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Miners Trick and Treat

10-31-2019

Last night, three miners that I have positions in reported: Equinox, Alamos Gold, and Pretium. The former were both fine and don't really require a lot of discussion. Pretium, however, dropped a bomb in that the grade was 9.1 grams per tonne versus expectations of about 12, and the implications of that were less gold produced and higher costs.

The problem, of course, is that two weeks before the quarter ended, management reiterated its guidance. In other words, they misled everybody. The explanation in the press release about what exactly occurred didn't really make sense to me, so I'm not really sure what happened, but management has no credibility now. Having said that, if the company can produce 400,000 ounces per year (based on 9 grams per tonne at 3,800 tonnes per day), which it should be able to (but who knows if it will), at today's gold prices it would not be difficult to earn $1 a share.

"He Knew" Is Bad News Thus, while the equity itself is very cheap, management itself has lost its credibility. As a consequence, I have decided to eliminate the rest of my position. Unfortunately, the insider (Pretium's head of exploration) who sold stock in late August turned out to be correct, but that in itself poses an even bigger problem because it would seem it may have been clear to certain insiders that a grade problem was apparent at that time. That makes management look even less credible. The bottom line is that it's a great ore body in a great place, and the valuation is low, but you have to be able to trust management (and, by extension, what they say about the ore body), so until something changes I don't want anything to do with them.

Turning to the market action, it was under pressure, probably because of the news out of China that basically said what we all know, i.e., that there isn't a deal, or at least not much of one. In addition, I think at some point the intense hatred between the Democrats and Trump is going to matter to the market. The Senate won't convict him, but I think all of the contentiousness may cause people to begin to worry about the economic consequences of one of the current Democrat frontrunners winning, and that won't be bullish for equities, or the currency either, for that matter.

In any case, through midday the market was 0.5% lower. In the afternoon, the indices lifted a little, as a check of the box scores will show.

A Little Paydirt Away from stocks, green paper was weaker, fixed income jumped higher, and the metals did as well, with silver gaining 1.5% to gold's 1%. The miners generally all did quite well (and the recent action appears to confirm what we have seen since Agnico Eagle reported), with the notable obvious exception of Pretium.

Positions in stocks mentioned: long AGI, long EQX, long AEM, long AEM calls.