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Trump’s Dilemma And Refuting The Gold/Yuan Peg Theory
The following is an excerpt from my December 6th issue of the Mining Stock Journal:
Trumps Dilemma – The dollar index has been rising since Trump began his war on trade. But right now it’s at the same 97 index level as when Trump was elected. Recall that Trump’s administration pushed down starting in 2017 to stimulate exports and attempt to cut the trade deficit. The dollar fell from 97 to 88. Gold ran from $1125 to as high as $1360 – a key technical breakout level – by late April 2018. Something had to be done to keep gold from moving higher…Trump started his Trade War in March, which pushed the dollar higher. Gold began tank. Ironically, the trade deficit one again began to balloon.
If Trump wants to “win” the trade war, he needs to push the dollar a lot lower. This in turn will send the price of gold soaring. This means that the western Central Banks/BIS will have to live with a rising price gold, something I’m not sure they’re prepared to do. This could set up an interesting behind-the-scenes clash between Trump and the western banking elitists.
I’ve labeled this, “Trump’s Dilemma.” As anyone who has ever taken a basic college level economics course knows, the Law of Economics imposes trade-offs on the decision-making process (remember the “guns and butter” example?). The dilemma here is either a rising trade deficit for the foreseeable future or a much higher price of gold.
The other problem with pushing the dollar lower to stimulate exports – or at least attempt to stimulate exports – is the funding of Treasury debt. If foreign investors, who fund a large percentage of Treasury issuance, expect the dollar to decline it will significantly reduce the foreign funds that finance Trump’s spending deficit. That deficit – on-budget + off-budget – will likely end up somewhere between $1.5 – $2 trillion this year…
Refuting the yuan/gold peg theory – When the theory about the Chinese pegging gold to the yuan based on the chart correlation was floated, how come nobody bothered to check the other major currencies vs. the dollar and vs. gold? The dollar has traded higher as if on steroids since late-April. Gold was trading at $1360 in late April. Between now and then it has traded as low as $1170. The yuan began falling vs. dollar in late April. But so did the Swiss franc and yen. The euro began falling vs. the dollar in February.
The charts of the Swissy, euro and yen vs the yuan over the last 12 months are all largely flat over that time period. More to the point, the chart of gold vs all four of those currencies (yuan, Swissy, euro and yen) over the last 12 months looks very similar:
As the chart above shows, the price of gold in all four currencies – yen, yuan, euro, Swissy – has been correlated. The argument could be made that gold is “pegged” to any four of those currencies. The yen, euro, Swissy make up a large portion of the dollar index. Gold is thus not pegged to the yuan so much as it is trading inversely to the dollar, which is expected.
The Trade War Is Not The Problem With The Global Economy
I chuckle when the hedge fund algos grab onto “positive” trade war headlines and trigger a sharp spike in stock futures. Settlement of the trade war between the Trump Government and China will do nothing to prevent a global economic recession – a recession which will likely deteriorate into a painful depression. The Central Bank “QE” maneuver was successful in camouflaging and deferring the symptoms of economic collapse. Ironically, treatment of the symptoms made everyone feel better for a while but the money printing ultimately served only to exacerbate the underlying financial, fiscal, economic and social problems that blossomed after the internet/tech bubble popped.
Trade war “hope” headlines coughed up by Larry Kudlow last Friday morning were designed to offset the disappointing job report and sent the Dow up 156 points in the first 12 minutes of trading. But alas, the gravity of deteriorating systemic fundamentals took over and the Dow ended up down 558 points:
All three major indices closed below their key moving averages (21, 50, 200 dma). I wanted to show the chart of the Nasdaq because, as you can see, the 50 dma (yellow line) crossed below the 200 dma (red line) last week. This started to occur for the SPX on Thursday. The Dow’s 50 dma remains above its 200 dma, but that will likely change over the next few weeks.
The point here is that investors, at least large sophisticated investors, continue to use rallies to unload positions. The stock market has a long a way to fall before the huge disparity between valuations and fundamentals re-converges. This reality will not be altered even if Trump and China manage to reach some type of trade agreement. Nothing but a painful “reset” can correct the massive overload of fiat currency and debt that has flooded the global financial system over the last ten years.
I also believe that a massive credit market liquidity problem is slowly engulfing the system. This is a contributing factor in the yield curve inversion, which moved from the 3yr/5yr interval to the 2yr/5yr interval last week, thereby reflecting the market’s growing awareness of the percolating systemic problems. In 2008 the liquidity problem began with widespread sub-prime bond defaults and was compounded by derivatives connected to the sub-prime credit structures. This time, it appears as if the credit market problem is starting in the investment grade bond and leveraged bank/senior loan markets.
It was reported last week that $4 billion was removed from leveraged loan funds over the last three weeks. Although the loans are leveraged, these are typically senior secured “bank debt equivalent” loans. Money is leaving this segment of the loan market because of a growing perception that the leveraged senior loan market is becoming risky. Loan and bond investors are more risk-averse than stock investors. They thus tend to be more vigilant on the ability of debt borrowers to make loan payments.
Currently there’s a record high amount of triple-B rated corporate debt outstanding. This amount outstanding is higher than any other rating category. At some point, as the economy continues to weaken, a large percentage of this triple-B rated will be downgraded. Assuming cash continues to flee the loan market, and as a lot of low investment grade paper is moved into junk-rated territory, it will exert huge pressure on bond yields. It will also make it much harder for marginal credits to raise capital to stay alive.
General Electric losing access to the commercial paper market is an example of the market cutting off a source of liquidity to companies that need it. It’s also a great example of a company with a large amount of outstanding debt that is headed toward the junk bond pile (GE is one notch away from a junk rating – at one time it was a triple-A rated company). Ford is headed in the same direction – the stock of both companies trades below $10. If this is happening to a companies like GE and Ford, it will soon happen to smaller companies en masse.
The commentary above is an excerpt from the latest issue of the Short Seller’s Journal. Also included is an updated analysis on Tesla and why I am increasing my short exposure in the stock plus follow-up on my Vail Resorts (MTN) short presented a week earlier. You can learn more about this newsletter here: Short Seller’s Journal information.
The Friday Avalanche In Vail Resorts Stock
I recommended shorting MTN to my Short Seller’s Journal subscribers in my December 2nd issue. While I expect MTN to lose at least $200 over time, I did not expect nearly 25% of that price-decline expectation to occur in 5 trading days after I presented the idea.
After I sent out my newsletter last Sunday, a subscriber sent me a link to a Motley Fool article titled, “Why You’re Smart To Buy Vail Resorts Now.” I had to laugh. I certainly hope that report didn’t deter any of my subscribers from shorting MTN or buying puts. I booked a 4-bagger on the puts I bought last Friday. I had several subscribers email me with thanks, most reporting gains anywhere from 2x to 5x (I always advise that shorting shares gives you the best probability of success shorting but I use put options and present put option ideas with every short idea). Here’s an excerpt from this idea presentation last week:
Shorting MTN was an idea I had been thinking about for a few months. About two weeks ago I heard a radio ad from a Denver-based, national mortgage firm (American Financing) which pitched the idea of using a home equity loan to raise money for a down payment to purchase a ski resort condominium or house. At that instant I knew the top was in for both the mortgage underwriting business and mountain real estate. Shorting Vail Resorts is pretty much the only avenue for expressing a bearish view on mountain resort real estate.
The insiders at MTN must agree with my view. Over the last three months there have been 23 open market stock sale transactions and zero purchases. Over the last 12 months, there have been 38 open market stock sales and 1 purchase. The purchase was for just 225 shares in December 2017.
With the help of Fed money printing and highly accommodative bank commercial real estate lending policies, MTN went on a large resort acquisition spree. The highly accommodative Government mortgage programs helped MTN capitalize on 2nd home resort home sales. The stock ran from $16 in early 2009 to an all-time high of $301 on September 4, 2018.
The stock trades at a 30 p/e, which is absurd for a business with a top line that grew just 5% year over year for its fiscal year 2018, which ended at the end of September. As the falling economy begins to take a wrecking-ball to the resort industry, Vail Resorts revenues will tank and the Company will begin to take big asset write-downs (real estate and building values). This will send the stock mercilessly lower.
Having studied, researched and traded the real estate industry for the better part of 25 years, including trading this sector as a junk bond trader on Wall Street in the 1990’s, I know that mountain resort real estate has a beta of at least 2 vs metropolitan real estate.
When the sector goes bad, mountain properties go bad times at least 2. Vail Resorts is not immune to this just because Vail and Beaver Creek cater to the wealthier demographic. Many of MTN’s resorts host the middle class. This is the middle class that uses home equity loans to buy vacation properties. We saw the downside effect of mountain resort real estate leverage on Friday when MTN lost $48 – or 17.8% of its value – on one day on one earnngs “miss.”
I have not had a chance to dig elbow-deep into MTN’s earnings report yet. But by the time I release this Sunday’s next issue to my subscribers, I’ll have a good a idea about what happened and why last quarter and where my next bet will placed based on what will likely happen over the next 12 months with Vail Resorts’ fundamentals and stock price. That said, I have mentioned to colleagues that I expect, based on a rapidly deteriorating economy, that this coming ski season – though likely a banner year for snow quality – will fall well short of analyst expectations in terms of skier visits and money spent.
You can learn more about my stock shorting newsletter here: Short Seller’s Journal.
Trump’s Trade War Dilemma And Gold
If the “risk on/risk off” stock market meme was absurd, its derivative – the “trade war on/trade war off” meme – is idiotic. Over the last several weeks, the stock market has gyrated around media sound bytes, typically dropped by Trump, Larry Kudlow or China, which are suggestive of the degree to which Trump and China are willing to negotiate a trade war settlement.
Please do not make the mistake of believing that the fate the of the stock market hinges on whether or not Trump and China reach some type of trade deal. The “trade war” is a “symptom” of an insanely overvalued stock market resting on a foundation of collapsing economic and financial fundamentals. The trade war is the stock market’s “assassination of Archduke Franz Ferdinand.”
Trump’s Dilemma – The dollar index has been rising since Trump began his war on trade. But right now it’s at the same 97 index level as when Trump was elected. Recall that Trump’s administration pushed down the dollar from 97 to 88 to stimulate exports. After Trump was elected, gold was pushed down to $1160. It then ran to as high as $1360 – a key technical breakout level – by late April. In the meantime, since Trump’s trade war began, the U.S. trade deficit has soared to a record level.
If Trump wants to “win” the trade war, he needs to push the dollar a lot lower. This in turn will send the price of gold soaring. This means that the western Central Banks/BIS will have to live with a rising price gold, something I’m not sure they’re prepared accept – especially considering the massive paper derivative short position in gold held by the large bullion banks. This could set up an interesting behind-the-scenes clash between Trump and the western banking elitists.
I’ve labeled this, “Trump’s Dilemma.” As anyone who has ever taken a basic college level economics course knows, the Law of Economics imposes trade-offs on the decision-making process (remember the “guns and butter” example?). The dilemma here is either a rising trade deficit for the foreseeable future or a much higher price of gold. Ultimately, the U.S. debt problem will unavoidably pull the plug on the dollar. Ray Dalio believes it’s a “within 2 years” issue. I believe it’s a “within 12 months” issue.
Irrespective of the trade war, the dollar index level, interest rates and the price of gold, the stock market is headed much lower. This is because, notwithstanding the incessant propaganda which purports a “booming economy,” the economy is starting to collapse. The housing stocks foreshadow this, just like they did in 2005-2006:
The symmetry in the homebuilder stocks between mid-2005 to mid-2006 and now is stunning as is the symmetry in the nature of the underlying systemic economic and financial problems percolating – only this time it’s worse…
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The commentary above is a “derivative” of the type of analysis that precedes the presentation of investment and trade ideas in the Mining Stock and Short Seller’s Journals. To find out more about these newsletters, follow these links: Short Seller’s Journal information and more about the Mining Stock Journal here: Mining Stock Journal information.
The Trade War Shuffle And The Fukushima Stock Market
The market is already fading quickly from the turbo-boost it was given by the announcement that China and Trump reached a “truce” on Trump’s Trade War – whatever “truce” means. Last week the stock market opened red or deeply red on several days, only to be saved by a combination of the repetitious good cop/bad bad cop routine between Trump and Kudlow with regard to the potential for a trade war settlement with China and what has been dubbed the introduction of the “Powell Put,” in reference to the speech on monetary policy given by Fed Chair, Jerome Powell, at the Economic Club of New York on Wednesday.
It’s become obvious to many that Trump predicates the “success” of his Presidency on the fate of the stock market. This despite the fact that he referred to the stock market as a “big fat ugly bubble” when he was campaigning. The Dow was at 17,000 then. If it was a big fat ugly bubble back then, what is it now with the Dow at 25,700? If you ask me, it’s the stock market equivalent of Fukushima just before the nuclear facility’s melt-down.
Last week and today are a continuation of a violent short-squeeze, short-covering move as well as momentum chasing and a temporary infusion of optimism. I believe the market misinterpreted Powell’s speech. While he said the Fed would raise rates to “just below a neutral rate level,” he never specified the actual level of Fed Funds that the Fed would consider to be neutral (neither inflationary or too tight).
I believe the trade negotiations with China have an ice cube’s chance in hell of succeeding. The ability to artificially stimulate economic activity with a flood of debt has lost traction. The global economy, including and especially the U.S. economy (note: the DJ Home Construction index quickly went red after an opening gap up), is contracting. Trump and China will never reach an agreement on how to share the shrinking global economic pie.
While Trump might be able to temporarily bounce the stock market with misguided tweets reflecting trade war optimism, even he can’t successfully fight the Laws of Economics. His other war, the war on the Fed, will be his Waterloo. The Fed has no choice but to continue feigning a serious rate-hike policy. Otherwise the dollar will fall quickly and foreigners will balk at buying new Treasury issuance.
For now, Trump seems to think he can cut taxes and hike Government spending without limitation. But wait and see what happens to the long-end of the Treasury curve as it tries to absorb the next trillion in new Treasury issuance if the dollar falls off a cliff. Currently, the U.S. Treasury is on a trajectory to issue somewhere between $1.7 trillion and $2 trillion in new bonds this year.
Despite the big move higher in the major stock indices, the underlying technicals of the stock market further 
deteriorated. For instance, every day last week many more stocks hit new 52-week lows than hit new 52-week highs on the NYSE. As an example, on Wednesday when the Dow jumped 618 points, there were 15 news 52-week lows vs just 1 new 52-week high. The Smart Money Flow index continues to head south, quickly.
For now it looks like the Dow is going to do another “turtle head” above its 50 dma (see the chart above) like the one in early November. The Dow was up as much as 442 points right after the open today, as amateur traders pumped up on the adrenaline of false hopes couldn’t buy stocks fast enough. As I write this, the Dow is up just 140 points. I suspect the smart money will once again come in the last hour and unload more shares onto poor day-traders doing their best impression of Oliver Twist groveling for porridge.
Guest Post: New Home Sales Collapse
Note: New homes sales, based on the seasonally adjusted annualized rate metric, are down over 23% from their peak in November 2017. Pending home sales, which translate into existing home sales less canceled contracts (typically failed financing), are down on a year-over-year basis 11 out of the last 12 months. But it’s not just interest rates, which aren’t up much from their lows in the context of the last 20 years. A bigger factor is “market mortgage fatigue.” The Govt has tapped out the pool of potential mortgagees by continuously lowering the bar for qualifying for a FNM/FRE mortgage. In addition, the Government slashed the cost of PMI insurance. That plus the tax cut have offset the cost effect of slightly higher mortgage rates (up about 1% in the last year – big deal). The remaining pool of first time buyers largely will have trouble qualifying until the Government lowers the bar again…
Aaron Layman, who is one of the few honest realtors, wrote a worthwhile commentary, posted below, on the state of the housing market. You can visit Aarons’s site here: AaronLayman.com
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The Census Bureau numbers for October new home sales posted at a seasonally adjusted annual rate (SAAR) of 544,000 units. This was way below expectations of a 575,000 print, and near a three-year low. Many people are struggling to find new homes which meet their needs as well as their budgets, and anyone looking for a home may want to browse tiny homes for sale as these can be an affordable alternative to traditional houses. As I have been detailing for much of the year, much of that “pent-up demand” that you hear real estate industry mouthpieces talking about is a giant work of fiction, a tired marketing ploy that the media, economists and Realtors have been using in attempt to justify grossly inflated home prices across the U.S.
Well, it appears the cat is officially out of the bag with the release of October home sales. While the previous months sales were revised higher, the miserable October print just corroborates my thesis that the Fed’s asset-bubble unwind is just getting started. There are plenty of other consequences in the pipeline. It’s important to remember that the housing market, thanks to the Federal Reserve’s failed policies, is more intricately tied to the financial markets than ever before. This was the Faustian bargain that Obama and the Fed made when they decided to bail out every Wall Street institution under the sun at the expense of American taxpayers, including the ones running obvious accounting control frauds. Of course the millions of homeowners who lost their homes to foreclosures (many of those executed in kangaroo courts with fraudulent robosigned documents) were deemed acceptable collateral damage to save the “system”.
The ultimate con was of course advertised as a salvation of the economy. In reality it just delayed the eventual reset with a new pile of debt that is larger than ever and spread among multiple asset classes rather than just housing. The big problem, one that the Fed’s economists remain willfully ignorant of, is the unfortunate reality that all of this speculative debt is more interest-rate sensitive than they would have you believe. The new home sales market is exposing this unfortunate dilemma very clearly.
According to Census numbers, new home sales in October collapsed 12 percent from the same time last year. Sales were down 8.9 percent from the revised September print. The median price of a new home contracted in October was 309,700, down $9800 or 3 percent. The average price of a new home contracted in October came in at $395,000, up $1,000 from October of last year. The supply of new homes for sale in October rose to 7.4 months, a 32 percent jump from October of last year! So if prices fell three percent and supply jumped higher, why the big collapse in sales? Can you spell “housing market bubble”. Aside from the swoon in the stock market during October, the other key ingredient for deflating an asset bubble was also present, as interest rates hit a multi-year high. We now have a good idea of what the breaking point for the housing market is, and it’s a lower threshold than many in the media were/are willing to admit. This is the result of years of rampant artificial asset price inflation courtesy of the Federal Reserve.
The swoon in new home sales is simply the reflection of moral hazard coming home to roost. While the media, the Fed and its army of economists have continued to tout the amazing bull market “recovery”, the sand (debt) upon which it was built is now shifting. That carefully crafted narrative that we have been spoon-fed for the last several years is looking more tenuous by the day.
Powell Just Signaled That The Next Crisis Is Here
Housing and auto sales appear to have hit a wall over the last 8-12 weeks. To be sure, online holiday sales jumped significantly year over year, but brick-n-mortar sales were flat. The problem there: e-commerce is only about 10% of total retail sales. We won’t know until January how retail sales fared this holiday season. I know that, away from Wall Street carnival barkers, the retail industry is braced for disappointing holiday sales this year.
A subscriber asked my opinion on how and when a stock market collapse might play out. Here’s my response: “With the degree to which Central Banks now intervene in the markets, it’s very difficult if not impossible to make timing predictions. I would argue that, on a real inflation-adjusted GDP basis, the economy never recovered from 2008. I’m not alone in that assessment. A global economic decline likely started in 2008 but has been covered up by the extreme amount of money printed and credit created.
It’s really more of a question of when will the markets reflect or catch up to the underlying real fundamentals? We’re seeing the reality reflected in the extreme divergence in wealth and income between the upper 1% and the rest. In fact, the median middle class household has gone backwards economically since 2008. That fact is reflected in the decline of real average wages and the record level of household debt taken on in order for these households to pretend like they are at least been running place.”
The steep drop in housing and auto sales are signaling that the average household is up to its eyeballs in debt. Auto and credit card delinquency rates are starting to climb rapidly. Subprime auto debt delinquencies rates now exceed the delinquency rates in 2008/2009.
The Truth is in the details – Despite the large number of jobs supposedly created in October and YTD, the wage withholding data published by the Treasury does not support the number of new jobs as claimed by the Government. YTD wage-earner tax withholding has increased only 0.1% from 2017. This number is what it is. It would be difficult to manipulate. Despite the Trump tax cut, which really provided just a marginal benefit to wage-earners and thus only a slight negative effect on wage-earner tax withholding, the 0.1% increase is well below what should have been the growth rate in wage withholding given the alleged growth in wages and jobs. Also, most of the alleged jobs created in October were the product of the highly questionable “birth/death model” used to estimate the number of businesses opened and closed during the month. The point here is that true unemployment, notwithstanding the Labor Force Participation Rate, is much higher than the Government would like us to believe.
Fed Chairman Jerome Powell signaled today that the well-telegraphed December rate hike is likely the last in this cycle of rate-hikes, though he intimates the possibility of one hike in 2019. More likely, by the time the first FOMC meeting rolls around in 2019, the economy will be in a tail-spin, with debt and derivative bombs detonating. And it’s a good bet Trump will be looking to sign an Executive Order abolishing the Fed and giving the Treasury the authority to print money. The $3.3 billion pension bailout proposal circulating Congress will morph into $30 billion and then $300 billion proposal. 2008 redux. If you’re long the stock market, enjoy this short-squeeze bounce while it lasts…
Could GE’s Slow Collapse Ignite A Financial Crisis?
Will GE be the proverbial “black swan?” – It had come to my attention that General Electric was locked out of the commercial paper market three weeks ago after Moody’s downgraded GE’s short term credit rating to a ratings level (P-2) that prevents prime money market funds from investing in commercial paper. Commercial paper (CP) is an important source of short term, low-cost, liquid funding for large companies. At one point, GE was one of the largest users of CP funding. As recently as Q2 this year, 14.3% of GE’s debt consisted of CP. Now GE will have to resort to using its bank revolving credit to fund its short term liquidity needs, which is considerably more expensive than using CP.
Moody’s rationale for the downgrade was that, “the adverse impact on GE’s cash flows from the deteriorating performance of the Power business will be considerable and could last some time.” Keep in mind that the ratings agencies, especially Moody’s, are typically reluctant to downgrade highly regarded companies and almost always understate or underestimate the severity of problems faced by a company whose fundamentals are rapidly deteriorating.
As an example, Moody’s had Enron rated as investment grade until just a few days before Enron filed bankruptcy. At the beginning of November 2001, Moody’s had Enron rated at Baa1. This is three notices above a non-investment grade rating (Ba1 for Moody’s and BB+ for S&P). Currently Moody’s and S&P have GE’s long term debt rated Baa1/BBB+. In the bond market, however, GE bonds are trading almost at junk bond yields.
Once a company that relies on cheap short-term funding is locked out of the commercial paper market, it more often than not precedes the rapid financial demise of that company. Because GE is GE, it may not be rapid, but I would bet GE is on the ropes financially and could go down eventually. GE’s CEO was on CNBC two weeks ago on a Monday proclaiming that the Company’s number one priority is to bring “leverage levels down” using asset sales. One asset GE is said to be considering selling is its aviation unit, which is considered its crown jewel. This is the classic signal that a company is struggling to stay solvent – i.e. burning furniture to keep the lights on and heat the house. It’s not a bad bet that GE might file chapter 11 – or even Chapter 7 liquidation – in the next 18-24 months (maybe sooner).
I wanted to discuss this situation because I opined on Twitter recently that a sell-off in GE’s stock below $5 could trigger an avalanche of selling in the stock market. Just as significant, an event in which a company like GE is shut off from commercial paper funding is the type of “pebble” that is tossed onto an unstable financial system and starts a credit market crisis. The downgrade of GE’s short term funding rating is a reflection of rising and widespread systemic instability and the general financial deterioration of corporate America. I predict that we’ll start to hear more about GE’s collapsing operational and financial condition and we’ll start to see a lot more companies head down the same path as GE.
Note: The above commentary is an excerpt from the November 18th Short Seller’s Journal. Since then, GE’s stock price has dropped another 5.5%. I had recommended shorting GE at $30 in the January 29, 2017 issue of SSJ. GE’s tangible net worth (book value minus goodwill + intangibles) is negative $31.3 billion.
GE also has a $28.7 billion+ underfunded pension obligation. It is by far the largest underfunded pension in corporate America. I say “$28.7 billion+” because I’m certain that if an independent auditor plowed through the pension fund assets and liabilities, it would discover that the assets are overstated and the liabilities (future beneficiary payouts) are understated.
In other words, GE’s balance sheet is the equivalent of financial Fukushima. The previous CEO borrowed $6 billion to cover pension payments through 2020. This is like throwing napalm on a gasoline fire.
Stock, Bond, and Real Estate Bubbles Are Popping – Got Gold?
“I don’t know how this whole thing is going unwind – I just think it’s not going to be pleasant for any of us, even if you own gold and silver. I think owning gold and silver gives you a chance to survive financially and see what it’s going to look like on the other side of what is coming…”
My good friend and colleague, Chris Marcus, invited me on to his Stockpulse podcast to discuss the financial markets, economy and precious metals. In the course of the discussion, I offer my view of the Bank of England’s refusal to send back to Venezuela the gold the BoE is “safekeeping” for Venezuela.
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If you are interested in ideas for taking advantage of the inevitable systemic reset that will hit the U.S. financial and economic system, check out either of these newsletters: Short Seller’s Journal information and more about the Mining Stock Journal here: Mining Stock Journal information.
Mining Stock Daily: Western Copper & Gold Is Undervalued
The Mining Stock Daily, a collaboration between ClearCreekDigital and Investment Research Dynamics, interviewed the CEO, Paul West-Sells, to learn more about Western Copper & Gold (WRN on both the NYSE and TSX). But first, here’s background on WRN:
Western Copper & Gold is advancing the Casino Project, a world-class copper-gold porphyry deposit, in the Yukon. The deposit contains 4.5 billion lbs of copper and 8.9 million ounces of gold reserve and 5.4 billion lbs and 9 million ozs of inferred resource.
Western Copper was a spin-off from Western Silver after Glamis Gold acquired Western Silver in May 2006 (three months later Goldcorp acquired Glamis). WRN acquired the old Lumina Resources in September 2006 for Lumina’s three copper properties, one of which was Casino. WRN spun-off the other two properties.
WRN only has 106.4 million fully-diluted shares outstanding (including options/warrants), which is remarkable for company that has been developing a massive copper-gold project for 11 years. Insiders own 8% of the stock. A small group of high net worth private investors who have made a lot of money on companies run by WRN Executive Chairman, Dale Corman, own 48% of the stock and institutional/retail own the remaining 44%.
WRN raised $32 million in 2012 selling a Net Smelter Return royalty to Orion Capital. That NSR was sold to Osisko in June 2017 when Osisko acquired a portfolio of royalty assets from Orion.
With a market cap of US$70 million (fully-diluted basis), WRN is extraordinarily undervalued on a risk-return basis. This is especially true considering the recent wave of copper-gold porphyry project M&A activity. Recall that Newcrest invested approximately US$14 million for a 19.9% stake in Azucar’s El Cobre, which valued that early-stage copper-gold project at US$74 million. In 2017, Goldcorp paid US$185 million for Exeter’s Caspice copper-gold project high up in the Chilean Andes.
There have been several other transactions in the copper-gold space, including Zijin’s (Chinese company) acquisition of Nevsun for $1.41 billion (September 2018) for the Timok copper-gold project in Serbia and the recently closed sale of the Malmyzh copper-gold project (Freeport, EMX Royalty) to Russian Copper Company for US$200 million.
WRN’s project is not as large or as high-quality as Malmyzh, but it’s several years closer to being converted into an operating mine. At this juncture, with the current price of copper and gold, the “asset value” of WRN, based on the roster of comparable transactions, is at least US$140 million. I would not be surprised to see one of the companies with projects near Casino make bid a for WRN at some point in next 6-12 months. There’s also a list of other potential acquirers, including RioTinto, BHP and Freeport.
Click on the graphic below to hear Trevor Hall’s interview with WRN’s Paul West-Sells (you can also download the interview on your favorite app by clicking here: MSD platforms):
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The analysis above on WRN is from the November 8th issue of the Mining Stock Journal. To learn more about this newsletter, click here: Mining Stock Journal information