Resource Sector Digest: Sell Gold And Buy Bitcoin? (NYSEARCA:GLD) (2024)

The 100^th (!) edition of:

Resource Sector Digest( vol.100– August 7, 2017)

an offering that is brought to you by Itinerant and The Investment Doctor.

As always, this edition of our newsletter will:

set the scene; highlight actionable ideas; comment on news releases; and link to relevant articles.

In case you missed out on previous editions of this newsletter, simply click here, here or here to catch up.

This indeed is the 100th edition of Resource Sector Digest, which means Itinerant and The Investment Doctor have been doing this for about two years now. Time to get the party started!

The Investment Doctor is writing this week’s edition, but I dare to say I can speak for Itinerant as well when I say it has been a fabulous two years wherein we encountered ups and downs in the market, and enjoyed a great interaction with you, our readers.

So we would like to thank you all for reading and commenting in the past few years, whether you agreed with us or not, all feedback is welcome and we always enjoy lively discussions in the comment section!

Setting The Scene

Most gold and silver owners have initiated their exposure to the precious metals as some sort of insurance policy against sudden economical or political shocks, as owning gold proved to be very valuable when the Russian Ruble crashed, when ATM’s in Cyprus were empty and when Greece was falling off a cliff once again.

The fact that owning physical gold allows you to keep a part of your assets outside of the financial system also appealed to investors, as the collapse of pretty much the entire financial industry in 2008 is still fresh in the minds of most market participants.

Some would only consider buying physical gold and silver whilst others are fine with ‘paper’ gold and paper silver and bought the Gold ETF (NYSEARCA:GLD) and Silver ETF (NYSEARCA:SLV), or one of the Closed End Funds like the Central Fund of Canada (CEF) or the Sprott Physical Silver Trust (PSLV) as closed-end funds sometimes trade at a discount to their respective NAV’s. The next chart shows you the premium or discount of the CEF unit price versus the Net Asset Value per share.

Source: stockcharts.com

‘Paper’ gold and silver hasn’t really under-nor outperformed ‘the real thing’, and the only argument against it would be the counterparty risk (you basically have to trust the ETF issuer the gold is really there).

Gold Price in US Dollars data by YCharts

It was perfectly valid to consider precious metals to be ‘the’ investment to protect yourself against the implosion of a political or economic system, but since the cryptocurrencies have been booming, more money has been flowing in that direction. Bitcoin (COIN) is perhaps the most ‘famous’ cryptocurrency and has recently broken through the $3,000 level.

And the hype ain’t over yet, as we have seen several articles claiming‘bitcoin is better than gold’, as ‘there’s a growing mistrust of national currencies’. The author of that Forbes article is even comparing the performance of Gold versus the Bitcoin Investment Trust (GBTC) (for an up-to-date comparison, see the next image).

GBTC 6 Month Price Returns (Daily) data by YCharts

Whilst I do understand the ‘desire’ to own and hold assets outside of the conventional financial system, I’m not particularly sure cryptocurrencies are the way to go. After all, it’s a ‘virtual’ asset, and you need to keep your bitcoins in a digital wallet. I won’t even argue hackers could hack into those digital wallets (the same thing could happen when someone breaks into your house and takes your gold and silver), but I’m particularly worried about how easy (or difficult) it would be to convert Bitcoins back into cash in an emergency situation.

Imagine you’re in country X which has had a fragile political system resulting in a continuously weakening domestic currency. It’s perfectly understandable to diversify your asset base into ‘things’ to protect yourself against the weakening domestic currency.

But imagine the fragile political system reaching a tipping point, and you wake up one morning after an overnight coup which will see the system being completely overthrown with a partial confiscation of the assets ‘inside the system’. For governments, it now is a piece of cake to shut down ‘the internet’ or block access to certain websites, so if that happens, how will you be able to convert your digital currency in ‘real’ currency? If you own an ounce of silver, you can buy a few loafs of bread whilst a gold coin could easily be used as a bribe to be prioritized for evacuation in the case of a civil war.

But what about a bitcoin? If you wake up in an entirely new world with new principles with restricted access to the internet, how will you be able to cash in your bitcoins or at least use it to barter for (necessary) goods?

Long story short, I (The Investment Doctor) would feel much better with a few ounces of physical gold under my pillow rather than owning a few bitcoins. Tangible assets are usually the better and safer choice if you’re expecting Armageddon anyway.

I realize this is a thought-provoking situation, and I would like to invite you all to chime in in the comment section. Whether you agree or disagree, please keep the discussion civil!

Also note, this Setting the Scene section was written by The Investment Doctor and represents his personal opinion and is not necessarily the opinion of RSD co-author Itinerant.

Actionable Ideas

• The Investment Doctor has written an update on Randgold Resources (GOLD) which saw its net cash position come in at almost $600M as of at the end of June. Some commenters suggested the company might chase Semafo (OTCPK:SEMFF) or Hummingbird Resources (OTCPK:HUMRF) as it will need a backup plan for when its Tongon gold mine will be depleted, early next decade.
• Perhaps not a ‘pure’ commodity play, but Transocean (RIG) has beaten the expectations which could mean the worst is over in the sector. Several authors have voiced their opinions about the results and as it was difficult to pick just a few of the commenters, you can read all recent comments and articles here. Other drillers like Seadrill (SDRL) and Atwood Oceanics (ATW), which will merge with Ensco (ESV). Vladimir Zernov is following this merger story from closeby.

News Releases

This week was very busy as several miners and oil and gas producers released their production results and financial results. It’s perfectly possible some companies were omitted from the news release-section this week, and we do apologize in advance!

After pre-releasing the production results, the mining companies have started to release their financial results as well. Guyana Goldfields (OTCPK:GUYFF) reported a total revenue of $37.9M and an AISC of $1,144 per ounce (Itinerant released an update on Friday morning) whilst Africa-focused Endeavour Mining (OTCQX:EDVMF) produced 152,283 ounces of gold at an all-in sustaining cost of $897/oz.

CNOOC (CEO) confirmed the BD Gas field in Indonesia (EIDO) (IDX) has now been brought into production with a current production rate of 7,200 boe/day. The expected peak production rate of 25,500 boe/day will be reached next year.

The Athabasca basin in Saskatchewan, Canada still is one of the hot spots for uranium exploration. Denison Mines (DNN) has now announced a new high-grade discovery after drilling 0.8 meters of 1.1% U3O8 at Waterbury Lake, whilst NexGen Energy (NXE) released the results of the long-awaited PEA on its Arrow uranium project.

On the corporate side, Osisko Gold Royalties (OR) has completed the acquisition of the Orion Mine Finance royalty & stream portfolio and announced its financial results later in the week, whilst Imperial Metals (OTCPK:IPMLF) has closed a$20M bridge loan with two major shareholders.

It’s dividend time at Bonterra Energy (OTCPK:BNEFF) again, as the company confirmed its monthly dividend at 10 cents (Canadian, obviously) per share, despite the recent weakness in the oil and gas market.

Silver Bull Resources (OTCQB:SVBL) has closed the second and final tranche of a private placement, raising a total of C$1.7M. The company has been in a bit of an identity crisis as it’s hesitating between profiling itself as a silver company or a zinc company as its Sierra Mojada project in Mexico contains both metals.

Energy Fuels (UUUU) is still waiting for the Uranium (URA) market to recover, but the company eased the fears of the market by confirming it had a working capital position of$35M, of which $18.7M is hard cash. It also sold 300,000 pounds of uranium at a price of $50.14 per pound. Meanwhile, Uranium Participation Corp (OTCPK:URPTF) reported its NAV was just C$3.23 per share which means the current market price of the ‘holding’ company is approximately 18% higher than the fair value.

Silvercorp’s (SVM) shareholders will be happy, as the company reported a net income of $0.07 per share in the first quarter of the financial year, whilst the operating cash flow was a very respectable$16.9M after selling 1.5M ounces of silver, almost 16M pounds of lead and 5M pounds of zinc. The by-products allowed Silvercorp to report an AISC of just $4.7 per ounce.

A tonne of financial results rolled in in the second half of the week, as Great Panther Silver (GPL), Endeavour Silver (EXK), Alamos Gold (AGI), Asanko Gold (AKG), Avino Silver & Gold Mines (ASM), Richmont Mines (RIC) and Taseko Mines (TGB) reported their financials. That was a serious overflow of information of one day, and we’re sure the mining-focused authors on Seeking Alpha have started crunching the numbers. Expect some interesting earnings-focused articles to be published shortly, especially as Kinross Gold (KGC) also published its financials, whilst Hecla Mining (HL) released an exploration update and confirmed it has secured the mill for its San Sebastian ore until 2020.

Oil and gas companies are usually a bit slower to report their earnings, but Crew Energy (OTCQB:CWEGF), TORC Oil & Gas (OTCPK:VREYF), Seven Generations Energy (OTC:SVRGF) and Canadian Natural Resources (CNQ) already reported their financial results. The latter also announced a quarterly cash dividend of 27.5 cents per share (Canadian Dollarcents).

Victoria Gold (OTCPK:VITFF) reported some stellar drill results from its Popeye target on the Dublin Gulch project in Canada’s Yukon Territory. With 4.3 meters containing 46.63 g/t gold, the company pulled some un-Yukon-like assays out of the ground.

In the diamond sector, Lucara Diamond Corp (OTCPK:LUCRF) reported a total revenue of $80M and an EBITDA of almost $52M. Itinerant still follows Lucara, so you might expect an update from him as well!

Capstone Mining (CSFFF) and HudBay Minerals (HBM) also reported earnings, and we have the impression things are finally looking up for copper producers. First Quantum Minerals (OTCPK:FQVLF) is lagging as it has sold its entire production for the remainder of this year at a substantially lower copper price, so its cash flows will only pick up from next year on. The higher copper price now also makes Western Copper and Gold (WRN) more appealing for potential suitors. For the more risk-averse investors, the Copper Miners ETF (COPX) might be a safer choice as even major producers like Freeport McMoRan (FCX), Southern Copper (SCCO) and Teck Resources (TECK) are sometimes very volatile.

In Colombia, Gran Tierra Energy (GTE) reported a 22% higher oil production rate resulting in a funds flow from operations of $51M. Ecopetrol (EC), another Colombia-focused oil company will announce its financial results on Tuesday after the closing bell.

Gold Resource Corp (GORO) has reconfirmed its full-year production outlook after reporting a 6,000 ounce gold production in Q2, as well as 400,000 ounces of silver. The EPS came in at $0.02, and GORO will pay a 0.5 cent dividend.

Platinum Group Metals (PLG) joint venture partner JOGMEC has now completed the requirements to earn a 28.35% stake in the Waterberg project, and both companies have now formed a joint venture whereby PLG owns 45.65% of the property, JOGMEC 28.35% and BEE partner Mnombu Wethu 26% (Platinum Group owns 49% of the BEE partner as well.

Endeavour Silver (EXK) wasn’t the only silver miner which disappointed the market, as First Majestic Silver (AG) lost almost a quarter of a billion of its market cap after disappointing production results due to lower development levels and lost time due to work stoppages and road blocks. Is the market overreacting?

NexGen Energy (NXE) reported the results of the Preliminary Economic Assessment on its Arrow uranium project in Saskatchewan. The economics look very impressive with an after-tax NPV8% of C$3.5B based on an uranium price of $50 per pound. The average annual production rate will be 18.5M pounds, with an average output of in excess of 27M pounds in the first five years of the mine life. Will Cameco (CCJ) now finally make a move to strengthen its position in the Athabasca Basin?

Solitario Exploration (XPL) released the disappointing results of a PEA on its Florida Canyon zinc project, where a Votorantim subsidiary is earning a 30% stake. The Investment Doctor has the impression this PEA has been rushed to show some sort of valuation for the property, but Solitario just can’t be happy with an after-tax NPV of US$198M (which is lower than the $214M capex), and an IRR of just 24.7% using a zinc price of $1.20 per pound. If the company would have used a more conservative zinc price of $1.1 per pound, the IRR would have been just 21%. Back to the drawing board, as more drilling will undoubtedly increase the value of the project; this PEA looks very premature and TID has no clue why Solitario completed one at this stage.

Birchcliff Energy (OTCPK:BIREF) is reducing its net debt after selling non-core assets for a total consideration of C$142M. The asset was producing 3,600 boe/day and had a 2P reserve of 48M barrels of oil-equivalent. Birchcliff will release its Q2 financials on Thursday.

And finally, B2Gold (BTG) confirmed it remains on target to start producing gold at its Fekola project in Mali on October 1 st as the construction activities remain three months ahead of schedule. Quite refreshing as large mines usually come in late and over budget.

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Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

The Investment Doctor

The Investment Doctor is a financial writer, highlighting European small-caps with a 5-7 year investment horizon. He strongly believes a portfolio should consist of a mixture of dividend and growth stocks.

He is the leader of the investment group European Small Cap Ideas which offers exclusive access to actionable research on appealing Europe-focused investment opportunities not found elsewhere. The a focus is on high-quality ideas in the small-cap space, with emphasis on capital gains and dividend income for continuous cash flow. Features include: two model portfolios - the European Small Cap Ideas portfolio and the European REIT Portfolio, weekly updates, educational content to learn more about the European investing opportunities, and an active chat room to discuss the latest developments of the portfolio holdings. Learn more.