Here’s our next addition to our investment portfolio:
I discussed my outlook on the precious metals in this morning’s Macro Wrap:
Having said all this, it’s quite rare that a steep, long-term downtrend, such as the one experienced by the precious metals complex in 2013, would be reversed on a dime. That’s one big reason why I’ve said on several occasions over the past month that I expected consolidation rather than a continued breakout. Now that the correction is here, I’ll be looking to buy the dip with the right vehicle to play for further upside in the coming months.
Coming off the bottom in late December, we owned GG in our investment portfolio, which we took off in mid-February with the following thoughts:
We’ve had a very nice run owning GG in our investment portfolio. The stock is up more than 30% since our purchase a little more than 2 months ago. With today’s bounce higher, the stock is rapidly approaching the 30-31 resistance area that could be difficult to breach in the near-term.
GG weekly, Courtesy of Bloomberg
While we don’t expect a major correction, we like the idea of selling the stock here, giving us the flexibility of watching the price action in the miners over the next month with a clear mind.
Action: Sold GG at $27.77 for a $6.32 gain (including the loss on the weekly put protection)
Today, GG has sold off all the way to technical support:
So far in 2014, GG is up 18.5% vs. about 16.5% in GDX. The stocks’ outperformance is also reflected in the fact that it has held its 200 day moving average on this most recent selloff, in contrast to GDX.
Fundamentally, we preferred GG over the other precious metals miners because of the lower cost base of its existing mines. Here was the full explanation in our initial investment post:
Goldcorp’s marginal cost for operating its mines is in the $700-$900 area, much lower than the vast majority of gold miners in the world. On top of that low cost, Goldcorp’s projects are very well diversified geographically, limiting geopolitical risk as well. While Goldcorp looks more expensive vs. peers on a P/E basis, in distressed situations like this, I prefer to look at the balance sheet and asset/liability structure rather than the current earnings power. In that regard, Goldcorp has limited near-term debt, a Price/Book ratio of 0.84, below the industry average, and much better long-term mining assets than the bulk of its peers.
While the stock has appreciated since then, it still trades at just above book value, even though the outlook for precious metals prices going forward looks much more favorable to me than the free-fall late last year.
On the most recent update on its mid-February earnings report, Goldcorp reiterated the low cost basis of its existing projects. It also reassured investors that its largest projects were both on-time and on-budget, which is crucial in an environment where investors are closely scrutinizing free cash flow projections over the next few years.
With fundamentals in tact, and the stock back down to technical support, we like entering GG on the long side once again:
TRADE: Bought GG for $25.50
We might look to overlay this structure with a short call position if GG retests the $28.50-$30 resistance area over the next month. On the downside, we would get out of the GG if it broke the $22 level.