I am going to set a goal of writing a short market summary at the end of the week, focusing on certain events, notable market changes and significant stock or commodity movements in the past seven days.
Junior Mine ReportI recommend reading PwC's latest Junior Mine October 2013 report in which John Gravelle highlights that it’s the junior mining sector that is suffering the most despite majors taking costly write-downs, suffering from weak commodity prices and a sector-wide confidence issue.
Anyone trading AIM will notice the comparable to this ASX focused report in which PwC suggest junior markets have been plummeting since 2011 following a brief period of recovery after 2008 lows. The market valuations of the top 100 TSX listed mining companies has fallen over 40% annually for the second consecutive year. This is an accurate reflection of what has happened to valuations across AIM.
The report makes for bleak reading with reports of cash, short-term investments and capital expenditures all down by hundreds of millions, with "explorers making up the largest share". But despite warnings from certain industry commentators such as John Kaiser, there have only been a handful of companies going under, with many able to reduce operating costs and conserve capital, 7 reportedly de-listed for adverse reasons.
Margin SqueezeThe Footsie miners shed 2.4% to 16,131.09 in line with gold, platinum, copper and aluminium all falling. The only notable riser was iron ore. Margins are being squeezed across the board with Antofagasta suffering on its earnings update despite an increase in production. The same story was true of Vedanta Resources as revenue fell despite increased output. This is becoming a common theme amongst producers, those highly leveraged falling hardest.
One stock I like to follow, Avocet Mining (AIM:AVM) a West African gold miner completed the buy-back of a gold hedge from McQuarie Bank. They have a highly leveraged gold project at the Inata Mine in Burkina Faso which is struggling to turn a profit despite targetting 130,000 ounces this year. If they are able to survive in this climate then the chances are much improved for the likes of Amara Mining (AIM:AMA), another gold producer located in Burkina Faso. Avocet's total cash costs amounted to $1,195/oz in the third quarter whilst Amara are targetting reduced cash costs as it brings the Sega mine into production. It's total cash costs are expected to fall from $1,357/oz in the first half to below $800/oz in the second half.
I've previously stated my position in Amara and still believe quarterly results (Q3) due this quarter will be considerably better than earlier in the year. To recap in Q1 2013 gross revenue of almost $14m, cash costs of $10.5m for a margin of approx $400/oz resulted in EBITDA of $3m. Amara expect costs will reduce to around $700-800/oz and with gold trading at around $1300/oz margins should be higher at $500-600/oz in Q3 results, potentially rising to $600-700/oz in Q4 results should gold bounce off the current support level.
"If we assume 15,000 ounces are produced at costs of $700/oz and a conservative gold price of $1300/oz, EBITDA of $8m is achieved per quarter. This increases to $12m if production reaches 20,000 ounces."
It seems I'm not alone in recognising Amara's potential as RDV Corporation, a majority owned private company run on behalf of the DeVos family who co-founded Amway, one of the largest U.S. private firms has taken a 21% stake through a share swap. Assets from their exploration company Amlib, including $10 million cash and a profitable drill operator are included in the deal. RDV have been actively investing in West African gold for over a decade but Amara is one of the first to bring in a major U.S. family fund. If Amara fall short of production targets only achieving 15,000 ounces and costs are reduced at a slower pace in Q3 realising a $500/oz margin they should still turn EBITDA of $6.7m
There is a concern that the gold price will fall further. Such a move would impact marginal producers and indeed is deterring investors now as gold toys with the $1,270 support level. What will cause gold to break out/down? This is a much debated topic and one that I would like to discuss another term. In the short term US jobless figures are likely to support the bearish case, the US continues to show signs of recovery. The strengthening of the US dollar alongside the monthly QE figure of $85bn has helped push US stocks to new highs. Is this the reason for gold falling? Perhaps not, but it goes some way to explaining why ETFs are being sold down on a huge scale.
What will cause a shift in sentiment? For one thing, we know the US debt ceiling is due to peak again in January so expect some market volatility. Many commentators also expect tapering of QE to begin early next year. There is an argument to be made for the physical demand which has increased yet again and is up year on year. This won't be a surprise to many, the East are buying physical. The West are still reducing according to the World Gold Councils Q3 Report, ETFs sold significantly higher than any increase in physical demand. Is there manipulation going on? Probably, and it stands to reason those selling will begin to reduce at a lower rate. US economic growth is expected to plateau at around 2% of GDP once QE draws to a close whilst their deficit reduction programme will actually begin to rise again in 2016 according to the Congressional Budget Office. This year’s lower deficit can be largely attributed to short-term economic factors rather than systemic reforms in the federal budget, for never has the deficit fallen from such a high level. The sign to look for will be an improvement in ETF positions in the next quarterly WGC report.
- Amara (AIM:AMA)
I'm expecting a significant improvement in quarterly earnings as well as a more robust balance sheets thanks to the deal with Amlib for $10m additional cash. Any weakness in the price of gold is unlikely to reduce the impact reduced costs and increased production will bring.
Target 18-20p before January 2014.
- W Resources (AIM:WRES)
Exciting quarter for W Resources as it nears completion in constructing its tailings processing facilities. The pre-concentration plant was expected to be complete in October and according to the company things are progressing on time and on budget. They will begin producing tailings from next month for a period of approximately 3 years at which point they should be in a positive to bring their flagship La Parilla Mine into production.
Target 1.2-1.3p before January 2014.
- Tertiary Minerals (AIM:TYM)
Volumes have been increasing in recent weeks and the share price peaked at around 8p in anticipation of drilling results and resource classification due early next year. They recently completed a financing deal with YAGM. The MB Nevada project is expected to weigh in larger than the Storuman project which is currently Tertiary's most advanced deposit as historical drill data and two phases of drill-work is compiled into a JORC resource. Now I am no chartist but even I can tell the stock is in an uptrend so I would suggest interest will continue to grow as we approach the second set of drill results, followed by a brief period of consolidation as we await the JORC resource early next year before further gains as value is recognised.
Target 11-12p before March 2014.
Hopefully anyone following will be able to see how accurate these targets are. My strategy is threefold in this current climate - analysis of trends, volumes and catalysts. Ignore the 'company potential' if any of these factors change for the worse and take profits.