You Can’t Argue With Stupid
December 23, 2010
Commodities Gone Wild
January 3, 2011

2010 Year End Position Updates

It’s time for the year end position review. As you can see, it’s been a good year for the home team. My strategy of focusing on a small handful of companies has once again paid off with a lot of winners.  I would have liked to have made more investments, but you can only work with what the market gives you. Throughout the year, I constantly searched for businesses that had strong secular tailwinds, high returns on capital and competent management. I went to over a dozen countries and took nearly a hundred business meetings with management teams. I found a few great companies, but often the valuations seemed too high. Absent bargains, I generally kept my capital in large cap gold mining stocks or in gold. Both had good years, but nothing like the performance of my little guys. However, the point isn’t to have the biggest gains—it is to not lose money. As I said, it was a good year for the home team. In summary, I’m a happy hedgie.

Positions Mentioned

AAG.V     Price At Mention    $0.56      Current Price    $0.92     Change    +64.29%

2010 was the year when a promising asset became an investable business. First, top quality management like David Rae and Bruce Ramsden joined the company. Read these guys’ bios. They know what they’re doing. They both have broadened the depth of experience at a company that had previously been dangerously understaffed. Next, two good friends of mine joined the company, Mark Zabel (VP, Corporate Development) and Paulo Bilezikjian (Chairman of the Board). Near year end, the company raised $16.4 million in a financing. This capital gives the company time to finalize community and debt agreements. I do not anticipate any future dilutive capital being needed. In summary, the company continues to inch towards building Invicta in 2011. The share price has increased, but the risk has come down considerably. In the interest of disclosure, I sold a few Andean shares near year end to cover redemptions. I first wrote about Andean on July 18, 2010.    Price At Mention   $0.019   Current Price   $0.029    Change   + 52.63%

Apex Minerals continues to make progress on production. November gold production results were the best to date (6,936 oz vs. 6,822 oz in October) and the cash cost ($871/oz) has finally begun to decline as production increases. For a point of reference, quarterly production numbers for the September and June quarters were 19,300 ounces and 16,300 ounces respectively. If they can keep up the pace of November production, they are at 20,800 ounces of quarterly run rate production.

By my estimates, the company has broken even for each of the last two months. Clearly, no great feat, but they finally appear to be turning the corner. The one thing to watch is the price of gold in Australian Dollars. When I first wrote about Apex, Aussie gold was $1,500. Now it’s $1,390. They need increased production to make up for the missing gross margin. Remember, this isn’t like most of my investments in world class assets. This is an old underground mine. These are tricky businesses and quite risky as investments, but I thought that at 1.9 cents, this was simply too cheap. I first wrote about Apex on June 8, 2010.    Price At Mention   2355         Current Price 2500           Change 6.16%

BDSec continues to ride the growth of the Mongolian economy. I anticipate that earnings may be lighter than expected in 2010 mainly because a large financing (and associated fees) will be pushed back to Q1 of 2011. However, I have heard that BDSec has a number of sizable new financings planned for 2011. Given the order book for transactions and the fees associated with those transactions, I anticipate some big earnings for 2011. As of today, this is my favorite way to invest in Mongolia’s rapid growth. I first wrote about BDSec on November 19, 2010.

EGD.V     Price At Mention   $2.70       Current Price   $3.98         Change   47.41%

Q3 earnings were a bit weaker than I had expected, however it is dangerous to only look at reported numbers and ignore the reason why. Simply put, Energold is ramping up for what I anticipate will be a huge 2011. They are spending money now and it is reducing current earnings. They also have a number of rigs turning at old contract rates. These will roll-over into much better pricing terms over the course of the next year.

Energold now has over 100 drill rigs and they drilled a new company record of 102,500 meters in the third quarter, which is a significant increase from the 86,000 meters drilled in the second quarter. Much more importantly, revenue per meter has started to inch up to $160 in the third quarter compared to $147 a year ago. Remember that when revenue per meter goes up, it is almost pure gross margin. The demand for drilling has really ramped up lately as have pricing terms. From anecdotal conversations with people in the industry, I am hearing of mining companies hoarding rigs and not releasing them when projects are completed—they are scared to lose them to another company. Instead, they continue to pay the drillers to do nothing as they wait for the next drill target. This is similar to the situation in 2008 which forced per meter pricing up to nearly $200. My hunch is that this cycle sees even crazier pricing than the last one.

In early December, Energold announced a financing. While I was very disappointed by the terms and the “bought deal” nature of the deal, I knew that the company needed more capital to continue growing at such a rapid rate. I’m glad that this is now behind the company. Drilling is a cyclical industry and I do not want to see Energold use debt to grow. In summary, this is my largest position at cost and one of the best run companies that I have ever invested in. If these guys come anywhere close to my estimates, 2011 should be a very good year for Energold investors. I first wrote about Energold in Mining services Part I and Part II on March 16, 2010. I wrote a follow-up piece on mining services on October 1, 2010.

GLD     Price At Mention    $108.28        Current Price    $137.71      Change 27.18%

Around the world, Western Economies are bankrupt and central banks are printing money to fix problems. This is the perfect scenario for higher gold prices. Gold has just put in a big move—it probably needs to consolidate for a bit. However, this bull market is nowhere near finished. I should point out that after increasing nearly 6-fold in a decade; gold is no longer all that cheap. However, there’s no reason for me to sell my gold any time soon.

For the first time in a while, if I had to choose between gold and some large cap gold mining shares, my preference would be the miners. Some of the better miners trade for single digit multiples on cash flow and they have finally gotten their arms around cost pressures. More importantly, after years of declining production, many of these guys are finally seeing increased production. I think we are getting closer to the ‘crazy phase’ in gold where retail investors finally discover gold miners. I have a hunch that the next few years will be very good to these companies.  I first wrote about gold on March 20, 2010.

VXX Short         Price At Mention    $82.40        Current Price   $38.40    Change +53.40%

VXX has continued to slowly decay. It will forever continue to decay. Just remember, this is a product where every few months, you will have a really bad week. This cannot be a big position. I first wrote about VXX on April 28, 2010.

New Opportunities

There are a number of interesting investment opportunities that I’m exploring (there always are), but right now very little seems cheap enough. As always, I’m hopeful for market declines that will create bargains.

I want to thank all of you who read this site. I have learned a lot from your emails and comments. I have even found a few interesting ideas through subscribers—which is the reason that I created this site in the first place. I want to wish everyone a happy New Years and the best of success in 2011. It wouldn’t be much fun having adventures if I had no one to share them with…..

Categories: Current Investments
Positions Mentioned: none

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