Why Gold Miners Just Keep On Diggin’ A Deeper Hole For Themselves

What does Peter Schiff not understand?

If only gold mine operators could flatten their debt mountains as easily as they can the real things.

Mining companies built up record borrowings to boost gold output during a 12-year bull market in the metal that stopped dead in 2011. The 42 percent slump in prices since then leaves them effectively servicing the debt with devalued currency.

Gold mining companies boosted debt to take advantage of rising prices.

Output that might have fallen as gold sank has continued on to all-time highs as producers need to generate enough cash from sales at lower prices to keep up payments on what they owe.

That’s squeezed profitability and share prices, with a benchmark index of 30 of the biggest precious-metals miners falling to the lowest levels since 2001, when bullion was barely a quarter of its current rate of $1,110 an ounce.

Equities tumble to their lowest since 2001.
Equities tumble to their lowest since 2001.

“The industry is in a shocking state,” said Mark Bristow, head of Randgold Resources Ltd., the producer with the best share performance in the past decade. “Everyone is still focused on production and not on profitability.”

Growth in output has exacerbated an oversupply that makes a recovery in the bullion price harder to achieve, Bristow said.

Gold production continues to rise even as prices fall.
Gold production continues to rise even as prices fall.

Debt held by 15 of the biggest producers including Barrick Gold Corp. and Goldcorp Inc. hit a record $31.5 billion at the end of the first quarter, up from less than $2 billion in 2005, according to data compiled by Bloomberg Intelligence.

That was spurred by the dash for growth when prices were rising, including $8.5 billion for Barrick’s mine in the Andes mountains and C$8.2 billion ($6.3 billion) for Kinross Gold Corp.’s bet on Mauritania. In the past decade, world output expanded 24 percent to last year’s 3,114 metric tons.

“The whole industry is being encouraged to continue to live on hope,” Bristow said. “The question is how much cash flow do you need to expunge the debt? There’s nothing really left to create value for shareholders.”

Sell signals from Eric Sprott

Sell signals from Eric Sprott according to information published by the Canadian Insider, Mr. Sprott has made four separate sales since the end of September. In all, Mr. Sprott sold 375,000 units at prices ranging from US$10-to-US$9.44.

 

Bloomberg Despite those four sales – which resulted in gross proceeds of US$3.6-million — Eric Sprott still has almost US$35-million of skin in the game.

Over the past six weeks, Eric Sprott — one of the country’s best known gold bugs — has been selling units in the Sprott Physical Gold Trust, a fund formed to hold physical gold.

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Here are the details: Sept. 30 (15,000 at US$9.96 per unit); Oct. 2 (40,000 at US$10); Oct. 31 (210,000 at US$9.62) and Nov. 6 (110,000 at US$9.44.) Despite those four sales – which resulted in gross proceeds of US$3.6-million — Mr. Sprott still has almost US$35-million of skin in the game. According to the most recent filing on SEDI, he owns 3.49 million units in the fund.

Related
Barrick Gold co-president joins insider buying spree
The gold mining meltdown is so bad even activist investors won’t touch it
Sprott adds to investment management team in Toronto, New York
In its IPO, the fund raised US$442.5-million. Since then it has been back to the market on six separate occasions and has raised almost US$2-billion. Its most recent offering was in September 2012.

Glen Williams, a spokesperson for Sprott, said in an email message. “We don’t comment on Eric’s personal trading activity but Sprott’s view on gold is unchanged.” Another Sprott source said that Eric has been using the proceeds to invest in gold and silver equities which offer greater leverage.

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Sprott Physical Gold

Gold Buddha
Gold Buddha (Photo credit: @Doug88888)

Gold (GC : NASDAQ : US$1415.40), Net Change: 22.30, % Change: 1.60%, Volume: 146,830
Sprott Physical Gold (PHYS : NYSE : US$11.84), Net Change: 0.11, % Change: 0.93%, Volume: 1,469,493
Go for torque, go for quality or go for the physical? Worries about a potential U.S. military strike against Syria sent oil and
gold prices higher on Tuesday. After almost a 30% fall in the gold price (peak to through) in H1/13, all gold producers without
exception have had to adjust to the new environment.

Even producers with a better quality asset base have had to improve their working capital management, adapt exploration budgets, and in some cases postpone/suspend lower priority development projects. Higher cost producers, have had to come up with new business models (new mine plans) in order to survive in the world of lower gold prices. Higher leveraged companies have had to go even further by postponing key capital projects and searching for alternative ways to generate cash (non-core asset sale for example).

Over the past month, gold shares have recovered some of their losses following the rebound in the gold price and more clarity on managements’ revised plans. At this stage, it is important to look at gold equities by evaluating a number of key parameters in order to select those companies that are best positioned to weather likely higher gold price volatility in the near term without needing to make significant changes to their growth plans and/or business models.

Investors should more on defensive gold equities with a low-cost asset base, low leverage and the ability to deliver development plans even in a volatile gold price environment. Barron’s published an interesting technical comment on gold this week, “the [gold] market negated its June breakdown and now has its sights set on a much more important feature – the former price floor in the $1,542 an ounce area…If gold can reclaim that level, it would be a 30% gain and a bull market by definition.”

Separately, it is worth noting that Sprott Physical Gold Trust now trades at NAV or at a slight discount. Historically, PHYS’s premium/discount to NAV (since inception on February 25, 2010) has ranged between a discount of 2.49% (May 27, 2013) and premium of 23.68% (May 25, 2010).

Sprott Inc. Buy Eric Sprott’s Advice – Not This Stock

Sprott School of Business
Sprott School of Business (Photo credit: Wikipedia)

SII : TSX : C$3.50
HOLD 
Target: C$3.75

COMPANY DESCRIPTION: 
Sprott Inc. manages approx. $9.9 billion in client AUM. The company currently operates through four distinct business units: Sprott Asset Management LP (mutual funds and hedge funds), Sprott Private Wealth LP (wealth management services to HNW individuals), Sprott Consulting LP (management, administrative and consulting services to other companies), and Sprott US Holdings. Sprott Inc. is headquartered in Toronto, ON.

We are maintaining our HOLD rating and lowering our 12-month target price to C$3.75 (from C$4.00) mainly due to mark to marketing our YTD
AUM growth to -6.0% to reflect our estimate of -5% market depreciation and -1% (or -$100 million) in net redemptions; we are slightly lowering our performance fee estimate to $1.19/share (from $1.24/share).
Investment highlights
 Base EBITDA higher than expected. SII reported base EBITDA of $15.6 million for Q4/12 vs. our $10.4 million estimate. However, on an
adjusted basis, base EBITDA was closer to $14.0 million (up 34.5% QoQ; down 12.5% YoY). The variance related to higher than expected base
management fees ($29.2 million vs. our $28.0 million estimate) and lower than expected expenses (i.e., compensation / benefits partially
offset by higher G&A).
 AUM increased 8.7% YoY due to bullion launches. For Q4/12, Sprott’s AUM growth of -3.6% was slightly ahead of our forecast of -4.2%. Over
the past 2+ years, fund performance has lagged peers and benchmarks due to the firm’s AUM bent toward commodity-related investments. We
believe this will continue to strain flows in SAM; however, the company continues to launch new product offerings to support AUM growth.
 Product update. Sprott has three growth initiatives: (1) pursue global fund opportunities (US$110 million seed investment for offshore fund);
(2) develop institutional business (US$25 million seed investment for Sprott Macro Managers Fund); and (3) increase performance fee eligible
AUM ($123 million raised YTD through U.S. Limited Partnerships and reopening of Sprott Private Credit Trust).
Valuation
Our 12-month target price is based on a sum-of-the-parts approach, derived by a: (1) 8.5x NTM base EBITDA multiple; and (2) a DCF model to value the performance fee business (we value at $1.19/share).

Sprott Funds Shrink – Causes Investor Stink

Sprott School of Business
Sprott School of Business (Photo credit: Wikipedia)

few months after closing its acquisition of Flatiron Capital Management — rumoured to be a $10.7-million deal, about half of which was paid in stock — Sprott Asset Management has made some substantial changes to some of the funds it acquired.

When the acquisition was announced in June, the funds had about $275-million in assets; when the deal closed two months later, the funds had about $260-million under management. At the end of November the funds were home to about $140-million in assets.

For instance in response to “a most unfortunate and most undesired situation,” the changes include:

• Front Street Investment Management Inc. an affiliate of Front Street Capital and Sprott, will be appointed as co-investment advisors to three funds for at least six months. (The term can be extended.)

The funds are the Front Street Strategic Yield Fund Ltd., the Flatiron Strategic Yield Ltd., and the Sprott Flatiron Yield Trust. Prior to this, the funds — a number of which have suffered major redemptions of late — were managed by Flatiron Capital Management. That firm has now been relieved of its duties.

Some investors are concerned that the new management team lacks the necessary experience to run the funds given that the team at Flatiron was acquired by Sprott as a means of broadening its product base. As well, the Flatiron team has a 12-year track record of strong performance. The new managers are Frank Mersch and Eric Dzuba from Front Street and John Wilson, Scott Colbourne and Michael Craig from Sprott. The newly-merged team is expected to have a different approach to investing. “No one is in love with any stock,” was the message in Monday’s conference call.

Of particular interest is the Front Street Strategic Yield Fund Ltd., a market neutral fund advised by Flatiron on which Front Street was the manager. It was formed “to preserve capital in market downturns and to participate in rising markets,” by investing in convertible debentures and warrants of Canadian issuers as well as merger arbitrage.

Flatiron, which employs top-down macroeconomic and quantitative analysis to execute their investment strategy, posted a net asset value that was down by 31.99% in November. “We are disappointed at Flatiron and at Front Street,” said one frustrated advisor on Monday’s conference call who was critical of the way that investors have been kept informed about developments at the fund. The fund’s NAV was $6.24. One month earlier the NAV was $9.184.

In secondary market trading, the units closed Monday at $6.01.

In a conference call Monday, investors were told that the problems at Flatiron weren’t related to leverage but a series of events — a so-called “perfect storm” caused by liquidity (including a loss on a major investment in Great Basin Gold), which led to a concentration of the securities in the portfolio that eventually caused a withdrawal of bids for the securities.

One other fund Flatiron Market Neutral LP is being wound up effective Nov. 30. In a release it was said that there will be “no further redemptions or subscriptions in FMN LP will be processed, which Sprott believes will allow for the liquidation of FMN LP’s portfolio securities in a consistent and orderly manner.”

Sprott Power Corp. All Things Sprott

Sprott School of Business
Sprott School of Business (Photo credit: Wikipedia)

 

Nov. 26

because Sprott is always ahead of the curve he is worth watching

Sprott Power Corp. 
SPZ : TSX : C$1.06
BUY Target: C$1.45

Company Description

Sprott Power Corp. owns, operates, and develops wind farms in Canada. The company currently has net 95 MW in operation. Sprott Power’s development portfolio includes 47 MW of projects which have been awarded PPAs and over 700 MW of earlier stage projects. The company is aiming to have 500 MW in operation by 2015.
All amounts in C$ unless otherwise noted.

Investment recommendation
We are reiterating our BUY rating on Sprott Power following the close of its acquisition of Shear Wind (SWX-V | not rated) and reporting of third
quarter results. We take a positive view towards the Shear Wind transaction as it increases Sprott Power’s operating capacity, we estimate is accretive to DCFPS, appears attractively priced, and has the potential to drive substantial dividend increases.

The acquisition expands Sprott Power’s fully contracted operating capacity by an impressive 51% or 31.2 MW. We expect the addition of Shear Wind to be accretive to DCFPS by 1.2¢/share, representing a 17% improvement. The acquisition has an enterprise value of ~$79 million, which equates to ~$2.5 million per operating MW, ~11% below the precedent transaction average of ~$2.8 million/MW.

Bottom line, we believe the transaction will lead to an improving payout ratio and the ability to increase the dividend materially through 2015. We are reiterating our BUY recommendation and increasing our 12-month target price to C$1.45 from C$1.30. Our revised target price implies a potential return of ~42%, including the dividend yield of 5.0%.
Investment highlights
Acquisition of 31.2 MW of operating wind capacity (63.7 MW gross)
 $79 million enterprise value o $33 million, plus $51 million of assumed debt offset with $5 million of cash
 Expected DCFPS accretion of 1.2¢/share (17% increase)

Sprott Managment – Oil Junior Picks

English: This map shows the extent of the oil ...
English: This map shows the extent of the oil sands in Alberta, Canada. The three oil sand deposits are known as the Athabasca Oil Sands, the Cold Lake Oil Sands, and the Peace River Oil Sands. (Photo credit: Wikipedia)

 

July 18

LEGAGY OIL & GAS (T-LEG) $5.82 +0.42

PAINTED PONY (V-PPY) $7.96 -0.03

WHITECAP RES. (T-WCP) $6.62 +0.38

ATHABASCA OIL (T-ATH) $12.05 +0.02

Eric Nuttall ( Sprott ) interviewed on Canadian TV Monday July 16  – I guess you wouldn’t be too surprised to hear him say that some of the more junior oil and gas stocks are “absolutely, jaw-dropping cheap.”

There has been a crash of some significance over the last five months on all resource stocks, but if you have been in the oil and gas sector, you have been hit hard as well.

 

Look at the return on two of his top picks from his visit last August.

juniors have lost almost half one’s money. Surprise, surprise…

Tthere has been a lot of that in the oil and gas sector, with many of the more juniors having a three or four-for-one

sale.

 

 Nuttall has these three top picks going forward.

 

Legacy Oil and Gas (again…and yes it has debt folks);

 

 

Whitecap Resources and

Athabasca Oil

for those that like charting and has some relatively intriguing news expected in the coming while.

 

We thought we would look at these three years charts on Nuttall’s three picks (next page) and apply the

 

 

 

The Schacter idea like it has in the past…buy the oil stocks in October-ish as Schachter says and sell in February. Once again, that statistical  anomaly seems to work again (the suggestion is that you go from the weak season for oil demand in the fall, to the heavy oil use season in the winter and that’s usually a million and a half barrels of extra demand).

Very large sums lost in the resource sector over the last while, hopefully this October/February, Schachter thing, might be worth trying in the fall to get some of that lost money back.

 

Meanwhile, Nuttall suggests the gassy stocks might be a bit ahead of themselves and the oily stocks he suggests are cheap.

One thing of course that could throw these plans into a dust bin is the continuing deterioration of world economies. Suddenly China is only growing by 7 1/2% (hey folks, 7 1/2% – there is nothing wrong with that). India is slowing to 6% and so forth. The big problem of course is the United States and Europe. If the U.S. goes into recession and Europe goes into something worse than that, well, that “Shack Attack” might not work.