With continued uncertainty in global markets, here is a look at the big picture from around the world, including silver.
By Bill Fleckenstein President Of Fleckenstein Capital
November 15 (King World News) – Bond markets were a bit higher overnight, with the exception of Japan, which is now seeing its 10-year yield trade all the way “back” to zero. Equity markets more or less ignored the bounce in the same way they ignored the decline. My opinion is that when you have a big secular change like we’ve seen in the bond market it is easy for people to rationalize the first break lower and perhaps it will take a rally that doesn’t carry too far to get folks to feel uptight…
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Blinded By the Bright Side
It is hard to know for sure, however, because we are talking about psychology, and the central bank actions over the last 20 years, especially the last 10, have rewarded people for essentially buying all news and being willing to suspend disbelief at the drop of a hat, which of course is what has gone on in spades since the election. As I keep repeating, equity investors are discounting all of the positives and none of the negatives while assuming a rapid timeline, all during a period when stocks are extraordinarily expensive and the trend in the bond market has likely changed. That is not a recipe for making money in equities in my opinion, but on the other hand I am not going to pick a fight with the stock market until the action changes.
Turning to the tape here, the reprieve in the bond market allowed the high-multiple stocks to have a nice bounce, and the Nasdaq gained 0.75% by midday while the Dow essentially took the day off and the S&P had a decent rally as well. With an hour to go, when I had to leave, the Nasdaq was 1.3% higher. The current view of markets seems to be: higher inflation, interest rates, budget deficits, stock prices, and a higher dollar. Can that all happen at once and be sustained?
Away from stocks, green paper was mixed, oil rallied 5%, the bond market was slightly higher, and the metals saw a bounce with silver gaining 0.5% to gold’s fractional gain of $3.
Hey China, House It Going?
On the subject of commodities, it is worth noting that copper, lead, and zinc have all seen pretty respectable rallies lately. I had first suspected a short squeeze, and I’m not saying it isn’t, but it also could be a function of the monetary policy expansion taking place in China. I had not read much about this until the Lord of the Dark Matter pointed out that new mortgages are exploding, as are their monetary aggregates. I am really not sure what to make of that, but if somehow China manages to get itself rolling to some degree thanks to money printing that will change the dynamics of a lot of markets. I’m not saying that is going to happen, just that I intend to keep my eye on that situation.
And a Hearty, “High-Yo, Silver!”
Now I’d like to turn to the subject of Pan American Silver, a company I have a big position in and of which I used to be a director. Last night they reported results for Q3 that were absolutely spectacular following results from Q2 that were also quite good, although not as good as this one. (In addition, they increased production guidance for all metals, ex gold, and lowered expense guidance again.) I am going to go into a fair amount of detail because I would like to make a point about the importance of good properties and good management, as well as the potential for the right miners prospectively, compared to what we have seen in the past.
First of all, for a long time Pan American was considered one of the premier mining companies and certainly one of the top silver producers. In the last couple of years they have had to digest an acquisition and spend a lot of money, along with the disappointment of having their property in Argentina get written down to almost nothing. Meanwhile, they spent a fair amount of money, time, and effort to mechanize and automate many of their mines. Thus, what you are seeing now is a permanent reduction in certain costs. That’s not to say that all of the cost reductions are a function of things the company did. Some are beyond their control and could turn out to be somewhat transitory, such as the decline in the Mexican peso or base metal prices.)
The combination of having spent the money it has spent and now having the mines in the cycle they are in with the improvements I have described has allowed the company to post an extraordinary quarter: estimates were between 13 and 18 cents but actual results were 28, and the guts were even more impressive. Cash flow in the quarter was over $100 million and to put that in perspective, the last time it had a quarter similar to that was back in 2011 when silver was $35, or around two times where it is today. And to put the last couple of quarters in perspective, for the first nine months of this year Pan American made 51 cents versus losing 62 cents last year. So these are very big changes.
There’s More Where That Came From
This is what can happen to a mining company that is run properly and has a bit of good luck. You can actually see operating leverage. This is also another reason I don’t like streaming companies. They can’t disappoint (actually, they can), but there is no possibility of any upside. Pan American has done all of this, and I believe it is in a good position to bring on the Navidad project that has been mothballed in Argentina. Given the fact that the current president, Mauricio Macri, is a hundred times more business friendly than former presidents Cristina and Nestor Kirchner ever were means that not only can the project come on (once the laws change in the Chubut district), it is potentially going to be more profitable than originally envisioned because of the changes in mining laws, taxes, and the decline in the Argentine peso.
Here’s what Navidad could mean. Spend $500 to $600 million raising cash plus some debt and you get 16 to 20 million ounces a year, with all-in sustaining costs of less than $10 at today’s prices. That is an extra $100 million-plus per year incrementally. Said differently, you basically drop a Tahoe Resources (pre Lake Shore acquisition) into Pan American, which ought to be an extra $800 million of market cap, i.e., $5 to $6 per share.
Despite all of the problems the miners have gone through in the last five years it is important not to lose sight of the fact that it is possible for companies to surpass expectations and demonstrate real momentum in their businesses. That said, I don’t like using some of those words because it sounds like the verbiage game-playing that Wall Street is incessantly doing, but the fact is that Agnico Eagle and Pan American Silver will have a chance to deliver more than satisfactory results prospectively (however PAAS is far from cheaper than AEM), and I think soon we can add New Gold and potentially Goldcorp to that list (we shall see).
A Rising Tide Lifts the Best Boats
Regardless of whether one wants to own Pan American, I think last night’s earnings report demonstrates what is possible in mining. If we can run higher metals prices through some of these business, folks might be surprised by how much money they can actually make. However, I want to be very clear, there are lot of mining companies that are in bad jurisdictions or have bad properties or managers who aren’t that capable, so one needs to be quite selective.
Included below are three questions and answers from the Q&A’s with Bill Fleckenstein.
Question: Regarding repatriation of funds that is largely a myth, the money is “overseas” in name only. A large portion of the money in a companies foreign subsidiary is already invested in domestic investment companies, treasuries, and US dollars. Now eliminating the repatriation tax may allow for the money to be put to more productive use, which is a different argument.
Answer from Fleck: “Good point.”
Question: CEF got slammed today. Discount to NAV now 12%, matching the discount at the lows in Jan/Feb.
Answer from Fleck: “Thanks.”
Question: PAAS is killing it. This is the kind of earnings growth Silicon Valley Unicorns dream off way, way off several years in the future Am I too ebullient?
Answer from Fleck: “It was a spectacular quarter after a great one last quarter. They are doing really well. If it was a tech stock, it’d be up huge Tuesday.”
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