Taking Profits in Precious Metals: Model Portfolio Recap
By Ben Abelson
14 Apr 2006 at 06:19 PM EDT
NEW YORK (ResourceInvestor.com) -- The last few months have been very good to investors in the precious metals sector, especially to those who have been invested in our undervalued gold portfolio, first developed in late November. Since our portfolio was implemented, it has returned nearly 75% - more than double the Amex Gold Bugs (HUI) index’s return of 37%.
But with the mining sector starting to look a little overheated, and some of our stock picks having gone through the roof, it looks like a great time to take profits in some of our better positions. Of course, our goal going forward will be to add to existing positions and implement new positions as they get cheaper in the future.
Northgate Soars on Solid Operational/Exploration Results
Since being recommended at $1.61, Northgate Minerals [TSX:NGX; AMEX:NXG] has taken off, recently hitting a high of $3.18 on the back of strong operational results. The stock also got a nice boost last week after releasing drill results of 8.38 g/t over 25 feet and 5.65 g/t over 104 feet (within which there was a 40 foot interval assaying 10.35 g/t) at its newly acquired Young-Davidson property in Ontario.
Northgate remains one of my favorite mid-tier miners, throwing off tonnes of cash from its existing operations while remaining fiscally disciplined in its new acquisitions. However, given our nearly 100% return, I would recommend using this opportunity to take some money off the table. Those invested should implement a 10% trailing stop on one-third of the current position. (For those new to this practice, this means selling the one-third stake if the stock declines by 10%.) However, let’s be sure to hold onto the remaining stake in Northgate in the expectation that this company will continue to do well in the future.
Those investors who are less willing to ride out the ups-and-downs of the sector, however, are encouraged to sell one-half of their position using the above criteria.
Cambior Plays Catch Up
After trailing the sector for much of gold’s recent bull run, Cambior [TSX:CBJ; AMEX:CBJ] has been playing catch up of late. As the precious metals sector continues to heat up, investors have recognized the intrinsic value of this stock and its undervalued asset portfolio. Still, production at the bulk of Cambior’s mines are well past their heyday, and barring any acquisitions the company’s production profile is expected to decline over the next couple of years. In fact, it’s more likely that a senior or mid-tier miner will snap up this still discounted miner to add to its production base.
With a 66% return since November, let’s use a 10% trailing stop for one-third of our position.
Nevsun Spikes on Pending Feasibility
Investors aren’t writing off Eritrea any more! With production seeming more and more likely at Nevsun’s [TSX:NSU; AMEX:NSU] flagship Bisha deposit, investors have begun to pile into Nevsun. Now that we’ve racked up gains in excess of 90% (and over 100% at the stock’s recent highs), let’s place a stop sale order for one-quarter of Nevsun at $3, if the stock is able to close solidly above that level again within the next few weeks. At that point, put a 10% trailing stop under the stock for another one-quarter of the position.
In the event that Nevsun doesn’t cross back over the $3 mark in the near future, scrap the above information and sell one-third of the entire position at a stop of $2.70.
Nevada Pacific Soon to Be Part of U.S. Gold
With the early-March acquisition plan announced by U.S. Gold [OTCBB:USGL], it looks likely that Nevada Pacific Gold [TSXv:NPG; OTCPK:NVPGF] will soon be folded into Rob McEwen’s latest venture.
Investors who purchased the stock in late November should be quite pleased, however, given that they’ve racked up returns in excess of 160%!
While McEwen’s new venture may have long-term potential, it looks especially overheated in the near term. I would recommend that investors sell one-half of their current position in Nevada Pacific at market prices. U.S. investors who purchased the stock via the pink sheets should be sure to use a limit order.
Golden Star Continues to Disappoint
While we continue to believe in Golden Star Resource’s [TSX:GSC; AMEX:GSS] turnaround potential in the intermediate-term, it has been a disappointment lately. The stock has actually underperformed the HUI since November, and operational results have been middling. Larger institutional investors, obviously, still are not confident in management’s abilities to develop a long-term mining operation in West Africa.
Golden Star had traded up into the $3.80 range earlier this year, but recently fell back to trade in the lower-$3 range. Place a trailing stop for one-half of the company at 10% under the current prices. If the stock spikes above $3.75 before that stop is hit, tighten the trailing stop to 5% below the going price.
Hang Onto Wolfden and European Minerals
Wolfden Resources [TSX:WLF; OTCPK:WFDNF] and European Minerals [TSX:EPM; OTCPK:EPMCF] have been fairly flat since being added to the portfolio in November and January, respectively. Still both of these companies have tremendous long-term potential, and I would encourage investors to hang onto them. Wolfden has consolidated its assets in Nunavut, adding several Inmet projects and Kinross’ Lupin property while preparing for a planned spin-off of its southern Canadian assets.
Across the pond, European Minerals continues to move toward production at its Varvarinskoye deposit in Kazakhstan, while resolving many of the contracting and financing issues that had plagued the company. The shares have been held fairly flat as the market absorbs a recent equity financing, but investors can look for that situation to diminish over the course of the spring and summer as the company gets closer to production.
Two New Additions
But even with things looking toppy in the sector, bargains still exist. One up and coming junior with strong potential is Alexis Minerals [TSXv:AMC; OTCPK:AXSMF]. Alexis has been making tremendous progress at its Lac Herbin deposit, located on the Aurbel property near Val d’Or, Quebec. Initial drill results on the deposit have been very encouraging, include 7 metres grading 25.86 g/t, 2.7 metres grading 8.14 g/t, and 0.6 metres grading 299.5 g/t.
The company is currently planning a three-phase exploration program, with the goal of upgrading some 250,000 inferred ounces of gold to about 180,000 ounces in the measured and indicated category. The goal is to begin production (and generate cash flow) on this initial deposit by early 2007, and use the proceeds to fund exploration on the rest of Alexis’ massive landholdings. A scoping study last year indicated that Alexis could expect to produce 35,000 ounces per year, at a cash cost of $224/ounce for just over five years. A final production decision and feasibility study aren’t expected until later this year.
Given the strong drill results and recent corporate action, production on Lac Herbin is appearing quite likely in the near future. The company recently cemented a 100% ownership stake in the Aurbel property from Aur Resources [TSX:AUR], and purchased a nearby 1400 tonne-per-day mill. The total cost for the transaction was $3 million and a 2.5% net smelter royalty.
While the production amounts from Lac