Lawrence Roulston: It’s Time to Look at Companies, Not Markets.
Below is an interesting article contributed from Lawrence Roulston, editor of Resource Opportunities.
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It’s Time to Look at Companies, Not Markets.
Resource markets remain extremely volatile in the face of global economic uncertainty. After a terrible beating in the first half of the year, resource company shares began to recover in August and September. A reversal of that uptrend in October leaves many companies still priced at irrationally low levels.
On a superficial analysis, the junior resource markets are merely treading water, with the TSX Venture Index barely ahead of the low point in June. A closer examination shows a very different story. Many companies are still losing share value, creating an aura of a flat or declining market. In fact, many companies with little or no cash and without tangible assets are still trading well above their fundamental values and will continue to sink.
On the other hand, a few tens of companies with strong management, good projects and which have cash are appreciating in value. We counted at least a dozen companies that we follow in Resource Opportunities which have appreciated by 50% to 200% in the past six months. Those big gains have come at a time when “the market” has been moving sideways.
While investors in general are not putting much value on the development-stage companies, larger mining companies can see the values, as evidenced by several takeover offers in recent weeks. The bid prices in those offers are well above market prices, with at least a couple of the deals priced at two-times the trading prices before the offers.
Interestingly, many of the takeover offers are coming from companies in emerging countries: Galway is being purchased by a private Brazilian company in a $300 million cash deal; Inter-Citic is being purchased for $250 million cash by a Chinese company.
Several of the companies that we are following are well positioned for takeovers, with large advanced-stage metal deposits. While many investors and analysts cast their eyes over the traditional developed world, for mining companies as the only players in the takeover game, the reality is that many, or most, of the offers in the future will come from rapidly growing mining companies in the developing world. Those companies can see the intense need for new resources and are prepared to pay reasonable prices. Investors in the developed world, taking a myopic view of the short-term issues close at hand, are missing the global picture and are under pricing resource assets.
A few investors, those who can identify the best companies, are coming back into the markets in a big way, quietly picking away at the higher quality companies. By the time that “the market” has turned around, the high quality companies will be trading at prices well above current levels.
The past year has been extremely difficult for resource investors. Looking forward, we believe that the extremely low valuations, the recent takeover offers and the improving global economic outlook provide strong evidence for a rebound in high quality development-stage companies. In due course, “the market” will also begin to move higher. In the meantime, we continue to present high quality companies which can generate big gains in spite of the near-term market sentiment.
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As always….thanks…Doc!
Marc, the PMs will be under pressure this month. Also, as mentioned before, the conventional markets will out-perform. The new year will not be good for the conventional markets——however, the PMs, the PM stocks and the resource stocks will hold their own. The dollar should move higher next week. We’ve turned the corner on the PMs and have seen the lows in this consolidation. On the next move down will be the last chance to buy at favorable prices.
You know Doc,
I have been actively involved on this site for many moons – and I must say, as I have said many times before – you, Sir, are A LOT more right than most – just amazing, Doc…I look forward to the fall, 2013….when the PM’s really start to sparkle…correct?
Marc
Conventional market is doing much better. I entered that recently and have had 2 very good weeks.
As anyone here can tell, I’m not nearly as subdued as Richard about the prospects for the miners in 2013. I believe they will do far better, even as a group, than to merely hold their own. When the scared dumb money realizes their error, catch-up will be anything but long arduous. Profitability will drive the sector in an environment where everything else will face margin compression. Further inflation will be icing on the cake -a cake that that icing is already baked into!
The action in the metals this month should be interesting. If gold does not make a new high, it will be the first time since the bull market began that a new high wasn’t reached in the calendar year.
Matthew,
As you know, I am a LT investor guy. The inevitability of your “prediction” WILL occur. 2013, I hope will bring ‘positive” fireworks for the PM sector…. You are simply saying, if I read you right, is that the year looks like a boost THROUGHOUT the ENTIRE year. I hope for alls sake that they start sooner rather than later…l think Doc believes (an autumn rush) is likely scenario after continued range bound action with a slightly moving upward trend UNTIL September, 2013 rolls around……It sure looks to me that we are in agreement about 2013…it is just a matter of, of course…when!
Marc
Marc, you’re right on. Could the metals and the metal stocks make a move up early in 2013—–absolutely. And if I see that coming, I’ll certainly post that. In fact, it wouldn’t surprise me if the stocks do better then the metal. The charts just tell me we have a little more work to do in 2013 throughout most of the year. The bias, however, will be to the upside. I’m very excited where we are currently as regards the technicals.
Richard,
With all due respect, your charts led you to post the following on August 13, just before gold shot up almost $200.
“I know TR has been excited about the PM market “taking off” for some time. As I’ve posted “ad infininitum” the charts at this time are showing a slow bottoming pattern. We have some work to do for awhile. The weekly Bollinger bands are about as narrow as they can get and it appears we’ll be trading in them for awhile before the breakout either way. The strength indicators no longer favor the precious metals moving down. The momentum indicators now favor a sideways to up movement for the PMs.
…The action of the PMs will lull people to sleep and that’s healthy for those in the process of purchasing.”
And with the S&P at 1404 you also said on Aug. 13th that it is “totally ridiculous” to expect the conventional markets to go higher. The S&P 500 then went up 70 points to a new 4.5 year high. It is still higher today than it was on 8/13.
Then there was the sub-$3 copper call and the BDI to new all-time lows.
There’s nothing wrong with missing a call, but I don’t get the feeling that many here are aware that you ever do. People only seem to respect the bearish view after they’ve had their rears handed to them.
Matt, thank you. As far as gold was concerned back in August, many were commenting about gold breaking to new highs which I certainly didn’t believe to be the case. As we can see even now, that’s not happened and we still appear to be “bottoming” as mentioned. The momentum indicators at that time (as mentioned) revealed a sideways to up movement for the PMs—–we did move up and now are lower. We’re still bottoming. When I mentioned (S&P at 1404) that it was totally ridiculous to expect the conventional markets to go higher, I’m sorry I didn’t mention “significantly higher” ——I’ll have to be more careful in the future. Am I going to hit the nail right on the head everytime; absolutely not. Hopefully, I’ll be at least close to the appropriate trends in the various markets.
You have to know what you are doing as 2012 has been a bust for most folks.
The goofs on Bay and Howe St (Canna Crap) better get off the short machine so that companies can make a go of it again.
This industry is very naughty.
Doc, the more you comment the better; Al has said you’re welcome to do audio with him when ever you wish. TR’s exit definitely creates a need for you for anyone who wants to know about the short term up to 1 yr ahead or so…I hope to hear much more from you in the near future…now question: All these too big to fail banks, can’t they use borrowed leverage to suppress pm prices? As they have minimal capital amounts required to make loans, could they not also use the same strategies and trade, say $ 1 billion with only $100 mil or so in the bank/assets? I welcome all to answer
PC,
I agree. I believe astute people like Matthew and Doc (Mark A.) add a decisive learning experience to trend analysis….hear, hear!!
I’ll always give it my best—–I’m about to go out on a limb here, Based on the multiple charts I watch and predicated on the “fiscal cliff” not being resolved in the next 3 weeks, we’ll probably see a bias of PMs sideways to down and the conventional markets sidewqys to up. The Santa Claus conventional market rally could last for a little while.
Canuck, speaking of banks:
Market Nuggets: Deutsche Bank: China’s Strategy ‘Likely Includes A Definitive Position On Gold’
Friday November 30, 2012 1:19 PM
China’s government appears to be emphasizing the property of gold as a currency and its role in preserving wealth during financing crises and safeguarding national economic security, says Deutsche Bank. Analysts cite the Ministry of Industry and Information Technology’s new guidance on development of the gold industry this week. The Ministry says China’s gold demand has increased in recent years, while the country’s mining industry faces challenges such as scattered resources, low grades, high cost and deep extraction. Deutsche Bank cites Ministry expectations that in 2015, China’s gold demand could exceed 1,000 metric tons while domestic supply could only be 450. Concludes Deutsche Bank: “In our view, China’s long-term strategy on trade and finance likely includes a definitive position on gold. Given the possibility that China’s could be the world’s largest economy in the second half of the century, we expect that at some point over the long term the RMB (renminbi) may be in a position to challenge the USD (dollar) as the world’s reserve currency. China may see a stockpile of gold rivaling that of the U.S. as a requirement.”
By Allen Sykora of Kitco News asykora@kitco.com
Doc,
That is SO FUNNY…I saw that and thought that was a very significant piece of info to supply to our blog…..thanks for doing that! Just excellent.
Marc
Canuck, they certainly could but I have a feeling they realize the risk currently. In spite of what they state as their financial conditions, I don’t believe the figures. When you get to decide what is in your various tiers as regards your assets, you can certainly paint a picture better then reality —–I don’t think the banks want to put themselves in any riskier a position then they already are—-you remember when JP Morgan recently took a huge write off for trading losses—–can you imagine Jamie Dimon in front of congress explaining the huge losses from uncovered shorts on a gold trade?
thanks
Update from expected returns:
There are certain trades that are pretty much risk-free. For example, if interest rates are held at 0%, then betting on a rise in rates (decline in bonds) is going to pay off in the long run. The same goes for artificial currency pegs. The trade is risk-free because you are basically going against the government’s attempts to manipulate the currency at an artificially high level. Soros’ short of the British pound was not all that crazy because his downside was defined. As the best traders know, it’s wise to have some of these “low risk, high reward” trades in your portfolio.
The hedge fund managers who struck it rich during the subprime crisis made trades with defined downsides and virtually unlimited upside. The only real downside to these trades is the cost of carry, which is why timing is so critical. You need to be aware of cycles and investor sentiment to know when a market will turn. So for example, there are bears out there who think another market crash is coming ala 1932, which was the second leg down of the crash that begin in 1929. To them, this is a “low risk, high reward” trade. However, a market crash of the 2008 kind is not really in the cards right now because so much leverage has been removed from the system, particularly in housing. After all, is there anyone who can get a 0% down, negative amortizing loan anymore? I think not. We are in a totally different environment and this implies stocks will rise significantly.
The Fed needs some time to figure out how to react to crises, but once they have a gameplan they just need to press a couple of buttons to create electronic money. They could double the supply of money in an instant, and they have shown a willingness to go this far, so it’s really hard to imagine a crash in this environment. All of the people who predicted new lows by 2012 have been dead wrong since the Dow is actually testing its all-time highs. Instead of learning, they are sticking to their guns and they will probably be wiped out if they actually try to go short. In short, this is not a risk-free trade.
The smart way to think is to build a position that you won’t get blown out of if the market moves against you. Anything but long-dated options are tricky because you must be very precise with your timing. But buying stocks on corrections? That’s not very risky, and it’s the smart way to play a rise in interest rates.
I personally prefer to buy after things get wiped out and there is clear value. Of course we all know it’s incredibly difficult to buy at or near a bottom because it seems so “obvious” that going long is positively nuts. That’s where you just need to be good at controlling your emotions. A total wipeout is coming in the bond market, and there will be more than enough opportunities to buy at historically cheap prices. I’ve mentioned Japan, but China is also in that category- their market has stagnated since rallying powerfully in 2008. One of the best ways to play emerging markets is via real estate, because you may not pinpoint the exact industries that do well, but if the economy as a whole does well, so will housing. Remember, you may have been exactly right about how airplanes would revolutionalize traveling, but if you bought airline stocks you would have been crushed. The most innovative industries are not necessarily the best investments- this is an important lesson.
In this environment, I would be backing up the truck in gold and silver. I would also have some cash on hand for emerging market stocks (such as India), and if you’re more adventurous, real estate abroad. Depending on your risk tolerance, some long-dated puts in a year or so on bonds can potentially pay off huge. But generally, keep things simple and generally leverage only if it produces cash flow to support the leverage. But yea, I can’t stop thinking about gold; it’s almost time for a significant rally.
Disclaimer: 1. This newsletter is for informational purposes only. I am not a registered investment advisor and I am not responsible for any actions taken by subscribers.
Mining costs are rising rapidly while production drops. Gold & silver will become more scarce and rise sharply over the long term but it does not look good for the future of gold stocks. Silver may be the better investment. See the scary cost chart. $1500 per ounce full cost.
http://www.safehaven.com/article/27887/golden-bullshine
According to the first chart in the article, cash costs have risen 187% since the end of 2005 while the price of gold rose 270%. This is very positive for the miners. The author concludes the article by saying that quality juniors are the way to go. I agree with him and now actually hold no seniors at all (though I might soon buy some GDX calls).
I do think that silver offers a superb compromise for those who want leverage to the gold price but without the risks associated with the miners.
Matthew,
I personally think the gold streaming company, SAND is a great call LONG TERM along with the junior for leverage
I don’t follow SAND (my mistake!) but the chart says you’re right! I hope you’ve owned it for years. It sure bucked the trend in 2012. It reminds me of the great performance by Royal Gold (RGLD) in 2008.
SAND sure has had a big rise in volume lately. It looks like it might need some time to digest those gains, but overall the chart is a picture of strength.
Anyone who is interested in cycles should take a look at this video:
http://youtu.be/PBlEHOs6zNI
This video seems to be from a couple of years ago but I find it very interesting that Charles Nenner is calling for a top around July 2013. Other cycle analysts that I follow are warning around the July/August time frame as well so I think we could drift higher until then before things fall apart.
A saw a chart somewhere showing gold peaking every 22 months for the past 12 years or so and due for the next one in July 2013.
A possible roadmap for silver based on planetary cycles (possibility of 12/21 being a major low):
http://changeintrend.wordpress.com/2012/12/01/a-roadmap-for-silver/
Didn’t Roulston recommend PEM a while back? Wonder if he still does. If so, it is a real bargain right now IMO.
I am due to talk with Del, Dan. I will do that and report back. Yes, it could be a real bargain!
Big Al
Thanks Big Al. Looking forward to the update.
Dan
Now is a great time to collect PMs, PM stocks, and resource stocks. We’re in a bottoming process and inflation is on the distant horizon. The dollar will be a drag for awhile but over time should work lower.