Junior/Mid-Tier Metal Producers

All commodities are booming whether is be gold, silver, copper, molybdenum, uranium, oil, wheat, corn, etc. The spot price in all of them have skyrocketed over the past few years and the trend seems poised to continue given the huge demand and lack of supply. However there has been a divergence lately and I will show you what that is and how we can exploit it. The divergence is in the junior/mid-tier metal producing stocks which have lagged and even moved against the uptrend of metal prices. The market perception in the junior miners' industry is poor because of the credit crises as most investors prefer the flight to quality in names such as Rio Tinto (RTP), BHP Billiton (BHP), Vale (RIO), Barrick Gold (ABX), Goldcorp (GG), Silver Wheaton (SLW), Teck Cominco (TCK), Freeport-McMoran (FCX), and the list goes on. Other speculators prefer to park their money, without having to deal with mining exposures, in ETFs such as GLD, SLV, DBA, etc. Junior miners (the play on words get me every time) need a lot of funding to start operations and the perception is that banks will not loan them money and the company shares will have to be diluted in stock offerings. Cost overruns are frequent in this group and delays are never a surprise.

So why do I like the juniors when most write them off? Well, to be frank, I do not like the junior miners, as a whole, too. To clarify, I do not like the risks involved with the junior 'explorers and developers,' but I do love the junior 'producers.' There is a huge difference, in my opinion, on how one values a company and most people put the junior miners in the 'explorers and developers,' category; thus, overlooking the corporations that are already in the production. Many investors have not investigated enough on the internals of the juniors and leave some gems buried. The production stage allows a company to become what I call a "cash cow" since they become self financed from operational cash flow (OCF) and can function as a bank once they generate copious amounts of net income. These companies then move into the mid-tier category like Yamana (AUY) by either ramping up production internally or through mergers and acquisitions (M&A). The major corporations' source of growth comes from gobbling up the smaller fish so the junior producers are primed as likely takeout canditates. The lack of M&A in the juniors does not show poor economics as most would like to believe, but rather the juniors are asking for more than what the big fish are bidding (pennies on the dollar). The junior producers want to become part of the elite and will not take offers unless the bid increases substantially. M&A picks up when business is unfavorable and slows down when business is booming (remember buy low and sell high?). The market is pricing the junior 'producers' as 'exploration and development' entities. The current metals boom is allowing the juniors to further grow their business and the low valuation in their stock offers us huge opportunity.

Although most of the junior producers are Canadian stocks with little exposure to US retailers, it does not mean one cannot make an offering on the AMEX or NYSE. I believe that exposure to more exchanges provides a short term pop, but the long run fundamentals will dictate the company's worth as in most cases and initial public offering (IPO) examples. As you will see in the Excel spreadsheet, a lot of them are trading at OIBDA [Operating Income Before Depreciation and Amortization (may exclude Tax and Interest)] multiples <5. I used OIBDA in my calculations because it measures the core operations of a business. Of course these are rough estimates and the actual earnings will differ when the other measures are factored in. I do know if and/or how to upload the spreadsheet here so please email a request and I will get it to you ASAP and for FREE!

The Stages of a Metal Mining Company

I spent the last month getting familiar with the mining industry and now I feel like a better investor. While there are thousands of corporations in this field ranging from basic to exoctic metals, very few actually generate revenue because plenty can go wrong from exploration to production in what is a 6+ year project. Below is a basic outline of how it all works.

An exploration company begins its business by staking land and receiving various permits to explore the region. The next challenge for a mining corporation is to scatter across their property and to find several concentrations of whatever metal they want. Higher graded resources are preferred since the extraction yield is better so the costs are lower. However with the current commodity boom and lack of supply to meet demand from BRIC (Brazil, Russia, India, and China), the cut-off grade continues to lower so even low grades are currently profitable. Many companies go belly-up by not measuring and indicating significant yields of resources and years of funding and patience from investors go down the drain.

For the ones that measure and indicate enough material for potential profitability, the next process is to conduct several feasability studies which breakdown the economics of the mine(s). Also, a company would need to apply for mining permits and comply with several regulations such as environmental standards which takes a long time. Some mines are vastly cheaper than others to develop as they depend on geography. Although most of the more economically viable mines are in foreign countries, they also carry their own geopolitical risks. For example in my province of BC (British Columbia), environmental regulation is very strict as opposed to other regions in the world and labour wages are higher, but the cost of energy and infrastructure is cheaper than in Ghana. North American mines operate with little intervention from government whereas a mine in Mongolia can be suspended by the Mongolian regime.

Should a corporation receive approval and funds for development, the construction of the mine begins. This stage is critical because poor planning can lead to future production problems in the future. A company typically experiences delays and cost overruns because a lot of emphasis is put on weather, labour, equipment, energy, safety, etc. Most companies further dilute their shares in order to finance their projects and the expenses can tally up immensively depending on the planning. The effect of poor economics can hurt a company like Novagold (NG) as represented by its chart. Novagold had to suspend their Galore Creek operations in Northern BC after cost estimates ballooned from $2.2 to $5 billion despite them having one of the largest deposits in the world. On a side note, several previously foreclosed mines have been coming into favor again because the CAPEX (capital expenditures) are low. Be aware on the same hand that old mines contain lower grades since the higher grades have been previously mined. If the spot price of metals fall, the cut-off will grades rise along with falling operational margins.

After the construction phase of the mine is complete, the process of commercial production can begin. The last step before the first pour is commissioning and that takes several months. Once final approval is granted, a corporation can begin commercial production and start generating income to finance more projects, acquire companies, pay back debt, or issue dividends, etc. A company can further ramp up production at any given time in order to take advantage of favorable metal prices and further increase their reserves by proving and making probable of the measured and indicated resources. The income from production fluctuates a lot depending on the production yield, grade being tapped, market spot price, cash costs from operations, etc.

Now you have a basic understanding of how metal mining corporations operate and a starting point with how to valuate them.

Technical Analysis for December 20

It's Official, I'm an Idiot!

My day went farely well until I got tired and decided to call it a day at noon when the action dried up. My mistake was FORGETTING TO CANCEL MY ORDER for LDK Solar! I initially had a buy order at $68 with the intention of scalping intraday and closing the position before Q3 earnings. Unbeknowingly, my fill got executed when I was counting my profit in my dreams. Immediately after waking up, I decided to find out how LDK did and what afterhours trading was like. They had only beaten guidance and estimates slightly so after hours. I was saying to myself, "that's why you lock in profit and don't gamble into earnings." I literally was feeling good about myself having executed my trading plan until it hit me, "$hit didn't I have a buy order at $68? LDK closing price was $66.33 and had traded as low as $58. I'm HOPING I can get out above $60 because I don't want to see this loss compounded. Although this mistake won't break me, its 30% of my portfolio right now because of the extra shares filled for daytrading. I might lose 5-7% of my assets if prices stay in $58-62. Although this comes as a huge blow to me, this has been a humbling experience and emotionally I feel fine...as long as the price goes to the mid-low $50s. I have a list of trading rules and I have obeyed them all to some degree. However, double checking your account status before sleeping is one I left off the list. It MAY become an expensive lesson, but there's a chance...we gap up...pweeez.

Get a Trading/Investment Mentor

I guarantee you will learn something new in terms of financial awareness and discipline. Whether or not you agree or disagree, another trader's insight gives you knowledge and there is no substitute for education. You may even find a new friend to bounce ideas and trades with. Developing a good relationship with another trader is an investment itself and you should not have to pay for the advice given unless you want to. A mentor doesn't necessarily have to be physically available to you. All the traders on the videos I post are my teachers and so are the several traders on message boards that I bounce ideas with. Don't be embarrassed to question or criticize because we all will learn something, as long as it is in a polite and respectful manner. It's a win-win situation for both parties.

New Positions

I finally bought NNRI which has been heavily pumped by Stocktiger. I got in at $1.23 as both a trade/investment. I'll have a stop in place for most of my shares should we violate the double bottom at $1.15 on the daily chart. If we rally to the upside, I'll be scaling out into resistence. Even though stochastics are not oversold, I'm betting that we will bounce off the rising stochastics trend line. Also, I'm seeing positive divergence in the MACD and RSI as well so on a technical level, I expect at least a short term rally. For me anyway, I see 9% downside risk with huge upside in my trade so I like the risk-reward.

I got hit again at $0.405 in PYR.V and don't mind the stock going lower and hitting my next bid level. Of course going up would be fine as well. My stop loss is 50%, but the upside target of 500-1000% makes up for risk. Also dipped my toe into Holloman Energy, HENC, at $0.51 at the close today. Last week I scooped up some IV.V at $0.54, now $0.61, and I am still holding all my shares in that one. I like the basket of junior oil companies I've acquired and I still have a lot of wiggle room to invest more should the opportunity present itself.

Holloman Energy is definately an intriguing company with enormous potential. Their probable/unrealized reserves are valued at $2.3 billion according to one analyst http://www.stocksjournal.com/PDF/HENC.PDF and their management team looks very savvy. They have been forecasting 1500-2000 bopd by the end of 2008. With a current market cap near $70 million, it is trading at an enterprise value ratio of 1. With a huge interest in the Australian wells, I think the company could trade at a premium and I would agree with the analyst in her valuation. The company should be worth $100-300 million ($1-3/share) depending on how well management delivers on their guidance. However, their plans do not look very visible and as a skeptical investor, I am cautiously optimistic of them actually reaching their targets in such a short timeframe. I would also feel more comfortable if they were to move to a more regulated exchange. Pyramid Petroleum has more upside on a valuation basis and is fast money, but Holloman Energy I think has more upside past 5 years and could offer similar returns. I'm going to play it like NNRI and sell most of my shares should my stop get violated and perhaps accumulate more at a lower price.

For all those whose convictions are being tested, I wish you the best whatever happens. Stocks are always a gamble, especially small caps on the bulletin boards, and you shouldn't bet what you can't afford to lose. Always have a game plan and execute it no matter what. As a contrarian investor, I like to go against the grain and bottom fish when perception is depressed. I've found out that message boards provide a good consensus of this. When everyone is a bear, that's when I go long, but only if I like the fundamentals and potential catalysts that can turn the stock around and squeeze out shorts. Of course I am wrong at times, but my risk-reward is easily defined as long as I execute my plan which includes a stop loss. I only have to be right roughly 20% of the time if my risk-reward exceeds 1:5 to being break even or up. The market owes us nothing and the only thing that matters is price.

Technical Analysis for December 19

Technical Analysis for Tuesday December 18

Vindication in LDK Solar

Accounting irregularities my a$$. Took profits at $73 and bought back at $68. I never lossed sleep over LDK since my purchase at $38 back in October even though it fell as low as $26. My conviction and belief in the company remained strong even as the charts blew up. I did however fail to execute my game plan which was to average down under $30. The charts made me hesitant to pull the trigger despite my confidence that the stock would make a full recovery. And I could have afforded to double down in shares and still not be overly positioned in my portfolio. The lesson I learnt is that charts can fail to tell the truth from time to time and that news can be the leading indicator for movement. By focusing more attention on the charts, I missed a great opportunity to triple my returns. Had I remained more concerned with the news, I would have realized that it was a shoe in that the audit report would come back without a hitch. The solar wafers are not easily accountable given the grade variance and storage space which can make accounting difficult and it's human nature that we make errors. The internal investigation came back clean and LDK's CEO kept reiterating that there were no material adverse changes in the company despite the rumors. The company continued to sell contracts and also raised guidance as the stock price declined which provided a lot value for savvy investors. Downside risk had been factored in and then some. The upside return will be unfathomable. Next time I will by options to better mitigate my risk/reward when an opportunity like this presents itself.

-----------------------------------------------

Fundamental analysis originally posted on google message board November 4

http://www.cnanalyst.com/solar/index.html

After doing even further extensive homework on solar stocks, I have to
reiterate LDK as being the cheapest and the most valuable player in
its industry. Although I like to look at P/E multiples, growth and
profit margins are even more important in my opinion. Also, I tend to
invest in profitable companies so stocks currently with negative
earnings I do not cover. With that said, to me it makes no sense to
see LDK and WFR lagging behind FSLR and other solar stocks. These two
companies are making < 100% return YTD yet First Solar is making
nearly 400%. Perhaps LDK will catch up or FSLR will fall or maybe
both may happen. I do not disagree with the fact that every company
is different, but one has to wonder if they really are that different
from each other to cause such a huge range in stock prices. The stock
market is irrational; otherwise I'm just an ignorant investor. Yes
LDK is being accused of fraud with a potential 25% inventory
overstatement and thus receiving bad PR, but shouldn't the closed
contracts and growth offset most if not all of this? Is the stock
price being manipulated? Can we not trust this Chinese company, but
other non-profitable ones are fine to invest in? As Penn and Teller
would say, "this is BULL$HIT!"


Based on the FIRST CALL EARNINGS VALUATION REPORT, the industry (not
specifically focused on solar) growth rate is 15.3% and PEG ratio of
1.64. LDK, 3 analysts give a 5-year growth rate consensus of 50% for
a PEG ration of 0.60! Moreover, their net margins are 31%. Here are
the other solar stocks' PEG ratios and net margins in order from
highest to lowest in market cap that are currently showing positive
earnings:


WFR (PEG = 0.77 based on 8 analysts) 32%
FSLR (PEG = 5.725 based on 2 analysts) 26%
STP (PEG = 1.40 based on 8 analysts) 13%
SPWR (PEG = 2.52 based on 12 analysts) 3%
LDK (PEG = 0.60 based on 3 analysts) 31%
YGE (PEG = 3.31 based on 2 analysts) 11%
JASO (PEG = 1.71 based on 7 analysts) 18%
TSL (PEG = 1.18 based on 1 analyst) 11%
SOLF (PEG = 2.63 based on 1 analyst) 10%


The downside of a negative audit has mostly been factored in to the
point that any news will boost the stock back up. I am not concerned
about the 25% inventory statement, but rather their integrity, net
margins, and quality of the wafers. The high margins give them that
competitive advantage as well as their growth with evidence to the 1
billion dollar facility being built for them. Here are some
theoretical price targets:


1. (Industry's PEG/LDK's PEG) x current price = target price based on
50% growth rate
(1.64/0.6) x $39.55 = $108.10


2. (FSLR's PEG/LDK's PEG) x current price = target price based on 50%
growth rate
(5.725/0.6) x $39.55 = $377.37


3. (Industry's PEG/LDK's PEG) x current price = target price based on
75% growth rate
(1.64/0.4) x $39.55 = $162.16


4. (FSLR's PEG/LDK's PEG) x current price = target price based on 75%
growth rate
(5.725/0.4) x $39.55 = $566.06


Based on the industry's PEG, FSLR should be worth $41.98 and LDK
should be worth $108.10. It is absurd to see FSLR rising and LDK
falling when it should be the reverse. I would agree with Jim Cramer
in that I wouldn't pay for a stock with a PEG over 2. At the same
time however, he is very very wrong when he blatantly told people to
sell sell sell this stock when the accounting irregularities have yet
to be proven and have been blown out of proportions. That douch is
recommending BIDU as a buy with a PEG of 3.28!

Very Blurry Market Right Now

The charts in the shorter term daily timeframe are favoring the downside and the Santa Claus Rally may be in jeopardy. Investor psychology is waining and the media is creating a gloomy image on the market with so called experts criticising the Fed's surprising move. Although it seems like there's a massive flood to the exit, I believe we are in the final phasing of the correction. When sentiment is very bearish, we tend to reverse up and vice versa when sentiment is bullish. Bulls are getting whipped now, but I think they will be rewarded a few months from now. Fundamentally, inflation risk has yet to be confirmed and still the market is factoring in the prices that mirror a recession. Fear overpowering greed seems to be the perception and that's all it is. There are a lot of attractive stocks with high growth that are trading at a big discount. Recession in the US should not affect the global demand in terms of the broader picture. The emerging markets are bigger than ever and there seems to be no signs of haulting in those markets. I believe global equities will continue to perform well and this period of profit taking provides a great opportunity to get long in foreign stocks. As history points out time and time again, the greatest economic countries experience a downfall and give rise to a new successor. It is inevitable that the US will no longer become the economic powerhouse with the likes of China and India.

I'm going to stick my neck out and say that we will not fall of the charts next year and most definately not in the emerging markets. The subprime woes seem to be stablizing and as proof, the Homebuilders ETF (XHB) is showing good relative strength as it is up for the month of Demember whereas the strong performing ETFs have pulled back. Although it is the worst performing fund on my list since August 31, buyers are stepping to the plate and shorts are covering. Bad stocks seem to be bottoming and good stocks look to be topping. These mixed pictures, to me, signal profit taking and usually the volatility declines. When that happens, prices usually go to the upside. I think downside risk is smaller in comparison to the upside, however given the poor sentiment, we could trade sideways with no clear direction in the immediate future. Down the road, I think there will be an upwards bias and most definately a flight to quality such as the emerging markets and commodities. I have been trying to play the game of the contrarian investor and it has paid off well thus far. While people are parking money in the more liquid large caps, I'm slowly accumulating positions in small caps for my long term portfolio. My swingtrades and daytrades have been exceeding my expectations, but my long term holds have been dogging me. The only thing that matters is price so time will tell if I've made the right call or not.

FRPT Short Squeeze Rally

Here is a 5-day chart of Force Protection with 1-min candlesticks and do make note of the huge volatility and price movement in such a small timeframe. I bought 1K shares with an average share price of $5.11.



Here is a 2-day chart



Short Interest:

FRPT $ 6.85
Force Protection Inc. 1.59
Shares Short 19,035,700
Days to Cover (Short Ratio) 9.0
Short % of Float 28.89 %
Shares Short - Prior 17,456,900
Short % Increase / Decrease 9.04 %
Squeeze RankingTM -151
% from 52-Wk HIGH ( 31.16 ) -354.89 %
% from 52-Wk LOW ( 4.52 ) 34.01 %
% from 200-Day MA ( 20.55 ) -200.00 %
% from 50-Day MA ( 18.83 )
-174.89 %
Price % Change (52-Wk) -58.10 %
Trading Volume - Today 15,360,815
Trading Volume - Average 2,116,200
Trading Volume Vs. Avg. 725.87 %
Total Shares - Float 65,900,000
Total Shares - Outstanding 68,247,649
% Held by Insiders 21.52 %
% Held by Institutions 61.10 %
Market Cap 467,496,396
EPS 0.70
PE Ratio 7.50
Sector: Consumer Goods
Industry: Trucks & Other Vehicles
SI Record Date 2007-DecA


Information Provided Without Warranty

The Week That Was

Seems like there are a lot of people on CNBC, especially the ones with a bullish sentiment, that are pissed by only a 25% Fed basis cut on Tuesday along with the "surprise announcement" the day after. Although I'm just speculating, I think the Fed wanted to catch shorts off guard on Wednesday to add fuel to the bull run. However, the $40 billion injection is rather meaningless so the selloff is justified. I shorted again by buying FXP at $68.90 and cashed in during the highs of Thursday at $77.97. Also on Thursday, I began building a position in FRPT anticipating a short squeeze rally and that turned out very well for me if you read my other post. Mid-December tends to be a temporary bottom for the precious metals before it ramps up into the New Year. As a result of this 40-year seasonal study, I double downed in WGI.TO at $3.30, FR.V at $4.43, and got back into IV.V at $0.54. The rising inflation should be a good catalyst for these stocks.

At the close of Friday however, I made some rather questionable decisions. I picked up a little bit of CMZ (Compton Petroleum) at $9.02 which had gapped up on news of an acquisition. The stock has been in the toilet and I guess I bought it as a momentum play for Monday, but I don't see much upside in hindsight and the stock is traded rather thinly. Perhaps I would have been better getting back into FRPT as a continuation play. I'll take what I can from CMZ and be done with it on Monday unless there is a good surprise for me to luck out on. The other iffy purchase was FXP at $79.22. Even though several support levels were broken today on most indexes, I'm getting a feeling we might reverse back up on Monday. If that is the case, then I might have set myself up for some pain by purchasing this hedge. Considering most of my stocks are commodities and inflation driven, it does not make sense for this to be a hedge play. I'm hoping for a spike down in the market so I can get out with a profit on this trade. Cash would have been the best option looking back now.

Technical Analysis for Monday December 17

Videos For 12/11/07

My Hands Are Tied

We've had a very big run in such a short time and you have to stop and think that perhaps a 50 basis point cut is factored into the market. I've been gradually liquidating my positions since the end of last week into this strength and have booked incredible gains. I would hate to give that up going into the Fed's decision tomorrow and I wouldn't be surprised to see a selloff especially if they cut only 25. 50% of my money is going long and the other 50% in cash. I also have stuff to do this week so I won't have time to watch the market or posts. LDK has been a gem and I was emotionally torn when I chopped my position in that to half. I know it has a better chance of going higher in the long run, but it is way overbought in the short term and I expect a pullback. Even if it continues to jettison, it's never a bad thing to take profits and manage risk. Discipline over emotions when it comes to stocks.

My position for this week are either swing trades/long-term investments:
6% LDK (Feeling sad having parted with half my shares)
5% ETFC (Will get bought out and/or turnaround...great price/book ratio)
2% USU (Small position on a revenge trade)
8% GWDC (Way too deep in this spec play...lots of good news and I will scale out on a pop)
7% WGI.TO (I love gold, especially companies that are highly leveraged as gold futures rise)
6% FR.V (Silver is pretty awesome as well)
5% FSY.TO (Uranium is the way of the future)
5% BBP.V (Great price/book ratio...linked with the Lundin Group...big discount since they have struggled to drill successfull wells...properties are very strong)
2% PYR.V (5-10 bagger on a comparable basis)
2% WNP.V (Getting killed, but I like the prospects...invested a little too much)
2% BDY.TO (Poor investment...trying to get money out...stay away)
50% cash (Bull market or bear market? I'm ready to go either way)

Pennant Pattern/Triangle Breakout

I managed to find one setup today so I hopped in with a small position of 200 shares at $44.34 in LDK. I had my stop set at $43.89 which was underneath the trend line. I thought I picked the breakout point as prices spiked, but being the amateur I am, I didn't wait for volume and candlestick confirmation. Also, buying at the breakout does not give a good risk/reward ratio. I risked $0.50/share to gain $1.50 potentially whereas buying at the support would've been a risk of say $0.25 (basically 1:3 vs 1:6). Anyway, I moved my stop up to $45.13 after the 2 bearish haramis and I was lucky not to get stopped out. I sold at $45.75 for a gain of $1.41 less commission. The Stockcharts service basically pays for itself :D

A small tutorial on how this pattern should be traded and my mistake:

Pennant/symmetrical triangle forming.



Still bouncing in the range.



A breakout at $44.34 or is it a fakeout?



A second pennant formation.



In depth analysis.



Pay attention to volume to confirm signal.

Videos for the Weekend

Indecision

Most of the stocks on my watchlist are in a middle range and I don't know with good certainty how they will play out. I'm probably going to play it safe for today and Monday and let the market decide for me. Not going to make much money, but at least I won't lose much.

Bought Yearly Subscription Into Stockcharts.com

Cost me $309.35 for 13 months access. Having reliable charting tools can only help you make profits. I don't mean to be advertising them just to let you know.

At least now I'll be able to save and post some of my plays daily or at least I'll try to. I was born with slow hands so it takes me forever to type these posts. I had cement hands when it came to hockey so naturally I played defence. In baseball I struck out more than making any contact with the bat...never caught a flyball either, but I digress.

Raising Cash and Sitting on the Sidelines After Liquidating My Portfolio

Well today we tagged the 1490 resistence a couple of times in the S&P before finally busting through for a small pop. This level will be heavily defended by the bears and I believe those go long right at the breakthrough may be falling into a bear trap. The volume going up was not very impressive and I expect sideways trading or a late day selloff. I would not be a buyer yet nor would I be a seller unless volume picks up and favors a direction. I don't want to gamble by holding overnight where we could gap up or down, but I'd rather just daytrade and hop in and out. Preserving capital to fight another day is the key to this game.

I sold FRPT at $9.94 after gapping down during the open. Although I believe the stock will ultimately go higher, I didn't like today's signal and I I'd hate to lose all my profit.

Exited LDK at $41.15 and will buy back during the day's close at a lower price.

I made a very nice gain on KUN averaging out at $8.94

I also took a small position in FXP at $64.85 as a bounce play off support but prices reversed and I had to sell for a loss at $63.55.