RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:Easy moneyCyanide5,
I agree with your long term optimism about Americas Silver’s future. If we imagine a World where gold is trading at $1750 USD per ounce and silver is at $30 USD per ounce, and fast forward to Q4 of 2020.
Relief Canyon is in full production by then producing at least 15,000 ounces of gold per quarter and $11.1 million USD.quarter in profit, EC120 is in production adding 600,000 silver ounces of equivalent production and $7.5 million USD/quarter in profit, on top of the $12.5 million USD in profit from the San Rafael mine which brings USAS EPS up to 33 cents per share for a PE10 stock price of $13 USD per share.
At those metal prices with Tucano at peak seasonal production of 55,000 ounces in Q4, GPL EPS is only 25 cents USD per share which merits a PE 10 stock price of $10 USD.
Therefore, long term USAS is the better stock to own from the standpoint of leverage to an increase in the silver price. However, Relief Canyon will not be in commercial production until sometime in Q1 2020, so backing out the gold production from Relief Canyon, profit in our future scenario drops to 21 cents per share for A PE 10 stock price of $8.42 USD.
The other problem with our scenario is that the EC120 project would take at least 2 calendar quarters to get into production, so backing out the EC 120 profit leaves us with a projected loss of $2.2 million USD or minus 2 cents per share at $1750 USD gold and $30 USD silver, which is my current scenario for Q4 2019.
So, using a military metaphor, USAS has its guns loaded with the wrong ammunition for the current fight, while Great Panther is on track to generate 25 cents USD per share in profit in Q4 2019 and has its guns loaded with the proper ammunition!
So, the short term issue for USAS is that gold looks like it is in the process of making a move from $1450 to $1750 USD at this point in time, and USAS is caught flat footed with NO GOLD PRODUCTION. So the question is whether USAS stock holders will hold their shares with a potential Q2 2019 loss of 5 cents per share or greater or move to a stock that is set to make a Q4 2019 profit of 25 cents per share at $1750 USD gold?
My concern about the short term profitability of USAS is the main reason why I exchanged the last of my USAS shares for GPL in May, and why I have no exposure to USAS.
So here are some of the things that I look at:
1. Valuation relative to gold production.
For me, investing is all about risk management, and adjusting portfolio stock allocations to minimize risk and maximize future returns. As of the close of trading today, GPL closed at a valuation of $6376 USD in market cap per ounce of quarterly gold equivalent production, while USAS closed at $14,759 USD per ounce of quarterly gold equivalent production based on the Q2 production report. So therefore, if USAS is trading at fair value, then GPL stock price should increase to $2.32 USD per share to have the same valuation relative to gold equivalent production. By this valuation metric, GPL is clearly the undervalued stock of the two and the less risky one to own.
2. GPL Seasonality relative to other gold and silver stocks
Seasonality is one of the factors that I look at in making decisions about stock allocation. GPL is particularly interesting because of its seasonality relative to other junior gold and silver stocks.
GPL versus MNDJF During the August to February time frame GPL gains on average 42.9 % in relative value from August to February.
GPL versus USAS During the August to January time frame GPL gains on average 40.4 % in relative value from August to February.
GPL versus ASM During the August to December time frame GPL gains on average 42.6 % in relative value from August to December.
GPL versus ORVMF During the August to February time frame GPL gains on average 33.8 % in relative value from August to February.
So based on stock seasonality GPL is entering the seasonal period of outperformance versus USAS, MNDJF, ASM, and ORVMF based on the previous 5 years of trading history, and this seasonality does not include Tucano, since that mine was added this year.
3. Tucano gold mine seasonality
During the wet seaon in Brazil Q1 and Q2 of each year, gold production is expected at 30,000 ounces with a strip ratio of 9 to 10 during the rainy season. During the dry season in Q3 and Q4 gold production increases to 40,000 ounces and 55,000 ounces respectively based on current 2019 guidance, and the strip ratio decreases to 4 to 6, thus lowering mining costs through the combined effects of increased gold grades and reduced strip ratios.
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