Turn-Around Stocks - Snatching Victory From The Jaws Of Defeat
Excelsior Prosperity w/ Shad Marquitz – 07-18-2024
Over at the KE Report on Tuesday, I had a thought-provoking conversation with Dave Kranzler, of Mining Stock Journal, and it really got my wheels turning. I started writing this then and pecked away at it throughout the week, so some of the charts are a few days out of date, but the main points are exactly the same. One of the areas we discussed was that many investors tend to put some companies in the penalty box for the perceived jurisdiction risk, and it is just one of many areas where discerning investors can exploit opportunities for scalping value in a rerating scenario.
One of the examples Dave cited was the overreaction by the market to the news back in October of 2022, when the US sanctioned specific politicians and businesses in Nicaragua. As a result, investors sold PM companies operating in Nicaragua first and asked questions later (if they even bothered to ask questions later or listen to the answers). Many investors sold in a panic, before getting clarity on the actual situation or assessing what the sanctions were even specifically levied on. Most importantly, they sold before even finding out if it even impacted foreign businesses (like a mining company based in Canada) operating in Nicaragua in the first place.
The reality was that many weak hands reacted hastily and liquidated positions in companies like Calibre Mining and Mako Mining, even though the specific US sanctions actually had nothing to do with Canadian companies operating in-country. Now, Canadian sanctions specifically aimed at their own companies operating in Nicaragua would have been a different situation, and that is a potential risk factor to consider, but that also isn’t what happened.
I actually remember this period of time very well, because both Calibre Mining (TSX:CXB) (OTCQX:CXBMF) and Mako Mining (TSX.V: MKO) (OTCQX:MAKOF) were positions in my own portfolio (and still are), and they were show sponsors over at the KE Report. The hyperbolic statements and misinformed bashing on chat forums amplified and we heard it in pundit interviews, and it was frustrating seeing all the erroneous F.U.D. (Fear, Uncertainty, and Doubt) circulating around.
We had both Calibre and Mako on our show once they had digested and better understood the news, had talked to their legal and operations departments,and press-released it clearly to the market. The feedback from management teams, was that it really wasn’t going to impact their operations in any meaningful way.
We aired those episodes, and shared those news releases, and yet people that listened to them address the relevance and impact, would totally tune out their answers. A number of folks emailed or private messaged me asking me what I thought about the situation in Nicaragua. I’d say, “If you listened to the management interviews we just conducted, directly with companies that have in-country exposure and operations there, the main takeaway was that they are not worried and that it is mostly business as usual.” A few people ignored that actual company feedback, and instead wrote back that they thought it was too risky because “Person X or Person Y” said so.
I thought to myself… “Well, if you don’t care what company management teams that are actually operating there are saying, but instead, are basing your decision to sell solely on an armchair pundit that isn’t in Nicaragua, and doesn’t seem to understand what the sanctions actually impact, then why in the hell are you even emailing me about it? Some skepticism is healthy, but flat out ignoring direct statements from management teams is not a wise investing strategy.
With so much F.U.D. snowballing downhill in the sector and also from misrepresentation of the risks seen from many media outlets, then the aftermath was that both companies share prices were impacted in a selling wave. This was then further amplified and distorted by internet chat forums and some vocal pundits in the sector adding fuel to the disinformation fire.
Wise investors gather more data first, before just having a knee-jerk reaction. If the concerns are too large to ignore, then maybe just trim a partial position to reduce overall exposure, but then be ready to add that position right back once more clarity is obtained. Dave Kranzler actually first took a look when people asked him for his opinion, but unlike most people, he actually spent some time researching the situation and doing due diligence about the risk/reward setup. A winning approach.
Here is a hot-link to the part in Dave Kranzler’s interview Tuesday where he specifically discussed this perceived jurisdiction risk in Nicaragua back in 2022.
To Dave’s credit, after initially dismissing the jurisdiction himself as too risky, he then stopped for a moment and did something most retail punters didn’t do – actual due diligence on the specific US sanctions and what they meant, the country’s dependence on the mining sector, and if the jurisdiction risk being applied to Canadian operators in country was even germane in the first place. After realizing the whole situation had been way overblown, and how mining friendly Nicaragua actually was towards companies operating there, he decided to take action by accumulating shares in Calibre Mining while they were on deep discount.
This was the epitome of “Snatching victory from the jaws of defeat.”
That fishing line selloff in late October 2022, where so many investors exited at exactly the wrong time, was actually the spot to be buying into the F.U.D.
(CXB) bottomed at $.052 during this liquidation event. For reference, (CXB) closed Tuesday when I interviewed Dave Kranzler at $2.20; up over 400% off October’s low.
Calibre has been a 4-bagger since that time where the perceived jurisdiction risk got way too extreme; especially considering the ridiculous valuation CXB had crashed down to with respect to their annual production levels, development projects, resources in the ground, and on-going string of exploration successes. People accumulating shares in the later part of 2022 have been handsomely rewarded since then for being true contrarian investors.
The perceived “too risky” Calibre Mining has been one of the better performing gold stocks in the whole mid-tier sector the last 2 years. There aren’t many mid-tiers up 4x over this time period. It has snatched victory from the jaws of defeat.
Below is the Mako Mining chart from that same period. The stock had already been under pressure throughout 2022, due to an additional layer of F.U.D. with regard to their resources, so the move down was not a dramatic as in Calibre, but Mako gapped down to $1.15 in late October, and corrected down further to $1.10 during tax-loss selling in mid-December 2022. People in chat forums and talking heads in the sector started proclaiming it was toast along with Calibre. Then (MKO) shot up 154% from $1.10 to $2.80 in just 2.5 months for a snapback rally that caught haters and even many existing shareholders by surprise, that then used this rally as an escape hatch to exit.
Then (MKO) came down to retest those lows from 2022 in 2023, going back down to $1.16 in a slightly higher low and larger double-bottom pattern. Since retesting the lows, the chart pattern and price action has resolved to the upside, going up 3X to $3.74 just in May of 2024, and closing Tuesday at $3.64. (I worked these charts up early Wednesday morning and don’t feel like updating them to today’s close because the point is still exactly the same).
These particular Nicaragua F.U.D examples really tie into a larger investing premise in the resource sector, and the prime takeaway in this article:
Quite often, market participants react incredibly emotionally to news for short periods of time, and as a result, a stock can get mispriced (to the downside or upside), where all rationality leaves the discussion and corresponding valuation.
These are moments where those paying attention, should sit up, do more research, and then take appropriate action based on the risk/reward setup and their own unique risk tolerance levels and investing goals. In a surge up to unrealistic valuations based on a ebullient emotional response to news, one may decide to lighten the load and trim back some of their positions. If there is a fishing line selloff or period of punishment inflicted on a valuation to the downside, then the risk/reward factor may actually be more attractive than it was prior to the bad news becoming more than priced into the future. It is situational, and there are nuances to consider.
Let’s look at some other recent examples where we saw this phenomenon play out when there is perceived bad news that hits the market, and a stock craters by an irrational amount of value on a percentage basis… thus creating an investable moment and ability to increase the upside x factor in a rerating:
Take for example, Franco-Nevada’s (TSX: FNV) (NYSE: FNV) exposure to the Cobre Panama Mine, operated by First Quantum. This metals stream at Cobre Panama was ~17% of their overall net asset value based on future production expectations. However, when the news broke about Panama shutting down First Quantum’s operations at the mine, FNV sunk by about 34% from $137 down to $102 from late October to early December of 2023. The market overreacted on a factor of 2:1, and clearly FNV has clawed it’s way back up since then, to a recent peak $131. Contrarians that accumulated the selloff in December of last year, or January or February of this year, have seen a nice appreciation, whereas those investors panicking out of shares sold in an emotional state at precisely the wrong time.
Often these gaps down can mark great buying opportunities if the fundamental value drivers for the company are still intact, or outweigh the correction in value.
One of the best examples of this type of overreaction to negative news from the last few years, in my own portfolio and trading was the resource overstatement correction that was issued from Gatos Silver (TSX: GATO) (NYSE: GATO) in early 2022. Based on new interpretations and data when the modeling the resource, the company had updated the market that the resource was previously overstated. The stock dropped from over $10 to below $3 down to $2.68. That was a huge sudden correction!
Now I had been following this company as a relatively newer publicly-traded silver producer, that had initially been a private company. I always felt it was more properly valued than many of it’s peers, and thus had passed on holding it in my own portfolio. That is… until I saw that fishing line sell-off and complete over-reaction and market tantrum from existing shareholders. There were lawsuits launched, and investor outrage, calls for management’s heads on spikes, torches and pitchforks, fire and brimstone, etc… I sat up, paid attention, and thought “Ah ha! This may be my chance to finally get positioned in Gatos Silver!” (this is the value in a having a watchlist)
You see, I remember this exact same thing happening to Orezone Gold (TSX: ORE) back in 2016, when they announced they may have overstated their block model and resource estimate, and the stock dropped far more than the reduction in resource warranted. I had purchased into Orezone at that time, and then had one heck of a good position-trade, as it clawed it’s way back higher over the fullness of time. I thought at the time… “OK, so they don’t have as much gold as initially thought… but they still have a lot of gold… and they are going to have even more confidence in the resources they do have after this, and moving forward.” That had worked out well.
I envisioned the Gatos Silver saga of the over-stated resource playing out the exact same way. “OK , so they don’t have as much silver as initially thought… but they still have a lot of silver and they are a well-run mining operation… They are going to have even more confidence in the resources they do have after this, and moving forward.” A key question at the time was “Did this company actually just lose 2/3rds of their value?” (because that is what the stock price action implies). Is the market always right? (clearly not, because we see value disconnects like this fairly regularly).
I decided that this waterfall decline and bottoming and basing valuation was way overdone and started accumulating (NYSE: GATO) in traches throughout 2022 at $2.76, $2.84, $2.92. $2.49, $2.23, $2.54, and $3.16. When I decided to shed some other silver positions, I just kept dumping a few of those funds into GATO for the eventual rerating back up to a more sane valuation. I’ve definitely taken a big chunk of the profits off the table along the way higher, but still have a core position left that is up multi-fold. For reference, the stock just closed today at $13.09. That is down from the recent peak at $14.45, and Tuesday’s close at $14.11, but still way above the bottoming process for much of late 2022 in the mid-$2’s and low $3’s. From a technical perspective, once (GATO) cleared $10 a couple months back, then the gap had been filled. We’ve absolutely seen an upward trend and momentum for the last year and half since the over-reaction by Mr. Market.
Let’s check out another of these scenarios that readers of this channel will recognize that we’ve looked at in the past in prior articles here -- The recent saga in Argonaut Gold (TSX: AR) (ARNGF), prior to the takeover offer by Alamos Gold. There was an over-reaction to the downside after putting out worrisome news, after a series of setbacks and cost over-runs at their Magino mine. This illustrates the exact same kind of market tantrum, that I was able to exploit, and was the same premise of scalping opportunities after a fishing-line sell-off due to an over-reaction by nervous nellies to unpleasant news. These are the kind of one-off events we want to watch out for.
On March 3rd in an article on Growth-Oriented Gold Producers, I closed up that article with this passage discussing my positioning in Argonaut Gold the prior week on February 28th. (I’m only switching which passage is bolded for emphasis):
“After already having a really tough 2 years prior, and becoming the poster child for cost overruns and missed timelines, this company has been severely punished for it’s sins. However, when more news broke about challenges with selective mining, 5-10% lower grades expected for throughput, lower anticipated ounces in guidance, and the reality that they’ll need more money… the share price was further chopped in half. I’m talking of course about Argonaut Gold (TSX: AR) (OTC: ARNGF). (Yes, that’s right, I said Argonaut Gold).
Please… before you throw pies and rotten tomatoes at me though, at least suspend passing judgement on this provocative and likely polarizing selection, until you read Part 6 in this series where we’ll unpack together the good, the bad, and the ugly about Argonaut Gold. I’m happy to freely share my thinking and rationale behind the decision to accumulate more shares this last week into the recent weakness and market carnage. I also acknowledge that while this is definitely risky, it may not be as risky as it is being currently perceived (especially after the recent waterfall decline).
Yes, their key new mine, Magino, has been a complete mess getting developed and constructed for the last 2+ years, with more problems surfacing again 2 weeks back. We’ll get into the big picture view of where things are going, and address some specifics in that recent news announcement that has led to the stock being essentially chopped in half in market cap valuation, once again, over the last 2 weeks.
That aside, Argonaut Gold is going to be a legitimate growth-oriented gold producer at the end of this saga. It is run by a much more solid management team and board now than in the past, and Magino is absolutely still going to be transformative to the company,…”
In truth, I didn’t expect Magino to be so transformative that it would lead to a takeover announcement by Alamos Gold just a few weeks later on March 27th. To quote the great Ron Burgundy, “Wow, that really escalated quickly!” I was anticipating a rerating higher over time, more like Gatos Silver. I still believe that likely would have happened over time in Argonaut, if the takeover news hadn’t overshadowed everything prior/present, resulting in a solid premium for more than a double, and additional SpinCo that was sideline to the merger.
At the time of this article, my shares have converted over to Alamos Gold (AGI), which has been under pressure this week with the rest of the sector, but this position (that only includes the Magino mine asset being acquired by Alamos) is still up 104% in my trading account. Keep in mind that doesn’t factor in the additional upside of the SpinCo, where based on today’s close would represent an addition 25% (so 129% gain on the trade overall).
I’m considering ringing the register on this trade, to roll these funds into other stocks selling off harder than Alamos Gold, and am still trying to understand exactly what is happening with the new SpinCo, Florida Canyon Gold Inc. (FCGV). It got hit hard starting on Wednesday, when Heliostar Metals Ltd. (TSX.V: HSTR, OTCQX: HSTXF) announced it was acquiring the Mexican assets out of this newly formed spinco from Argonaut.
Heliostar to Acquire Gold Portfolio of Producing Mines and Development Projects in Mexico for US$5M - July 17, 2024
Man… the dust hasn’t even really settled yet from this transaction and the assets are already being further acquired. I believe that Florida Canyon Gold will pick up the $5Million on this assets sale, and retain the Florida Canyon Mine in Nevada. All things considered, I would have preferred if Heliostar had just acquired the whole spinco so I could have had shares in Heliostar… and think $5million is way too cheap to have let those Mexican assets go for, but we’ll see how they monetize this final asset moving forward. [way to go to Charles Funk and the team at Heliostar on a nice pickup of these assets on the extreme cheap during all this merger confusion].
The final example for this article is what we saw play out recently with Endeavour Silver (NYSE: EXK) (TSX: EDR). In much the same way that Magino was going to be transformative to Argonaut (and now Alamos), the massive Terronera Mine is going to be transformative for Endeavour Silver, significantly increasing their production profile and lowering their overall costs as a company. However, on January 24th, news was released where it was apparent that even more money would be needed.
https://edrsilver.com/news-media/news/endeavour-silver-provides-2024-update-for-the-terr-7571/#2024
“Given the trends that we have seen at our existing Mexican operations, Terronera is being advanced against headwinds, which include a stronger Mexican Peso, ongoing inflation and tight markets for equipment and bulk materials such as steel, piping and electrical supplies.”
This resulted in an increased project budget by $41 million to $271 million.
Well, Endeavour Silver had been under pressure for more than a year, as a higher cost producer in a generally bearish silver equity backdrop. I’d sold a big chunk at the end of 2023 for tax loss purposes. I saw this news in January, that was restated again on February 12th in the next press release, and thought… “Endeavour’s build of Terronera is playing out very much like Argonauts build of Magino…” They had cost overruns due to inflationary pressures and currency fluctuations, and timeline extensions. I nibbled on a little bit more during the duress, but unfortunately didn’t get back in seriously, like I had been prior to selling so much the end of last year. I was starting to scale back in but thought there was a bit more time to layer in before it started to rerate. Then silver prices took off like a scalded cat…
Higher-cost producers often have the most upside torque on rising metals prices, as their margins increase more on a percentage basis than lower-cost producers, and thus they have more torque to rising underlying commodity prices. As a result, when silver prices started taking off in March through May, Endeavour Silver (EXK) shot up bigly after making a low of $1.42 and peaking recently at $5.02, for a 253% gain.
The examples above with Calibre Mining, Mako Mining, Franco-Nevada, Gatos Silver, Argonaut Gold, and Endeavour Silver highlighted similar opportunities to snatch victory from the jaws of defeat; in the form of oversold valuations on the back of worrisome company news. Even if they were for different fundamental reasons, the chart damage and company shunning by investors, created similar opportunities that led to big surges higher when the eventual valuation re-ratings came into play.
I’m seeing similar setups currently in a few stocks that could be turn-around stories and/or fixer-uppers, and may start a new series here soon: “Turn-Around Opportunities – From Ugly Ducklings To Stellar Swans.” Stay tuned for more tantalizing trade ideas…
Thanks for reading and may you have prosperity in your trading and in life!
- Shad