Friday File: REITs, First Mining and Gold

by Travis Johnson, Stock Gumshoe | July 15, 2016 6:35 pm

In which your Gumshoe checks in on Healthcare REITs, First Mining Finance and gold, and Solves a

Today I’m breaking up our Friday File into two segments, which many of you have noted that you prefer — one part is a teaser pitch solution, the other is an update on a few stocks that I own and/or have suggested to the Irregulars. The teaser pitch is a look into Cabot’s “Stock of the Next Decade” and you can find that here[1], and the updates are… well, right below this paragraph.

Our hospital REIT Medical Properties Trust (MPW) has now finished more than what they said they would do in terms of “fixing” the balance sheet — they’ve now effectively refinanced $1 billion of debt this year at an average rate well below 6% ($500 million in February, when things were much dicier, at 6.375%, and another $500 million just this week at 5.25%). That, combined with the $500 million+ net from their asset sales earlier in the year gets rid of any near-term risk from being overly levered. The cost of capital is still fairly high for MPW, and they do still need to grow and they have some small exposure to European currencies, so as the price recovered to near old highs I sold a bit of my MPW to rebalance among healthcare REITs last month, and could do so again at some point if other REITs look relatively appealing (most likely those healthcare REITs I already own, OHI, VTR and DOC). That’s mostly because my MPW holdings are still almost twice as large as my holdings in other healthcare REITs, which exaggerates my preference for the shares.

I think MPW is a significantly safer bet today than it was six or nine months ago and I continue to like their performance and the solid 6% yield (which they raised last quarter), but now that they’ve recovered to a solid valuation this is really a sector play for me more than a specific company that I want to dramatically overweight versus its peers.

Omega Healthcare (OHI), by the way, also just raised their dividend… but they do that every quarter, so it’s only news if they stop — that’s arguably the riskiest of the bunch since it’s focused on the skilled nursing sector where reimbursements are critical and some operators have had trouble… and also, appropriately, the one with the highest and fastest-growing yield.

It’s hard to focus much on a specific performer in the REIT space, since they’re almost all doing so phenomenally well — the average REIT (as represented by the VNQ ETF) is up twice as much as the S&P 500 so far this year even if you don’t include dividends. The REIT sector is not cheap, and it’s not a huge opportunity to buy, but it’s a nice bit of ballast in portfolios right now and REITs and gold have been able to make up for quite a few laggard sectors so far in 2016… both benefit from the expectation of continued low interest rates, partly because that makes even historically low REIT yields look pretty good and partly because investors deciding between the 10-year bond and gold for some sort of “safety” hedge against equities or currency panic now only give up a 1.5% yield if they choose bonds over gold. The market as a whole seems a little giddy with undeserved optimism to me right now, and steady non-cyclical REITs (like healthcare) and gold give me some feeling of stability… that could disappear quick if interest rates rise faster than expected, but that’s why it’s only part of my portfolio.

As I’ve noted before, thinking about the interest rate exposure of your portfolio as a whole is a useful exercise — banks and insurance companies should theoretically benefit from rising rates, in general, while gold and income investments and companies that rely on a lot of debt financing have some tendency to suffer from rising rates. That’s an oversimplification, but it’s an oversimplification that investors often cling to during times of uncertainty so you’ll often see at least the short-term market sentiment follow that trend: interest rates rising, buy banks and insurers… interest rates falling, buy gold and REITs and other high-dividend stocks (and Treasuries).

Oh, and if you missed my update on it a few weeks ago[2] yes, I ended up giving up most of my Coresite (COR) shares when the calls I sold were exercised — so I missed some upside above $78 or so (the shares got above $90 briefly), but will look to rebuild that position if the pricing gets a little bit more rational. That has already begun, perhaps, we’re back below $85… at $70 it’s an easy buy with a 3% yield that’s been growing at better than 20% a year, somewhere inbetween those two numbers I’ll likely get tempted to either buy shares or sell puts to ease my way back in (I do still have a position in COR shares, but it’s quite small). My sentiment would be a “hold” here, but my action happened to be a sell because I reached for a bit more yield from covered call selling — that’s the risk you take when you sell options, and there’s no point in gnashing your teeth over it (though I did a little of that, too).

What on earth is going on with First Mining Finance (FF.V, FFMGF)? The stock has been going bonkers over the last week or two, even more so than most of the crazy moves of the mining sector.

Part of that is almost certainly because it’s still a small stock, with a market cap of under $500 million… but most of it, I would argue, is simply due to the attention they’re getting from pundits and newsletters and well-respected voices in the mining community. And, perhaps, from the large volume of attention that came First Mining’s way when Money Map Press started touting their special private placement[3] that they were facilitating for First Mining shares and warrants a couple weeks ago.

Interestingly, Michael Lewitt publicly retracted his recommendation of that private placement[4] that he had apparently posted to his free Sure Money Report subscribers because the terms of the placement were changed by First Mining, though the private placement may still go through and, thanks to the 40% move in the shares over the past week that was probably at least partly caused partly by Money Map’s attention, the terms are still appealing in comparison to the current share price.

We also now know, since First Mining finally publicly announced the terms on Monday[5], that the placement is for up to 20 million units (shares with attached warrants)… and, since Lewitt publicly recanted his recommendation, I wonder whether Money Map Press was implying an exclusivity for their $4,000 Money Map Project that didn’t exist. Probably they still made Sure Money subscribers sign up for Money Map Project to get the details for applying for the private placement, but if not I’d be quite furious if I had signed up for Money Map Report (particularly since the $4,000 was non-refundable).

First Mining’s latest presentation[6], which includes data from their most recent acquisition of Tamaka Gold, says that they have 13.5 million ounces of what I’d call “possible gold,” including all of the reported stuff from the companies they’ve acquired. None of it is in proven and probable reserves, which is the level that indicates the gold is both there and can be produced profitably, but the gold they have “in the ground” is in measured and indicated resources (which means they’re pretty sure it’s there) and inferred resources (which are modeled to be there based on what they think they know about the deposit) and historic resources (meaning some number of ounces that’s been estimated for the deposit in the past, perhaps using different standards than today).

Following that latest acquisition, they have 493.3 million shares outstanding, so that means the market cap is C$572 million (US$442 million). That means you’re paying roughly $33 per “potential ounce in the ground.” That sounds low, with gold at $1,300+, but it’s also true that I have essentially no expertise in judging the quality of the ounces that First Mining owns, and they were able to buy all of those “ounces in the ground” over the past year for about C$180 million worth of shares. So that means they bought these ounces for about $13 an ounce, without using cash, and the market now values those same properties at $33 an ounce… and it’s not just the stuff they bought last Summer that came at per-ounce prices well below where First Mining is valued. The latest acquisition, at an implied price of $59 million, was of Tamaka with 3.3 million ounces of “historical gold resource”, so that’s about $18 an ounce… though the C$59 million worth of shares they announced they would use for the acquisition in May would now be worth about C$90 million.

So yes, it’s a financial arbitrage to some degree — the ounces become more valuable as part of First Mining than they were in the hands of a one-property junior miner, and that value is either coming from the attention that First Mining is generating, or from the genuine value created by owning a portfolio of these kinds of semi-explored assets and having the “name” and leadership connection with people who have historically built successful large mining companies. This is basically a play on Keith Neumeyer’s ability to build another company, and on the hope for revitalized enthusiasm for gold mining that could mean that the actual miners start looking to replace reserves and build more mines.

Which means, yes, that it’s a very risky play — it depends not just on the quality of the project they’ve acquired, but on the re-emergence of enthusiasm for miners to invest in exploring, adding to reserves, and developing new mines. That’s the nature of leverage — it’s levered to gold and to the re-emergence of excitement about gold mining, but it is also very heavily followed by newsletters and mining enthusiasts in the individual investor community because of all the pundits who love Keith Neumeyer. That means it gets more attention, which means the price goes up in unpredictable ways — the same is true of Brazil Resources (BRI.V, BRIZF), which I also mentioned when I went into my “dumb ideas” spiel that was mostly about junior miners a couple weeks ago.

A stock that rises 40% in a week when gold actually falls 2% is worth doing a little worrying about, despite the cheer that you may feel as you see your portfolio’s quoted value climb — even other heavily followed smaller stocks that are also pretty promotional and not reporting fundamental change (like acquisitions or drilling results), like Brazil Resources, are up far less (only 5%) in that week, and the average miner is up less than 1%. That doesn’t mean one has to sell, though I’d probably shave off some profits with a portion of my holdings if I hadn’t promised to extend my trading moratorium for a bunch of these junior miners that I wrote about two weeks ago[7] (and if I weren’t writing about it today), but it does mean that we should be wary of the risk. A stock that rises 40% because of additional attention (so it seems to me, at least), without any real change to their projects or the underlying commodity, can also fall 50% pretty quickly if that attention lessens.

I like exposure to gold miners and levered gold plays like First Mining in this current market, because I want some hedging against currency upset and against fear and I think we’ll have a very risky election season with a lot of fearmongering that gets investors worried, but that doesn’t mean I want those hedges to take over outsize positions in my portfolio — these miners have already had a strong run that in most cases has seen levered 5-10X moves on gold’s 25% rise year to date, and that leverage works both ways. If I’m wrong about the appeal of gold this year, or about sentiment continuing to shift in gold’s favor, then a drop of 20% in the gold price could easily bring a drop of 60% or more in these levered mining investments. That’s not my expectation, but it’s a very real possibility that should be in the back of all our minds as we speculate on junior mining stocks — don’t hold positions that are big enough to destroy your portfolio if you’re wrong about the direction gold moves over the next six months. That holds true for anything that’s speculative in nature, of course, but it’s hard to limit exposure and think about risk when you see that gold miners are by far the best performing part of most portfolios this year — human nature leads us to chase returns, and that works… until it stops working.

Disclosure: I put a personal trading moratorium for the month of July on my small gold stocks, of which Sandstorm Gold, First Mining Finance and Brazil Resources are mentioned above, so I do own all three of those today and won’t trade them again them until August at the earliest. I also own all of the REITs mentioned above, and won’t trade any of them for at least three days per Stock Gumshoe’s normal trading rules

Endnotes:
  1. Cabot’s “Stock of the Next Decade” and you can find that here: http://www.stockgumshoe.com/reviews/cabot-stock-of-the-month/friday-file-whats-cabots-stock-of-the-next-decade/
  2. update on it a few weeks ago: http://www.stockgumshoe.com/2016/06/plow-and-core/
  3. Money Map Press started touting their special private placement: http://www.stockgumshoe.com/reviews/money-map-report/private-offering-for-next-multi-billion-dollar-gold-venture-from-money-map/
  4. publicly retracted his recommendation of that private placement: http://suremoneyinvestor.com/2016/07/why-im-withdrawing-my-recommendation-of-first-mining-finance/
  5. First Mining finally publicly announced the terms on Monday: https://www.firstminingfinance.com/news-room/first-mining-announces-private-placement-financing
  6. First Mining’s latest presentation: https://www.firstminingfinance.com/assets/docs/first_mining_presentation_june-17,-2016.pdf
  7. I wrote about two weeks ago: http://www.stockgumshoe.com/2016/07/some-stupid-ideas-for-the-month/

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