Saturday, March 31, 2012

Cheap Gold Miners & Bassari Resources (BSR)

Get ready for a bit of a long post here as I start with some of my thoughts and those of others on Gold mining stocks in general and then get specific on an ASX listed Gold exploration company that I think is worth a look.

It's been a while since I've talked about Gold/Silver stocks. I wrote a few posts late last year suggesting we could be looking at a  move to new highs for the Gold stocks (e.g. Gold stocks cheapest since early 2009). We did see new highs in the HUI for the briefest of periods... however it ended up being a poor call and after increasing my exposure (to 50%) in Gold stocks in the lead up to the rally/breakout I ended up in damage control the rest of the year and liquidating several positions for a loss. I'm now back to around 15-20% Gold stocks as a percentage of my invested capital/savings (not including the blue chip Gold stocks held in my super).

One of the ratios I was watching was the HUI:GOLD ratio where the lower the ratio the cheaper the stocks are relative to the price of the metal. I thought .31 was low, but it has deteriorated further since: 

CLICK IMAGE TO ENLARGE
This image from a recent Zeal article showing the panic lows of today compared with late 2008 when the miners crashed along with the metals:


Some of the capital from the sell off went into physical Silver in the late 2011/early 2012 sell off (as mentioned in this post). I was a buyer several times in the correction all the way down to $26, including a purchase at the bottom, with a bit of luck I managed to time the purchase within half an hour of the near $26 low (got to love the recent introduction of online Australian dealers who provide live pricing 24/7). 

I've also been a buyer more recently with the correction driving Silver from AUD$34.50 to AUD$30. In my personal opinion Silver represents good buying at current prices and as long as you 'buy the dips' the bull market (assuming it continues) will iron out any mistakes or if you miss the bottom. In the grand scheme of things I don't think purchasing a dollar or two out from the bottom of the correction will make that much difference when taking into consideration where I think the price of Silver is heading in the next few years (triple digits).

Back to stocks. So the sentiment in the precious metals sector is extremely negative at the moment, in the physical metals and in particular the miners. A few well written (and argued) articles (from notable commentators and blogs) have popped up in the past week. 

This one from The Short Side of Long (recommend reading the full article, but here is the summary):

Summary: As you can see, there are a lot of indicators pointing to a Gold Miners bottom either around these levels or in coming days or weeks. Be it oversold price, oversold breadth, an already large cyclical bear market (Silver down 48%, Juniors down 44% from 2011 peaks), relative strength and bearish sentiment, which contrarian love to see - all of these point to buying into the PMs sector.

Having said all that, refer back to the beginning of the post. If the Euro breaks up, it will confirm what I have written here; but if the Euro breaks down (Dollar breaks up), than we could see some more selling first for a few more days or weeks, until the final bottom is reached. It is critical to keep your view on the Euro Dollar exchange rate in coming sessions to gauge weather this is the right time to invest into the PMs sector or not.
This one from Zeal (once again a good read in it's entirety, but brief snippet below):

Gold stocks had been doing great since their panic lows in 2008.  Measured by the venerable GDX Gold Miners ETF, gold stocks were up nearly 300% to their late-2010 highs.  This well outpaced the gains of both the general markets (+86% as measured by the S&P 500) and gold (+100%) over this time.  But once 2011 rolled around, gold stocks’ powerful upleg started stalling out.  Even though gold prices stayed strong, the gold stocks succumbed to weakening global equity markets and a weakening commodities patch.

15 months later, now entering Q2 2012, gold has held steady and the S&P 500 has enjoyed an excellent two-quarter run that has brought it to new cyclical-bull highs.  These conditions should have boded well for gold stocks.  But as you can see in the chart below, they continue to languish in their slump.  And the juniors in particular have been getting crushed!

CLICK IMAGE TO ENLARGE

Gold stocks are actually as cheap now as they were near 2008’s panic nadir!  And if the sentiment cycle that has been so consistent across this entire bull swings back in favor of these stocks, thus drawing investors back in, then I submit to you that this sector, especially the juniors, is poised to explode.  And I’m not talking a violent explosion that will lay waste to gold stocks like so many believe, I’m talking an explosion akin to a rocket ship blasting off into space.
This from Bob Moriarty who called the April 2011 Silver top to the day (mind you with a couple of misses in the months leading to the top):

When investors love gold, they buy the XAU. When they hate gold, they sell the XAU. You literally could draw lines on the chart and when either one or the other was violated it gave a clear signal to buy gold and gold shares or to sell. That worked right up until August of 2008 at the beginning of what came to be called the GFC or Global Financial Crisis. During August, September and October of 2008, investors around the world were unloading every share they could sell just to raise cash to make margin calls.

As a result, there were hundreds of gold stocks selling for less than the cash they had on hand. The last time that happened was in 2001 at the bottom for gold shares. So with gold at $695 in late October of 2008, gold shares as measured by the XAU were actually cheaper than they were relative to gold at $255 gold in mid-2001. That’s nuts. Gold shares got hammered in November and December of 2008 with tax loss selling and investors dumping every loser they owned but between October of 2008 and six months later gold and gold shares rocketed higher.

If you want to invest and make money, you have to be a contrarian. If it makes you feel better to whine about how the nasty guys at the Fed and Treasury and every bank in the world are making gold go down every time gold drops a nickel, it may make you feel better but it won’t make you feel richer.

If you want to invest to make money, buy when everyone wants to sell and sell when everyone wants to buy. Right now, at $1662.80 gold, investors are more negative on gold shares than they have ever been in history and that marks bottoms. For both shares and gold.
And finally this from Jeanne d'Arc at Screwtape Files:
Gold and its miners look ready for a big move

It's times like this that PM bloggers stare deep into what is left of their soul, throw their pens at the cat in frustration, and swear blind that they'll switch from writing about PMs to penning poems about lovely butterflies or creating daguerreotypes of renaissance sculpture. At least the butterflies won't change their spots seconds after a photo of them is published, and sculpture is harmless (and often armless) enough.

But I soon realised what utter nonsense this attitude was. Because the charts' indications haven't changed. And I still very much believe that we're about to have a big move higher in both gold and its mining stocks. Let me try to convince you again...

Let's start with the mining stocks. Earlier in the week I set out to show how the HUI was near its traditional lows of 480 - 500, which I argued was the perfect 'buy zone'. From recent history, this seems entirely reasonable, as the HUI has been moving in a range from 480 to 620 since November 2010.

However, there was one vital missing ingredient - the price of gold! I'd wrongly assumed that the gold price would be static at worst, and this was clearly not the case. Bad JdA. The miners were neatly in their buy zone, at the customary lows, ready for their move higher, but once gold took its big hit there was no way on earth that they were going to do anything other than fall further. The HUI hit lows during the latter part of the week of around 475, and currently stands not much above that. This low is lower than those seen during the last 18 months.
The physical metal has been a better performer than the stocks for the past 12 months, but it's likely that situation will change at some point in the future and when the precious metal stocks play catchup it's likely to be an incredible rally.

Rather than try to pick a bottom I will be instead looking for signs that interest is returning to Gold/Silver stocks. With many juniors bouncing around today at what I consider to be bargain basement prices it takes a lot of self control to stop jumping back in.

Personally I think the biggest risk short term is that the miners get caught up in a final down drought as the overbought stock market goes into a deep correction following the runaway move we've seen over the past few months. There's no guarantee they don't hold up though (despite a general market correction), many of the Gold miners performed extremely well in early 2009 (having bottomed in October/November 2008 alongside the drop in physical prices) as the rest of the market was crashing to the GFC lows.

While I'm not heavily invested in junior miners at the moment I am holding a couple. One of them, Bassari Resources (ASX: BSR), is a West African Gold explorer (I hold BSROA options, rather than BSR, more details further down) which I bought initially in August 2011 and have averaged down as the price dropped lower.

Here is a short profile which I wrote for the February/March edition of AHA Investor Magazine:
Bassari Resources – A West African Story

Gold and Silver mining stocks have had a rough time over the past 12 months as the debt crisis in Europe has deteriorated. The ASX Gold Miners Index (XGD) fell from its April 2011 peak of 8500 to an October low of 6000 (a 30% fall), an index price not seen since July 2010 when Gold was trading several hundred dollars lower at AUD$1300.

If nothing else this crisis has shown that although miners can benefit from a higher Gold price, they don’t always rise when the price of Gold rises and often fall harder than the metal when the spot price corrects. Gold stocks are far from the safe haven that physical metals are, although with the right timing and company a lot of money can be still be made trading or holding them (with the wrong timing and company a lot of money can be lost as well!).

The XGD is made up primarily of larger companies; some of the junior mining and exploration companies have seen an even larger fall than the XGD as Gold corrected from US$1920 in early September to the late December low of just over $1500.

Bassari Resources (BSR) is one of the junior mining companies which have seen their share price decimated as fear gripped the markets in 2011. In early 2011 BSR traded briefly above 20c per share, later that year in September BSR traded for a short time around 8c per share, today the share price is trading below 5c (up to 75% lower than early 2011, 40% lower than September and not far from the lows seen in the middle of the GFC).

In this case the decay in share price can’t only be attributed to the Gold correction and western debt woes, BSR have also had some company related issues. For example their Douta alluvial gold project was put on care and maintenance in the second quarter after operational issues arose and due to a lack of plant/equipment availability.

However, 2011 also bought many successes for the company. In May 2011 BSR released their maiden resource for the Makabingui Project of 240,000oz Gold; this was increased by 126% in December to 543,000oz Gold. The resource includes a higher grade zone of 189,000oz Gold at 4.5g/t. The resource announcements have come following an aggressive drilling program which is continuing into the New Year (2012).

Some of the most impressive results from Makabingui (location of their JORC resource) included 7m @ 54.3g/t Au from 165.3m, 2m @ 37.3g/t Au and 3m @ 14g/t Au (some intercepts which had visible Gold in the mineralised lodes/drill core).

The Konkouto Prospect (35km North East of Makabingui) also returning notable grades with intercepts of 20m @ 1.7g/t Au (including 4m @ 3.8g/t Au) and 5m @ 1.5g/t Au and more recently results announced in January, 50m @ 2.5 g/t gold and 20m @ 3.0 g/t gold. Drilling confirms an east-west trending mineralised zone over a strike length in excess of 600 metres, open in both directions and at depth, which has prompted BSR to commit to another 12 holes (1000m) drilling at this prospect in the first quarter of 2012. There are also still assay results pending from both Makabingui and Konkouto, unfortunately the company has been at the mercy of long lab wait times which seems to be quite typical of African based Gold exploration companies at the moment.

BSR has an interest in 3 contiguous permits (located in Birimian Gold Belt, Senegal, West Africa) with an area of around 1000 square km, within this lies 80km of strike with 13 prospects identified. The region BSR’s tenements lie in are host to 50 million ounces of Gold already.

The risk from Europe and other indebted western nations continues to form a dark cloud over the prospects for junior mining companies like BSR who still at these early stages need to regularly seek funding from the market in order to progress their development. However if they can continue to source adequate funding the exciting grades being delivered and impressive speed at which they’ve started to prove a mineable resource should continue and see BSR flourish in 2012.
At the time of writing the above article the share price was still languishing as uncertainty over their cash position kept investors wary (cash position suggested they would need a capital injection by end of March), however the last two weeks has seen a huge turnaround.

On March 21st they went into a trading halt and March 22nd saw them announce an $11m capital raising at 5c with the share price having closed the previous day at 5.2c.

In the recent Gold miner doldrums many junior Gold stocks (and even the blue chips, KCN's recent placement coming to mind) have traded back to or below the placement level at least for the short term. This wasn't the case for BSR and the share price has taken off in the past week having reached a high of 6.8c, a 36% premium to the placement price and settled to close on Friday at 6.3c.

The share price seems to find support/resistance consistently around the .8c levels as is evident in this short term chart:

CLICK IMAGE TO ENLARGE
So the 6.8c level might put up some short term resistance and a retrace back to test 5.8c seems like a viable possibility (but in my opinion would be a buying opportunity if support at this level holds).

On a longer term chart the 200 Moving Day Average has both acted as resistance and once passed acted as support and the share price is one again at this level now:

CLICK IMAGE TO ENLARGE
While it's possible that BSR could head back (over the medium/long term) to the highs above 35c seen in early 2010 it's worth keeping in mind the number of shares on issue at the time was significantly lower (so to get back there would command a significantly higher market capitalisation). 

By the end of the year I think a share price target in the vicinity of 15-25c is not out of the question if they can prove up over 1m ounces of Gold (a target the company has suggested will be met this year) at their Makabingui Project (at which they already have over a 500k oz resource) and another 250koz at their Konkouto Prospect. The existing resource is relatively high grade when compared with their peers and on a market cap/resource ounce valuation basis they are somewhat undervalued compared with some of their nearby peers (GMR and PIR being two examples).

Another way that BSR may be able to add value for shareholders is through a JV for their alluvial project (mentioned in the above article I wrote), it's currently on care and maintenance but management have indicated that they are seeking interest from other parties to progress this project.

Above I mentioned that I am holding BSROA rather than BSR. Options are a lot more speculative than holding direct shares and would implore that you don't purchase them without understanding the security. They do however provide significant leverage (explained in detail below) if the share price of BSR heads over 11c before 30th November 2012.

Options as as the name suggests is an 'option to buy', the strike price being 11c and expiry is 30th November 2012 (8 months away). Essentially this means that you can convert them to BSR shares by paying 11c each. Obviously with the BSR share price today at 6.3c there is no incentive to convert, but if the share price was to reach 12c for example then the options are considered 'in the money' and the owner would generally pay the amount required to convert them before the expiry date. If the options are not converted before the expiry date then they expire worthless.

Hopefully the above provides a basic explanation on how the options work. So we know if they aren't converted before 30th November 2012 they expire worthless, what is the inventive to buy? They offer significant leverage if the share price heads over 11c (or potentially even if it doesn't, but there is confident speculation that it will), consider the following purchases and future share price:

$10k worth of BSROA purchased at .013 = 770,000 options
$10k worth of BSR purchased at .063 = 159,000 shares

At 12c the intrinsic value of BSROA is 1c (although potential to be trading higher):

BSR: 12c x 159,000 = $19,080
BSROA: 1c x 770,000 = $7,700

At 14c the intrinsic value of BSROA is 3c:

BSR: 14c x 159,000 = $22,260
BSROA: 3c x 770,000 = $23,100

At 18c the intrinsic value of BSROA is 7c:

BSR: 18c x 159,000 = $28,620
BSROA: 7c x 770,000 = $53,900

At 25c the intrinsic value of BSROA is 14c:

BSR: 25c x 159,000 = $39,750
BSROA: 14c x 770,000 = $107,800
 
You can see how the leverage really starts to kick in if BSR gets to 14c or higher before expiry and of course there is the potential that BSROA is trading higher than it's intrinsic worth as the BSR share price moves up due to the leverage it provides. However you would want to be careful that you trade out of BSROA prior to expiry unless you have the cash and interest to convert them (for example in the example used above you would need a further $84,700 to convert the 770,000 options).

Not a risk that all are prepared to take, but my BSROA is a speculative holding, so prepared to hold on and may take an opportunity to trade into BSR as time goes on. A member on Hot Copper provided some interesting charts on the risk/comparison of holding BSR/BSROA (link to post here). Another thing worth noting is that there are other options BSRO expiring earlier and with a higher exercise price which I personally expect will expire worthless, so be careful you don't accidentally purchase these.

All in all I think it will be an interesting (and potentially company making) year for Bassari Resources and if the junior Gold sector does turn around as suggested in the articles I linked near the top of this post then there is the potential for this companys share price to soar.

BB.

Disclosure: Position held in BSROA. Not investment advice. Do your own research and come to your own conclusions/decisions to buy or sell any security or investment asset.

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