At the Market
August 14, 2017
‘Follow the Money’
Upon reading the recent weekly market statistics, I couldn’t help but notice that a very large proportion of the new TSX 52-week trading lows were being set by Canadian petroleum companies. And these were not just the usual hit and miss junior exploration companies but many were well established leaders of Alberta’s oilpatch including such giants as Canadian Natural Resources ‘CNQ-T’, Cenovus Energy ‘CVE-T’, Husky Energy ‘HSE-T’ Imperial Oil ‘IMO-T’, Oil Sands Sector Fund ‘OSF.UN-T’, Paramount Resources ‘POU-T’ and Vermillion Energy ‘VET-T’ just to name a few. And while crude oil was trading at a 3-month low of about US$45-a-barrel – many of these well-established Canadian petroleum companies are trading at not just 52-week lows - but at multi-year lows.
At the same time some major international companies are selling their Canadian oilpatch assets and leaving the country. Royal Dutch Shell ‘RDS-N’, ConocoPhillips ‘COP-N’ and Apache Corp. ‘APA-N’ are in this group. It’s as if the international petroleum community – for reasons economical or political - is putting very little value on the future of Canadian oil. Giant international oil & gas companies tend to be slow moving and get behind the curve so it is not too surprising they are leaving after a multi-year bear market. It looks to me like are at or at least near the bottom of the oil market.
Now, what is of even more interest here is that the buyers of those assets were not new players to the oilpatch, but the same struggling Canadian petroleum companies mentioned above. Canadian Natural took out Royal Dutch Shell. Cenovus bought out ConocoPhillips and Paramount purchased the remaining Canadian assets of Apache .These companies took the chance of further bruising of their already beaten down balance sheets to purchase these extremely undervalued assets. Could it be that the boards of these domestic companies knew something that the international’s missed, or did they just purchase these assets to avoid them not being just dumped on an already oversold market.
I feel that just as the gold companies became lean & mean a few years ago after the price of gold fell to near US$1,000-an-ounce - the petroleum industry is going through the same process today – trying to adjust to a world of US$45 oil. And adjust they will, driving down costs to make their industry profitable even at today’s lower prices. When this happens, these large domestic acquisitions to consolidate their industry will be looked upon in a more favourable light that should be reflected in their share price. And if as I suspect, the price of oil actually recovers, the current price of these stocks will look like screaming buys.
There’s a theory in my industry that suggests one should buy a stock when the company’s insiders are buying. The reasoning being that the insiders have some insight of the future and know when their company’s share price is undervalued. I suggest this same thesis can work on a sector as well as a stock. Canadian petroleum companies are buying up assets in their own industry at deep discounted prices. These companies are the insiders of their sector and they know when the assets are undervalued. Retail investors would be well served to look into doing the same and buy the shares of the companies that are buying their own assets. These companies and shareholders should be the beneficiaries of an improving petroleum market going forward. At the very least it is a low risk buy.
Let the informed leaders of the oil & gas industry be your guide. Or as Hal Holbrook’s Deep Throat suggested to Robert Redford’s Bob Woodward many years ago in the outstanding movie ‘All the President’s Men’ – “Follow the Money.”
At the Market
August 12th, 2016
At the Market
‘Sell in May – No Way!’
A few months ago I wrote in this publication - ‘One Step at a Time’- that I thought if the TSX Venture Exchange could hold most of the gains it had made in the first quarter of 2016 that there was a good chance that the new bull market for resources was upon us. To recap, the exchange had risen about 20% from a record low of 474 set in January and I was looking for a confirmation that the gains would hold. This was because recent history had shown that the resource markets tend to go into a severe correction during the summer months – to the point that the saying of “Sell in May and go away” had become the norm. And those who sold were proven right as some of the summer corrections managed to negate a full year or more of gains.
So there we were in April with the Venture Exchange at about 575 and a nice gain in hand, but nervously wondering if the sell in May scenario was poised to play out again. I didn’t think it would, but history had taught me not to stick my neck out too far. And the Venture Exchange proved the naysayers wrong. Not only didn’t it correct - it actually kept going up. Up through 600 and on up through a significant 1-year resistance level of 703. And except for a brief post Brexit shudder, that tested the recent 703 breakout, the Venture Exchange now stands at a 20-month high of about 765.
The advance seems to be fairly broad based. Gold & silver prices are at 2-year highs. Crude oil and natural gas are well up off of their multi-year lows. Copper seems to be building a base above $2-a-pound and zinc has quietly gained about 35% this year to almost US$1-a-pound. Add to this the new enthusiasm for the electric auto induced interest in lithium and you have a resource market unlike anything we’ve seen for a number of years. Multiple resources all moving in the same direction. And with daily Venture Exchange trading volumes having doubled in the past 6-months to about 200-million shares-a-day one could safely say that this resource bull market has legs.
Granted it’s still summer and this market could still consolidate or correct, but I think the lows of the year are now well behind us. In fact, following perhaps a quieter summer and barring any world calamity, I’m expecting the TSX Venture Exchange to move up and test the 2014 upside resistance level of 1,050 sometime later this year or early into 2017. Sell in May and go away – not this year. This market looks to be going higher.
At the Market
JUNE 9TH, 2016
‘Bull and Bear Markets’
Looking back, I’m always fascinated by the parameters that create a new bull or bear market, and in particular, a resource based bull or bear market. Most are caused by simple supply or demand fundamentals. Some by a change in the price of the underlying resource, and a few are caused by events not even directly related to the resource involved.
Let’s take a look at a few examples. Going back to 1999 – 2000 the classic secular or long term resource based bull market was created from many years of declining prices that pushed gold down to $275, copper to $0.50, and crude oil to $12 to name a few. Then, with economic expansion and rising demand, a long term bull market for most commodities developed and ran almost unabated for about eleven years to the spring of 2011 when an unsuspected bear suddenly appeared.
Most resource bear markets are caused by an excess of production. But in April 2011 the bear was triggered in an instant by Mother Nature herself in the form of an earthquake off the eastern shores of Japan and the resulting devastating tsunami that flooded and ultimately shut down that country’s nuclear energy infrastructure. And with Japan being one of the world’s largest users of uranium, the price of uranium itself collapsed overnight from $105 to just $20-a-pound, with the price of most uranium stocks following suit.
This was followed by a cyclical or five-year bear in gold, silver and most metals (and their related equities), as a strong U.S. dollar, helped by the anticipation of rising American interest rates, became the go to currency of the world.
Crude oil entered a bear market in mid-2014 because of technology – in particular – the technology of fracturing or fracking the ground with high pressure water to extract more oil from every well. This technology became so good that the United States became self-sufficient in oil production to the point where the world’s largest consumer of oil actually lifted its export ban and started shipping crude to the highest bidder.
Early this year the resource bulls returned and in most cases, such as gold bullion, the new bull markets were the result of many years of exhaustive selling that finally came to an end when more and more central banks officially took their key lending rates down to below zero. There’s nothing like the reality of buying a negative interest government bond to get one to instead consider buying the equivalent amount of gold bullion.
And most recently, we suddenly experienced a new bull market that was caused by of all things - a weekend sales promotion. Interest in lithium and lithium stocks soared immediately after Tesla Motors announced that in one weekend they had pre-sold over 400,000 new electric cars that would be powered by lithium batteries.
Looking back on bull and bear markets – always fascinating.
At The M Market
April 12th, 2016
‘One Step at a Time’ by Rod Blake
There’s a famous ballad or saying - “What a difference a day makes”. Or in the case of the TSX Venture Exchange – “What a difference six-weeks makes”. As little as six-weeks ago I wrote in my last column for this publication that if the Venture Exchange could hold and rise above the new record closing low of 474 it set on January 20th then it would indicate that the start the new bull market in resources might be upon us. Now, fast forward to March 11th and the Venture Exchange closed at a new seven-month high of 576 - so the new bull market must clearly be on its way. Or is it? Let’s take this one step at a time.
Short term, (and it feels good to right for a change), the new bull market speaks for itself as the Venture Exchange is up some 20% from its January low. Longer term, over the next quarter or two, similar moves will be needed to confirm the bull. And while I feel the bull market will continue, recent history dictates that some caution is required. If you look at a long-term chart of the Venture Exchange you can see that since the market high of about 2,400 in March, 2011 the bear market of the past 5-years was driven by a number of large descending steps that were countered by small assenting relief rallies that were again followed by more large descending steps that eventually dropped the Venture down to the record low we experienced in January. Now that pattern seems to be changing as for the first time since the bear began we’ve just had an ascending market (474 – 576) that was twice the magnitude of the last descending step of 525 – 474.
As sure as spring follows winter, every bull market, whether short or long-term has corrections. In recent years, the Venture Exchange, led by the price of gold bullion, has tended to peak in March, (in what some call ‘the curse’ of the Prospectors and Developers Association of Canada (PDAC) mining conference in Toronto), and then correct until about late summer. The key confirmation of the bull market going forward will be to see if the magnitude of the next correction is less that the upleg we’ve just experienced. If the next pullback is relatively small and the market consolidates and rallies again to new highs, then we can probably confirm that the long term bull market is here. I’m pretty sure that is, but let’s be a little cautious and - take it one step at a time.
Articles of Interest
Crude Oil – The Black Gold?
To my eye, the price crude oil in 2016 seems to be tracing out a similar bottoming pattern that of gold bullion late last year. And gold bullion, after a 3-month bottoming process that retested its US$1,050 low has suddenly gained about 20% in 2016 to about US$1,240-an-ounce. Securities in the resource sector tend to follow the price of their underlying commodity, and this has certainly been the case in the gold sector, with some industry giants such as Barrick Gold ‘ABX-T’ up by almost 70% in 2016. Similarly, the price of oil has been bouncing off of a bottom of about US$30-a-barrel for some months now, and most petroleum stocks have been trading in a similar pattern. I think the next advance in crude oil and petroleum stocks could be just ahead.
Just as the price of gold usually has its best performance in the first few months of the year, the price of crude oil tends to have seasonal strength in the few months going into the peak summer driving season or, from about now to early-summer. Who hasn’t noticed how the price of gasoline always seems to peak somewhere around the May long weekend. If I’m right, and the price of crude oil follows that gold then there should be similar advances made in oil & gas securities.
Crude oil, just as gold bullion last year, is coming off multi-year lows so the upside could be significant.
Feel free to contact me regarding investment opportunities in the oil & gas sector.
At the Market
February 17th, 2016
'Resource Solid' By Rodney Blake
I ended my last Resource World column by stating "Happy New Year...I hope." I was hoping, that after nearly five years, one of the most vicious resource bear markets that I had ever experienced would finally come to an end, and that resource prices and resource stock prices, would finally move up in 2016. To briefly recap, at the end of 2015 - gold bullion was building a base above US$1,050, copper had moved from a low of just above US$2.00 to about US$2.15, and crude oil was in a trading range of about US$35 - $38. And the TSX Venture Exchange, the bell weather index for resource issues, had rebounded from a tax-loss induced record low of 496 to end the year at an encouraging level of 526.
So what did my little bit of New Year’s optimism give us? The first three weeks of 2016 began with several days of a Chinese stock market meltdowns, news of Saudi Arabian mass executions, reports of record high crude oil inventories and just to top things off, North Korea announced they had set off a hydrogen bomb. All of which helped pushed copper down to a seven-year low of US$1.94 and crude oil down to a 13-year low below US$29. Gold bullion, the safe haven metal, managed to move higher into the US$1,100 range. And the TSX Venture Exchange, in a clear breakdown in investor confidence, turned turtle and quickly plunged back down to set new record lows of about 474. So is that it for the year? Is my reason for optimism shattered? Shaken perhaps, but not shattered, and here’s why.
The resource markets seem to be focusing on China and crude oil for their direction, and as of late, that’s been down. But let’s look at the big picture. The Chinese economy, while consolidating of late, is still expanding and is still the largest movement of people ever to modernise. This means increased demand for all things commodity…over time. Crude oil is adjusting to the sudden flush of increased production bought on by a new technology – hydraulic fracturing of the rock – or fracking. But fracked oil is not cheap oil and the producers cannot keep producing at below their cost of production. In fact, the number of active North American drill rigs is down by more than half from just one year ago. Crude oil supply should and will begin to tighten, again…over time.
New bull markets are never announced and they tend to go unnoticed in the confusion of the current bear. We may have missed the traditional New Year’s bounce, but the year is still young. If China and crude oil stabilize and the Venture Exchange begins to move higher then I still think the foundation for next resource based bull market is solid – resource solid.
At the Market
December 10th, 2015
'Happy New Year!' By Rodney Blake
I'm looking forward to a happy New Year in 2016 because gold bullion....oh wait. Gold is down by 10% so far this year. OK, forget gold. I'm excited about 2016 because copper is......oh dear. Copper is off by 26% in 2015. Well then, 2016 will be a great year because crude oil is.....wrong again. Crude oil has plunged by 30% so far this year.
How can I be optimistic about 2016 when clearly there little or no optimism for gold, copper, oil or for that matter - resources in general? I'm encouraged going into the New Yew year with the fact that while two of these bellwether commodities, namely gold and copper are struggling to establish and hold multi-year lows, the third, crude oil is so far holding slightly above the six year low it established earlier this summer. With crude oil holding, I’m hoping that copper and gold will finally bottom this year and then recover - hopefully into the New Year. And isn't that what the New Year celebration is all about - optimism and hope for the year ahead.
I'm also optimistic for the New Year because I've never experienced such negativism towards resources and resource stocks. Whether it's the media, politicians, analysts or clients, I've never come across such a broad spectrum of people that say the commodity cycle is dead and will stay that way. It's as if none of the record number autos being produced will ever need metals or petroleum, or that there will never be a need to build or upgrade a road, railway or airport, or that everyone in the world has a perfectly good home and that industry will never have to modernise. No, it seems that the building blocks of modern life are considered to be of no value while the market gets overly excited because of a new app company going public. Yes, I'm optimistic because as a contrarian, it's been my experience that when a trade is overly weighted to one side that the pendulum will eventually swing the other way - hopefully early in 2016 for commodities and resource stocks.
Interestingly, while most commodities sold off hard during 2015, there was one that managed to actually rise in price. Uranium, the price of which virtually collapsed overnight after the disastrous Japanese tsunami in April, 2011 has recovered by 2% this year to about US$36-a-pound. Uranium was the first commodity to enter the current resource bear market almost 5-years ago. If the price of U3O8 yellowcake is finally on the rise could it be that copper, gold and crude oil may soon follow.
So while I'm sure 2015 will be remembered as one of, if not the worst year ever for commodities and resource stocks, I'm optimistic that 2016 will be and could be surprisingly better. So Happy New Year!......I hope.
At the Market
October 7th, 2015
'Shell Shocked’ By Rodney Blake
You’ve probably can picture the seen from an old war movie. Our heroes emerge from a pile of dusty rubble and stare blankly into the sky – wondering if the barrage that had leveled their world was finally over. Satisfied that the shelling has ceased for at least a while, they slowly look around and assess the damage to see what if anything can be salvaged. And from there, as any good movie, piece by piece they begin the long process of rebuilding their life to ultimately prosper once again in the future.
Now transfer this image to the world of resources and I give you my impression of today’s resource investor. The average resource investor, especially a junior resource investor, has been hit with an excruciating 4½-year barrage after barrage of negative events in this sector. From Japanese tsunamis, to shale fracking, to zero interest rates, to Chinese economics, almost every mineral from uranium to petroleum to precious metals to base metals has been decimated. Add to this a sky high Canadian housing market that seems to be attracting most of the Canadian investment attention these days and you have a TSX Venture Exchange that traded down to a record closing low of 518 on August 24th. So there they are - resource investors staring blankly at their statements and wondering what to do. Is the worst over? Is it going to get worse or is there any hope of a recovery? Should they just throw in the towel and sell and go away?
These are all difficult decisions and no one can say for sure that things are going to get better or worse for the resource sector. But there are a few indicators. The price of uranium at US$37 is up by 17% from its lows and is actually up almost 6% for the year. Crude oil at $45 is up by 19% from its low, gold bullion at US$1,132 is up by 4%, copper at US$2.30 is up by 3% and the lowly TSX venture Exchange at 543 is up by 5% from its record low in August. Plus, the tradition season of strength for commodities and resource stocks is from mid-summer through to the end of the first quarter of next year.
Now granted, not all issues will recover just because of an upswing in the price of their underlying commodity. Some companies are just too weak financially or may have dropped their projects. Some may have left the sector entirely. My advice – take this time to refocus your resource portfolio. Sell the issues that you don’t like, trust or understand anymore and purchase more of the ones where their story is still in tacked and makes sense to you. This way you will accumulate some tax loss credits while still being exposed to a sector that is long overdue for a broad-based rally. The shelling is probably over. It’s time to come out from under the rubble.
At the Market
May 23, 2014
‘Beware the Ides of March’ By Rodney Blake
The Ides of March. Originally an early Roman one-day of celebration marking the mid-point of the month of March that grew over time to be a phrase of forewarning of impending doom or misfortune as used by William Shakespeare in his play Julius Caesar – “Beware of the Ides of March”. And we all know how that worked out for Julius Caesar. In the world of resource stocks, this famous phrase coincides nicely with the seasonal market top that often follows the giant Prospectors and Developers Conference or PDAC that takes place in Toronto, Ontario in early March of every year. In more years than not, the PDAC has marked the top of the seasonal advance of the resource market that usually begins in early January and runs until somewhere near the middle of March. This seasonality has many commonalities such as new money coming into the sector following the tax loss sales of the previous year, rising resource prices, (especially natural gas and precious metals), and the optimism of the North American exploration season to come.
Historically, it seems that most of the new money comes into the resource markets in the first three months of the New Year. Then, with investors all-in, they anxiously wait for the summer field season to drive the market higher. The trouble with this theory is that when the buying slows, the selling pressure takes over as there is always a new supply of sellers that come from the four-month hold period coming off of the corporate financings that were done when the market was lower in the previous fall. Add to of this the seasonal pressure of resource prices that usually peak in the first few months of the year and then drift lower until mid-summer. Case in point, as I write this piece near the end of March, the price of gold bullion has already fallen from a mid-month short-term top of US$1,392-an-ounce to about US$1,330-an-ounce. Similarly, the price of copper, which was trading in the US$3.40 range at the start of 2014, has now fallen below $3.00 to about US$2.93-a-pound.
Please don’t get me wrong. I’m a long-term bull on resource prices and resource securities. Both are just coming out of an agonizing three year bear market and I feel that over time they will reach those peaks of yesteryear once again. But in the short-term, the TSX Venture Exchange, the broadest index of resource securities, has risen from 885 to 1,045 in the first quarter of 2014, a move of over 18%. We’re due for our annual seasonal correction. Hopefully a very short one or perhaps just a sideways pause before the markets move higher once again. Mild corrections or pauses are a good thing as they let the market comfortably rebalance. A deep correction however would be devastating to this still fragile resource market. We’ve had a good start to the year, but beware the Ides of March. Et tu, Brute.
At the Market
‘If I Had A Million Dollars’ By Rodney Blake
As we enter 2014 I keep finding myself studying charts of the TSX Venture Exchange, and by extension, charts of most of the junior resource stocks that I follow. And by studying, I probably mean staring, as for the most part I am dumbfounded as to what I am looking at. I can’t remember when I’ve seen so many charts that look the same. It’s as if someone took a photocopy of one chart, and then to save time and expense, they just put other names to it. These chart patterns are all so similar that I’m sure sometime in the future that market technicians and investors will look back at 2013 as a year that stood for the invincibility of the junior resource sector. Let me try and explain…
What I’m seeing is chart after chart of resource companies that peaked sometime in early 2011 and then started a long two-year bear market slide to about April of 2013. And while there were a few bear market rallies such as in the first few months of the New Year, the bear market slide was deep and relentless. In the case of the TSX Venture Exchange, which again, represents most junior resource issuers, that peak to bottom slide was some 63% or 1,545 points from about 2,465 in March 2011 to just 920 in April of 2013. From there, the Venture Exchange, and by inference most junior issuers, held their ground and established a tremendous sideways congested range bound pattern that extended for over eight months through the end of 2013 and into early 2014. This range-bound pattern has for three times tested bottoms down to about 900 and then tried to break out over 970 four-times in that period, only to be met with great selling resistance and get pushed down once again. It is only now in mid-January that the Venture Exchange looks to be taking a fifth and perhaps final push up through 970 and perhaps beyond. If this New Year’s rally should finally break through and 970 and this then holds as a support level, we could be looking at the beginning of the next short-term bull market for resource issuers. And if the rally continues on through the first quarter of the year, then we may be looking at the start of a long overdue cyclical bull for the resource sector.
There only a few times in your life when you really feel that you are right, like when you meet that special someone or buy that perfect home, and I really think this is one of them. God knows, that after being wrong about the markets for most of the last three years, this sudden change of outlook is testing my sensibilities to the max. But I tell you, if I had a million dollars, I wouldn’t just be buying more Kraft dinner.
Rodney Blake is an Investment Advisor at Canaccord Genuity Wealth Management, a division of Canaccord Genuity Corp., Member-Canadian Investor Protection Fund. The information contained in this article is drawn from sources believed to be reliable, but the accuracy and completeness of the information is not guaranteed, nor in providing it does the author, Canaccord Genuity Corp, or its subsidiaries, or affiliated companies, assume any liability. This information is current as of the date appearing in this article, we do not assume any obligation to update the information or advise on further developments relating to these securities. This report should not be considered personal investment advice or a solicitation to buy or sell securities. Canaccord Genuity and holdings of its respective directors, officers and employees and their associations, from time to time may buy or sell any securities mentioned herein. The views expressed are those of the author and not necessarily those of Canaccord Genuity. Rodney Blake can be reached at 604-643-7567 or email@example.com.
At the Market
'Recovery Bound' by Rodney Blake
There is no denying that the resource markets have been sick for some time now. Yes, very sick for nearly three years. They first caught a cold in April 2011 when that disastrous tsunami hit the coast of Japan and caused the price of uranium to begin its rapid descent from US $105/lb to just above US $35 today. And just like someone who first catches a cold, investors first ignored this initial setback as a one-off as the rest of the resources, especially gold bullion, were still doing extremely well. But the cold turned into a full blown flu when the price of gold broke from its record high of US $1,923/oz in September of the same year. The flu got worse when base metal and petroleum prices also moved lower and eventually most resource investors were buried, huddled on their couches and feeling sorry for themselves. Finally, they couldn’t stand the look of their portfolios anymore and when the price of gold bullion fell to US $1,179/oz in late
June of this year, they sold their holdings into the market as they drove the TSX Composite Index down to 11,759 and TSX Venture Exchange down to a multi-year low of 859. From these deep lows, the resource markets slowly began to recover, and just like someone recovering from a bad flu, the recovery was tentative at best, and even though the resource market started to feel better, there was still one last relapse yet to come.
This began in September with a series of negative reports from Gabriel Resources Ltd. (permitting issues), Augusta Resource Corp. (false press coverage), Pretium Resources Inc. (resignation of consultant), and Detour Gold Corp. (resignation of CEO ), among others, that resulted in some culminating selling in late November. And that’s where I think the resource markets are today. Almost all of the bad news from companies to resource pricing is behind us. Those who really wanted out left in June to November. With the possible exception of year-end tax loss selling, I just can’t see from where much more selling will come. The worst of this resource sickness is over and, as we enter 2014, I’m thinking that this near three-year bear market has run its course and soon these issues will begin to feel better once again. And, just like someone finally getting up off the couch after a prolonged flu, once you start to feel better, it’s amazing how much brighter your outlook becomes. You watch. The market, just like recovering people, will once again focus on the good instead of the bad. More chicken soup anyone?
‘Extended Sideways Consolidation’ By Rodney Blake
Do yourself a favour and take a long look at one-year chart of the TSX Venture Exchange. Now, other than the shock of seeing that the exchange trading at about two-thirds the value of what it was just one year ago, take a closer look the pattern that has developed over the last three months or so. Notice that following the bounce off of a very oversold bottom to the 860 level at the end of June, the junior exchange did indeed form the positive reverse head & shoulders pattern that I mentioned in my last column. More interesting now, is the length of the right shoulder. Since the third week of July, the right shoulder of this pattern has extended more or less sideways for some three months now in a very narrow range between the 910 - 950 levels, which coincidentally, also happens to be the approximate level of the chart’s 50-day moving average. I think this lengthy sideways consolidation along the 50-day moving average is significant.
What I think we’re seeing here is a market that is under steady accumulation along its near term support level. For the past three months it seems that no amount of bad news, whether it’s the talking head rants over the U.S. debt ceiling or even the recent $40 plunge in the price of gold bullion to US$1,267 can break this pattern. Trading volumes on the Venture Exchange have been steady as well, hovering for the most part somewhere between 115-million shares-a-day on a down day and over 150-million on a good day. Steady trading volumes, a steady index level and a steady 50-day moving average for over three months. To me, this is highly unusual, as I for one have not seen anything similar to this before. But what does it indicate going forward?
I think that the market is saying that for the most part the bottom is in. After more than two years of negativism towards resource stocks, whether they be oil & gas, uranium, base & precious metals or rare earths, investors are finally saying that this is the time to aggressively accumulate their favourites’ in anticipation of the next pending bull market in resources. I’ll qualify my observation with the caveat that we may still bump up against that annual phenomenon of last minute tax loss selling that could drive the index lower short term. But other than this or some other unforeseen world calamity, Finally, I think this market is building a very strong base from which to move higher. If I’m right, the extended length and strength of this sideways consolidation indicates that the last of the negative selling is coming out and being absorbed, taking a lot of future overhanging resistance away from the market, and setting the TSX Venture Exchange up for an extended move higher, probably going into the New Year and perhaps beyond. Here’s hoping that I’m right.
‘Bullish Technical Indicators’ by Rodney Blake
Near the end of June I sent an alert out to my clients that I thought gold bullion had just experienced an important ‘Key Reversal’ day. Following a perilous two-week waterfall-like plunge from the $1,375 level, gold bullion had opened on June 28
th at $1,199, which was significantly below its previous day’s close of $1,212. It then rallied during the day to close considerably higher than the previous day’s close at $1,224. This was important to me because it was an indicator that the sellers of gold bullion, led by the large gold backed exchange traded funds or ETFs, had finally exhausted themselves of their selling, leaving the way for buyers of the yellow metal to once again take control of the bullion market. One day does not a market make, but to me this was the most significant indicator yet that the gut-wrenching two-year bear market in gold bullion that began in September 201, was finally over.
Interestingly, and to no surprise, the bottoming in gold bullion was duplicated by many resource stocks, as indicated by the TSX Venture Exchange that bottomed that same day in June at 859. But while gold reversed in one day to close higher, the TSX Venture Exchange took a little while longer and quietly recovered to the 930 level over the next three weeks. Since then, it has been consolidating at or about this level. This recovery to the 930 level was of note because 930 was the support level the Venture Exchange had managed to hold for some two months before it broke down with gold at the end of June, and was therefore now the resistance level that the exchange had to break through before being able to move higher. By consolidating at 930, breaking down to 859, then recovering and consolidating again at 930, the TSX Venture Exchange had traced out another bullish indicator of a market reversal, an ‘Inverse Head & Shoulders’.
Simply put, an Inverse Head & Shoulders chart pattern is when a stock or, in this case, an index consolidates, breaks down sharply and then rises to the previous level and consolidates again. The two consolidation levels form the right and left shoulders, and the breakdown in the middle forms the inverted neck and head. The theory is that once the inversed head and shoulders have formed, the index has sold off and then rebuilt a base from which to move higher. This is the pattern that I think the TSX Venture Exchange seems to have been building this summer.
In the past two months I feel I’ve identified a ‘Key Reversal’ in gold bullion and an ‘Inverse Head & Shoulders’ pattern for the TSX Venture Exchange, two very bullish technical indicators that perhaps the worst is over for the resource markets. If I’m right, I’ll be looking for these important technical indicators to reverse or re-invert themselves when the resource markets turn bearish once again….in about four or five years.
‘Second hole blues’ by Rodney Blake
One of the most difficult tasks a junior explorer faces is to keep long-term investor
momentum in their stock price after reporting exceptional assays from a discovery
drill hole. Not that discoveries aren’t great; they are much better than the alternative. But, for whatever reason, many junior explorers’ share prices are discounted once the
rush of the original discovery has abated and assays are reported.
In a recent case of what I call the second hole blues, is Colorado Resources Ltd. [CXOTSXV], whose exceptional copper-gold assays from the initial drill hole from its North
ROK property in northern British Columbia excited a depressed junior resource market
whereby their stock surged from under $0.20 to over $1.70 in less than a month.
Colorado then received much attention with North ROK being compared to the nearby
giant Red Chris copper-gold deposit being developed by Imperial Metals Corp. [III-TSX].
All this from one hole! Then the market anxiously waited for the results from the second
drill hole. Rumours abounded and the stock traded great volumes daily for about six weeks
as core from the second hole was logged, split and sent for assay. Then, in early June, the
second, third and fourth drill holes of the current program were released, and while admittedly not as good as the first hole, two of the three, I would consider encouraging for such
an early stage project. But the market, instead of building upon this additional information,
sells off immediately to drive the stock all the way back down to just $0.70 – a tough crowd
to please indeed. Why would investors discount this discovery so quickly?
I think the answer is in the assay numbers themselves. Remember, Colorado had the
fortune of reporting exceptional copper-gold assays from its first drill hole, which was
very exciting for investors. Unfortunately, to the market, these numbers now represent
the standard for this deposit. That is, anything less than those first assays would be seen
as disappointing for this deposit, even though they may be considered very good if they
were reported there first, or in another drill play altogether.
So, when Colorado released the second set of assays, the market was disappointed,
even though the numbers added to the size and scale of the North ROK deposit and gave
management much needed information for spotting future drill targets.
Bottom line – be very cautious of chasing discovery stocks higher. Mineral deposits are
developed with many drill holes, over many years. Chances are, after a discovery, the next
set of assays will bring the stock price back to reality. Wait for the second set of assays. Not
only will you have more information from which to evaluate your investment decision, but
chances are, you may be a shrewd buyer while others are feeling those second hole blues.
‘Bottoms up!’ by Rodney Blake
918 – Remember that number. That’s the level that the TSX Venture Exchange got driven down to earlier this spring when the price of gold bullion took that very sudden and unexpected $200 plunge to US $1,321/oz. 918 is not a very big number. Not very big indeed, especially when you consider that the world’s premier resource stock exchange was trading over 1,100 just weeks before, and worse still, had peaked out above 2,400 in March of 2011. 918 is not a very big number at all. And now, many are saying investing on the Venture Exchange is dead money and will be for years to come, that the resource super cycle is over, that up to one-third of Venture Exchange companies are not going to make it, that it’s time to cut one’s losses in the resource sector before it’s too late and move on other exchanges like the Dow Industrials and S&P 500 that are trading at or near record highs. Then why is the Venture Exchange trading higher than 918? If the junior resource game is over, why is money continuing to flow into the promising Alpha Minerals/Fission Energy Patterson Lake South uranium project in Saskatchewan? Why have the shares of Colorado Resources moved up from just $0.25 to the $1.50 range since releasing a very encouraging copper/gold drill hole assay from its North ROK property near Imperial Metals’ Red Chris copper/gold deposit in British Columbia? Why have Cosigo Resources’ shares quietly tripled from just pennies to near $0.30 on word that the company has finally attained the environmental permits required to begin limited drilling its Machado gold project in Colombia? It may be limited, but there seems to be some selective optimism here. So far, as of May 15, the Venture Exchange is holding above that terrible low of 918. Are the pundits right in that this is just another of a long series of dead cat bounces and that lower lows lie just ahead? Are resource investors throwing good money after bad? What does a few points above 918 really mean when the traditional ‘sell in May and go away’ summer doldrums are just ahead of us? And goodness knows that the Venture Exchange hasn’t done very well during recent summers. Or, could this be the quiet start of a rally off of the bottom and not just a dead cat bounce? Could it be that the low of 918 will hold and the Venture Exchange will begin to move higher? After all, the price of gold has recovered somewhat on increased physical demand. The price of copper has risen lately on reports of tightening inventories. Word has it that a few Japanese nuclear reactors are being prepped to be put back on stream. And low and behold, North American natural gas prices are rising as inventories are suddenly at five-year lows. I can’t be sure, and we may well retest 918 again, but to me this resource market feels like the bottom has been seen. The next few months should tell, but if the Venture Exchange can hold here, the future could be more enjoyable. Bottoms up!
Over the years, I’ve been to many Prospectors and Developers Conferences(PDAC) in Toronto, (some would say too many, but that’s a story for another time), and I’ve witnessed the event grow to be the largest of its type in the world, attracting some 30,000 miners and investors from all areas of the globe. I was a little apprehensive about going to this year’s conference because after nearly two years of a very rough bear market in resource stocks, I wondered if it would really be worth the time and money to attend what many were predicting to be a very depressed event. In fact, many of the media headlines prior to the conference accentuated how many of the junior resource companies attending PDAC 2013 were running out of money and had little hope of getting financing in this market. Some pundits even suggested that one-third of the junior resource companies represented in the Investors Exchange wouldn’t be around in their present form for PDAC 2014 – a very negative prelude to an investment conference indeed
But to my pleasant surprise, instead of a mood of doom and gloom, there was a good deal of energy and optimism at the show. There also seemed to be a greater numberof company presidents at their booths than I remembered in recent years. I took this as an encouraging sign because instead of staying away and leaving the task to others, the CEOs were there to interact directly with investors, financers and deal makers alike. In previous years, when things were good and treasuries were full, the presidents were more complacent and often felt their time was better spent elsewhere, leaving public relations people at the booths to attract and talk to investors.
This year of course things are tough, budgets were cut and the executives rolled up their sleeves and joined the rank and file to work the booths. Those who so offhandedly predict the demise of the junior resource sector fail to understand the mettle of the people who run these companies. Junior mining is not some new, start-up endeavor. It’s an industry whose roots and work ethic goes back to the gold rush years of the 1850s. These people know what it takes to survive.
I’d say, that from what I saw at PDAC, the end of the junior mining industry as we know it is certainly not at hand. The presidents were at their booths, investors were being informed and deals were being made. In recent years, PDAC seemed to mark the top of the market. This year, PDAC 2013 may well have marked the bottom of the market and, with a little luck, PDAC 2014 will be bigger and better than ever. I’d better book early.
‘Ante Up’ by Rodney Blake
In his hit song The Gambler, Kenny Rogers references a late night train encounter with a card playing drifter who maintained that whether in a poker game or the game of life, one had to “Know when to hold ‘em. Know when to fold ‘em.”
That is, one has to be able to recognize when they’ve been dealt a bad hand, toss it in, and move on the next. I think we saw this play out in the resource markets in midApril when, after the price of gold bullion, which had been struggling for a number of months, suddenly plunged by over $200 in just two-days, the largest drop since 1980. Many resource stock investors, who had up until then had been holding on to their already underwater positions in the hopes of better markets to come, just couldn’t take it anymore and folded their hands and hit what bids were available and moved to cash. Time will tell whether or not this was right move to make, but make it they did, leaving the TSX Venture Exchange down by another 9% to about 958.
Up until then, the TSX Venture Exchange had been holding its own, trading either side of 1,050 through much of the month of April, as investors stayed in the game by continuing to accumulate resource positions in the hopes of a spring rally because of the positive trading action of the Alpha Minerals/Fission Energy new Patterson Lake South uranium discovery in northern Saskatchewan – this being the first real action in the uranium space in about two years.
That action suddenly ended and the risk now will be to see if investors have the fortitude to ante up again in anticipation of the next resource rally or if they fold for good and move on to other markets. And who could blame them? After all, it’s been an ugly bear market in the resource sector since the Japanese tsunami of April, 2011.
The resource markets have been hit with a series of lower lows that have pulled the Venture Exchange down by over 60% from the 2,465 level two years ago. The only visible support level left now for the Venture Exchange is the post US housing bubble low of 680 established in December of 2008, and to test that level again would be devastating for most. Resource investors understand risk better than most, but even they can only afford to lose so much. Especially as they watch the Dow Jones Industrial Average and S&P 500 Index reaching new post recession highs. Money naturally flows to where it is treated the best, and right now, that is not the resource sector.
Hold them, fold them, or ante up to buy more. These are the hard decisions being made by the resource players today. Me? I’m betting the selling in the resource sector is overdone and those buying at these levels will be the ultimate winners in the end. It’s time to ante-up and play the next hand. Cards please…
|Disclaimer: This newsletter is solely the work of the author for the private information of clients. Although the author is a registered Investment Advisor at Canaccord Genuity Corp., this is not an official publication of Canaccord Genuity Corp. and the author is not a Canaccord Genuity Corp. analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and are not necessarily those of Canaccord Genuity Corp. |
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