Position Updates (June 23, 2010)

Every once in a while, it is useful to go over what has changed amongst the positions I have mentioned. I want to make one thing clear. This is a diary of my investing. This isn’t a list of recommendations for playing along at home. These are not recommendations to do anything.

AXM.ax

I have nothing to add. To the best of my knowlege, nothing has changed since I first wrote about it on June 8, 2010.

EGD.v

The recently announced quarter was something of a disappointment at first glance. However, I think it is the last one that will be weak as drilling demand is rapidly increasing from panic lows in 2009. The key to the weak margins in Q1 was the need to remobilize a lot of rigs that were out of work. This involved re-hiring crews and re-positioning the rigs. This is a 1 time expense that came through the income statement in the most recent quarter. The expense was much higher than normal because there was such a large increase in demand for drilling. The company reported a loss because things were going so well. Make sense?

Get ready for real earnings. My guess is that with 91 rigs, the company is in position to earn around 20 cents for 2010. This includes a bad Q1 and a slightly weak Q2 with some weak pricing similar to Q1. However, pricing is rapidly increasing on new contracts. As old contracts roll off, expect company-wide pricing to really ramp up. At the peak in Q3/2008, the company got $194/m drilled. This troughed out at $144/m in Q4/2009. It’s already back to $149/m in Q1/2010 and seems to be rapidly moving back towards peak pricing as drilling demand increases.

Barring another economic collapse, I think the company will earn something near 40 cents in 2011. At quarter end, Energold had $15m in cash and an investment in Impact Silver (IPT: Canada) which is worth $7m at market prices, there is no debt. Tangible Balance Sheet is $1.70 a share. That gives you a pretty good margin of safety for a company with a market cap of only $78 million. The stock currently trades at 5 times what I figure they’ll earn next year and about four times enterprise value. Normally, industry leaders in rapidly growing industries with high returns on capital trade in excess of 20x earnings. I have no idea what the right multiple for a company that has grown nearly 5-fold in five years is, but four times enterprise value seems silly cheap. I used the recent weakness to buy a few more and I already had plenty of shares. I first wrote about Energold in mining services (part I) and (part II)

GLD

Acting well. I have a core position and then some more that I added when I wrote Got Gold? I never sell the core position. I have a stop at about break-even on what I added. Gold can have violent shake-outs. Remember that. However, over a longer time frame, there are a lot of reasons for gold to go up. Not very many for it to go lower. Almost daily, our politicians have added more reasons to be long. The original piece was Victory For Gold.

VXX

I posted this about a day before the world currency regime imploded. Naturally, volatility ramped up considerably. To quote my post,

“I hate to short. It’s tough and when they go against you, they make you lose sleep. When I do short something, I do it small and try to be patient. Unlike most shorts, I’m keeping this one extra small. The nature of this beast is that if there’s bad news or something whacky happens in the world, this could scream higher. There’s a decent chance that every few years, this will double on the open. That’s when I intend to really pile in. For now, this needs to be kept small. However, over time, VXX will go to zero. It’s a rigged game.”

Fortunately I was small. I traded around the position and avoided some of the pain. Unfortunately, I never got a chance to ‘really pile in.’ VXX is almost back to 27. Look at the VIX curve. July VIX is 28.65, August VIX is 29.4 and September VIX is 30.65. This is still a decaying asset. If I stick with it, it will ultimately go to zero. I intend to stay small and stick with it. VXX is Designed To Fail.

Market collapses create opportunities. There are plenty of interesting ideas I’m looking at. Unfortunately, they just aren’t cheap enough–yet.

Categories: Current Investments
Positions Mentioned: none

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