This is not a time for investors to sit on the sidelines and suck their thumbs.
Now is the time to act.
Now is the time to buy, buy, buy!
Why?
Because the U.S. Federal Reserve just released the biggest fiscal monetary policy BAZOOKA in history.
The Fed has completely taken all of the risk off the table — and the stock market already roaring with its approval.
The legendary hedge fund manager Paul Tudor Jones explained perfectly what has happened.
Jones said that BAZOOKA doesn’t actually do the Fed’s response justice.
Tudor Jones believes that what the Federal Reserve has just done is more like a NUCLEAR BOMB!!!
He means that in a good way…..
“Investors can take heart that we’ve counteracted this existential shock with the greatest fiscal, monetary bazooka. It’s not even a bazooka. It’s more like a nuclear bomb,” Jones said on CNBC’s “Squawk Box.”
The numbers don’t lie.
The action that the Federal Reserve has now enacted in just two weeks is already greater than what it took the Fed to do in eight months during the 2008/2009 Financial Crisis.
There is so much money about to come flooding into the markets.
And remember unlike in 2008 this time around the U.S. economy is not weak….
The U.S. economy has just been paused.
The number of new Coronavirus cases is going to peak in the next two weeks.
Once we get over that hump the entire world is going to feel a massive moment of relief — everyone and anyone is going to be buying stocks.
The stock market is going to soar.
So too will the economy on the back of the $2 Trillion that the Fed is going to be pumping into the system.
We get very few moments to capitalize on stock market fear.
1987, 2008 and now today.
Sitting on the sidelines and waiting is the wrong response.
We just had the fastest 30 percent fall in the history of the stock market.
That was the S&P 500 — small-cap stocks got hit much harder.
There are stocks currently trading at unimaginably cheap valuations.
Great companies trading at a fraction of their true value.
The Federal Reserve just took away all of the risk.
Now is the time to pounce on those opportunities…..they are already starting to go away quickly.
My favourite gold producer doubled its dividend last year. I expect it to DOUBLE it again this year. No debt and fast-increasing production–in the USA!
Yes it’s true. Ensign Energy Services ESI-TSX has an official dividend of 24 cents per year—6 cents paid quarterly. And the stock trades for 24 cents.
Ensign is a Canadian-listed drilling company, but is one of the most international stories, with oil and gas rigs around the world. Only about 30% of its EBITDA comes from Canada.
Ensign is a stock with an interesting story—both in the short term and in the long term.
Long term, it is owned 18% by Canadian oil legend Murray Edwards, a Calgary lawyer who founded giant oilsands producer Canadian Natural Resources (CNQ-NYSE/TSX), and is part owner of the NHL’s Calgary Flames hockey team, among other business interests (Imperial Metals (III-TSX) & Magellan Aerospace (MAL-TSX).
Wikipedia has him listed as having a net worth of US$1.5 billion, but that page was last updated in October 2019 (with CNQ as the largest oilsands player, it’s probably a little less right now—like the rest of us ;-)).
Edwards has been with Ensign since the late 1980’s – about the same amount of time he has been with CNRL. The COO and President of Ensign is Bob Geddes. Geddes has been with the company since 1991. Ensign does not have a CEO, which hints at the decision making role that Edwards likely plays.
In that time there has only ever been one dividend cut—late last year.
Now, here’s the short term interesting thing—on March 23, the company announced several cost reductions including:
Capital budget dropping $40 million, or 40%, to $60 million
Cutting Chairman Edwards’ salary by 40%
Cutting President Geddes’ salary by 20%
Cutting other executive salaries by 12.5%
Guess what they did NOT cut? The 24 cent a year dividend that costs them $38 million a year.
This is a company with $1.57 BBBBBILLION in debt. Debt to Cash Flow (D:CF) is over 7x. Now, the company is making enough to cover the dividend. The Street has the payout ratio this year as 82% of Free Cash Flow (FCF) and 34% of general Cash Flow Per Share (CFPS).
But they do have a $750 million credit facility coming due Q4 next year, and for just the 2nd time in living memory (the other being a few months in 2008) the Market can’t be sure that this will get rolled over seamlessly.
However, Murray would hold huge moral suasion over these bankers. Nothing would ever get said, but would you be the bank calling a loan on Canada’s most rock solid and politically connected oil entrepreneur? Let’s see if you get another piece of business across that empire.
Of course, when a stock goes to 100% dividend yield, the Street is pricing in that it will get cut to zero—which it likely will. The dividend is paid quarterly, and was just paid out, so the board at Ensign has some time to see how Saudi production war and the Coronavirus demand shock plays out.
The truth is, likely no one will ever collect their 100% dividend. But it was intriguing that the board chose not to cut it this week.
Oil is rocking up today, but the social fallout of the very low oil price in western Canada could deep, and for a long time. If a lot of wells get shut in–I’m not sure people really understand what that means for rural communities.
Oftentimes, the largest two expenses for an oil and gas company is
Municipal taxes
Landowner payments
Small towns across western Canada rely on this resource income to help fund…everything. In British Columbia, as the logging industry got mechanized and then mills shut down, it wasn’t just wages that went bye-bye—municipal payments did too.
Alberta and Saskatchewan will now go through this. Landowners would get something like $25K for the year a well was drilled on their land and then $5000 every year thereafter that the well was producing. And if you had a pipeline go through your land, you would get a big check the year it went through and you couldn’t plant anything, and then $5000 per section (1 section = 1 sq mile) per year after that.
Farmers could work in the oilpatch for a time, and then farm for a time; keep the family farm going. Sons would come up and do the same. Now, unless the Saudi’s giant GHAWAR field goes dry, those days are gone.
Truthfully, much of it is already gone as the young folk in these rural areas have moved into the cities or another industry.
But it is sure going to exacerbate the regional differences between urban and rural across western Canada.
THE US WILL HAVE TO MAKE MORE PAINFUL CUTS THAN CANADA NOW
Down south, in the Permian basin of SW Texas, the economic impact will be much more severe than it will be here in Canada. You see, the oil&gas industry in Canada has been dying a slow death for years. Canadian industry has had to adapt to lower hydrocarbon prices and profit margins on a steady basis for six years.
But the Permian was booming right up until the Saudis declared an oil price war. Production had grown and grown, and both money flow and production were going great—despite realized pricing being barely break even for the last few years.
Remember, there is no such thing as an American oil producer. They all have so much natgas in their production stream that almost all the US “oil” producers barely get half of the WTI price for their product on any given day.
But just like their natural gas brothers, these management teams kept pumping and spending on razor thin margins, and pipeline companies kept levering up to 3-4x debt to cash flow to install more pipe. (I have never seen a more reckless cratering of shareholder value by management teams in any other sector than US natgas production).
Now, oil (and therefore associated natgas) production is about to fall off a cliff—taking tens of thousands of good paying jobs (what a ripple effect that’s going to have in Texas!) away, and pipeline volumes will drop. We will see what MVCs are really worth—Minimum Volume Commitments.
Debt is the other big issue obviously. There is tens if not hundreds of billions of debt in the Permian alone, and it’s relatively concentrated into 20 or so entities. What happens to them and their shareholders? Well, these debt holders—mostly Private Equity—will do what Americans do better than anybody else in the capitalist world—they will cause a lot of deep intense pain very quickly and move on.
They will merge whatever producers or OFS (OilField Services) companies they need to, rationalize management teams, balance sheets and shareholders. They will likely wipe out equity and recap them with preferreds that pay out dividends (20-30% of gross cash flow) and make sure that none of these companies grows for a couple years. Yeah, you know that “return-of-capital” chorus that we investors have been shouting at Energyland for 2-3 years? The PE guys (that weren’t crushed in this last month) will get that now.
ARE NATGAS PIPELINES A PLACE FOR INVESTORS?
I was thinking natgas pipelines in the Northeast USA would be a good bet to invest now—they are not impacted by the drop in oil prices or in anticipated US oil flows. Yet they have been slaughtered along with the rest of the energy sector, but natgas prices have been low for years. But here’s the thing—you can buy an 11% yield right now on a company like TC Pipelines (TCP-NYSE)and think, hey, this is a safe place to hide because:
natgas demand is relatively inelastic as it’s used for basic heating and other infrastructure needs, and
I see Cabot Oil and Gas (COG-NYSE) going up from $15-$20/share this last week as the market prices in losing 5-7 bcf/d of associated production from the Permian and Bakken in North Dakota (today, as oil prices jump big, COG stock drops as market thinks maybe oil production–and natgas–stays up).
BUT—while TCP may not actually be impacted that much from the oil price decline (its assets are in the Marcellus natgas formation in northeast US; no oil), there is the possibility that with the new ESG investing craze going on now, fossil fuel pipeline companies might become like the tobacco sector—shunned, giving those stocks permanently high yields.
And if you’re a pipeline company, you want to be trading at 5-7% yield. So if the Market doesn’t reward you with a small yield, you may as well transfer a big chunk of that free cash flow to your 4x debt to cash flow and improve your balance sheet. So cut that dividend by 60% to get to 5% yield and #TooBadSoSad to you retail shareholders. Maybe that doesn’t happen. But that’s the risk.
MLP Madness and Droopy Drops
MLPs–Master Limited Partnerships–are tax-advantaged investments that are supposed to pass through their cash flow (and their tax liabilities!) to investors. In energy, that means pipelines. There’s a lot of paperwork involved in owning MLPs, so institutions don’t bother with them and they are almost all retail shareholder owned. Being as retail shareholders are more skittish than institutions, these have a lot of volatility, especially in downturns like the last month
Now the general partner in these firms (in energy) is usually a producer, who, IMHO, often mistreat their MLP children by what’s doing best for the partner (lower toll fees) and not the MLP–so they have been average to poor businesses for the most part.
For example, with the huge increase in oil and natgas production in the US in the last 10 years, these investments should have done well. But they have horrible stock charts, as the industry used low interest rates and continual equity to overbuild pipelines and keep toll rates low.
(Yes Canada, the US has overbuilt pipelines while funding groups up north who stir it up to make sure you can’t build even ONE.)
Kayne Anderson (KYN-NYSE) is a closed end fund full of pipeline stocks, so it’s more like the ultimate leverage on these pipeline plays–which all got hit hard post-Saudi production increase. It dropped from $12 – $1 in 3 weeks–over 90%. Part of it was because its constituent holdings were dropping. Part of it was because it always carries 25-30% leverage, and the company had to get rid of that in a fast dropping tape.
And part of it was the drop just scared its own shareholders away. When the stock hit $1, it was trading at something like 60% lower than its NAV. It usually trades 10% lower.
KYN has led the charge up as well this week, now a triple off its $1/share bottom. Several other midstreamers are also up 30-50% today.
I think all these MLPs will cut distributions to match a 9-10% yield depending on where their stocks end up.
WHAT I’M DOING NOW
I never thought I would say this, but I was so lucky oil and gas were bad investments in the last two years. I say that because I recognized it, and was in mostly cash for a long time. That was really boring for subscribers and didn’t my personal cash flow being bearish and not buying anything. But I missed a lot of the pain in the last two months.
As yet, I’m not buying traditional energy stocks right now-I mean oil or natgas, upstream, midstream or downstream. I see a huge increase in US COVID cases coming in the next month, and I mean HUGE doesn’t really describe it. So more fear is coming and I’m willing to be patient.
The gold miners and gold itself endured a rough week last week.
There are plenty of explanations of what contributed to the fall. There was
the reversal in long-bonds (see bottom of this article)
the flight to sell what is liquid
just the overall panic that pervaded all asset classes.
But I think that something else contributed to the magnitude of what happened with the miners last week. First, let’s look at the behavior.
First, there was a crazy drop at the end of day Friday for both the VanEck Vectors Junior Gold Miners ETF (GDXJ – NYSE) and the VanEck Vectors Gold Miners ETF (GDX – NYSE).
Source: Yahoo Finance
Second, these indexes closed at larger and larger discounts to their net asset value as the week progressed.
On Thursday the GDXJ at a 13% discount to net asset value (NAV). On Friday it closed at an even greater 16% discount to NAV!
The GDX closed at a ~7-8% discount to NAV both Thursday and Friday.
This disconnect with the underlying stocks that make up these indexes led to even more bizarre intraday behavior.
On Friday morning the GDXJ was up over 10% early-on while top holdings like Kinross (KL – NYSE), Pan American Silver (PAAS – NYSE), Gold Fields (GFI – NYSE) and Yamana Gold (AUY – NYSE) were down between 2-8%.
It was bizarre. The ETFs were totally disconnected with the underlying securities that they were supposed to represent.
On Friday morning Fred Hickey of the High-Tech Strategist put forth the theory that the 3x levered ETFs (Direxion Daily Gold Miners Index Bull 3x Shares ETF (NUGT – NYSE) is 3x gold miners ETF and the Direxion Daily Junior Gold Miners Index Bull 3x Shares ETF (JNUG – NYSE) is the 3x gold junior ETF), were to blame for the historic volatility.
These 3x ETFs are exactly what they sound like. These ETF should move 3x the level of the NYSE Arca Gold Miners Index and Junior Index on any given day. These are the same indexes that the GDX and GDXJ indexes are based off of.
To do that, the 3x ETFs have to lever up with swaps and future contracts.
Normally this works fine. The problem comes when the ETFs experience significant single day declines.
Both the NUGT and JNUG ETFs must rebalance at the end of each day. They promise 3x leverage but only within a given day. Each day they have to start over.
This becomes a problem if a single day decline is particularly large. For example, a 20% decline in one of these instruments can cause them to have to liquidate 50% of their holdings to get back to their 3x leverage ratio.
That kind of declines happened not once, not twice, but three times last week! NUGT was down 23%, 36% and 46% on the last three days of the week.
This drove a massive deleveraging of their holdings—which drove down both the underlying securities and even moreso, the GDX and GDXJ indexes of which these 3x ETFs own both securities and derivatives of.
This led the extremely large discounts to net asset value that I already noted.
What makes it possible that this spillover was significant is–just how big these 3x ETFs are.
Going into last week (before the carnage) JNUG was worth $1.8b whereas the GDXJ (the 1x ETF that it tracks) was only $5.4 billion – that means that JNUG was the same order of magnitude of size as GDXJ. NUGT isn’t quite as large comparatively – it comes in at $1.6 billion (a little over a week ago) while the GDX was $11.8 billion at the time.
Nevertheless it is easy to imagine a very large influence given that it still comparatively sized (roughly 1/7th the size) and especially considering that NUGT was essentially liquidated in the last week (it ended the week at a little over $300 million capitalization).
What occurs to me is that this was a situation ripe to be gamed. When you have a triple-leveraged version of an ETF that is sized at the same order of magnitude as the indexes they are designed to track… well, it is not hard to imagine the opportunity that could be had in a panic!
At the very least, funds clearly knew that as these 3x levered ETFs dropped in a market that was already bereft of liquidity that it would not take much to push that drop into a route.
The good news for gold stockholders is that:
A. this has nothing to do with your individual holdings in miners and B. these 3x funds are now so small that their influence on the GDX and GDXJ indexes should be greatly reduced.
The other theory that was making the rounds that made sense to me–and I think this came from Hedgeye–is that bonds are being sold down to get to cash, which is making yields jump—and gold often trades inverse to yield.
Gold was up Sunday night as Asian markets opened, but the need for liquidity swamped that as opening approached for Monday open in North America.
EDITORS NOTE: Panic selling this week may not mark a bottom in the Market yet, but it may mark a bottom in sentiment. Tomorrow I’ll show you how to profit from this–quite possibly this week!
The man who has made me more money than ANYONE – Nathan Weiss – is hosting a special conference call on the latest Coronavirus, COVID-19.
On this call, you will learn
Why there will be vast improvement in treatments in the next 1-2 months (the response by the global medical community is better than you think!)
Where and why the Coronavirus is happening – and how we can map out where it will break out when
The top medical stocks that are a play on Coronavirus
Why this COVID-19 came at the worst time in the business cycle, and will hurry up the recession that was already coming
What stocks to buy when COVID-19 fears subside
MONDAY MARCH 9
1:00 PM EDT , 10:00 AM PDT
GUEST SPEAKER:
NATHAN WEISS, UNIT ECONOMICS
Nathan Weiss runs an institutional newsletter with only 25 clients – and I am the only retail newsletter subscriber. His insights over the last 10 years in the energy markets have made me well over $1 million.
He has a way of looking at data and finding cause-and-effect relationships that others don’t see until much later.
He has been researching the COVID-19 virus, and he will be outlining his top stock picks for this issue on a call with us, this coming Monday. His detailed analysis and charting is something to behold on its own!
Nathan is one of the cornerstones of our premium subscriber service, THE CONVERSATIONS. (Email me if you are interested in learning more about this group!)
This will be one of the most profitable hours of your investing life in 2020!
Nathan’s research has made me over $1 million. Here are just a few of his ideas:
Dec 2010 Golar LNG (GLNG) up 200% (that’s a triple) in 6 months
Sept 2011 Northern Tier Refinery up 50% in six months
Feb 2013 Green Plains (GPRE) up 400% (that’s 5x!) in 18 months
Nov 2013 Pacific Ethanol (PEIX) from $3-$23 in six months
June 2016 Resolute Energy (REN) from $7-$48 in 8 months
Oct 2018 TLT-NYSE inverse ETF for US interest rates—up 50% in this horrible market!
This is a GREAT way to start making money using our independent research.
Join this call – and our community – by clicking HERE.
The Market had its biggest UP day in history Monday, with the Dow up 1294 points, as central bankers around the world committed to liquidity for the Market. That will mean lower interest rates and making more money available to keep the global money flow going!
Of course, this was in response to the first, post-IPhone flu pandemic, COVID-19.
COVID-19 may or may not be a global killer flu strain. But for sure, government and business response to it has been massive as it moves into an area
mass
quarantines in China for tens of millions of people
Japan
is now paying people to stay home
In
North America, Costco line-ups an hour long or more as people stock up,
fearful they may not go out for days or more
All this will have a definite impact
on the global economy – even if it’s only for a quarter or two.
Nobody really knows what how big the economic impact will
be, or how quickly the Market might start to price in a potential cure (very
bullish) or at least a reduction in cases & deaths expected (mildly
bullish).
No, the ONLY SURE THING IN THE MARKET TODAY… is more liquidity is coming to
make sure we all keep spending!
And all that liquidity folks is very good news for GOLD.
Retail investors can make a lot of money in gold stocks, as they have explosive
upside – especially if they are growing production as the gold price is rising
I see huge capital gains in my near term future with one stock:
Massive growth underway as production is doubling in the next 12 months
The dividend just jumped 100%, and I expect TWO MORE increases in the next 12-16 months, even if gold does not go up from here
Management has a big stake in the company
This company’s new mine (its second) is in the United States
A tight share structure, creates explosive upside
Zero long term debt on the balance sheet
Central bankers will continue to pour gasoline–liquidity/lower interest rates–on this fire (the stock market). And this US gold stock will keep increasing dividends along the way. Gold is the “gimme” trade in this market. Get this gold stock before the next dividend increase
Financial markets have an impressive ability to discount (or predict) major events days in advance.
For example, think of the market declines leading up to 9/11–the S&P 500 declined 7.79% over the ten trading days prior. NOW, over the past five trading days, the S&P 500 has declined 12%, as market chatter is focused on Coronavirus cases outside China spiking up.
The Market changed this week, IMHO, for a couple other reasons besides the developing COVID-19 story:
the US economy & some economic notes out of China
President Trump’s press conference on COVID-19 on Wed night
President Trump’s press conference was a strange spectacle – with nine senior people on stage as the President disclosed the ‘Coronavirus Task Force’ will be headed by Vice President Pence and will receive billions in initial funding.
This did not jive with their message that ‘risks were extremely low’ and there are ‘just 15 cases in the U.S.’ (plus 45 from the Diamond Princess cruise ship). Even more alarming was the fact that several times President Trump referred to meetings with experts being brought in tomorrow for discussions.
Now, just prior to President Trump’s press conference it was announced a California person had tested positive for COVID-19 despite having no recent travel history and no known exposure to the virus, marking the first ‘community exposure’ in the United States.
So it is now quite likely the Coronavirus (now called COVID-19) is spreading unchecked among the general population in California.
While warm weather and the likely small exposed population to date will keep infection totals low initially, each new case will weigh heavily on financial markets and a critical mass of 20, 50 or perhaps 100 cases could result in exponential case growth and possible hysteria – and that appears to be triggering a massive equity selloff.
If this week’s new case was in fact a ‘community exposure’ infection, others in contact with the same carrier will likely test positive shortly (quite possibly resulting in several new cases by Monday) with a further wave of infections (spread by those infected by the initial carrier) beginning a week from now.
These will be very damaging headlines – particularly given markets hate uncertainty more than bad news.
An early indication of the likelihood of the spread of the Coronavirus in the U.S. will come from the number of people being tested, which is reported daily by the Atlanta based Center for Disease Control (CDC): If those with newly-confirmed infections travelled, worked with or interacted with a large number of people, expect a surge in the number of people being tested after each new case.
You can keep up to date on this number at http://bit.ly/CDC-Covid19-count . As of the latest update—4:00 PM on February 25th (as reported February 26th)—445 people had been tested in the U.S. resulting in 14 confirmed cases.
CORONAVIRUS HITTING JUST AS US ECONOMY SLOWING
This is happening just as the US economy appeared ripe for a slowdown. Higher wages and a tight labour market have been saying for months that the US economy was traveling full tilt.
That means we are going to have a regular business cycle folks! And after euphoria comes stagflation–which we have been in for a year, despite rising stock market–and then (now!) recession.
US industrial capacity utilization has been declining for over a year and preliminary Q4 19 GDP data shows durable goods purchases continue to slow (from contributing 1.74% to Q2 Real GDP growth before declining to 1.09% in Q3 and .26% in Q4) while non-residential fixed investment has declined for three consecutive quarters – a streak typical of recessions which has not occurred since 2009.
The virtual halt of economic activity throughout much of China should be quite deflationary – a big plunge in commodity prices has already taken place. And the same thing that has happened in the US–rising stock market despite flat to negative economic numbers-has been happening in China. Forbes reported a week ago that car sales are down 90% in Beijing, and subway traffic in China’s capital city is also down 90%–yet the market in February kept going up (until a few days ago).
The global impact of the unprecedented loss of demand from Chinese consumers will only increase deflationary pressures while supply chain disruptions dampen already-fragile business sentiment in the United States and Europe.
Is Coronavirus Simply a New Influenza Strain?
Probably… Does That Matter Now? No…
Coronavirus (COVID-19) may not be any more lethal than traditional influenza: The 3,527 confirmed cases outside of China and Iran have resulted in 37 deaths to date (1.04%) while a lagged model shows a 2.14% fatality rate (current mortality versus confirmed cases six days prior).
These statistics most certainly overstate the fatality rate as not everyone who contracts COVID-19 is tested as many remain asymptomatic (particularly children, who rarely show symptoms).
If roughly half of individuals infected with Coronavirus do not receive laboratory confirmation, the fatality rate is quite likely within the .3% to .8% range typical of common influenza. In the case of the Diamond Princess cruise ship, Japan’s Ministry of Health reported last week that 322 of 621 confirmed COVID-19 cases were asymptomatic.
The roughly 3,700 passengers trapped aboard the Diamond Princess for nearly a month are an interesting case study: The vast majority of passengers have been tested for COVID-19 (3,011 as-of February 19th) and 705 have tested positive to date.
While this could indicate a high infection rate (almost double the typical 10% general population infection rate for severe common influenza outbreaks), cruise ships have a reputation for spreading illness among passengers and the quarantine protocols employed appear to have been anemic (if not moronic) – passengers were allowed to roam the vessel and were served meals from buffets!!!
More importantly, the Diamond Princess passengers likely represent the most thoroughly tested population exposed to COVID-19 in the world, making their fatality rate more relevant than anything else we have to look at now.
To date, four passengers have died (.57%) – all of Asian descent (there are anecdotal reports non-Asians are less severely impacted) and all over eighty years old. Keep in mind that the average age of cruise ship passengers tends to be close to 50 while Princess lines have an even older demographic. That means the fatality rate should be higher than that of the general population (i.e. the general population fatality rate should be lower than 0.57%).
CONCLUSION–I DON’T CARE WHAT I THINK
One of my market mantras is—I don’t care what I think. I gauge the overall market; what does the majority think. While I am not fearful that COVID-19 will be a globally lethal pandemic a la Spanish flu in 1918, millions of people are!
For equity markets, only perceptions matter and thus the Coronavirus is extremely deadly, even if it isn’t. So I expect continued volatility, and I’m at 80% cash with most of my equity in gold stocks.
Prime Mining Corp. (PRYM:TSXV, PRMNF:OTC) has a very rare mine plan – they believe they can achieve a 6-8 month payback on their gold mine in Mexico.
Folks, I rarely find oil wells with that fast a payback. When I find them, I buy them.
It’s a low capex (just US$30 million projected!) gold mine that management is forecasting will produce 60,000 – 70,000 ounces of gold a year. Similar mines in the region produce gold for roughly $750/per ounce (La Trinidad, El Gallo, La Cienega). At those rates, Prime would enjoy cash flows in the tens of millions of dollars per year.
Prime has just a CAD$32 million (US$25 M) market cap right now.
As management transforms their Los Reyes property into a simple, high grade heap leach mine, I expect the Market to reward the company A LOT.
This is the type of asset the Market wants now – a low capex mine that can generate a large amount of cash flow at current gold prices. Now, I think gold prices ARE going higher, along with the profits of all gold producers – but for Prime, gold prices can stay here and this company can still create an incredible amount of value for shareholders.
This management group – led by Chairman Dan Kunz, CEO Andy Bowering and COO Greg Liller – have put over a dozen mines into production. This asset – Los Reyes – would be the smallest and simplest.
There’s already a resource of more than 500,000 ounces, and a new resource calculation is due THIS MONTH. I’m expecting this to be a major catalyst for the stock. I wanted to bring this company to your attention BEFORE that happens.
In their powerpoint, they talk of producing 60,000-70,000 gold ounces a year, starting in 2022. In speeches, management says they believe they can keep costs at $750 per ounce that nearby mines have achieved.
Current gold prices are over $1600 per ounce. $1600 – $750 = $850/oz profit margin – multiply that by 60,000 ounces and cash flow has the potential to be in the tens of millions of dollars.
This is where The Big Money is made in junior mining – having an experienced production team that can take an exploration asset – priced at some low valuation like 0.2 Net Asset Value – and in two years they get it to production, spewing cash and being valued at 1-1.5 NAV. That’s ALL I’m looking for in junior mining right now.
The Company will complete a Prefeasibility Study to get the exact information they need to build the mine.
When I first heard Prime’s story I did two things:
I did the simple math I just outlined
Determined if management had the ability to execute. Once I had dinner with Chairman Daniel Kunz, that was a BIG YES.
Also, I like northern Mexico as a jurisdiction – there are MANY MANY operating mines nearby.
This is the kind of gold play I want to invest in – proven team, simple asset, good jurisdiction. This team has already put TEN mines into production.
As management delivers on their goal over the coming 20-24 months, the stock clearly has the potential to re-rate from its current CAD$30 million market cap.
I’ve spent most of my 30 years in the junior markets looking for assets that pay back their capital costs quickly – in oil & gas or mining. Los Reyes is a simple oxide gold deposit that tests show can be a great heap-leach mine. Heap leach is one of the lowest cost mining operations there is – investors routinely see grades of 0.5 grams per tonne OR LESS in heap leach operations.
Prime’s current resource is over 1.25 grams per tonne. That’s high grade for a heap leach, which often see grades of a half gram or less – AND heap leach is very low capex. Add in an experienced mine building team. This has everything I’m looking for in this gold market.
Exploration spending can be hard to raise in this market still – but capex spending, which brings immediate cash flow, is easier.
If Prime can deliver on their plan, it would put them in a peer group that gets valued at 5-6 x cash flow. There’s a lot of leverage there for investors – especially for a small $32 million market cap like Prime has.
Understand folks that the re-valuation I see here – plain as day – won’t happen overnight. But only a projected US$30 million of capex stands between now and then.
The key to the equity being re-valued is the market’s confidence in management to execute; to actually get this done.
That’s where I became completely sold on this company.
I had a long dinner with Chairman Daniel Kunz in Vancouver just over a week ago. Kunz is the former CEO of the industry heavyweight IvanhoeMines (the original IVN that was acquired by RioTinto). During his eight years as CEO there, he led the company to a $4 billion increase in market cap – nearly a tenfold increase in share price.
In addition to his time at Ivanhoe, Kunz also founded and built US Geothermal Inc. which recently sold for $250 million… and has helped build several other mines.
It’s unusual to seeing him jump on board as the Chair of a junior with a US$25 million market cap. BUT… Kunz has a lot of experience with gold geology in this part of Mexico. Kunz is a founding director of Chesapeake Gold, an explorer which operates right beside the Los Reyes project.
Kunz has a great reputation. His integrity is so high he actually resigned from Chesapeake – which has a nearby asset – when the Prime opportunity came into focus. He has done a deep dive on the geology and loves what he sees.
Men like him don’t get involved in a company this small for something to do… they get involved because they see an unusual opportunity to generate wealth quickly both for themselves and for shareholders.
Kunz has the ability and the reputation to get a simple but highly profitable heap leach mine into production. The Market will reward this team in advance of that.
By the way, Kunz and the entire leadership group at Prime actually don’t take a salary. They have elected to take their compensation in the form of shares… again suggesting that they believe Los Reyes is going to make them a lot of money.
Insiders are fully aligned with shareholders and motivated to create value here in a hurry – which is why Los Reyes which can get to production quickly is the perfect project.
Joining Chairman Kunz is CEO Andy Bowering. Andy is a successful company builder. The last venture that he founded was MillennialLithium (ML: TSXV) which came public at $0.15 and then rocketed to $4.62 in short order.
Bowering doesn’t need a job. In fact, he used his own personal wealth to buy Los Reyes because when it became available, he had to move fast.
Los Reyes is an exceptional project for a junior gold miner. I would go as far as saying that it is a perfect project.
Small miners don’t have the big balance sheets to fund a project with big capex. Los Reyes is so beautifully simple that all that management projects is just US$30 million of capex.
No big asset purchases or buildout, just bring in some contractors and go.
This team has already put a total TEN mines into production. Los Reyes is a small, simple but potentially very very lucrative deposit. This team can handle that. AND… it has LOTS of resource upside.
As I mentioned $30 million of capex is all that is required to bring Los Reyes to 60,000 ounces of gold production…which management says they will aim to recover all capex spent within just 6-8 months!
WHAT IF I’M WRONG – THE ANSWER
No investment is perfect, and here is the one potential problem with Prime’s Los Reyes asset: The deposit could become too big too fast.
You see, heap leach mines have lower gold recoveries than a more expensive mill. And only so much gold can leach out, so if you have too high a grade or a large deposit – well, a lot of that gold doesn’t get dissolved and recovered from a heap leach.
If Los Reyes turns into a major, multi-million ounce gold deposit, Kunz & Bowering would be leaving WAY too much on the table in a quick & inexpensive heap leach operation.
Management has publicly stated that they see the potential for a multiple increase in the current resource. Two million ounces is a target for all these juniors – that’s the minimum that mid-tier producers want to see to buy an asset.
Now folks, that is just an arm-waving number for now… BUT… there is a new resource calculation coming out THIS MONTH. (Yes I know how many days are left in February)
Only 40% of known mineral structures have been explored – there is still a full 10 km of strike length left to explore. At the end of the day, the current $25 million EV may look ridiculously small next to the size of the Los Reyes prize.
Back-of-the-envelope-style the valuation is already appealing with Prime trading on an Enterprise Value / Gold Resource level of barely USD$20. An argument can easily be made that the valuation should be two or three times that based on peer valuations.
IF – and it’s still an IF – this resource base jumps – then Prime’s share price would have to take that into account. For now, the stock has a discount for being unknown and for being small. But the stock has the potential to slingshot higher not just on more ounces, but also on a much higher value per ounce.
CONCLUSION – Ground Floor, Exciting Time
This is an exciting company and an exciting time for its shareholders.
You see, the company and the stock are at ground floor still, as almost no new data has been released. But Kunz and Bowering are moving very fast, and new data is pouring in.
Los Reyes is the perfect asset for this market – investors want low capex, high cash flow assets. Chairman Kunz has the right experience to put this into production.
The possibility for quick cash flow is starting to excite investors – but this game is barely getting started. That’s what has me excited – early days with a tight share structure and a simple business plan.
IF IF IF… all this new data turns this into a much larger deposit… well, absolutely none of that is priced in to the stock today. That’s a much bigger win, but could take a bit longer to realize it.
The market is just catching on to this story – last week a big block of stock was transferred from a mining company to a group of investors, that took a big overhang away.
It’s as close to a perfect set up for investors as I can see. I begged them to let me be part of the team here – because I can see A Big Win if gold prices just stay steady.
But I think the price will go a lot higher this year – and take Prime Mining with it.
I am long Prime Mining.
Keith
Prime Mining Corporation has reviewed and sponsored this article. The information in this newsletter does not constitute an offer to sell or a solicitation of an offer to buy any securities of a corporation or entity, including U.S. Traded Securities or U.S. Quoted Securities, in the United States or to U.S. Persons. Securities may not be offered or sold in the United States except in compliance with the registration requirements of the Securities Act and applicable U.S. state securities laws or pursuant to an exemption therefrom. Any public offering of securities in the United States may only be made by means of a prospectus containing detailed information about the corporation or entity and its management as well as financial statements. No securities regulatory authority in the United States has either approved or disapproved of the contents of any newsletter.
Keith Schaefer is not registered with the United States Securities and Exchange Commission (the “SEC”): as a “broker-dealer” under the Exchange Act, as an “investment adviser” under the Investment Advisers Act of 1940, or in any other capacity. He is also not registered with any state securities commission or authority as a broker-dealer or investment advisor or in any other capacity.
GH Research (GHRS – NASDAQ) posted some extremely impressive results in a Phase 2 trial earlier this year to help patients with depression.
Results were...
This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.
Strictly Necessary Cookies
Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings.
If you disable this cookie, we will not be able to save your preferences. This means that every time you visit this website you will need to enable or disable cookies again.
3rd Party Cookies
This website uses Google Analytics to collect anonymous information such as the number of visitors to the site, and the most popular pages.
Keeping this cookie enabled helps us to improve our website.
Please enable Strictly Necessary Cookies first so that we can save your preferences!
