Tim Biggam – Big Tech Earnings This Week
Big Tech Earnings This Week Tim Biggam @Delta_Desk talks $VIX, $MSFT, $AAPL, #Fed, #Futures, #CallSpread, and #Straddle.
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Not All Gold Miners Are Created Equal
It’s been a challenging two years for investors in the gold space, with the metals making no progress since Q3 2020 and the Gold Miners Index (GDX) suffering a 52% decline from its highs.
This violent bear market can be attributed to significant margin compression for most gold producers, with them being hit by inflationary pressures (fuel, steel, cyanide, labor) and the impact of a lower gold price on sales.
The result? Margins are down over 25% on average from Q3 2020 peak levels.
(Source: TC2000.com)
On the surface, this might not seem like a very attractive investment thesis given that gold producers are price-takers, gold continues to trend lower, and they’re already seeing margin compression at $1,660/oz.
However, the 52% correction in the GDX has left sector-wide valuations at their lowest levels since 2018, when all-in-sustaining cost margins were at $200/oz, nowhere near the $500/oz margins currently.
Hence, I believe this negativity is more than priced into the sector, especially if gold can find a floor near $1,600/oz, which looks likely given that we have extreme pessimism.
That said, not all miners are created equal, so it’s essential to focus on quality and those names bucking the margin trend. In this update, we’ll look at two names trading at deep discounts to net asset value that have outstanding business models:
Agnico Eagle Mines (AEM)
Agnico Eagle (AEM) is the world’s third-largest gold producer with a $20.3BB market cap. The company has 11 mines in four countries (Australia, Canada, Mexico, and Finland), with over 95% of its gold production coming from Tier-1 ranked jurisdictions, deemed to be the most favorable from a permitting and geopolitical standpoint.
The company recently released its Q3 2022 production results and produced 817,000 ounces of gold at $779/oz costs, a significant increase from the year-ago period due to its merger with Kirkland Lake Gold.
While most producers in the sector have seen a $150/oz increase in costs since Q3 2020 due to inflationary pressures, Agnico Eagle has been much more resilient than its peers, seeing only a $50/oz increase. This is because it’s benefiting from significant corporate and operational synergies related to its merger, potentially shaving up to $50/oz off its all-in-sustaining costs.
Meanwhile, the merger brought three lower-cost mines into Agnico’s portfolio, reducing the consolidated costs for the portfolio. Hence, Agnico Eagle is bucking this trend, yet it’s still been sold off similarly to the GDX, down 50% from its highs.
(Source: FASTGraphs.com)
Following this violent decline in the share price despite much better cost performance than its peer group, Agnico has found itself trading at just ~8.3x FY2022 cash flow estimates ($5.41) at a share price of $45.00. This is a massive discount to its historical cash flow multiple of 13.7, and this discount makes even less sense given that AEM should trade at a premium to its historical multiple.
The reason is that it now has a larger and more diversified portfolio, two of the highest-grade mines globally (Fosterville and Macassa), and higher margins due to its lower costs.
Based on what I believe to be a fair multiple of 13.0x cash flow, I see a fair value for the stock of $70.20. Hence, I see this multi-quarter correction as a gift with a ~57% upside to its target price.
i-80 Gold (IAUX)
i-80 Gold (IAUX) is a much smaller cap company with a market cap of $400MM that has an industry-leading production growth rate.
Usually, I do not invest in small-cap gold stocks, given that there are more than enough options in the mid-cap and large-cap producer space. However, occasionally an opportunity comes along that is far too interesting to pass up, which is the case here.
This is because i-80 Gold is expected to be a 70,000-ounce producer in FY2023, but plans to increase production to more than 250,000 ounces by 2025 and over 500,000 ounces by 2028.
Notably, all of its assets are in the #1 ranked mining jurisdiction globally due to infrastructure, geologic potential, and ease of permitting: Nevada.
(Source: Company Filings, Author’s Chart & Estimates)
On top of this exceptional growth rate and a relatively simple Hub & Spoke model that it plans to employ (three mines feeding a centralized autoclave facility), i-80 Gold continues to hit some of the highest-grade intercepts sector-wide at its Ruby Hill and Granite Creek Projects.
In fact, the drill results at these properties are in line with the grades we’re seeing from the best projects held by $20BB+ companies, and this should help i-80 Gold to increase its resource base from 15.0 million ounces of gold to more than 19.0 million ounces of gold over the next two years.
This would leave i-80 Gold trading at a valuation of just $21.00/oz for a company that’s expected to extract gold at less than $1,000/oz costs ($700/oz margin).
It’s also worth noting that this $21.00/oz market cap per ounce figure doesn’t factor in the company’s $100MM in cash on its balance sheet.
So, why is the stock down sharply over the past month?
During a bear market, good news often gets ignored, and when it comes to tax-loss selling and redemptions, investors sell without logic and because they have to, with this form of forced selling occasionally leaving stocks trading at deep value levels.
I believe this is the case for i-80 Gold, given that the company has released world-class polymetallic results which the market yawned at, and it added more ounces at one of its flagship projects, and the result was that the stock was sold off further.
So, for those that understand the story closely, this has created a phenomenal opportunity to start a position.
If i-80 can deliver on its promises, I see a fair value for the stock of $1.45BB (1.0x price to net asset value) or US$4.90 per share by 2025 (190% upside).
If it delivers on its stretch targets, I would not be surprised to see the stock trade above US$6.00 by 2026.
In summary, I see this pullback as one of the best buying opportunities in the gold sector I’ve seen in the 15 years I’ve traded the sector; I plan to continue accumulating the stock on weakness below US$1.90.
Disclosure: I am long AEM, IAUX
Taylor DartINO.com Contributor
Disclaimer: This article is the opinion of the contributor themselves. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information in this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one’s portfolio.
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Learn to Love What Wall Street Hates
One of my favorite places to hunt for dividend stocks is among the companies Wall Street is avoiding—and chiefly among these, at the moment, are materials stocks. Wall Street is fearful a deep recession will hurt demand for materials, especially industrial metals, so it keeps selling off these companies’ stocks.
Meanwhile, Wall Street is also totally ignoring reports of potentially massive shortages of industrial metals, recession or not. The news—as with so much financial news lately—comes out of the U.K.
That creates a nice opportunity for us…
Russian Metal Ban
We’re all familiar by now with the fact that Russian energy exports have been put on a blacklist, resulting in higher oil and natural gas prices.
But now, the London Metal Exchange (LME)—the world’s largest market in standarized forward contracts, futures contracts, and options on base metals—is facing pressure from many traders to stop accepting Russian metal. The fear is that LME warehouses will become a stockpile for unwanted material, distorting global prices for commodities like aluminum and copper.
The LME plays a critical role in the daily functioning of the global industrial metals market, supplying metals when there is a shortage or taking metals into its warehouses when there is an oversupply.
The Financial Times reports that metals consumers are now saying to the LME: “Your contract is not fit for us at the moment, we are self-sanctioning Russian material, we don’t want to dip into the LME warrant pool and pull out a warrant for Russian material.”
If the LME continues to accept unwanted Russian material into its warehouses while many of its users shun it, there could be an oversupply of unwanted base metals. The effect would be that LME prices would reflect the glut of cheap, unwanted Russian metal it holds and not the everyday price charged in real-life deals that happen directly between producers and consumers.
Many private deals already include a premium on the price for transactions that do not include metal supplied from Russia. For example, Chile’s Codelco—the world’s top copper producer—is selling its metal for $235 per ton above the LME benchmark three-month contract.
If this mismatch continues, it will undermine the LME’s role as a marketplace that sets a fair and accurate global market price for industrial metals.
In addition to the LME, the Biden administration is also considering whether to target Russian aluminum through a U.S. ban, raising tariffs, or putting sanctions on Rusal, the largest Russian producer of aluminum.
Any U.S. sanction on Russian exports of aluminum (used in aircraft, weapons, vehicles, cans, etc.) would have far-reaching implications for global metals trading and also be inflationary.
Aluminum’s Time to Shine?
If there is no ban, but “self-sanctioning” becomes more widespread in 2023, we could see prices for Russian metals fall and the LME warehouse stockpiles keep rising, as it is the market of last resort.
However, aluminum is a different story than copper or nickel, which is already banned by the LME.
Russia contributes around 8% of global aluminum supply, and also exports lots of its precursor materials, bauxite and alumina. In the past, Russia had supplied up to three-quarters of LME aluminum warehouse stocks, so a full ban on its metals would certainly cut the metal available on the exchange.
Of course, the LME is hoping the White House acts, taking the decision out of its hands. But whichever entity takes action first, it will be good news for one company whose CEO recently said Russian aluminum should be banned.
Rio Tinto
That company is Rio Tinto Group (RIO), which is the only major mining company in the world that has a significant aluminum division. In fact, aluminum was its second-highest earner in terms of underlying cash profits in the first half of 2022, only behind iron ore and ahead of copper. A ban on Russian aluminum would boost Rio Tinto even further, thanks to its major aluminum operations in Canada. (The company bought Canada’s aluminum giant Alcan back in 2007.)
Of course, there is a lot more to Rio Tinto than aluminum. I like the fact that the company is also investing with a focus on the longer-term. On October 11, Rio Tinto announced that it will modernize its Sorel-Tracy site in Quebec to bolster the supply of minerals controlled by China, while reducing emissions at the site by introducing a new smeltering technology.
The company will start producing titanium metal and quadruple its scandium oxide output to 12 tons annually at the site. These materials are essential to aerospace, medical products, and fuel cells. Currently, China produces three-quarters of finished titanium products and 61% of scandium globally.
In addition, Rio Tinto has bid to take full ownership of Canadian miner Turquoise Hill (TRQ) for $3.3 billion, which would give it greater control over the vast Oyu Tolgoi copper mine in Mongolia. Turquoise Hill holds 66% of the Oyu Tolgoi project, one of the world’s largest known copper and gold deposits, located in the Gobi desert. The Mongolian government owns the remaining stake.
And don’t forget that Rio Tinto has a large portfolio of long-lived assets with low operating costs, meaning it is one of few miners that will remain profitable through the commodity cycle. Plus, most of its revenues come from operations located in the relatively safe havens of Australia and North America.
Rio Tinto’s balance sheet is sound, and I expect the company to run a relatively conservative balance sheet for the foreseeable future. I love the management’s focus over recent years on returning excess cash to its shareholders. In July, Rio Tinto management said it would pay a semi-annual dividend of $4.3 billion ($2.67 per ADR), or 50% of underlying earnings. That was the second-highest half-year payout on record, in line with the company’s dividend policy.
I believe Rio Tinto’s capital discipline will continue, the balance sheet will remain sound, and distributions to shareholders will remain generous (although the current 12.65% yield will drop), even if metals prices like iron ore weaken.
That makes Rio Tinto a buy anywhere in the $50s.
It’s raised its dividend 37.5% on average, could be acquired, benefits from rising interest rates, trading at massive discount, and pays an 8% yield. This is my top pick for income during a rough market.Click here for details.
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3 Stocks That Are Great for Passive Income Investors
The U.S. Gross domestic product rose by an annualized rate of 2.6% during the third quarter, according to initial estimates released by the Bureau of Economic Analysis. While the economic growth underscores that the United States is not currently in a recession, economists cautioned that the latest GDP report doesn’t mean one isn’t looming. Although
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How stocks perform during midterms (and a dire warning)
In my free weekly video, I have an interesting chart to show you. Over 20+ years, the S&P 500 has a historical pattern of how it performs in November and December. But, more importantly, how it performs during midterms. We have midterms in two weeks, obviously, so let me give you a glimpse of how
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These Two “Special Situations” Have Huge Upside
While the markets remain in a state of turmoil and prices continue to fall, corporate activists have been picking up their pace. Two developing situations are now worth the attention of patient but aggressive investors…
Because the potential returns are getting quite big. Here’s what I’m seeing…
First, there is the ongoing saga of Kohl’s Corp. (KSS). I am stunned that the board of this company has not been replaced in its entirety, and each of the directors sued personally for negligence. The department store turned down takeover bids as high as $68 back in May when the stock was trading in the mid-50s.
The board felt that the department store chain was worth more than that price.
They were wrong.
Kohl’s missed earnings expectations in the second quarter and dramatically reduced its expectations for the full year.
As soon as the report hit the wires, the rout was on: the stock now trades for less than $30.
Activist investors are piling on, demanding that the board be replaced and the chairman of the board be fired. A proxy fight is shaping up, and I am hard-pressed to see how the board wins the day.
Jonathan Duskin, the head of the activist firm Marcellum Advisors, recently sent a letter to the beleaguered depart store chain’s shareholders. He was not nice about demanding the ouster of the entire board. Instead, the letter highlighted the failed sales process at much higher prices, executive departures, and the downgrading of Kohl’s debt to junk status. Furthermore, the activist called the wounds at Kohl’s self-inflicted due to execution issues on the part of the board.
There is little doubt in my mind that Kohl’s is worth a lot more than its current share price. Of course, there will be headwinds from a weakening economy and margin pressure due to inflation, but the stock price should be well above current levels.
The biggest obstacle will be the board’s willingness to fight the needed changes.
The stock is trading at just eight times forward earnings expectations and 82% of tangible book value.
Management has shown itself capable and willing when it comes to destroying shareholder value, so I would stay small and move slowly with Kohl’s, using weakness in the market to accumulate a position. The profit potential here is too big to ignore.
More experienced investors might want to use cash-secured puts or long-dated out-of-the-money calls to bet on the stock’s recovery.
Farmer Bros. Co. (FARM) is another ongoing saga that has attracted the attention of activists. The history of the coffee roaster is full of drama, including family disputes, ill-fated M&A activity, and what was, at the time, a very unpopular move from California to Texas.
Then the pandemic came, and Farmer Brothers was hit hard. Its biggest customers were hotels, restaurants, and casinos, and sales dropped dramatically. The problem is that business has not recovered as strongly as hoped as the economy began to reopen.
Revenues are still well below pre-pandemic levels, and expenses are rising. Debt levels have increased by more than 20% year over year. Cash on hand is down to less than $10 million. Farmer Brothers is losing money, and none of the analysts following the company expect it to turn a profit in 2023, either.
There has been some insider buying by the CEO, CFO, and chief supply chain officer, but there is no convincing evidence the business is improving.
Now, activist investor KCP Partners has accumulated a stake of more than 6% in the company and is pushing for board seats. Farmer Brothers’ board has not issued a response, but I doubt the company will give in too quickly.
If KCP does get board seats, I expect it to push for the sale of the company.
A sale should get a much higher valuation than the current stock price. The new facilities in the Dallas area are running at half capacity, so there is plenty of room for expansion of management can get the core business back on track.
A buyer whose business is already back to pre-pandemic levels could immediately double the facility’s output.
Again, I don’t think you need to back up the truck for this stock, but a small position could lead to outsized gains. Either management gets the business turned around and starts paying down debt, or activists will force a fight to unlock the obvious shareholder value present in this company’s assets and potential.
Check out the picture on the next page. It’s a beat up building that would’ve turned $25k into $4.1 million. It’s not a real estate play. Actually, with the Fed raising rates, it’s the best asset to buy right now. View this beat up, millionaire-making asset.
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This Rare Options Trade in TSLA Protects Against A Big Drop
Tesla (TSLA) traded nearly 3.5 million options contracts the day after earnings last week. However, one unusual block trade really stood out on that day. A strategist placed a roughly one-week put butterfly trade, which has maximized gains if TSLA drops 20% in about a week. The trade starts making money if TSLA drops about
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3 High-Quality Stocks That Investors Should Accumulate During the Bear Market
Bear markets can be challenging processes for investors. However, the one upside is that they give an opportunity to buy high-quality companies at very attractive prices. Although it’s still early in the bear market, and odds favor another leg lower as we are nowhere close to a Fed ‘pivot’ and the economy has only just
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Extra Money in Your Pocket? Put These 3 Stocks to Work in Q4
September’s employment and inflation data have beaten expectations and seem to have paved the way for the Fed to respond with another aggressive rate hike during its November meeting. With the previous rate hikes manifesting in the form of softening demand, increased borrowing costs, and compressed margins in the Q3 earnings, a soft landing for
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Trade Like a Hedge Fund – 1 Stock They’re All Buying
The much-talked-about acquisition saga of Twitter, Inc. (TWTR) is finally drawing to a close.
SpaceX founder Elon Musk finally agreed to buy the company for $54.20 a share. In a regulatory filing on October 4, Musk notified TWTR of his intent to go ahead with the initial agreed-upon deal to acquire the company and take it private. The stock jumped more than 22% on October 4, 2022, and has been on an uptrend since then.
Source: MarketClub
There has been no shortage of controversy as the two parties were scheduled to go to trial on October 17. TWTR had dragged the Tesla CEO to court after he informed the company of his intention to terminate the agreement in July.
Musk had backed out of the deal, stating that TWTR had failed to disclose the number of bots and spam accounts on its platform. He claimed that the company was misleading investors by misstating the number of bots on its platform by providing false numbers in its corporate filings with the SEC.
On July 12, 2022, TWTR filed a lawsuit against Musk, as his decision to back out of the deal had led to its investor sentiment tumbling. In the lawsuit, TWTR argued that having signed a binding agreement, he could not abandon it.
Just after Musk officially tried to terminate the deal in July, hedge funds Pentwater Capital and Greenlight Capital sensed an opportunity. They went long on the stock as there was a signed contract, and Musk could only pull out of the deal if there were fraud in TWTR’s financial statements or any material event that could change the company’s value. So, in the absence of these issues, Musk had no option but to honor the contract.
Greenlight Capital founder David Einhorn said, “Investing in something like Twitter, which I think will resolve this year, is good because I should get the cash out to redeploy into the next thing.”
Matthew Halbower, Pentwater Capital’s founder, said, “In my 23-year career doing this, I’ve never seen an acquirer walk away without any reason.” “The probability of him being able to walk away was very low,” he added.
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Shares of TWTR are currently trading above their 50-day and 200-day moving averages of $44.11 and $40.74, respectively, indicating an uptrend. The stock has gained 25.8% in price over the past month and 21.3% year-to-date to close the last trading session at $52.44.
Here’s what could influence TWTR’s performance in the upcoming months:
Weak Financials
TWTR’s revenue declined 1.1% year-over-year to $1.17 billion for the second quarter that ended June 30, 2022. The company’s non-GAAP net loss came in at $57.72 million, compared to a non-GAAP net income of $174.51 million a year ago.
Also, its non-GAAP loss per share came in at $0.08, compared to a non-GAAP EPS of $0.20. In addition, its adjusted EBITDA declined 67.5% year-over-year to $111.70 million.
Mixed Analyst Estimates
Analysts expect TWTR’s EPS for fiscal 2022 to increase 425.3% year-over-year to $1.05. Its EPS for fiscal 2023 is expected to decline 23.9% year-over-year to $0.80. Its revenues for fiscal 2022 and 2023 are expected to increase 4% and 15.2% year-over-year to $5.28 billion and $6.09 billion, respectively.
Mixed Profitability
Regarding the trailing-12-month gross profit margin, TWTR’s 60.84% is 20.4% higher than the 50.52% industry average. Likewise, its 16.62% trailing-12-month Capex/Sales is 294.3% higher than the industry average of 4.21%.
On the other hand, its 4.04% trailing-12-month EBITDA margin is 78.3% lower than the 18.63% industry average. In addition, its 0.50% trailing-12-month levered FCF margin is 93.8% lower than the 8% industry average.
Technical Indicators Show Promise
While TWTR may not look attractive from the fundamental point of view, it does show strong trends, which traders could capitalize on. According to MarketClub’s Trade Triangles, the long-term trend for TWTR has been UP since October 4, 2022, and its intermediate-term trend has been UP since September 26, 2022. However, the stock’s short-term trend has been DOWN since October 21, 2022.
Source: MarketClub
The Trade Triangles are our proprietary indicators, comprised of weighted factors that include (but are not necessarily limited to) price change, percentage change, moving averages, and new highs/lows. The Trade Triangles point in the direction of short-term, intermediate-term, and long-term trends, looking for periods of alignment and, therefore, intense swings in price.
In terms of the Chart Analysis Score, another MarketClub proprietary tool, TWTR, scored +75 on a scale from -100 (strong downtrend) to +100 (strong uptrend), indicating Bull Market Weakness. While TWTR shows short-term weakness, it remains in the confines of a long-term uptrend.
The Chart Analysis Score measures trend strength and direction based on five different timing thresholds. This tool considers intraday price action; new daily, weekly, and monthly highs and lows; and moving averages.
Click here to see the latest Score and Signals for TWTR.
What’s Next for Twitter, Inc. (TWTR)?
Remember, the markets move fast and things may quickly change for this stock. Our MarketClub members have access to entry and exit signals so they’ll know when the trend starts to reverse.
Join MarketClub now to see the latest signals and scores, get alerts, and read member-exclusive analysis for over 350K stocks, futures, ETFs, forex pairs and mutual funds.
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Best,The MarketClub Team[email protected]
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