Thursday, August 12, 2010

Ford - leading US auto?

I have been bullish on Ford since GM and Chrysler got bailed out by the government. From a pure company fundamentals perspective I stand correct, however from a share price perspective it’s a mixed bag and that’s the topic for this article. The company has produced outstanding sales numbers compared to previous years. It has two highly anticipated cars coming to North America in the next year the European Fiesta and Focus. When one compares the existing North American Focus and the UK version there is no comparison; having driven both all I can say is that the UK version should sway a lot of hatchback and hot-hatch buyers over to the Focus. The company has had great success with its Sync system, increasing the number of vehicles sold with the system installed. It is also well on its way to meeting new emission guidelines even with its trucks (which have been very popular even globally). Ford has introduced a technology similar to Fiat and Alfa’s ‘Multiair’ technology which allows the engine to produce more peak power and higher efficiency numbers, thus allowing engineers to put smaller blocks in trucks and vans. The company has made a real commitment to renewable energy as well. Ford announced that it will be installing a 500 kilowatt solar power collection system for its Detroit assembly plant. It will save Ford $160,000 per year in electricity costs; however more importantly it will be the largest solar facility in Michigan and will give the company vital experience with solar power.

If this is all true then why did the stock dip into the $9 range? There are several reasons I believe for this happening. First and foremost the stock receives heavy volume and one can often observes spikes around macroeconomic news. It would appear that over the past 6 months the stock has deviated from the fundamentals coming from the company and stock movements have been more based on expectations for economic recovery. What will most likely be the critical success factor for the stock will be if Ford can continue to show that it can improve its numbers and performance regardless if the economy remains soft. In the short term there will obviously some resistance to the stock breaking out above $14 as the stock peaked in April at $14.46 and fell until June.

There is a lot of confidence inspiring news such as Bill Ford being awarded back dated salary from 2008, on the basis of the company getting back on its feet. Ford made $2.7 billion last year and $4.7 billion in the first half of this year, its most profitable first half in more than a decade. Although these figures cannot compare to the company’s glory days, what is more important is that the figures are improving substantially.

Ford received another debt rating upgrade from Fitch on August 6th to BB-. This comes after a whole string debt rating upgrades started in March this year led by Moodys. Ford has made it known that it wants to get back its investment grade rating by late 2011 or 2012. The company has already retired $7 billion in debt saving $470 million in interest.

Ford seems to be doing everything right, improving its products, simplifying its business, focusing on the environment, and improving its Balance Sheet however will it be enough to lure investors back into US auto?

Friday, July 16, 2010

Spreading the Wealth - Spread & Long/Short Strategies

The magnitude and speed at which financial innovation has occurred over the past thirty years is nothing short of astonishing. Increasingly complex financial products give investors the flexibility to implement more complex investment strategies. It is impossible to find the ‘perfect’ investment style or strategy; rather different strategies cater to different levels of investor sophistication and goals. Before trying to decide on a particular investing one must consider their own particular risk tolerance, time horizon, investment objective, need for liquidity and so on. Investing in a financial product with an initial lockup period might provide an excellent risk-adjusted return however would be completely in-appropriate for an individual that needs unobstructed access to their funds.

Market leaders are companies that are expected to show more potential than their peers or the market and posses a position of dominance compares to the offerings or market position of their peers. The opposite can also be said for companies that are ‘under performers’ relative to their sector, industry and index. This is where the concept of a spread trade comes in. In any given sector an investor can select what they think to be the leader(s) and underperformer(s) and exploit the spread (difference) between the outperforming leader and underperforming lager. This would be achieved by going long the outperformer and short the underperformer. In an ideal situation positive return would be achieved from the leader generating positive returns and the lager producing negative returns, thus return a profit on both the short and long positions.

The same logic could be applied to a sector and either a strong/poor company and its sector. With a negative outlook on the sector one could short it, and long a market leader. The logic being that even if the market leader and the sector both fall, the market leader will fall less than the overall sector meaning that the short on the sector will return more profit than the loss will be on the market leader, leaving the investor with an overall positive return from the combined two positions.

It goes without saying that there are risks with this investing style, some that are more specific to the style and others that apply generally to investing. One of the principal risks is that both the long and the short positions move against the investor, this could produce even greater losses than being simply long or short. Proper risk management measures will help to limit the extent of losses, such as a stop loss on the long position and a limit buy on the short position. Another risk for a trader could be a break from a historical relationship that exists between a pair of securities. A break in these traditional trading bands, ranges in which securities trade, can be cause by moments of market panic or euphoria. This in turn can be problematic for investor with a long/short spread trade because the two securities are out of their normal trading range and may not respond in the predictable way the investor expected. A matter of moments is all that it may take to break a historical relationship that has existed for such a long period of time that it is almost taken for granted. This reliance on empirical observations is not unique to this particular investment approach however this investment style is susceptible to this type of problem.

Monday, July 12, 2010

De-risking gold producers

One can group the various risks of gold producers into two main categories: operational and developmental (for a detailed list see my previous article: There are a few producers today that exhibit quite a bit of development risk although they are expected to have a relatively limited amount of operating risk when their projects eventually do come online. I will focus on two poster boys of the industry Detour Gold Corp. and Osisko Mining Corp. Both companies share many similarities, both have a single mine, both are located in Canada, both expect to produce 500,000 ounces of gold per year or more, and both will produce very minimal amounts of by-product metals. The main differences between the two companies are the following. First, Osisko’s mine has 8.4 million ounces of proven and probable gold reserves whereas Detour has over 11 million ounces in proven and probable reserves. The second main difference is that Osisko is expected to start producing gold in 2011 where Detour is expected to start production in 2013.

There are obviously pluses and minuses that one should consider before investing in a development stage gold producer. First and foremost is the risk of having any possible difficulties in the actual construction and setup of the mine. Failing to meet expected completion and gold production dates can show up negatively on share price. The market applies an even larger discount to companies such as Osisko and Detour who are undertaking their very first mine development project. The one thing that makes these companies very attractive is that once they de-risk (start actually producing gold) the discount disappears. The thing that makes these two producers more appealing than the average development stage gold producer is that aside from development risk, both companies will have very low operating risk. The fact that both companies have resources with very high gold concentration also helps increase their respective stock’s leverage to gold. Both companies also benefit from having low cash costs in the $400 range, helping to ensure that they will be able to generate positive cash flows even if gold prices turn south. Ultimately if an investor has patience and tolerance of mine development risk, these two gold developers can provide a very appealing alternative to a traditional large gold producer.

Monday, June 28, 2010

Goldcorp Mine Closure in Guatemala

Just today the Guatemalan government announced that the company must temporarily shut its Marlin mine during a probe into supposed environmental and human-rights abuses. This news comes surprisingly after the government stated over the past few weeks that there would be likely no need to shut the mine. No exact day for the closure has been sent and the president stated that he would give the company adequate time to close the mine. Most likely the closure will occur in 15 to 30 days. The closure has been prompted by the Inter-American Commission on Human Rights, which received numerous complaints from NGOs and local communities. The mine produces roughly 250,000 ounces of gold per year and 4.1 million ounces of silver which is approximately 10% of Goldcorp’s annual gold production.

“Guatemala is not going to close one of the country’s most important industries because of accusations that are probably based on anecdotal and non-scientific evidence,” said Patrick Chidley, a Stamford, Connecticut-based mining analyst at Barnard Jacobs Mellet USA LLC. The mine employs over 1,900 locals and pays a total of $21 million in annual salaries.

There are some key factors that one must consider when trying to think of the impact that this closure may have. First, shareholders of a large stable gold producer will not be happy to know that production will be temporarily stopped. This government intervention ultimately introduces the notion that Goldcorp’s mine might be located in a jurisdiction prone to policies that are unfriendly to mining. Now this is not to suggest that Goldcorp’s multiple will drop just like that however that may change depending on how protracted this closure becomes.

Guatemala has to be very careful on how it reacts in this situation for several reasons. The nation has a relatively low GDP per capita (approx $2,600, for 2009), and scaring away foreign investment is not really a luxury the country has. If anything I believe the country will deal with this situation in a reasonable and diplomatic matter, without causing too much of a fuss. Goldcorp on the other side will try its utmost to reduce the severity of any closures. However unlikely it may be, it would be very regrettable to see both Guatemala and Goldcorp losing from this situation.

As it stands I would hold-off from buying any stock at this moment until we see how serious the situation is. The stock dropped 1.12% on June 24th 2010 after release of the news. However I would expect the stock to trade down a bit more unless of course gold has a very strong rally. For someone looking to get into the stock after a 12% gain since the beginning of the year this may be the perfect opportunity.

Wednesday, June 23, 2010

Evaluating a Gold Producer

Whether you are looking for a small cap startup gold producer or one of the biggest names in the business there are several things you should look for when trying to pick out the right one for your portfolio.

The quality, composition, breakdown and accessibility of the assets owned by a particular gold miner are very critical; it is not simply about having x million ounces of reserve and y production. The market prefers certain types of mines over others and this will be reflected in the Price/Net Asset Value multiple that the market assigns to a particular company.

Size and production are the most critical when evaluating a specific mine or a producer as a whole. In general 300k oz of gold per year + would be considered a moderate sized mine, with 500k oz and above considered large. Mines below 100k oz of production a year tend to be looked down upon by the market since the economies of scale are not there and smaller mines may be more prone to production problems due to a lower quality of processing infrastructure because of the small scale. The life span of any given mine is based on its reserve base, some of the largest mines in the world can support 10+ years of production at moderate to high yearly production levels.

Location is a critical factor, mines based in politically stable regions such as Canada, U.S. and Australia are preferred to mines located in more unstable nations in Africa and Central Asia. There are several reasons behind this, first being that a stable country/government is less likely to social issues that could impact mining operations (such as were seen in Kyrgyzstan recently). A second reason is regarding infrastructure, constructing a new mine in a remote area in a developing country will most likely require transportation, power, water and communication infrastructure to be setup. These are additional projects which may further delay the completion of a mine. Finally, taxation risk is another concern. Certain jurisdictions tend to be more mining friendly from a tax perspective than others. Recently Australia released a proposal that suggest a very substantial mining tax hike which sent the entire industry in an uproar. Obviously the lower the company’s exposure to a jurisdiction likely to increase taxes the better.

The physical characteristics of a gold deposit also have an impact on the asset’s valuation and thus the company’s value. Grade is perhaps the second most important aspects after the size of the deposit. There are several ways of measuring the total gold deposit contained on a particular piece of property which can make it rather confusing at times. The most accurate measure is usually listed as proven and probable resources. These are resources that are confirmed to be present based on a feasibility study and are economical to extract. The Resources tend to be a broader term, and include deposits that may not be able to be mined currently at an economic profit and/or there are doubts on the grade (concentration) of the deposit. In general when you see a mine that has reserves that are close to the sum of reserves and resources then you know there is usually a limited upside from further exploration on that given property.

Grade is measured in grams of gold per ton of earth (g/t), logically the higher the concentration the better. This leads me to the structure of the deposit, essentially whether it lends itself to some form of open pit mining or underground/shaft style mining. As a rule of thumb you require about 0.8g/t as a minimum cut-off grade for open pit mining and 4-5g/t for underground mining. Generally open pit mines are cheaper, easier to construct and run, however environmental cleanup costs tend to be higher. Underground mines tend to require more complex engineering work and also run the risk of more safety incidents.

Another thing to consider when looking at a specific gold mine or a mining company in general, is the amount of by-product metals it produces. Metals such as copper, silver, and zinc are typically found near or with a gold deposit. Although these metals contribute to the company’s bottom line the market assigns a lower multiple to gold companies with a higher amount of by-product than ones with little to none. The reasoning behind this is that these by-product metals have a much lower price than gold, and that investors get a lower exposure to the underlying movement in gold prices since part of the company’s cash flows are coming from other metals.

When investors look to invest in gold producers many of them typically want a stock that will be strongly correlated with gold’s performance. One thing that should be considered is whether or not the company hedges its gold production. A gold producer usually does this by entering forward/futures contracts to lock in a future price at which they will deliver the gold to the counterparty of the contract. The logic behind entering these contracts is that it reduces the uncertainty surrounding future cash flows. A CEO would look very smart if he/she locked in future production at record high gold prices, however the opposite is also true; making commitments to deliver gold at a price which is below market price can be very painful. Usually investors prefer to see companies with little to no positions on their hedge books. This gives investors control over the direction they want to take on gold prices rather than leave it up to management.

These factors cover some of the most important metrics affecting the value of gold producers. In general one can find that the most renowned companies in the industry rank quite well amongst all these factors along with having very vast reserves and high levels of yearly production.

Thursday, June 3, 2010

Digging up the facts on Yamana(YRI)

Investment Opportunity – Yamana(YRI)


- Potential natural growth (without further acquisition) of reserves through exploration including a conservative doubling of Pilar’s reserves from 1.5 million to 3 million with up to 5 million)
o This will also serve to increase production in some of Yamana’s smaller mines, thus moving from small to medium sized mines. This may help to improve the market’s perception on the quality of Yamana’s assets.

- Reduction of reliance on Copper as a revenue stream as more Gold based resources come online between 2010 and 2013. This should serve to help the market to see Yamana as more of a pure play on Gold rather than as a diversified precious/base metal producer.

- Technical’s, trending sideways for the last month. Currently in the middle of its 2010 range (12.7 – 9.72; currently at 11.25). However has outperformed: Kinross, Goldcorp, Newmont, and Barrick over this same 1mo period.

- Dividend increase, whilst the dividend yield is not attractive enough on its own to warrant investment in the stock, this increase on the 5th of May is an implicit signal that management expects higher steady Cash Flows, this is accompanied by a better/improving cash position. However plowback is still high (.8623) indicating that management wants to grow this business, perhaps aggressively. This improving financial position should help to eliminate the need for further stock issuance.

- Dog of the industry, being at the bottom of the industry in terms of performance, with seemingly improving financials, and production volumes along with a shrinking reliance of Copper as a source of cash flow, the market may start to increase its support for the stock based on the overall outlook for the company improving.


- Divestiture by major shareholders: 5.3 million shares by Pyramis, 6.1 million shares by Fidelity, and 1.1 million shares by Blackrock, and 100k by TD and 170k by Harris Bank (owned by BMO). This is somewhat concerning since Fidelity, Pyramis and Blackrock were some of Yamana’s long time institutional investors.

- Poor Gold Play, as it currently stands, Yamana has given investors very poor exposure to gold. It would appear that the stock has benefited very little in the past year from the appreciation in gold prices in the last 6 mo. If this relationship holds true then Yamana shareholders may stand to gain very little from the medium term bullish sentiment for gold prices. The same can be said for Yamana’s performance compared to Copper’s performance over the same 1 year time period.

- Historical inconsistencies with regards to targets, this may very well be one of the reasons that YRI is trading at a discount to its NAV compared to its peers. The CEO (Peter Marrone) assures us that 2010 will be different, since YRI is already on track for Q2 and missed Q1 targets by 10,000 oz only because of an earthquake in Chile. If YRI misses these targets, the impact on the share price will likely be very detrimental.

- Diversified asset pool, the fact that YRI has many lower capacity mines has been a problem since it can be perceived as ‘more headaches’ by the market. However within this lies an opportunity if YRI can indeed deliver on its promise and expand the production capacity on some of its mines. However as it stands now this is currently a problem.

- Exposure to potentially imminent tax royalty increases, after announcements made by Australia about the consideration of tax hikes, there is a risk that this may spread to South American countries where YRI operates (Argentina, Brazil, Chile). This is an industry wide problem as much as it would be a YRI specific problem.

Thursday, March 18, 2010

Ford, a strong turnaround.

Ford(F) was beaten up very badly a year ago, when there was problem after problem with the U.S. auto industry. That was reflected in the share price, 52 weeks ago the stock was trading around $2.50, today the stock is over $14. Yesterday there was excellent news for both shareholders and debt holders as Ford received an upgrade from Moodys to B2. Also F has outperformed many of its competitors with regards to the quality of its product; it has exceeded the quality of Volkswagen, Chrysler and Suzuki(,0,1477320.story). Its market share has also increased its market share up to 19.2% in March 2010 from 14.6% in 2009.
Possibly one of the things that I put the most value on is that Ford is bringing the new U.K. versions of the Focus and Fiesta to North America in 2011. This is significant because the Ford focus has been the best selling car in the U.K. for 10 years, and the Fiesta has also done very well in the subcompact class since it was debuted. Currently 7,000 Americans have pre-ordered the Fiesta. While the number is not massive, for a sub $20,000 car its nice to see consumers wanting to buy the car already. Pre-orders show that there is some hype around the release of the car, and this may bode well for initial sales of the car.
I feel that with enhanced quality control, and new successful cars that have been shown to have strong sales internationally 2010 will be a very good year for Ford. The destruction of Toyota's perfect quality image has done nothing but help Ford. Honda has also recalled several thousand cars. As the Japanese auto makers are no longer viewed as bullet proof, and Ford has increased its quality the gap in consumers mind's between the Japanese and North American auto makers has shrunk. With all of this Ford will make a very good investment for the rest of 2010 and well into 2011. As America starts to emerge out of this recession, individuals will likely increase spending on new cars. Ford stock in my opinion will hit over $17-18 by fall 2010, and by 2011 the stock may be well over $20.