Spread Betting Mining Shares

It is understandable that large blue-chip companies, while relatively safer to hold, don’t provide the growth potential for significant short-term growth.  Thus smaller companies in more volatile sectors like the mining sector offer more potential for short-term spread betting profits.  Naturally a focus on mining companies could provide large spread betting gains (or losses) since it’s one of the most volatile sectors out there.

It’s an interesting sector to research, and I can understand the attraction, with the prospect of a company striking gold or finding diamonds having a certain allure.  It can certainly be more entertaining and dynamic than large, mature companies in slow-moving sectors.

Although searching for minerals in foreign land can be somewhat akin to the lottery, there’s always the hope of a big find around the corner to keep investors interested.  That’s if companies can afford to keep drilling and overcome the host of other factors that affect operations in emerging countries, such as politics, geology, weather and the underlying commodity price.  On the flipside, Africa is underdeveloped, ‘resource rich’ and vast, providing plenty of potential.

“I try to never fall in love with the mining or oil and gas sector. Plenty of money to be made in the sector but you need a large amount of luck and to only be in it at the right time which can be a very small window at times. Or be on the board of some of these companies as whatever happens to the individual company whether success or bust they keep on drawing an obscene wage.”

If you are looking at producers make sure to take in consideration  the AISC – this is the all-in sustaining cash cost and this figure needs to be below the price of gold for a company to be able to make a profit.  This figure doesn’t only include extraction costs but also includes items like royalties, company overheads, waste stripping and mine development.  It is also important to note that speculating on mining shares is a leveraged play on the price of the commodity:

Here’s a theoretical example with some easy made up numbers:
Gold price: $1000/oz
Gold miner costs: $900/oz

So this theoretical gold miner makes $100/oz. Now lets say the gold price goes up to $1100, the miner is now making $200/oz. So the net effect is that a 10% rise in the gold price causes a 100% rise in profits for the miner.

Unfortunately this cuts both ways…

There are many companies in the mining sector to spreadbet on – Eurasian Natural Resources (ENRC), Fresnillo (FRES), Glencore (GLEN), Polymetal (POLY) and Randgold Resources (RRS), Lonmin (LMI) and copper miner Kazakhmys (KAZ) just to name a few. Having made your choices, you’ll need to monitor these positions closely as share prices are very dependent upon news flow and can move quickly with good or bad news.  Mining companies have to keep the market informed regarding how their explorations are faring, whether they’ve struck the jackpot or come up dry.

Oil exploration, indeed all exploration works the way it works and the only important thing is that investors understand the process. Dilution is part of ‘the game’ and yes, salaries get paid regardless. For every Burren/Cairn/Tullow/Rockhopper there are hundreds that don’t make it. Looking at Tullow Oil (TLW) in particular the company has finally broken into the FTSE 100 oil and gas club so its record is truly impressive. But most oilers are unfortunately in the ‘scam’ game, churning dud licences and fleecing shareholders but others are sincerely trying to find oil.

There is no question in my mind that RRL falls into the latter category. How different things would have been if Georgia and Puntland had stuck oil but at least they have some producing assets to prop up the price and propped up it is. This is true of all business. I’m sure the MCHL directors were drawing salaries right up to administration.

As for miners/oilers finding it difficult to provide shareholder value in general – I suppose part of it is that it’s such a capital intensive business? Always another project to fund etc, with so many sunk costs and things that could go wrong before things like cash flow and profitability appear on the horizon? Not to mention, in the long term, commodity price cycles and changes in supply/demand?

Particularly inflation of mining costs: the engineering, mine vehicles and tyres, higher standards of protection for the local environment are all a problem. But these can be budgeted for. What cannot be budgeted for has been tax increases and disruptions from governments. There are fundamental problems with grades in many ores. Copper mines are being developed with 0.6% contained Cu. Production is often a two stage process. The mine produces a concentrate of ~10%, this is shipped thousands of miles to be refined with huge amounts of electricity.

Gold, two recent examples of 1g/tonne being rejected after 3 years exploration and testing. Estimates have been published that cost of production at a new mine is $1750 per ounce. [32g per ounce]. There are few big deposits left to replace depleting mines, so few opportunities to gain economies of scale.

To conclude exploration is exploration. It’s a daft place to invest anything other than money that you can afford to lose.

The market often gets overexcited by good news, such as positive drilling reports, and share prices can shoot up, only to fall back over the following couple of weeks.  But, why focus on the ‘big news’? Most ordinary news is very confusing to investors. Are production figures good because a company made record profits ? Or are they bad because targets weren’t quite met ? Are they good because they’ll ramp production up next year. Or are they bad because the production ramp might require more cash? The news is constantly changing and we can NEVER say how it will be perceived by others. To be honest, most news is more of a hindrance than a help…..if one is interested in price.

So, it’s just as well that it isn’t that important. The share price of a share is actually controlled by the traders, not the long-term investors. And most traders are not overly concerned with fundamentals…they want to sell their shares for more than they bought them…simples. In this scenario, it can be better to travel than to arrive: buy the shares and ride the potential with ‘hope value’ driving up the share price.  Often, after a company actually strikes gold, the share price will fall back as investors cash in after the good news.

If you decide to go for mining and resource stocks make sure to pay attention to the following:

  • Ore grades: At the moment the market is favouring quality over quantity. Higher grades mean less cost and waste material.
  • Operating costs: Be especially wary of companies operating with high costs or overheads particularly in Canada or the USA where the costs tend of be higher.
  • Ancillary costs: Royalties? Interest on borrowings? Be wary of companies that have arrangements allowing for issuing of shares at lower than market prices in exchange for cash.
  • Hedge arrangements: Locking in prices when gold prices are falling is good as it provides stability (however limits upside as well should gold prices reverse direction).
  • Diversification: Companies with a diverse portfolio of resources such as oil, gas and mining are better.
  • Geographic risk:  Just something to keep in mind.  Operating in South Africa or Egypt is not the same as operating in a country like the USA.
  • Financial requirements: The market doesn’t like companies that are very capital intensive.
  • Management: Be wary of companies that regularly miss production targets.

You can use a variety of sources to analyse holdings and research potential future plays.  Read the financial pages of papers such as The Times and The Daily Telegraph, as well as company websites to keep track of share price history, directors’ dealings and recent developments through press releases.

Deciding on when to dispose of such shares is a recurring problem faced by investors and there’s no magic solution since this depends on your goal and outlook.  One strategy is to sell on the crest of a wave of good news, and then try buying it back at a cheaper price when the fuss has died down and the share price has fallen back.  However, this is easier said than done, and nobody can time the market perfectly.

“Much of the demand for mining stocks is weighted in whether China can reverse the slowing growth and keep resource demand high. At the same time, mining stocks are typically one of the first sectors, alongside that of banks, to be hit by market uncertainty and so a marked escalation of the Eurozone crisis may see mining stocks pressured.”

The Trend Is Up Why Arent I?

I am currently in trades for both Silver and Silvercorp (SVM). The former is proving quite promising while the latter is disappointing to say the least. Considering that the metals and the gold stock index (the HUI) are now firmly moving north it is frustrating than my SVM trade is showing only a miniscule spread betting profit. Being one of the lowest cost silver producers, with a dividend to boot I thought the investment herd would be going gaga of this stock the minute silver managed to climb $14.00.  Alas it is not to be. So far that is.

With the company producing in China maybe there is an element of country risk worrying potential buyers. Or maybe it’s a case of the major producers moving up in price before the smaller ones. Who knows? The price in all likelihood will resolve itself to the upside. Hopefully it will do that soon and not take out my current sell stop in the low $3.00’s.

At least for the time being this mini downtrend has been halted just above that level. It’s bite my nails time until it decides it wants to move up again. One way or other it will not be too long before the situation resolves itself up or down. If the price can overcome that small series of lower highs on the above chart then I am taking an educated guess we will see $4.00 range  before you can say “silver shortage”, and I can stop biting my nails until the next trade comes along.

Personally I think that economic data due to the impact of the eurozone crisis on exports is likely to responded to. This is better news for global commodity markets. Beijing is likely to more seriously consider further acquisitions in the listed mining/oil and gas corporate area, given recent sharp falls in this sector. This has highlighted value in buying actual mine and oil producing assets rather than looking to build them from afresh. As such opportunistic large purchases by Chinese companies in the mining or oil sector space are very much possible in the medium term. This would also be taken well by global financial markets and especially the commodity facing stocks.

As for the general equity markets I feel quite comfortable saying I have no idea what the hell they are up to. Topping for now I guess.  But whether they collapse to new lows I am not so convinced. Because I am flat the indexes right now I am happy to just see how this all plays out. Of course if they do tank then it is quite possible they will take gold and silver stocks down with them.

The chart I find most intriguing of all is that of the $US dollar. It seems the whole world’s fate is determined by what the dollar is up to. The emotional side of me is predicting an imminent dollar collapse because the fundamentals just aint getting better. However I am well aware of my own biases when it comes to opinions about the dollar. Many of which have been fuelled by reading far too many end of the world scenario’s from overzealous gold bugs.

Of course the dollar sucks but what are the alternatives? Technically the chart sucks too but charts always suck prior to them reversing course. Like the indexes I have no idea what will happen next although many commentators are saying were headed alot lower. I guess it all depends on whether the 78-80 level holds or not.

Market sentiment is a hard thing to judge at the best of times. Depending on what section of the investing world you visit daily will give you a different indication of current market sentiment. I am a PM bug at heart so most of my time is spent monitoring the talk on precious metals related sites.

From what I see sentiment among this crowd is far too bullish for its own good, which does cause me to worry somewhat. I have lost count of the times I have read about “moon shots”, “$1300″ price targets, “cyclical lows” and “bullish Elliot wave counts” in recent weeks. It all makes me want to throw up. The same guys were calling $750 gold not so long ago.

I don’t like to be contrarian for contrarian’s sake but I do want to point out that we are at a seasonally weak time for the precious metals something that seems lost on the rampant bullish gold crowd right now. That said I am long silver and I hope I am stunningly wrong in reading market sentiment. Nothing would be better now than a “moon shot” to $30.

June 2012: Miners are lower because no one wants them. All metal/mineral exploration companies are high risk. The chances for finding profitable deals is reducing. The good and easy to work deposits in benign locations have all been worked out or are locked in to strong holding companies.  Take gold and look at the low grades and difficult to work problems at VGM and Norseman.  There is no easy stuff left.  This is also illustrated in Nickel, this is why so much effort is being put into the processing of oxides; African Eagle and RGM. Because Amur have a marginal grade sulphide nickel resource in the perma frost of Eastern Russia they are able to continue to finance the exploration and drilling. A few years ago the grade would have been rejected and everyone would have moved on. Not now – it just might work.

Look at the price of ALUM & NICK. They are almost back to 2009 lows and still falling. Who wants to buy a small Newfoundland nickel miner when the price of nickel is so low and BLT are mothballing large nickel mines in Oz. Stainless steel at at lows because it relies on new housing & construction. The falling price of commodities will drag down profits of oilers and miners. Who will want to develop an oil field, pipelines and shipping facilities in Somalia when Saudi can’t sell all they want to produce. It will get worse as the USA becomes self sufficient. Its all started to get priced in.

“The other fact is oil and gas exploration sector is in a massive bear market at the moment. Many of the shares that are invested in heavily by the retail sector are being beaten up badly as investor appetite is finally realising many of the shares they are investing in are cash hungry and the chance of success are slim and on a much longer time frame than they had believed.”

January 2014: I did some similar snooping around on the oil & gas explorers a while back. Including the big boring pension oilers, over 72% of the listed companies were consistently loss-making. Scanning through the miners, it seems the AIM miners would show an even greater percentage that have never made money – shocking considering the boom in commodities in some of those years.

As a business, pulling stuff out of the ground is exceptionally costly. It’s really tough, even for genuine, honest projects. For directors though, looking to sell a business to the public, it seems pretty cushy to me. You start a company, call it Rogers Resources. You state your intention to buy some oil fields, or tulip fields, or to mine for magic beans. You sell a chunk of Rogers Resources to investors for an outrageous price, who inexplicably, prefer this business proposition to anything making money. The founder and his mates draw a salary of anything from the hundreds of thousands to the tens of millions, which comes directly out of shareholder funds (where else when Rogers Resources has/will never make a dime?). The directors and shareholders have no problem with making a loss every year – and as the value of the business is whittled away on salaries, bean-finding experts, bean-extracting equipment etc, the real assets are eaten away. When money is tight, and there’s a risk that there won’t be enough money to pay the salaries, back to the shareholders to ask for more money.

That may be a cynical view, and is mostly in jest 😉 but I do wonder how many of these companies would exist privately, if a wealthy founder could only use his own money to fund “projects”, and pay his own salary out of profits. I was told recently there are over 400 gold miners on TSX exchange with [theoretically] one million oz of gold or more. The expectation is that a considerable number will go to the wall. The money has dried up, the tap is broken.

I recall an investor meeting a couple of years ago – the guy was an accountant and he said he had some gold somewhere in Australia. Three of the people in the room said yes to the placing….and so did I but I had a nagging doubt. At the last moment they changed the pricing of the placing. As I had already sent the money this was breach of contract so I asked for ‘money back and it was returned.

I think it was end 2011….this is what happened next:

Spread Betting Mining Shares

Similarly, I wonder why shareholders even give these companies a consideration… other than because “it might fly, ten bagger, wahey”? I really don’t know, maybe that’s not why they choose miners over other stuff, but I’ve never understood the popularity. (for investment that is, I momentum traded oil and mining stocks in 2011 too, but they really could’ve been magic bean explorers for all I cared at the time lol).

GKP is a good lesson for holders here. It shows how savage the market can be to people that are over leveraged. Would have been many that have lost their shirt in the last couple of years. This is especially true of shares that have a high retail following (no risk management). Just shows you should never have too much money invested in shares that are high risk money hungry like the oil exploration sector. Again I keep coming on similar threads on forums with posters that promise riches round the corner. The reality is expectation is not delivered and the share price is smashed on poor or average news. If the trend is down why put all your hopes in a share you are swimming against the tide? Try a hot sector the path pf least resistance for longs that’s my motto…

It does amaze me though that the yarn is spun so easily, and that the shareholders/government/regulators are so happy to see these projects funded, when there’s such uproar about small British businesses having no access to decent funding.

One final word: you might consider diversifying away from the mining sector into less volatile, more defensive investments in order to protect profits and avoid throwing it all away in the end.