Nothing beats performance for anyone in our industry. No matter how well liked or disliked, anyone in the investing industry is judged by performance. Making stock selections is a tough business and market timing is even tougher. This does not deter us, however, and we will share our views for 2017 by looking back at January 2016. This is the information originally given only to our paid members. There is a free list available through the website for those seeking a weekly perspective on all the markets. Our premium members receive not only analysis on resource companies, but intermediate timing calls as well.
Here is a partial look into last year's January 2016 issue: Every year we list our top picks than we expect will outperform over the following 12-to-18 months. We typically choose two to four from each category: Top-tier, Mid-tier and Speculation. If you had put an equal dollar amount into each pick, you would have ended the year up 99%. While this is an excellent rate of return over a 12-month time-period, 2016 was a wild ride for precious metals and especially the mining stocks.
If you had the ability to get out of each position at its 52-week high, you would have returned 228%. While this is unrealistic, had you listened to David Morgan's call for a medium-term top, and sold your trading positions, you would have booked a realized gain of roughly 190%. We will provide some of these picks and why we chose them, as well as listing the worst performing.
Senior Producers. First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE): This was a no brainer given the market valuation of the company, starting the year out at just $3.42/share. It has an excellent management team and a very lucrative asset base driven by low cost production, even though it didn't engage in what most primary silver miners did; high-grading. In fact, First Majestic "low-graded" select assets such that it could mine higher grades when silver prices rise. The typical silver company doesn't have the luxury of being able to do this. Costs were lower year-on-year for many reasons including the 2015 acquisition of Santa Elena, which First Majestic was able to mine more profitably, as well an identifying the potential for future expansion. Going forward, the company will realize capital investments made into existing assets after starving them of capital during the 2012–2015 bear market. This will be illustrated through higher output at existing operations in the second half of 2017, to the first half of 2018.
Mid-Tier Producers. Klondex Mines Ltd. (KDX:TSX; KLDX:NYSE.MKT): The operator of the highest-grade gold mine in the world (Fire-Creek) had a lot to offer in terms of upside potential coupled with a valuation discrepancy. Klondex began the year just under $2/share, and lagged the mining complex for essentially the first seven months of the year and then began to outperform. This was driven by several elements—the bid for and subsequent acquisition of the high-grade Hollister mine, first production from True North tailings reprocessing and a prefeasibility study of a full scale True North operation and a positive production decision. Organic growth from Fire-Creek, Midas and True North should support growth through the end of the decade, complemented by additional growth from Hollister, which could begin operating in 2017 as the Midas mill has excess capacity from which it can process material from Hollister.
"Organic growth from Fire-Creek, Midas and True North should support Klondex Mines Ltd.'s growth through the end of the decade."
Speculation. Santacruz Silver Mining Ltd. (SCZ:TSX.V; SZSMF:OTCQX; 1SZ:FSE): This was a very speculative and risky pick at the start of 2016 given its debt-laden balance sheet but like all investments, especially in this sector, it is all about management. It had over $20 million in debt at the start of the year, the majority coming due within the next 12 months. Its management team led by Arturo Prestamo was able to amend its debt obligations through a combination of paying some down through raising capital, a portion being forgiven and a portion amended into a much smaller note due in quarterly installments beginning in H2/17. Aside from that, Santacruz had acquired the rights (for a period of 15 years) to mine the formerly producing Veta Grande mine in Mexico, which is now its cornerstone asset, complemented by the Rosario mine and mill and the Cinco Estrellas mine (mined material has begun to be trucked to the Rosario mill, given that it has 300+ tons per day (300+ tpd) excess capacity).
While the majority of our top picks outperformed the HUI (NYSE Arca Gold BUGS Index) or related benchmarks, we did manage to pick some underperformers, the most notable being Goldcorp Inc. (G:TSX; GG:NYSE). The company had some small hiccups in the first half of the year with operations remaining fairly steady over this time, but this was enough to cause its stock price to lag related benchmarks.
2017 outlook and a top pick for you
Last year I was optimistic that we would see a rise into the first few months, as things appeared better my caution remained as gold was leading silver. This was confirmed because the gold/silver ratio was not confirming the move. Finally, silver came on with a vengeance with the shares leading the way. However, with the recent sell-off to some, it feels like the entire precious metals complex is similar to the Greek myth of Sisyphus where the sinner is condemned to an eternity of rolling a boulder uphill then watching it roll back down again.
At this point we are convinced we still are in a bull market even though we are well aware of the Harry Dents and Martin Armstrongs letting everyone know gold is going lower. In a bull market there will be some severe shakeouts to convince people they should not be in the market, and that is what we are experiencing now. If the gold/silver ratio were to move above 80 and gold were to trade below US$1050, we would reexamine our view. At this point we think most of the damage is done and we can expect a first-quarter rally that may not begin until late January or February.
Since we still affirm that the bull market is intact, it makes sense to us to trade a portion of our holdings as market conditions warrant. We did make our call and sold into strength, taking some gains off the table. Those gains have been gathering dust, staying in cash for now, with the plan to buy in over the next four to six weeks. We understand that position trading is not for everyone, but it does give one some advantages to see that boulder roll back down the hill AFTER taking some profits.
We don't often provide our research to the public for free, after all it is how we make a living. Yet let us give you a speculation, Prophecy Development Corp. (PCY:TSX). This company has been on our list a long time staring as Prophecy Coal, and the company spun out the Wellgreen PGM mine for free to shareholders, very similar to one of our current holdings. The PGM company went straight up for a short time increasing many multiples.
Prophecy Development has two very attractive development projects in Bolivia in Pulacayo and Paca. Pulacayo has had already seen significant capital investment in recent years as it was held by Apogee, which was overextended when precious metal prices entered the bear market from 2012–2015, and in turn sold these projects to Prophecy.
Prophecy is looking to commence small-scale production (200 tpd at Paca and 100 tpd at Pulacayo) sometime in the spring or summer. Both deposits are very high grade with Pulacayo (underground) having a resource with silver and silver equivalent grades of 530 grams per tonne (530 g/t) and 688 g/t and Paca (open-pit) having a resource with silver and silver equivalent grades of 363 g/t and 444 g/t.
Initial production should see total production of roughly 700,000 oz silver (annualized), however, this has the potential to increase and increase very significantly moving forward. In particular, we view the scalability at Pulacayo to be tremendous, making Prophecy a very exciting company to watch for years to come. The biggest drawback for investors is the fact that its silver assets are located in Bolivia and while this is a risk, we do believe the "Bolivian discount" is overdone and with recent history regarding asset nationalization has primarily been on early-stage projects which haven't been permitted. Even so, we categorize a company such as Prophecy as a speculation for a reason.
Further, Prophecy isn't a single asset, single country company as it also owns two significant coal assets including Ulaan Ovoo (with the significant rise in thermal coal prices over the last year, Prophecy is discussing whether to bring it back into production as early as this year), located in Mongolia and 17km away from the Russian border and the Chandgana power plant development project, also in Mongolia. Lastly, Prophecy owns an exploration stage titanium-vanadium-iron project in Ontario, Canada.
A Speculation where our hands are tied
Let's face the facts. There is a lot of competition in the resource sector to deliver, which means large capital gains count! We have a trifecta of speculations that seem to line up at the start of this year, and we can only hint at one, because we make our living through the paid research we do for you in the paid Member's Only section of the website. We have a speculative company that will be voting on a spin-off company that could be a leader in the electronic waste field. We are not allowed to mention much more because of legal restrictions that require all information be in the public domain at the time we publish. When/if this company "changes the path of the mining industry itself" remember you read it exclusively in Streetwise Reports.
The Morgan Report not only keeps an eye on the obvious mining sector investment pearls, but, in addition, doesn't hesitate to cast its analytical net far and wide in hopes of unearthing an investment gem that not only might "rewrite" our subscribers' portfolios, but that could even change the path of the mining industry itself.