, keep expanding Yellow Giant, and go shopping for more high-margin projects. I believe Banks will succeed. Consider this last photo, showing about $250,000 worth of gold in concentrates ready for shipment—not bad for a few days' work.
I did not have access to nonpublic data, so I can't give you any financial figures I'd care to defend. Based on what I saw, however, I can say that Yellow Giant is already bigger and better than anticipated, and it was built at an extremely low cost and is operating at what has to be one of the lowest costs per ounce I've seen. While other companies are reporting losses and write-downs, I now expect Banks to report net income in its first quarter of commercial production and growth soon thereafter.
Yellow Giant's profitability may not become fully apparent (or may not be believed) until the company's audited financials come out, but I expect the reality to become increasingly apparent with each press release throughout this year—perhaps starting with the next one.
I can't guarantee what gold will be doing in the nearest term, but Banks Island shares are selling cheaper than they have been since right after IPO, and back then, the company had only an idea, while now it has cash flow. This undervaluation won't last, and I see very near-term Push in this story.
So I'm reiterating my renewed Buy recommendation. Whatever happens in the near term, these shares are a great buy, whether for a first tranche or a second.
I intend to buy more myself—after giving you a chance to do so first.
Senior Metals Investment Strategist
Oh lordy I'm fed up to the back teeth of mining company news release wordsmith and spin bullshit, Argonaut Gold (AR.to) edition
...which combines one balance sheet item and one P+L item.
Argonaut Gold Announces Third Quarter 2015 Revenue of $32M; Quarter End Cash Balance Remains Consistent at $44M...
1) "Revenue of $32m". In fact it's $32.106m, but who gives a fig how much you bring in if it costs you more to produce the goods than you get?
2) "Cash balance $44m". Fine, but what about the one that really matters, working capital?
Notice anything there? Yeah, me too.
Costs and ValuationThe SRK 2014 PEA estimates underground mine costs will be C$89.60/tonne, process costs of C$28.12/tonne, and G&A of $32.22/tonne, for a total on-site operating cost per tonne milled of C$149.94.I don't buy it.Goldcorp reports mining costs of C$233.36/tonne and process costs of C$47.37/tonne from its nearby Red Lake deposit. Red Lake has been operating for over a decade, is a somewhat simpler deposit, and has a skilled workforce that knows the deposit well. Rubicon is starting from ground zero on a PEA-level study, and has not even determined what mining method will work best on this complex deposit.The 2014 PEA estimates a base case ($1,385 gold at a C$1/US$1.05 exchange rate) post-tax NPV5% of C$531 million and IRR of 27%. At a $1,108 gold price, the NPV drops to C$206 million. Rubicon states the PEA is conservative, as it employs a low diluted grade, low sustaining capex, and low recovery, plus a high C$ exchange rate; and therefore the project is deemed “low risk”. Rubicon has sunk in excess of C$600 million into the deposit, has a market cap of ~C$270 million, and ~C$59 million in debt.
SummaryIf the resource is wrong and the costs wrong, then the valuation presented in the PEA must be wrong. Cash flow problems, debt problems, and production problems on a deposit of dubious resources, questionable costs, plus a new guy in charge don't add up to a screaming buy.
- Gold equivalent (AuEq) sold: 53,475 oz
- Average realized price per Oz AuEq: U$1,115
- All In Sustaining Cost per Oz AuEq: U$454
- Difference between two: U$661/oz
- Total supposed revenue difference: + U$35.35m
- Earnings from mine operations: US$18.18m
*I'm not Chinese
TORONTO, ONTARIO--(Marketwired - Nov 3, 2015) - Rubicon Minerals Corporation (RMX.TO)(NYSE MKT:RBY) ("Rubicon" or the "Company") today announced it is moving to suspend underground activities at the Phoenix Gold Project (the "Project") while it enhances its geological model of the F2 Gold Deposit and develops a project implementation plan.
"We believe in the potential of the Phoenix Gold Project," said Michael Winship, interim President and Chief Executive Officer of Rubicon. "We have high-grade gold mineralization with extensive infrastructure, in one of the top producing gold camps in the world. Similar to other high-grade, narrow-vein, underground gold deposits, the geology can be quite challenging and requires additional analysis to be fully understood. During the trial stoping period, we have discovered that the F2 Gold Deposit is much more geologically complex compared to our understanding of it from historical drilling." continues here
Assuming the gold price remains in its current range over the next year, open pit operations will continue up to mid-2016, at which point the Mine would be placed on care and maintenance. Heap leach operations would continue through to early-2017. Production guidance for fiscal 2016 is between 65,000 and 70,000 gold ounces with a cash cost of approximately $700 to $750 per gold ounce. In the event of a sustained increase in the gold price, the Company could continue operations as outlined in the most recently published NI-43 101 technical report (dated December 6, 2013), which would see production continuing up to 2022 (based on reserves at a $1,250/oz gold price).
PPS: Here by request are paste-outs:
- Minera IRL Limited has issued a further press release this morning relating to a ‘cease trade’ order in Canada.
- The ‘cease trade’ order has been made as the board of Mineral IRL Limited did not file its interim accounts by 16 October.
- The company also states “Minera IRL expects that the Order will be lifted after the Company files the Financial Materials.”
- The statement also refers to the temporary compromise of the company’s Peruvian subsidiary.
- It is our view that given the EGM vote to replace the current board that is probably better from a shareholder perspective for the shares to be suspended in both markets.
- Shareholders need to decide which party should run this company going forward.
- Should it be Diego Benevides, joint founder and director of the Peruvian subsidiaries or the existing board which seem unable to work with Mr Benevides?
- We have been made aware of statements from persons supporting Mr Benevides. We will not reveal where these statements have come from but we will say that they provide damming accounts of the behaviour and actions of the board of Minera IRL Limited.
- We believe that the board of Minera IRL are disingenuous in their statements.
- In our opinion the board of Mineral IRL Limited are not acting in the best interest of shareholders.
- That shareholders should support Diego Benevides in voting for the election of a new board.
- Investors in the UK stock should send their votes to “Computershare Investor Services (Jersey) Limited, c/o Computershare Investor Services PLC, The Pavilions, Bridgwater Road, Bristol BS99 6ZY, United Kingdom, by not later than 3:00 pm on 24 November 2015.
At this moment, McEwen Mining (MUX) is trading at exactly U$0.888
PS: For the rest of you wondering why, this link with its quick explanation will help.
UPDATE: It's like magic. zhù nǐ háoyùn.