Rebalancing, Part 1

by James Kwantes

Gold’s recent bounce notwithstanding, rebalancing in this junior market feels a bit like Nik Wallenda must have crossing the Grand Canyon gorge unharnessed on a windy day. Add in the hounds of Hades howling from below and ill winds blowing from the general direction of China – welcome to the TSX Venture Exchange!

Somebody should tell Nik Wallenda about the TSX Venture exchange.

For those of you who haven’t read my disclaimer, go read it now. I wasn’t kidding when I said “this blog should not be construed as investment advice.” The performance of some of the companies whose shares I have purchased – and featured in this space – has been painful, even if gold has moved off lows and the portfolio is seeing more green of late. Mercifully, my most recent purchases have performed better.

This Venture bear market has taken no prisoners, and it’s not only retail schmucks who have been taking it on the chin. Just ask junior resource legend Rick Rule, who has been recommending shares of Robert Friedland’s Ivanplats all the way down from its IPO price of $5 (last price, $1.51).

I’ve been busy with other projects and haven’t posted much of late. But I have made a few adjustments in my portfolio. In this post, which has been hanging over my head for a while and is getting too long, I’ll detail the stocks I’ve sold. In a subsequent blog, I’ll outline what I’ve bought (Peregrine Diamonds, Pilot Gold, NexGen Energy, WesternOne Equity) and why.


Lumina Copper (LCC)

I sold most of my position in Lumina Copper before the plunge down to sub-$5 territory, but still hold some in an RRSP account. I continue to believe that Lumina’s Taca Taca is a world-class copper-gold deposit that will one day be a profitable mine. But I also thought Lumina Copper was going to get taken out in 2012 – management’s stated goal – and it didn’t. I should have pulled the trigger then – but didn’t.

Major shareholder Ross Beaty – known as a “broken slot machine” for his track record of developing and selling mineral assets – has made a lot of money for shareholders over the years. But in hindsight, it seems as if Lumina management may have missed an opportunity to sell the company in late 2011 and early 2012, when the stock was trading in a range of $10 to $16. For a while, it defied gravity as the rest of the Venture began to drop. No longer.

In this climate, with majors shedding assets, China growth slowing and the copper price treading water, I just don’t see a Taca Taca takeout for a large premium anytime soon, and that’s the reason I purchased the stock. The deposit’s location in Argentina, albeit in a “mining-friendly” province, has also hurt more than I expected.

Sandstorm Gold/Sandstorm Metals & Energy (SSL/SND)

I also pulled the plug on Nolan Watson’s Sandstorm streaming companies, which were the first I wrote up when I launched World of Mining almost a year ago.

I still like the business model but chinks in the armor have emerged. The companies may be insulated from some of the challenges of pulling rock out of the ground, but still have exposure to operational problems and financing pitfalls, which have occurred more frequently than I’d hoped for from this management team.

Sandstorm Gold partner Colossus Minerals recently announced dewatering troubles at its 75%-owned Serra Pelada gold-PGM mine in Brazil, pushing gold production back from Q2 2013 to late in the fourth quarter. Colossus also hinted at funding problems, a double whammy that took its stock down from $1.60 to 80 cents. The company subsequently did a dilutive $33-million financing at 75 cents.

Sandstorm Gold has a deal to buy 1.5% of the gold and 35% of the platinum produced at Serra Pelada for $400/oz and $200/oz, respectively.

Sandstorm Metals & Energy has been a world of pain for shareholders. Its coal and natural gas streams didn’t pan out as planned and Sandstorm’s copper partner Donner Metals is now experiencing a cash crunch, so Sandstorm waived Donner’s requirement to sell it copper in 2013. James Steels has a good recap and more details in a writeup here at
Sandstorm Metals & Energy also just released second-quarter financials.

The Sandstorm story has changed enough that I’m out. Sandstorm Metals & Energy has dropped enough, however, that it’s starting to look interesting again. But not THAT interesting.

Amerigo Resources (ARG)

On May 9, copper tailings producer Amerigo suspended its dividend, a detail that was tacked on to first-quarter financials.

CEO Klaus Zeitler cited weakness in the copper price as well as production guidance that was revised lower. Amerigo’s appealing dividend yield of about 7% was one of the reasons I bought the stock, as outlined here. Amerigo subsequently announced a deal with Codelco to process historic tailings from the Cauquenes deposit, a bullish development that will eventually allow Amerigo to double copper and moly production.

But shares are 28% lower than they were when the dividend got cancelled, the type of surprise I don’t much like. I cut my losses and moved on. Amerigo remains on my radar, however.

Disclaimer: As always, each investor should do their own due diligence. This is not investment advice.

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