World Of Wallstreet

Toyota Must Be Getting Really Desparate

There are no magnet known to man comparable to those using rare-earths. A discovery of a comparable material would be a major scientific break-thru of the Nobel Prize winning variety. Heard about that lately.

Toyota must be really desparate as far as Rare-Earth supply goes that they are trying to bluff the Chinese like this. I flat out missed the first big run in Rare-Earths. Maybe its time to buy some neodymium-rich near-term producers for a Toyota-inspired takeover play.

MontyHigh, www.worldofwallstreet.us

Chart Of The Day: Want Some 2008 Crash Insurance?

My savings took a giant hit (~70%) from my top in 2007 to the bottom 2008. That was before I started using technical analysis. That can happen when you depend just on fundamental analysis and your analysis is WRONG. I don't ever want to have that happen again.

The above chart shows that there was something I could have done to profit from the big crash in 2008. Go long gold and short copper. Gold as a store of value in times of fear and uncertainty. Copper as a commodity whose price is sure to get hit hard in a major economic slow down. The chart shows that ratio making a continuous move that could more than double what you have at risk, supported the whole way by a very tight 20-day moving average.

The fundamental buzz around copper concerns the almost certainty of a significant recession in Europe (China's biggest export market) along with scary anecdotal stories out of China itself regarding a potential housing bust.

I've already long and strong (but not heavily leveraged) gold with various kinds paper and physical gold. I expect I'm going to play that 20 day moving average on the long gold short copper trade with a decent sized percentage of my networth at risk via the futures market as both a big economic/market hit insurance trade with an expectation of profit. A decent size position, but not anything that could blow me up.

Of course, I'm not recommending any such thing for anyone else, this post is merely pointing out an interesting looking chart that shows you want to look for if another major downleg in this Great Recession resumes.

MontyHigh, www.worldofwallstreet.us

Short Copper Futures

I just went short copper futures. Here's the rationale:

• Fundamentals - it appears that the USA and Europe have entered a recession and Michael Pettis (Chinese economic analyst) is convinced that decoupling won't happen and that over the next few years Chinese industrial growth has too slow down significantly. Of course, China is by far the number one consumer of copper with the USA and Europe trailing behind. I'm hearing enough respectable buzz that China going into a hard landing that makes such a landing seems like a good possibility. Any lightening by China should hit the price of copper hard.
• Technicals - See the chart that follows. Also the seasonals (which I don't have time to dig up from a public source) are in favor of a declining price.
• Personal Psychology - I'm not overconfident about my copper trading as I haven't done that well at it. I am taking enough time to think about this and get a good entry and have a well-established and well-reasoned stop.
• Mass Psychology - The idea that a recession has already started has not grabbed investor mass psychology yet and the idea that China will not decouple and will have a hard landing has also not taken hold. If the price of copper falls further below $4.00 I expect the mass psychology will wake up and drive the price of copper down hard so now seems like a reasonably good entry.

As the chart says, the stop is at daily close above $4.10. Let me know what you think and whether you think my stop is too tight.

The position size is about 10% of portfolio value and the stop is about 3% above current prices so if the stop works out ok I have about .3% of total portfolio value at risk on this trade which seems quite safe. The target price results in a 21% gain so the risk to reward ratio on this trade of 7 to 1 which seems attractive. My 20 times larger gold position more than hedges this trade against a pure inflation / liquidity driven copper price rise.

MontyHigh, www.worldofwallstreet.us

Palladium And Norilsk Nickel's Transition To Activox Technology

How does this sound to you (click here for the whole story):

 "Norilsk Nickel(NILSY.PK), the largest nickel mine in the world who is also responsible for 45% of the world's palladium and 10% of platinum, is abandoning the traditional pyrometallurgy process andadopting the more efficient Activox Process, hydrometallurgy that extracts base metals from mineral ores by chemical leaching. The change is necessary due to severe pollution anddeteriorating ore grade. 

Knowing the physics in mining, I saw something with hugely significance: While the new technology can extract nickel and copper at near 100% efficiency at low cost, it also means that the chemically stable PGM contents, platinum and palladium, will be extremely difficult to extract. Norilsk will cease to be a major supplier of palladium and platinum."

Sounds like a story that could allow an investor to make a tonne of money over the next couple of years investing in palladium, doesn't it?

I was pretty excited at first, but decided it was too good to be true. At current metal prices, palladium accounts for 36% of Norilsk sales (the same as Nickel). I really doubt that they would switch to a process that cuts their revenue by 36%.

Isn't amazing how so many investing stories turn out to be "too good to be true" after just a few minutes of simple due-diligence? And so the investing addage is confirmed:

DO YOUR OWN DUE DILIGENCE.

Let me know if I'm wrong,

MontyHigh, www.worldofwallstreet.us

Commodity Resource Investing: Where's The Leverage? What's Your Edge?

The above chart examines how investing in a commodity (in this case Copper) compares to investing in the producers. The COPX (Large-Cap Copper Miners) ETF has not been around that long. The above chart looks a how it did compared to Copper itself during the nice run that copper had off a bottom last June.

We see that copper went from $2.75 to $4.50/lb. That's a 63% move in one year. Nice run. Meanwhile, the copper miners relative to copper when from 3.86 to 4.32 (an extra 12%). So, owning copper miners in general gave the investor another measely 12% compared to the underlying commodity price.

CONCLUSION: Large-Cap producers don't provide much leverage to underlying commodities.

CONCLUSION: You are better off, when you have a real edge, using moderate leverage with Commodity Futures (if your hands aren't tied with your money in an IRA) than buying a blind bushel of large-cap producers.

CONCLUSION: If you want to make real money with resource investing you both need to be "right" about the underlying resources. To Turbo-Charge your winnings you need to either leverage up with derivatives (futures and/or options)  or have an edge stock-picking smaller cap producers (and explorers).

Perhaps this is obvious, but sometimes its worth looking at a data point.

Here's a nice piece by Gregor (click here) where he points out that ramping up copper production seems to be pretty hard.

MontyHigh, www.worldofwallstreet.us

Part 1: Nickel, Another Metal Price That Went From 15 To Over 40

As I struggle to deeply understand what is happening with Silver, I consider what happened with Nickel. Lest some readers think I'm a Silver Bear, I direct their attention to this recent post (click here). This post tests some my Silver bullishness by looking at a comparable situation, the 2007 Nickel price rise. If you go back in time to the early days of this blog you'll see that I was there (but an investing baby) for the Nickel ride. 

As you can see, in about 15 months, the price of Nickel went from $15,000 per tonne to around 54,000$ tonne. Towards the end there were a range of crazy stories about Nickel:

• That there are no substitutes. Nickel has industrial properties for which there are no possible substitutes. 
• That the world was running out of Nickel (in the form of the high-grade sulphide mine supplies).
• That it was a precious metal now that it was more than $1 / oz.
• That it was the "Energy Metal" because you needed it to make pipeline steel, oil/gas drilling steel and nuclear power plants.
• That no new supply could come on line for years. 

As I recall, Nickel peaked and fell to earth when a combination of fundamental factors occurred:

• Substitution == Reduced Demand - lots of stainless steel products switched from Nickel and Chrome-based stainless steel to High-Chrome based stainless steel and some stainless steel based products were substituted with non-stainless steel products. While Nickel was rising this was considered to be impossible as there was "no substitute" for Nickel in stainless steel. 
• Increased Supply - the Nickel price rose enough to support the shipping low-grade Nickel Ore directly to Chinese blast-furnaces to produce "Nickel Pig-Iron" which could be used to make some forms of stainless steel. 
• Trading Rule Change - the London Metal Exchange (LME) made some kind of rule change that made it harder for speculators to go/stay long. This marked the actual peak of the Nickel price rise. 

So, what parallels are there to today's Silver market:

• There are plenty of "stories" about Silver to justify the price rises. 
• Substitution - we have not heard of any industrial substitution, yet. This kicks in only when industrial users get convinced that prices will not fall back to reasonable levels. As far as investment demand goes, I expect Silver will see quite a "substitution" effect (into some other "storied" momentum play) as soon as Silver's price stops rising. So, I don't see substitution as triggering the Silver price peak, but I do see it as reinforcing a post-peak price collapse. 
• Increased Supply - I see no short-term opportunities for increased Silver supply. There just are enough "old tea-sets" sitting around to be recycled. They just about all got cleaned out in earlier silver price rises. 
• Trading Rule Changes - I'm expecting some of this Shennigans to occur, but the Silver speculators have wised up to margin increases and this has no effect on the little guy buying silver. I expect we'll see more shortages on retail investing product (Silver Eagles, Junk 90% Silver US Coins, etc.) but that may increase the mania rather than slow-down the uptake.

So, in-conclusion, Silver has some parallels to the Nickel price rise, but investment demand is a major wild-card. One should be on the look out for substitution and unexpected supply rises, but those don't seem to be near term. There are no big warnings for the current Silver price trend that come out of the 2007 Nickel experience. 

Can you think of any parallels to the current Silver situation beside the 2007 Nickel ride? Uranium seems similar, but differs in that there were no futures exchanges trading the metal at the time. 

MontyHigh, www.worldofwallstreet.us

 

 

Life-Cycle Of A Junior Mining Explorer

Here's what google images brings up. Click thru to get to the original pages explain the graphs.  

 

In the past I have made quite good money in that startup phase, especially the one-year run up to production. Where do you like to get involved?

Also, I find that these graphs are way too smooth leaving out the following important common downward jags:

• Explorer/mine builder gets financing (usually below market price and with "warrants"): This drags the stock down to that price and holds it there will the buyers of the stock sell the stock off while keeping the "upside" in the form of the warrants. 
• Startup disappointments: Mines nearly always take longer than "expected" to actually get started and there are frequently several months of "unexpectedly" bad mining results. This can go on for years (e.g. Minefinders and Gammon Gold and Golden Start Resources). This is where miners without extra cash in the bank and especially those with marginal mining economics get hurt badly. You can make a good bit of coin if you are smart enough to guess when the kinks will get worked out for these situations. 

There's another point I'm quite interested in. What frequently happens in the weeks following the first really good hole announcement? I think there's a drop off in price until the next hole comes (which better be good). There are probably opportunities to buy in (with the right timing) after that first really good hole. 

I'd be glad to have a friendly discussion with you if you have thoughts (or mining stock names) you'd like to apply to these charts. 

MontyHigh, www.worldofwallstreet.us

Short Term Trading Plan: Dump The Uranium, Hunker Down

Here's where I stand:

(1) No silver or gold call options (got stopped out at the worst point on Friday). This doesn't look so dumb now.

(2) 42% long gold stocks, 11% long silver stocks (down from 75% long gold and silver mining stocks). I dumped, at the close yesterday, everything that was not either:

• High-grade ore core position OR
• Just too illiquid to sell.

(3) Around 32% cash.

(4) 5% long S&P 500 ES put options (short the US stock market) whose nominal value greater than (20 by about 1/3.

(5) Short copper futures whose nominal value is about 9% of total portfolio value.

(6) Long CCJ (Uranium miner) call options worth at the close yesterday around 1% of portfolio value - this seemed like an excellent move at the close yesterday, but now, given the further problems at Japanese nuclear reactors this appears to be going to zero.

So, overall I'm in a lot more conservative position than I have been. By far, the bulk of the gold and silver miners I'm holding are high-grade producers than can withstand virtually any down-turn in metal prices.

Here's the latest:

• Japanese stock market crash overnight as the size of the damage (and maybe some nuclear uncertainty/panic) kicks in. 
• World markets down hard. 
• US markets open down hard.
• Gold and silver down hard.
• Gold and silver miners (especially my Junior producers) down harder than gold and silver. 

My short-term trading plan is:

• Take the loss on the CCJ (Uranium Miner) shares. My variant perception that the nuclear power plant situation is "not that bad" and no significant radioactive material will escape was wrong. When you are wrong, admit it, get out and move on.
• Stay in the defensive position and watch the charts, especially on gold, S&P 500 and copper for a bottoming processing. 

Here's a summary of the moves I've made lately:

• Dumped the gold and silver options - not such a dumb move now.
• Went short the S&P 500 quite substantially - this worked out quite well, but it might have been luck.
• Went short copper substantially - is working well.
• Took a smallish loss on the Variant Perception trade on the Japan nuclear situation - oh well.
• Sold a bunch of gold and silver miners close to the start of a seemingly big correction - not bad, could have been done a little earlier and I should have been exiting the illiquid positions as the market became overbought.
• Decided to hold the rest of the gold and silver miners - we'll see whether this is a good decision.

At this point, I'm down quite a bit since the start of the year but am in a reasonably defensive position and don't feel very bad.

Having this down on paper helps me. Perhaps it helps you, dear reader.

MontyHigh, www.worldofwallstreet.us

Catching A Falling Knife: The Fear-Mongering "Nuclear Meltdown" Trade

I think this post  (click here) (hat tip Otto Rock's Inca Kola News) makes a clear case that the media are clearly overreacting. Having a basically correct Variant Perception can make for a good trade. UPDATE: Found the original article with pictures: http://bravenewclimate.com/2011/03/13/fukushima-simple-explanation/#more-3970

I expect I'll be buying uranium stocks near the bottom tomorrow (around 10AM?), preferably ones with long-dated call options. 

Know any mainstream uranium stocks that have long-dated call options? Cameco? Any other particularly good trading vehicles which should be hit hard in an over-reaction to by this weekend's media feeding frenzy?

MontyHigh, www.worldofwallstreet.us

For Gary BiWii... Gold To Copper Ratio...

I'm a very satisfied subscriber of Gary BiiWii's Notes From The Rabbit Hole (NFTRH). He provides the best (for me) visual way of understanding the global macroeconomic outlook as it affects the markets.

One of his main tools is the ratio chart. For example, the ratio of price of gold to other commodities (Copper in this case) is a good way of estimating the changing profitability gold miners (of which he and I hold a bunch).

Today I have a minor disagreement on the interpretation of the Gold:Copper chart.  He states: "Gold-Copper and Gold-General Industrial Metals hold support while remaining in
consolidation of the furious rise in 2008".

When I look at the chart (see above), I see the Gold:Copper ratio breaking above a downward falling trend line, popping above the 100-day moving average (which I think is a pretty important average) and is right at the upper edge of a downward falling channel. So, I'd summarize: "Gold:Copper seems to be reversing (bullish fundamentally for gold miners)".

By the way, given Japan disaster I expect to see gold pop (a bit) and copper go down tomorrow and I expect that the Gold:Copper ratio will nicely pop up and out of the channel.

Looking further I see that copper has broken down (or is at the edge of breaking down) from a clear head and shoulders pattern (which will take it under that 100 day moving average). This is a sweet enough setup that I will probably go short copper near the open tonight.

Leave me a comment with a link to a non-obvious chart that you keep going back to in order to keep an eye on what the markets are doing.

MontyHigh, www.worldofwallstreet.us

I'd Hate To Be Long Copper Today

Or... maybe Kitco is having some kind of data problem today.

MontyHigh, www.worldofwallstreet.us

Question For Commodity Trading Veterans: What Crashed Copper On 1/4/2005?

What was the news that triggered this? That's a 9% drop in one day! Precious metals and crude oil dropped at the start of the new year, but not like this.

I'd appreciate a reply if anyone can provide enough key words to let me research this.

MontyHigh, www.worldofwallstreet.us

 

Trading Eric Sprott "Hot Commodity" Funds

Eric Sprott, a stunningly successful money manager, has so far created four different commodity funds each allowing retail investors to participate in a "hot story" commodity. The most recent of these is a just launched silver fund, PSLV. This post ponders how to trade these hot commodities by looking at Mr. Sprott's fund charts. The funds are:

• U.TO, Uranium Participation Fund - Launched in the spring of 2005.
• MLY.TO, Molybdendum Pariticipation Fund - Launched in April 2007 and closed in 2009 (couldn't find charts for this puppy).
• PHYS, Sprott Physical Gold Trust - A gold ETF designed to appeal to genuine Gold Bugs.
• PSLV, Sprott Physical Silver Trust - A silver ETF designed to appeal to genuine Silver Bugs.

As a representive, extremely simple trading strategy, we assume that Sprott is a smart guy and knows what's hot and what's not, but that he only gives buy signals. We are on our own regarding when to sell. The trading strategy is:

• Buy Sprott's fund the day it starts trading.
• Exit on a daily close below the entry point. Reenter on a quick upward recrossing (repeat a couple of times if necessary), if we get stopped out during the first month of trading. This part of the trade protects us against Sprott being flat-out wrong. We assume that this won't happen, but we don't want to be suckers and every trade must have a stop. We give him a little slack when the trade just starts by having the reenter provision. 
• Exit on a 200 day simple moving average cross over. NOTE: Obviously it takes at 200 days of trading to get the first 200 day moving point.

Here's the charts as best I can reconstruct them.

Here's my comments on the above charts:

• U.to - quite a magnificent run up. If you waited to be stopped out by the 200 day moving average you would have netted a profit of roughly 175% in a little over 2 years. If you had gone short following that 200 day moving average crossing you'd be still short now a year and a half later and would have made another nice packet.
• Moly - Sprott got this one wrong, so wrong you can't even find a chart for it. Instead I offer the price of the underlying metal and the price of some representative moly mining stocks (GMO: General Moly Corp, TCM.TO: Thompson Creek Metals Company, MOL.TO: Moly Mines Limit, ROK.V: Roca Mines, AUA.TO: Adanac Molybdenum). The moly price itself was flat following the fund offering and the stocks popped roughly 50% for a couple of months. If you had been nimble and ready to bolt you could have done nicely. If nothing else you would have been stopped out by the offering price for not much of a loss.
• PHYS - Gold has been doing quite nicely. With the above trading system you'd be up 27% in roughly 10 months and still long.
• PSLV - Silver has been very strong and, following the above trading sytem, you'd be up roughly 25% in a month and a half and still long.

Sprott has made (or is making) quite a lot of money (and quickly) for his retail investors in three of four cases where he has started a commodity fund. You could argue that he is four for four in that he even made money quickly for his Moly investors (if they were nimble enough to get out quickly using a trailing stop or something similar). That seems quite attractive to me. So, just being very simple and following Sprott's nose for the hot commodity seems like quite a nice way to make money provided you are willing to be stopped out when either you start losing money relative to the amount invested or see a 200 day moving average cross. Obviously the nimble trader can do much better with individual stock picking or with more active trading.

The uranium situation points to the idea that going short after the fad is over is another way to make a packet of money, especially with individual stock picking. I'm already thinking about how to play the Rare Earth Elements craze (e.g. MCP: MolyCorp) on the short side. I'll be waiting for at least a 100 day (and probably a 200 day) simple moving average crossing to consider going short. I find it interesting that Mr. Sprott missed the boat on this Rare Earth Elements and, if he joins the party at this point (late), my respect for him will drop a few points.

To summarize, dear reader, what does Sprott have that you and I don't have and what do we have that Sprott does not. Sprott's edge, as I see it, is that

• Sprott is probably smarter than us.
• Sprott has decades more experience scrutinizing the markets than I (and perhaps you, dear reader) have.
• Sprott is probably more obsessive about investing than we are.
• Sprott has virtually unlimited resources for tapping the world's best research data and analysis (at least compared to us). 

Our edge, dear reader, is simply that we have much less money to invest than Sprott and so we can get out when the jig is up. Simply being able to admit when we are wrong and moving on is our edge. Mr. Sprott invests in completely illiquid Jr mining companies where he holds huge positions that he just can't sell. If the underlying commodity tanks, he's stuck. We aren't, dear reader.

In conclusion, I think following Sprott around and watching what he's buying makes a lot of sense. I expect I'll be doing this more and will start following his individual stock purchases.

As far as just Sprott's commodity funds go, I have another post in mind that I'll probably put up later this weekend.

What think ye?

MontyHigh, www.worldofwallstreet.us

Coro Mining (COP.TO): Bought On Fundamentals, Now The Chart Says Buy

Coro Mining is an Argentine copper explorer with an excellent copper deposit. Excellent in every way except that the part of Argentina where the deposit lies is somewhat hostile to mining. I bought in earlier when a permitting meeting was coming up where there was a good chance for a better than expected outcome (yes, folks... IKN's Otto Rock has a real edge and is making money for his subscribers).

The chart now shows a close to perfect cup and handle breakout with a retest of the breakout. The cup and handle target is roughly 50% higher than the current price. That's a pretty high-reward to risk chart formation, in my humble opinion. Of course, if it breaks down below $.70 is probably time to take a loss (according to the chart).

Do your own due-diligence, dude.

MontyHigh, www.worldofwallstreet.us

I'm Bearish The US Stock Market, But I'm Not Suicidal

I got creamed from from the summer of 2007 thru late 2008 by sticking with positions based on two faulty fundamental-based outlooks:

• First that my base metal miners were so undervalued at current metal prices that they would be fine even if base metal prices turned down. Instead, the stock prices got murdered in anticipation of metal price declines that, when they came, far exceeded my expectations.
• Second that gold would rise as a safe have pulling my undervalued Jr gold producers up with them. Instead, gold got hit because gold traders were leveraged up and needed to liquidate and Jr gold producer got hit worse than other stocks because, being Jr, they were considered "riskier".

Now, we seem to be in a similar situation: My my fundamental outlook is for the US to go thru an economic contraction pulling the general stock market down with it as the deleveraging from the credit bubble continues. Instead, the general market is going higher.

This time, I'm using technical analysis to keep my possibly-flawed fundamental outlook from turning into another massive money-losing disaster. When the S&P 500 crossed 1130 today, I closed my bearish positions: S&P 500 put options and retail ETF (XRT) put options for a smallish (around 1% of portfolio value) loss.

Here's the chart which made me close those shorts. As you can see, the S&P 500 broke thru that resistance at 1130. This is a perfect example of the Technical Analysis Maxim: double-tops usually hold, triple-tops are usually broken. From here there is just minor resistance after another 3 or 4 percent rise (say 1176) and really no significant resistance until the year-to-date high at 1220.

Its possible we'll get whipsawed and the S&P will fall back below that resistance, but I'm not going to let a losing position get worse and worse on that kind of hope. I'm going to use Technical Analysis to keep me from the kind of big losses I experienced in 2007 and 2008. 

This leaves me with some cash (not much), but mainly long precious metals (Gold and Silver call options) and Jr gold producers both of which have been jumping into overbought conditions. I have my finger on the sell trigger for these as well, especially the silver options. Its going to take at least 2 down days to get me to sell because there seems to be so many buyers waiting for a dip get increase their positions.

Well, that's what I'm doing. So far, adding Technical Analysis to my arsenal seems to have not reduced my upside much but seems to have helped limit my downside quite a bit. How do you keep an error in judgment from turning into a disaster? Leave me a comment.

MontyHigh, www.worldofwallstreet.us

Investing In Paladin Energy And Uranium Miners: How High Do You Think Uranium Will Go?

I'm filling out my spreadsheet with miners of different products and just got around too modeling perhaps the premier growth uranium producer, Paladin Energy (PDN.TO). I'm rather surprised to find that this company's most recent quarterly profits (quarter ending Mar 2010) show a loss (not a profit).

In that quarter PDN.TO was selling Uranium at $50.49/lb. Uranium is different from other metals (e.g. Cu, Au, Ag, Zn and Pb) which have well-developed futures markets and where everyone sells (apart from hedging) for roughly the futures "spot price". Uranium has a spot price (which was around $42/lb and has recently jumped to $46/lb) and a long term price which is individually negotiated between the miner and their customer and which is ordinarily higher than the spot price. Apparently most of PDN.TO's uranium is being sold via long-term contract which means it is not as leveraged to price hikes in the price of Uranium as a Uranium-Bug might wish.

PDN.TO is on track to grow from around 4 M lbs of U3O8 per year to 7 M lbs of U3O8 over the next year or so. The spreadsheet that follows shows the relative valuation of a gold miner, a copper miner, a zinc miner and PDN.TO as of the end of 2011 assuming metal prices stay constant and the companies meeting their production guidance. In the case of PDN.TO, I further assume that the cost per tonne mined and the ore grade is that of the most recently announced quarter.

PDN.TO (with these assumptions), unlike the others, is barely profitable (see rows 9 and 10) and is clearly more expensive in terms of the other key metrics. I conclude that PDN.TO's stock price is currently "inflated" by the Uranium story and the expectation that price of Uranium is going to rise.

So, how much will the Uranium price have to rise to make it comparable (assuming the price of copper remains constant) to EQN.TO? With the price of Uranium doubling to 101$/lb we get the following spreadsheet summary:

This doubling of the Uranium price puts PDN.TO equivalent to EQN.TO on a price to earnings before depreciation, amortization and hedging (Price / EBDAH) basis and comparable to OGC.TO on a price to metal in the ground basis. PDN.TO has a better pipeline for continued growth than either EQN.TO or OGC.TO, but this growth does not offset (in my view) the marginal profitability of PDN.TO at current Urnaium prices.

So, my take-away from this analysis is that:

• Uranium is still a "story" situation, not a pure value situation.
• Investing in Uranium stocks will only work out if the Uranium bugs are right and a serious rise in the price of Uranium is going to take place.
• Uranium stocks don't fit into my resource investing approach which depends on having two margins of safety. My approach to only invest when I can find:
• • Resources where I expect a rising resource price
  • And resource companies producing such a resource which are seriously undervalued at current prices.

At this point, I'm convinced of neither aspect of Uranium companies:

• Rising price of Uranium - I'm not bullish because the upcoming global economic downturn throws all commodity prices (except Gold) into question in my view.
• Seriously undervalued at current prices - as you can see, PDN.TO is losing money at current prices. As such they (and by inference all Uranium producers) don't qualify as seriously undervalued.

If you are a Uranium Miner investor please leave me a comment and bring me up to speed. What price for Uranium are you expecting and what is the time frame and catalyst for that price arriving? Or, are there Uranium Miners that have rocks that are sufficiently "better" that they can make serious money at current Uranium prices?

I'd appreciate your input. I'm not trying to "slam" Uranium stocks, I'm just looking for true value and haven't yet found it in the Uranium space.

MontyHigh, www.worldofwallstreet.us

P.S., An interesting thing in the first table above is PDN.TO's negative values for rows 15, 16 and 17 while PDN.TO is slightly profitable with a positive row 10. The reason for this is that PDN.TO is currently mining a higher grade of ore than the average across their reserves and resources. Using the  average grade and continued per-tonne and fixed costs I estimated PDN.TO to remain unprofitable on an EBDAH basis at current Uranium prices.

How Do You Like My Miners Spreadsheet Summary?

This page gives my summary for the miner's I've gotten into my spreadsheet for Q4 2011 (just a little more than a year away) at current metal prices. The spreadsheet is not complete. There are caveats for (or flat-out mistakes in) for the numbers given. I'm not recommending any of these stocks although I own some shares of some of them. Still, this might be some help to you in your own due-diligence.

I've put green boxes around stats that I find appealing.

• Oceana Gold (OGC.TO) - a likable, profitable, steady mid-tier gold producer in politically safe New Zealand that seems cheap on a price to minerals in the ground at current prices and extraction costs (Price / M&I In-Situ EBDAH At Current Rate). I own a bunch of these shares.
• CGA Mining (CGA.TO) - a mid-tier gold producer which I hold some of, although from this table its hard to see why. Seems like that $795 cost before depreciation, amortization and hedging / oz cost is hurting its valuation. 
• Minera Andes (MAI.TO) - owns half of a now profitable gold/silver mine in Argentina, has a decent advanced copper exploration project (whose valuation does not appear in the table) and a bunch of exploration upside. Seems likable based on the profitability of that mine, but the company has a hostile partner running the mine and is not getting cash-flow from the mine. I own a little.
• Gold Ore Resources (GOZ.TO) - a very profitable (if they meet their guidance and if the gold price stays high), high-cost gold producer in Sweden. I own a little. Look out below if the price of gold takes a big hit (but also should sail if the price of gold stays the same or pops).
• Gold Resource Corp (GORO.OB) - emerging low-cost gold/silver (with Cu, Zn, Pb byproducts) Mexican producer. I own a bunch of these shares. I suggest you check out their webcast presentation if you aren't already familiar with it.
• Medusa Mining (MLL.TO) - a very-low cost Phillipine gold miner with significant exploration / expanding production upside. High-quality and high-price. I own a little.
• Great Basin Gold (GBG.TO) - an emerging mid-tier gold producer with a mine with a lot of oz in South African (and a high-grade underground mine in Nevada). Lots of debt. Seems interesting.
• Breakwater Resources (BWR.TO) - a somewhat high cost zinc producer that should be very profitable if the price of zinc can hang in there. Can it? I'm kind of dubious as the USA economic outlook seems pretty dismal.

Leave a comment if you would like to collaborate with me on filling out/improving the spreadsheet (or you have something else to say).

MontyHigh, www.worldofwallstreet.us

OGC.TO, CGA.TO, BWR.TO And EQN.TO Compared

As part of retracting my earlier blunder on market valuations of zinc and gold I offer the following spreadsheet which compares a couple of gold miners (Oceana Gold and CGA Mining) to a zinc miner (Breakwater Resources) and a copper miner (EQN.TO). EQN.TO's numbers are much improved over Q1 and are based on production results for Q2 and rough estimates of the resulting financials.

I find the concept of an gold-equivalent oz (Au Eq Oz) as a useful tool for comparing miners producing different metals. The ideal is to convert a miner's metals in Au Eq Oz using certain assumed metal prices, in this case, the following prices (an approximation of recent prices with gold being cheated a few percent):

Au: $1156/oz

Ag: $18.4/oz

Cu: $3.37/lb

Zn: $.94/lb

Pb: $1.00/lb

Here's the spreadsheet results:

Breakwater is clearly the most undervalued at current metal prices (see, for example, the price to EBDAH ratio or the price to M&I insitu value ratio).

The cost per Au Eq Oz (excluding Depreciation, Amortization and Hedges) row shows a roughly equivalent profit margin for Breakwater at the assumed metal prices. If Breakwater is right about zinc supply and demand and zinc prices hang in there or go higher it will be quite a nice investment.

I'd say its time for more due-diligence on the zinc supply / demand outlook.

Sorry for the earlier blunder,

MontyHigh, www.worldofwallstreet.us

Planned Zinc Supply Growth Inadequate

I went thru the Breakwater Resources (BWR.TO) presentation this morning (cick here). Here's what I thought was the most interesting slide:

A ten year prediction is quite a stretch, don't you think?

Still, I remember from the glory days of 2007 the claim that several big zinc mines were closing around 2011 to 2012 and that there would be a deficit. I also remember that when the price of zinc went up that all sorts of mine re-openings were kicked off and all of those reopenings promptly shutdown when the price of zinc collapsed.

So what think ye? Is there a good way to get a handle on the supply part of zinc fundamentals going forward? Is there reason to think that zinc supply may have a rough time keeping up with demand?

MontyHigh, www.worldofwallstreet.us

OGC.TO vs BWR.TO: RETRACTION...

RETRACTION: I found the spreadsheet below had a 10-fold mistake in Breakwaters number of shares and so I am retracting this story.

MontyHigh, www.worldofwallstreet.us

Copper Overbought Trading System And The Current Situation With Copper

Here's a copper chart that highlights cases where copper has been overbought since the post-crash lows.

Here's a trading system:

• Enter short when the RSI falls from above 70 to below 70.
• Exit when the RSI falls below 50.
• Exit (stopped out) on the RSI again touching 70.
• Exit (stopped out) on the price of copper achieving and holding for two days a near-term high.

Here's the graphs for the four trades that would have occurred since the bottom. Three of those four trades are winners.

Here's the table of the results of the four trades.

 

Here's the results of the four trades:

 

I see that three of four trades are winners with and average of 2.05% gain and that the worst loser is less than the two best winners. That's pretty good. I also see that both of the Aug 2009 trades would have turned out worse had the stops not been carefully tuned. Yuck.

Now, here's the current situation with copper:

With this trading system we would have entered on Aug 3 and been stopped out Aug 4 and reentered Aug 5 (and currently be with a trade open).

I'm kind of tempted to enter Sunday Night (especially given the recent Copper inventories bottoming at the LME) even given the anticipation that the USA Federal Reserve is about to announce (on Tuesday) some kind of Quantitative Easing (which would goose Cu prices).

I'm tempted, but what should I do? Well, how about rolling up our sleeves and looking for more data to try the trading sytem out on. For example, going back into 2008 we find three more trades (two of three are winners):

And here's the results:

The loser was pretty small. The average winnings went up. The current situation is another of these cases where we have a reentrance after being RSI 70 stopped out. So we have two of those and they are both winners. Well, its pretty tempting. I don't know what I'm going to do and this certainly isn't a recommendation. If it weren't for the impending QE2 possibilities, I would probably put a small trade on. 

Well, that's interesting. Let's continue back in time to 2006 (no charts this time). The results remained attractive even thru these very bullish for copper years. I'm starting to like this system. One thing I like is that the losers all "stop out" immediately. Another thing is that the worst loss is only a little more than twice the average of all the trades. One thing I don't like is the stop that really counts is the "touching or exceeding RSI". If this is your only stop it leaves you with the potential for unlimited losses.

What think ye? Is it worth going short copper according to this trading system? Is anyone else out there eyeing copper and wondering whether its trade-able?

MontyHigh, www.worldofwallstreet.us

FWIW, here's the results spreadsheet: Download 20100807cuov

Chart Of The Day For Inca Kola's Otto Rock

With two questions for IKN's Sir Otto:

1. How long has it been since copper inventories were higher than they were 5 days earlier?
2. How long can the price of copper keep going up while copper inventories are rising?

MontyHigh, www.worldofwallstreet.us

Is Silver An Industrial Metal Or A Monetary Metal?: Silver/Copper Ratio

Everyone (myself included) looks at the gold/silver ratio chart. A rising value indicates rising fear of economic distress.

Right now I'm long silver and short copper. Seems like it makes sense to the look at the Silver / Copper ratio.

There is lots to see in this chart. Here's what I see:

1. Silver did way better than copper in the end of 2008 thru Mar 2009 crash (see the green rounded rectangle). CONCLUSION: Silver is more of a monetary metal than an industrial metal.
2. Silver did far worse that copper in the Mar 2009 thru April 2010 "Reflation" run (see the red rounded rectangle). CONCLUSION: Silver is more of a monetary metal than an industrial metal. 
3. Silver has seriously been outperforming copper since the start of May 2010. CONCLUSION: End of 2008 reprise may have started and so a double-dip recession has probably started and look out below for the general stock market.

I think this deserves more thought (probably looking at longer timeframes). Leave me a comment on what you see and think.

MontyHigh, www.worldofwallstreet.us

Chart Of The Day: Copper Inventory Problems

As you can see [Green Line], last year the inventories fell, in three months, four divisions (200K tonnes) from their February peak. This year [Red Line], inventories have fallen, in almost three months, just one division (50K tonnes).

This means that the copper supply versus demand is softer this year than last year (and yet the price is much higher). Seems bearish for the price of copper.

I'm short copper, so maybe this is just "confirmation bias" or "talking my book". 

MontyHigh, www.worldofwallstreet.us

Quick And Dirty Backtesting: Copper 100-Day SMA Trade

Here's a quick and dirty way of doing backtesting of a trading algorithm using stockcharts.com (see chart below):

• Start a rectangle at the point of entry and end the rectangle at the point of exit (in the example below we are following a very simple 100-day moving average trade where you go long when the price closes above the moving average and close the long and go short when the price falls below the moving average).
• Color the rectangle GREEN if the trade made money and ORANGE if the trade lost money.
• By eyeballing the relative size of the GREEN and ORANGE rectangles you can eyeball whether the trading system made money.

Of course, its a little hard to put in important things like entry stops and trailing stops, but it does quickly allow you to assess the situation.

With the chart below, I conclude:

• Copper, for the last 5 years, has tended to trend strongly.
• The 100 day moving average seems to filter out most of the fluctuations and keep most of the big moves.
• A problem with moving average trades is getting "whip-sawed" out where the price dithers around the moving average. You can lose a couple of percent (unleveraged, more with leverage) each time this happens.
• As you can see, with copper for the last five year at least, the number of whipsaws if roughly equal to the number of winning trades and the size of the winning trades grossly outweighs the size of the whipsaws. Even without stops there were no big losing trades. Some of the shorter trades had situations where all of the profits got away, but there were no big losing trades.

At this point, I'm waiting for copper to cross the 100 day moving average so I can try this out. I thought it would be today, but it looks like that is not going to be the case.

Let me know what you think about this, whether you ever to any backtesting and what platform (technology) you use for backtesting.

MontyHigh, www.worldofwallstreet.us

Why Copper Is Over $3.50/lb... Hat Tip To IncaKola News (IKN)

Otto finds another great chart for you at IKN (although that 2001 should be 2010 type-O is a little ugly).

My commentary: Look at where the world economy is growing... in places that need major upgrades to their infrastructure. That's why copper is at $3.50/lb. And yet the English language news sources are focused on all the areas where growth is stagnant and will remain stagnant (Europe and perhaps to a lesser degree USA). Remember that "divergence" everyone was talking about in 2007, where the emerging market economies kept growing despite a recession/slow-down in the West? It sure didn't work out that way in 2008/2009, but we may get it on the second chance if the USA and Europe slip gently into a double-dip as I suspect they will either later this year or next year.

MontyHigh, www.worldofwallstreet.us

P.S., IKN is a great source of out-of-the-mainstream (and valuable) investing news. The IKN subscription newsletter is the best stock-picking news letter I know of.

Chart Of The Day: Copper Inventory Levels

See anything seasonal in this chart?

Was that a 1 year fluke or does it happen just about every year this time?

How does that seasonal inventory drop affect the price of copper?

MontyHigh, www.worldofwallstreet.us

What I'm Thinking About The General Markets, Gold, Copper

I hear the Jay Taylor, the news letter writer is all gloom and doom on all stocks (including gold miners). I presume he's calling for deflation.

I'm:
o Watching gold closely. If it goes below $1040 (what Indian govt paid) and stays there I'll start selling Jr miners hard.
o Bearish on copper - short something like 20% of my portfolio in the copper futures market. If support at $3.00/lb breaks down then look out below. Inventories are still ramping up at around 10000 tonnes/week. Yikes!
o Bearish on the general market - at least until the next round of quantitative easing is complete.

There's a lot of people using the financial trouble in Greece to their advantage:
o Germany - want the Euro to go down to boost their exports.
o USA (Bernanke) - wants the dollar to go up so that he can announce another round of QE.

o China - wants the dollar to go up (pulling the renimbi with it) to quench growing inflation.

The way I currently look at the inflation / deflation debate is as follows:

o Threatened or incipient Deflation promotes inflation - when deflation looms its ugly head then...

o The central bankers start printing money (via their governments going crazy with deficit spending and with the central bankers monetizing that debt by buying the government bonds)

o Resulting eventually in a reflation (inflation) trade.

Right now we are in a threated / incipient deflation wave.

I expect this trend (deflation) to continue for around another month at least. Will back out of the copper shorts if another round of QE is announced. Will continue to get shorter as long as inventories are rising the price of copper keeps falling. I think the price of copper has been trending strongly and will continue to do so.

I think there's a decent chance that the fundamentals for gold (central bank and investor buy, especially in China and India) will stop the gold price slide very soon. We'll see.

That's how I see it.

MontyHigh

FWIW: Recent Trades

Closed my PALM short for a 12% loss on Friday (based on the technicals). Woulda, coulda, shoulda had a trailing stop when I was up by 10%. 

 

Went short Copper (HG May) about 5% of my portfolio Friday. Stop is a close above the recent high (around $3.50). Will go short more if the price degrades as I expect. Decided to go short because:

(a) The price is way above the price of opening a new copper mine (and keeping all the existing mines chugging) while inventories keep rising and rising.

(b) Sentiment for the general market is way overbought and I think copper will trade with the general market and is similarly way overbought.

(c) My deflation oriented investing news letter (Bob Hoye) gave a go short signal this week.

(d) The recent highs provide a nice stop exit point.

 

I expect there's a good chance I'll be stopped out on this (for a 5% loss unleveraged), but there's also a  good chance of making a killing (with a price fall to the $2.50 level, for example, for a 30% gain).

 

Its kind of a hedge for all of my illiquid Jr gold mining stocks. Portfolio is up around 6% YTD. 

 

We'll see. 

 

MontyHigh

How do you explain the price of Copper?

Its now touching $3.50/lb when inventories have been rising for month and every miner in the world can produce profitably at $2.50/lb. 

 

Its probably just momentum insanity, but it could be some kind of grotesque flight to safety against some looming financial disaster or inflationary spike.

 

What think ye? I think I'm going short hard as soon as the momentum gives up and turns down (providing inventories are still rising). I think its momentum insanity and that I'm going to be quite rich (not that I really want to be quite rich) when Wiley Coyote realizes he is well of the cliff's edge. 

MontyHigh, www.worldofwallstreet.us

Honestly, leave me a comment if you think you can explain the copper price action.

Sumitomo Mining And I Think Alike About Copper

http://www.mining-journal.com/production-and-markets/copper-rally-may-halt-on-china,-sumitomo-mining-says

Here's some snippets: 
'"Excessive imports mean much of the purchased metal was just stored, raising the risk that they may sell it back to the market and depress prices," Koichi Kaku, general manager at the Tokyo-based company’s copper and precious metals sales department, said. Imports may have exceeded manufacturing demand by as much as 1.3Mt in the first half, he said...

"I don’t think copper prices climbed because of a dramatic improvement in supply-demand conditions," Kaku said. "I’m skeptical about a strong recovery in the market."

Copper exports by Sumitomo exceeded its domestic sales for the first time in the first half, led by Chinese demand, Kaku said. The company didn’t ship the metal to China this month on the spot market because of a lack of demand, only supplying volumes committed under term contracts, he said.'

I'm short and underwater, but I'm watching the LME copper inventory numbers which seem to indicate a change in the demand/supply situation to over-supply.

"But store up for yourselves treasures in heaven, where neither moth nor rust destroys, and where thieves do not break in or steal; or where your treasure is, there your heart will be also."

MontyHigh

Jr Mining Stock Investing Is A Snake Pit: GORO.OB, NGG.V and CGC.TO

Today we see GORO.OB Up / NGG.V Down...

GORO.OB is up 5% on no news on a down day for gold and for gold mining stocks (GDX). I expect some good news has leaked. Permit or drill results?

New Guinea Gold (NGG.V) is down today on the public announcement of bad production results from Sinivit (as I expected, click here) that were known internally for over a month. It probably leaked and triggered the stock price fall from $.30 down to $.20. The fact that it is holding above $.20 sort of reinforces the fact that insiders knew what was going on and are buying back in.

Finally, we have this stockhouse bit about Capital Gold Corp's takeover by Gammon Gold:
"Lookin' Out For Number 1...

Well,the sentiment re the CGC Management team seems a bit sour.And rightly so,IMHO.
It was @ March 5 or 6 they granted themselves Options at $.44 when the stock price was at $.59.That I found pretty crass and sold out.That shows where Management's interests lie...and it isn't with the shareholders,whose money helped bring this Company to profitability.
March 12,Gammon announces the friendly takeover offer details.Now,I don't think this deal was negotiated in 1 week.So their $.44 Options gets even more smellier.
Knowing a deal is forthcoming,with a likely stock price jump,simply makes it almost criminal.And they announced the Options went mainly to workers.Not by the insider trading figures.
Any further comments would be superfluous.
Except,maybe,.......if part of the arrangement puts some of these miscreants on Gammon's Board or other cushy position,would you really want to hold onto those Gammon shares? 'Nuff said. "

Well, the point is, that everyone investing in these Jr Canadian stocks should fully understand what a snake pit it is with insiders and management taking advantage of passive investors like ourselves most of the the time.

I'm hoping this post kicks off a little discussion regarding how you personally deal with the fact that its a crooked game and how you detect/anticipate cheating and avoid getting unduly cheated yourself.

At this time, I'm handling it by looking more and more at management shareholder friendliness as a key criteria for buying a stock and dumping stocks where I see crooked things happen.

NOTE: Even though I've witnessed the recent NGG evidence, I have not dumped. There is just too much value there (click here).

MontyHigh