|Posted by Brian Fletcher on 30/08/2018||0 Comments|
In addition, I described a diversification approach that would enable an investor to allocate capital to a small number of individual miners (8-10), and for those seeking to supercharge their returns; I described the appropriate allocations to leverage as well.
It is critical to understand the idea that to achieve extraordinary returns it is not the number of mining companies one buys, but that it’s the right mining companies. The variation in fundamentals in this sector is figuratively a mile wide, which for those that do their homework; Mr. Market is providing some tremendous opportunities.
Unlike many who would have investors believe a portfolio comprised of 50 – 70 stocks is necessary, we view this approach is impractical for individual investors, and will result in difficulty staying abreast of and managing position entries, exits, and portfolio survivability. From a strictly fundamental perspective, variation between the enterprise values and reserves of one miner vs. another make sets forth a wonderful opportunity to identify sound companies with lofty reserves at cheap relative prices. You may recall that enterprise value takes into consideration the market cap, current assets, and liabilities. The other key fundamental relates to reserves and reserve jurisdictional risk. When purchasing a miner, the key questions are - 1. what are their reserves? 2. Are their reserves in jurisdictions that are stable? 3. What are we paying for their reserves (enterprise value)?
SSR Mining, Inc., (SYM: SSRM) is a company we will recommend to our subscribers for a host of reasons. Just to mention a few, at present, SSRM has a market cap of 1.065B. They have $643M of current assets, and total liabilities of $582M. This provides them with excellent liquidity to ramp up production as the prices for gold and silver escalate.
In addition, SSRM has 3.5M ounces of proven gold reserves, and 16.8M ounces of proven silver reserves. The unknown, or what we refer to as the X-Factor, is that they have an additional 5.2M ounces of gold that are indicated and inferred, plus an additional 14M ounces of silver that are indicated and inferred. This simply means there might be a great deal additional production in the future. Their franchise cost per ounce, converted to gold equivalent for ease, is $237, and their cash cost of production is $705. This suggests that, based on the current enterprise value, an investor is buying each of fully produced gold for $942.
Jurisdictional risk for SSRM is reasonable as well, with mining operations in Canada, US, Argentina, Mexico, and Peru.
Lastly, the Elliott Wave analysis is supportive of the purchase of SSRM shares – see attached chart. As stated in my previous article, we expect GDX to move into the $17.75 - $15.75 target zone in the next 1 – 4 months. Simultaneous to this, we view the downside price target, and thus entry purchase level in SSRM to be $6.44 - $5.03 per share. If we assume GDX, Gold, and the HUI Index achieve only a large C-wave to highs over that set in August of 2016, then our price target for SSRM would be in the range of $27.81 to as high as $49 per share. With such a wide price target range, one can assume the upside to be 4-9x increase in capital allocated to SSRM during a C-wave that should last approximately 8 to 18 months in time. We’ll be able to fine tune price targets through the rise to narrow down our exit strategy.
For our subscribers, we will provide entries into each individual miner, as well as the appropriate time to allocate a smaller percentage of capital to leveraged ETF’s and certain options positions. We have narrowed our short list down to 20 companies we’ll choose from, and SSRM has definitively made the cut.
Next week I’ll provide another great mining stock opportunity. Until then, thanks for reading!