written by reader Thoughts from Myron — A Contrast in Gold Miners

by takeprofits | April 20, 2014 3:43 pm


[Ed. Note: Today we’re pleased to present the latest piece from Myron Martin, who writes primarily about junior miners. As always, his words and ideas are his own, and he has agreed to our trading restrictions.] 

Greetings Gumshoers. I still have a tremendous amount of material to go through from the PDAC Conference in early March, with dozens of companies yet to research. I appreciate the input from readers, all I ask is that you exercise some patience as I can not get to everything right away and also keep up with the flood of e-mails coming in daily with important updates on stocks I am following for you. One of the highlights for me at PDAC this year was the McEwen Mining (MUX) shareholder luncheon (see picture below) and the opportunity to meet and talk to Rob McEwen, who outlined his conservative guidance for the company in 2014. Rob, for those who don’t know, was the far-sighted CEO of Goldcorp (G.TO GG) who challenged his people with personal incentives that built the Red Lake Ontario miner into one of the leading powerhouses in the industry today. As a high-growth gold producer in the Americas, Rob, now being located in the U.S., with mines in Argentina, Mexico and Nevada, has a goal of qualifying to be the first major gold miner to be on the S&P 500. I believe in his vision, given his past success and the solid foundation he has built since leaving Goldcorp. I’ve owned Goldcorp myself in the past, and it is so well known that I hardly need to do a profile on the company beyond saying that it is certainly an “anchor” for any precious metals portfolio and is available at a huge discount today, as are most (well run) companies that have survived the manipulations by the government/banker war on gold.

By contrast, the former #1 producer Barrick Gold (ABX), has fallen on hard times. In fact I have read several articles lately by analysts suggesting that Barrick might even end up going bankrupt. My reaction is that nobody in the precious metals field would be more deserving should that actually be the ultimate outcome of the brutal market the past two years. A comparison of McEwen Mining with Barrick’s current problems brings up the question of whether Barrick even qualifies as “well run”? How often have I mentioned that management is the #1 thing I look at when considering a stock for investment. Personally, I have never trusted the management of the establishment’s favourite gold company from the get-go, and have never had any desire to own it. They have an entitlement mentality that is disgusting. If they think paying an $11 million signing bonus to get an executive they think can turn the company around is a good idea, then it only emphasizes how clueless they really are. They certainly won’t be doing it with any of my money. Contrast that thinking with that of Rob McEwen, who built Goldcorp to the powerhouse it is and now has $25 million of his own money in his new venture while taking only a token $1.00 salary, so his personal fortunes are fully aligned with shareholders. The contrast in thinking is pretty glaring and I am betting my money on a guy who has “been there and done that” and knows what it takes to build a successful company. This press release[1] has their latest production figures and 2014 conservative projections. There is much more material on their website[2] to round out your due diligence on the company.

Rob McEwen has aligned his company with the Hochschild Group, one of the biggest and financially strongest miners in South America, and even though the McEwen stock price has been knocked down along with most others in the sector, it represents, in my mind, one of the best long-term investments in the precious metals sector. Having reached 52-week highs of $3.66 on March 12th and $4.08 on the 14th, it shows, given its strong underlying foundation of assets and financial backing, it will move when the market corrects. Today you can buy it at a bargain basement price of $2.61 on the TSX and $2.38 on the NYSE! Something I just learned is that, having viewed its public image as primarily a gold-focussed company, I hope you noticed in the McEwen production report I referenced above, that the three mines they own are major silver producers as well. First quarter production is shown as 32,146 gold equivalent ounces (eq), consisting of 20,062 ounces gold and 725,025 ounces silver, up 14% year-to-year, and is on track for full year production of 135,000 to 140,000 gold eq. ounces calculated at a 60:1 ratio. As many of you may know, silver-to-gold ratio has historically been as low as 16:1, and should that ratio restore itself over time, then the silver by-product could become quite significant if precious metals make a strong recovery over the next couple of years.

Numerous analysts predict such an outcome for silver, and for one example read this article[3]. 

I have only two regrets in respect to PDAC: first, according to my business card count collected, I actually talked to 130 company executives I need to follow up on and have had numerous phone calls already as a result. But even still, in four days I actually covered less than half the companies there, and that without sitting in on lectures/presentations. This gives you some perspective of how big PDAC is and how much work I do to bring you in-depth research and company profiles.

myron modified[4]My second regret is that while they took my picture with a 400-ounce gold bar, they wouldn’t let me take it home. That is just about what I need to actually retire, so I guess I will just have to continue to do what I enjoy and hope in the years ahead precious metals will return to the roaring market of 2009-2010 that allowed me to more than double my portfolio’s value. I firmly believe that kind of an opportunity is forming right now, even if it takes a year or two to fully play out. Don’t miss the opportunity to position yourself so you do not get caught by surprise.

OceanaGold Corp. (OGC.TO OGCDF) is listed on the TSX (Toronto), the ASX (Australia), and also on the NZX (New Zealand), where three of their four mines are located: the Reefton and Macraes open pits and the Fraser underground mine, all on the South Island. As a mid-tier multinational with a C$85 million market cap, it has excellent liquidity trading on average 2.4 million shares daily, $25 million in cash and a $30 million additional line of credit. What is totally unique in the industry to my knowledge is that their fourth mine, the Didipio project, located in the Philippines, was commissioned in the second quarter of 2013 and in its first year of production, exceeded company guidance with the entire mining cost for Didipio covered by copper, while also producing 95,000 oz. of essentially free gold, and costs are still going down. With lower debt levels reducing interest expense for 2014, savings are projected to fall between $10 and $15 million, with further cost savings a top priority for 2014.  Here is their corporate presentation[5] for March 2014.

Copper production at Didipio in 2014 is expected to range between 21,000 to 24,000 pounds plus 85,000 to 95,000 ounces of gold, solidifying OceanaGold’s position as one of the lowest-cost gold producers in the world. OceanaGold has outperformed its peers, rising 66.67% in the past 3 months. One analyst describes Oceana as “one of the safest investments in the gold sector currently, and likely to continue to be a top performer for 2014″. This current, temporary pull back in just about all precious metals shares, I strongly believe, provides a great opportunity to begin building an initial stake in these companies while the price is down. To give you even greater downside protection, I suggest you decide now much to allocate to this stock (up to 3% of your portfolio), buying in two tranches. If you buy half before April 29th, when they report their previous full year and first quarter 2014 results, should the market react negatively for any reason, you have the other half to average down on any dip. My buy-up-to price is $3.25 on the TSX or equivalent on the other exchanges.

The strength of the New Zealand dollar has allowed Oceana to substantially reduce their mining costs even further compared to their peers ($44 million in 2013) and with all-in sustaining mining costs averaged across all their mines falling between $750 and $850 per gold ounce, they are in an enviable position compared to most other primary gold producers. The total company gold reserves come in at 3.4 million ounces, representing a juicy takeover morsel for some larger company and should fetch a good premium on a buyout. While Didipio is the rising star, with the three New Zealand mines adding 190,00 to 210,000 ounces of gold for a total 275,000 to 305,000 total company ounces projected for 2014, at such low production costs, I challenge anyone to find another gold company producing that many ounces for such a low cost. If you can, I am a buyer.

Returning to a theme from my last two columns, New Zealand’s Central Bank was the first among developed nations to raise interest rates (as then reported), because of their strong dollar, based on a robust agriculturally-based economy. This makes New Zealand an excellent diversification for declining U.S. dollars as well as a great economy in which to operate for an established miner like Oceana, which has been operating in New Zealand for 20 years. As was pointed out by a reader, Agria Corporation is a Chinese company trading symbol GRO as an American ADR. It is a big investor in New Zealand’s largest agricultural distributor, and remains a “buy” in my books. No other company is as well positioned to supply the huge food needs of the burgeoning middle class of Chinese citizens able to afford a better and more broadly based, higher protein diet.

For the record, I have owned OceanaGold since 2010 and believe it has ten-bagger potential; just compare its production and price with established mid-tier producers. I also own McEwen Mining stock for nearly a year and will not trade in either until you have had at least three days to get your own orders in lower than what I paid.

  1. This press release: http://www.mcewenmining.com/Media-Events/News-Releases/News-Releases-Details/2014/McEwen-Mining-Q1-2014-Production-Results/default.aspx
  2. website: http://www.mcewenmining.com/
  3. read this article: http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/4/10_Shocking_Charts_Show_Silver_Set_For_A_Staggering_$70_Surge.html
  4. [Image]: http://www.stockgumshoe.com/wp-content/uploads/2014/04/myron-modified2.jpg
  5. Here is their corporate presentation: http://www.oceanagold.com/assets/documents/Presentations/140327-OGC-Corporate-Presentation-March-FINAL.pdf

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