Date / Location of update
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Comments |
20th August 2007, Weekly Update
(Stock price: US$2.31)
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We purchased the following gold/silver stocks:
...Western Goldfields (OTC: WGDFF) in the US$1.90s. WGDFF is no longer
in the TSI Stocks List because it was 'stopped out' at US$2.18 last
week. However, in our own trading/investing we never use protective
stops. We sometimes employ them at TSI for positions defined as
"trades" because this is the only form of risk management we are able
to demonstrate via the Stocks List (the TSI Stocks List is not designed
to operate like a portfolio) and because the use of protective stops on
individual stocks is a reasonable risk management approach for most
people. For our personal financial endeavours, though, we prefer to
manage risk on a portfolio-wide basis rather than on a stock-by-stock
basis.
The reasons we decided to buy some WGDFF on Thursday were: a) we only
had a small position in the stock, having exited two-thirds of our
original position when it traded in the US$2.90s a few weeks ago; and
b) WGDFF is less vulnerable to a downturn in metal prices than any
other development-stage gold stock we know of because it has forward
sold about 40% of its first 6 years of gold production at US$801/oz,
and yet it had sold off just as viciously as the other stocks.
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6th August 2007, Weekly Update
(Stock Price: US$2.65)
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We added WGDFF to the
TSI Stocks List at US$1.95 on 18th April as a trade with an upside
target of around US$3.00. We then exited on 23rd July after this target
was essentially reached (we exited at US$2.94), but stated that we
would return WGDFF to the Stocks List if it pulled back to support in
the US$2.50s within the ensuing few weeks.
WGDFF traded as low as US$2.50 over the past week so we have returned
it to the List at US$2.55 (the middle of our suggested buy range). This
is a trade with an initial 'stop' at US$2.18 and an upside target of
US$3.50-US$4.00.
A chart is included below and our previous comments on the stock can be
read at http://www.speculative-investor.com/new/WGDF.html.
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23rd July 2007, Weekly Update
(Stock Price: US$2.94)
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We added WGDFF to the
Stocks List about three months ago as a trade in anticipation of a move
up to US$3. The stock ended last week at US$2.94, so our target has
essentially been reached and we are therefore going to exit. Based on
our 18th April entry at US$1.95, the profit on the trade was 51%.
With the intermediate-term outlook having turned more positive for the
gold sector there's a reasonable chance that WGDFF will continue its
upward trend over the coming months. With this in mind, an alternative
to exiting now would be to stay 'long' in anticipation of additional
upside. If you choose this path it will, we think, make sense to use a trailing stop of around 15%.
WGDFF is one of the few junior gold stocks that is liquid enough to
trade efficiently on a short-term basis. We might therefore return to
this stock in the future. In fact, we will return WGDFF to the Stocks
List if it pulls back to support in the US$2.50s within the next few
weeks.
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20th June 2007, Interim Update
(Stock price: US$2.33)
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WGDF
broke-out to the upside earlier this week (see chart below) in response
to news that the company's Mesquite gold mine would reach commercial
production three months ahead of schedule.
We will raise our protective stop to US$2.08 and will exit the stock if it trades up to around US$3.
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4th June 2007, Weekly Update
(Stock Price: US$2.07)
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WGDF has spent almost
the entire time since late-March oscillating between US$1.90 and
US$2.00, but on Friday it finally broke upward from this narrow range.
Based on the 3.87M-ounce measured-and-indicated resource at the
company's Mesquite gold mine in California and the likelihood that the
mine will be producing gold at the annual rate of 165K ounces by this
time next year, we think WGDF would be fairly valued at around
US$3.00/share. In other words, we perceive upside potential of around
50% based on valuation.
From a technical perspective a move up to around US$3 (the May-2006
peak) also looks feasible, although there is significant resistance at
US$2.50 and WGDF's ability to rally will obviously be influenced by the
overall market for gold shares.
WGDF is in the TSI Stocks List as a trade and could still be purchased
for a trade -- with an anticipated holding period of 1-3 months -- at
the current price. As noted above, the upside potential is significant
and risk can be managed be placing a protective stop at US$1.85 (an
increase from our initial $1.58 stop).
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7th May 2007, Weekly Update
(Stock Price: US$1.91)
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About two weeks ago we added
development-stage gold miner WGDF to the TSI Stocks List as a trade
with an upside target of US$2.70-$3.00. As discussed at the time, the
main reason we wouldn't buy WGDF as a long-term investment is the
forward-sales program (75K ounces/year for 6 years beginning in 2008)
that the company will soon be putting in place as part of a debt
facility. However, while the hedge program will, in our opinion,
constitute an important long-term negative, it could turn out to be a
short-term positive because if it is implemented with the spot gold
price at or above its current level of $686 then the average exercise
price of the forward sales contracts will probably be around
$800/ounce. This will potentially create demand for the stock because
$800/oz will look high to most people.
The sizeable difference between the spot price for gold and gold for
delivery a few years from now stems from the difference between gold
and US$ interest rates. To be specific, forward sales contracts are put
in place by borrowing gold from a central bank (via a bullion bank
intermediary) at, say, 1% per year, selling the gold into the spot
market to obtain dollars, and then investing the dollars in Treasury
debt yielding, say, 5% per year. This interest rate differential, less
a small commission for the bullion bank, effectively gets added to the
spot price to determine the forward sales price. For example, if the
interest rate differential less the bullion bank's commission worked
out to be 4% then gold for delivery in May of 2011 would be priced at
$802 ($686 -- the current spot price -- invested for 4 years at a
compound annual rate of 4%).
With reference to the following chart, notice that WGDF has been
trading in an extremely narrow range since late March. It has, in fact,
spent about 6 weeks partially retracing the gains made in a single day.
This has the look of a consolidation within a short-term upward trend.
WGDF is an interesting speculation near its current price.
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18th April 2007, Interim Update
(Stock Price: US$1.95
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WGDF is in the process of putting the California-based Mesquite gold
mine back into production. The mine was previously owned by Newmont,
but was shut down in 2001 due to the low gold price and sold to WGDF in
2003. With the recent signing of a US$105M debt facility, mine
development is fully financed. According to the company, production
will be 165K ounces/year and will commence in the second quarter of
2008.
Mesquite has 3.87M ounces of gold in the M&I category, 2.77M of
which are classified as Proven and Probable reserves. This means that
the market is valuing Mesquite's reserves at only US$76/ounce, which is
very low for a US-based project only 12 months away from production.
The only significant problem we can see is that in order to obtain its
debt financing the company has agreed to a 450K-ounce hedge program
(75K ounces per year for 6 years). The hedge constitutes only 45% of
the first 6 years' production, but it is enough to create a worrisome
risk.
Just to be clear: we have no problem with hedging per se. For example,
with think it was reasonable for Northgate Minerals to forward sell 50%
of its 2007 copper production, and, with the nickel price in the
stratosphere, it would be reasonable for Crowflight Minerals to forward
sell the first 12 months of production at its Bucko project and thus
lock-in a huge initial cash flow (we don't know if CML's managers are
considering any hedging, we are just saying it would be reasonable if
they did). In general, locking in the selling price of UP TO 12 months
of commodity production will make sense when commodity prices are near
multi-year highs.
But WGDF's management is about to enter contracts to deliver gold at a
pre-determined price as far out as 2014. The thing is, nobody has any
idea where gold will be trading a few years from now. In our opinion it
will be trading well above today's level, but the risk, for miners who
commit their future production, is that major problems within the
monetary system will cause it to move to an unimaginably high price.
And if that happened then a gold mining company that had committed to
sell 'only' 45% of its annual production at a price that looked
reasonable in 2007 could end up with a large-enough mark-to-market loss
on its hedge book to render the company insolvent; and who wants to own
a gold mining company that has the potential to go 'belly up' in
response to a large rise in the gold price?
In addition, committing to sell a significant chunk of production at
what eventually proves to be a low price could become problematic even
if the company's bankers are willing to ignore the huge mark-to-market
loss. The risk is that operational or environmental issues force the
mining company to halt its production for an extended period. If this
were to happen then the company would have to buy gold at the current
market price in order to fulfill the obligations under its hedging
program.
WGDF's senior managers obviously believe they are doing the right thing
by going down the debt/hedging route rather than diluting the stock via
another equity financing. However, we think near-term dilution would
have served long-term shareholders better than taking on the risk
inherent in a combined 6-year debt package and hedging program. In our
opinion, junior companies that need money to build mines should take-on
the maximum amount of debt they are able to take-on WITHOUT having to
lock-in the price on more than 12 months of future production.
With that having been said you are probably wondering why we are adding
WGDF to the Stocks List. Well, the hedge book would prevent us from
taking a long-term investment position in the stock, but 2009 is the
absolute earliest the hedging could create a problem and we will be
long gone by then. We are interested in WGDF as a trade because its
valuation is attractive and its chart (see below) reveals some
short-term upside potential. For a development-stage junior, the stock
also offers decent liquidity.
If things go according to plan then we will exit within the next two
months at US$2.70-$3.00 per share. Otherwise, we will get stopped out
(we will set an initial stop at $1.58).
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