The short-term direction of gold and silver

I expect that the prices of gold and silver will come under significant selling pressure so long as the stock market continues to post strong gains. Strong corporate earnings and the Dow’s recent rally over 13000 has placed investors attention to stocks instead of looking for alternative currency investments or investment risk hedges. The recent rally in gold and silver silver has placed a strong opportunity for profit taking in the short-term. Gold also failed to cross the key psychological price point of $700.

I’ve written in the past that the precious metal markets are relatively small in comparison to other investment choices. A few large hedge funds can exceed the entire gold or silver markets. The opportunity for institutional investors to engage in price manipulation may be evident by the increasing volatility in the spot price of the metals. While this is merely speculation, readers can note that the price of gold or silver can swing + or - 5-10% in a weeks time.

The fundamentals behind why gold and silver remain strong investment choices haven’t changed. Building a position as institutional traders exit positions is exactly how individual investors can benefit from the increase volatility in the gold and silver market.

I watching the spot prices of gold and silver closely and may decide to increase my exposure to a few gold and silver miners in my portfolio. A few stocks that I believe are already trading at attractive entry points are Coeur d’Alene Mines Corporation (CDE), Tanzanian Royalty Exploration Corporation (TRE) and Gold Fields Limited (GFI). I may decide to build a physical position in Silver if the spot price reaches under $12.50. A jump up to $15 from $12.50, which I expect by the second half of 2007 will yield a 20% gain.

My price targets for gold is $650-$660 as the downside and $720 in the upside, in the next 1-3 months. I see the downside for silver at $12 and the upside at $15 in the same time frame. Silver tends to follow the price movements of gold and is shaping up to be a better investment in possible percentage gain if a short-term rally in gold and silver materializes.

*Disclaimer: The author currently owns 15,000 shares of CDE purchased at an average price of $4.24, 5000 shares of TRE purchased at an average price of $5.50 and 500 shares of GFI purchased at $16.94.

Value in Intel, Steady Growth Ahead

I caught a recent article on Intel Corporation (INTC) winning back market share from rival Advanced Micro Devices, Inc. (AMD).

Here is a quote taken from the article:

Santa Clara-based Intel gained about 6 percentage points of share in the first three months of the year, finishing the quarter with a commanding 80.5 percent of the worldwide market for desktop, laptop and server processors based on the popular x86 design, according to new data from Mercury Research.

I’ve mentioned the value behind Intel in previous articles and suggested that readers purchase the stock as a long-term holding at under $21. The article above underscores the importance of Intel’s R&D efforts and the results of launching a better line of CPU products over its rival AMD. Some writers have criticized Intel’s continued investment in new microprocessor fabrication technologies and the companies efforts to increase production scale. The company has recently announced an estimated $2.5 billion investment to create a state-of-the-art fabrication plant in China.

I believe the only way Intel can maintain its technological advantage is from continued investment. Intel’s cash, cash equivalents & short-term investments total over $9 Billion. The company’s ROA is 9.79% and ROE is 14.74%. Intel is a cash cow that can continue its current investment scale in new technologies with no short-term risk of going out of business. Intel’s cash position and ability to produce cash is the largest reason why I originally sought the company out as a value investment.

The semiconductor industry is highly cyclical and depending on your view of the industry, it is either in recovery mode and now set to rise to new heights or has grossly over-estimated demand and will soon consolidate. I believe the price of Intel’s shares have been beaten-down unfairly. The company has a superior line-up of products and market position over it’s major rival AMD. In recent weeks there has been talk of AMD having some risk of going-out of business or seeking a buy-out via private equity funds to stay in business. In the short-term, AMD’s financial problems should be viewed a negative event for both companies. In order for AMD to move more CPU products it will likely continue to engage in a price-war with Intel. The price-war inevitably leads to shrinking profit margins for both companies. The likelihood in the medium-term for AMD, is that the company will exhaust its ability to continue absorbing the negative effects of a price-war. Intel on the other hand, with its superior cash position, can afford to draw out a lengthy price-war in order to win market share.

The only medium to long-term risk for Intel investors is to watch out for a vastly superior technological CPU product from a competing company. It is unlikely that the company will ever return to the heydays of the 1980’s and 1990’s due to the proliferation of PC’s. China is one possible avenue for Intel to continue its growth. Intel’s investments in China are likely a long-term strategy that will not yield immediate short-term benefits. Intel investors should simply look forward to a stably growing company able to generate large amount of cash.

*Disclaimer: The author currently owns 2500 shares of INTC purchased at an average price of $20.55.

Value in Coeur d’Alene Mines Corporation


I would wager that over half the people in the general public don’t read annual reports, proxy’s, conference call transcripts or specially issued documents before making an investment decision. It strikes me as counterintuitive that people who consider themselves investors ignore the most basic pieces of publicly available information. I don’t read through these documents in detail, but I will take a look at the table of contents and read through sections of the documents that interest me. 
I believe people are always interested in growth and prospects, before understanding the fundamental balance sheet merits of an investment. After all, as Peter Lynch alluded to in One Up on Wall Street, an exciting growth story is easier to tell over a cocktail party than some discussion over cash flow merits or a staid company with respectable growth.
Investors who heed the advice of people like Peter Lynch will likely form the stories surrounding their investment choices with the “happened”, rather than the “may happen” facts.  
It is with this advice that I have found one of my current favorite value picks, Coeur d’Alene Mines Corporation (CDE).
The Story
Coeur d’Alene is principally a silver miner with minor mining exposure to gold. Silver has taken a backseat to the publicity surrounding the recent rise in gold prices. Silver equities aren’t covered with as much press as gold equities, paving the way for possible investment opportunities that may be overlooked. 
The business of mining is not very exciting: you explore, you dig it up, you store it, you sell it and repeat as needed.  The repeat part of the formula provides a company with future growth. 
The Good
Coeur has strong earnings. Specifically a few things I focus on are Return on Assets and Return on Equity. Coeur’s ROA is 6.09% and ROE is 16.35% for the quarter completed December 31st, 2006. These numbers are respectable in comparison to a principal competitor like Hecla Mining Company (HL) whose ROA is 5.43% and ROE is 35.81% for the same quarter.
Coeur has a low Trailing P/E of 13.07 and Forward P/E (fye 31-Dec-08) of 9.66. Hecla for example has a Trailing P/E of 15.93 and a Forward P/E (fye 31-Dec-08) of 17.23. It’s not uncommon to see Trailing and Forward P/E’s in the 20’s and above for silver miners.
*Coeur has a cash and cash equivalents hoard of $270.67 Million
*Note: I am not using the higher number of $341.05 Million provided by quote services that report a combination of cash and short-term investments. 
Coeur has debt of $180 Million in debt from issuing 1 1/4% Convertible Senior Notes due 2024
A large part of the debt is being used to fund new operations. Coeur announced that its new San Bartolome mine in Potsi, Bolivia is estimated to cost $174 Million in construction. According to the 2006 Annual Report: [Coeur has]…obtained a political risk insurance policy from the Overseas Private Insurance Corporation (“OPIC”) and a private insurer. The combined policies are in the amount of $155 million and covers 85% of any loss arising from expropriation, political violence or currency inconvertibility.
I view this as a positive move by management to cover the potential risk behind a high return investment. Coeur expects to begin full production by early 2008.
I am bullish on silver.  I expect to see silver over $20 if gold reaches above $800. I am expecting to see these targets reached in the next 12-24 months. Coeur estimates the cash cost at San Bartolome in the initial four years to average approximately $4.00 per ounce of silver produced.
The Bad:
Coeur’s shareholders suffer from dilution. In order to raise new funds, Coeur’s management has issued a large number of new shares. The number of shares outstanding is 278.03 Million compared to 120.11 Million for a comparable company like Hecla Mining.
Coeur’s Kensington Gold Project in Alaska has experienced some permitting setbacks. The extent and the degree of the setbacks are to be determined. By the end of 2007, Coeur will have spent nearly $200 Million on the Kensington project. The project has received tremendous local community and government support in Alaska. Depending on your stance about the Kensington project it may present a tremendous liability or a tremendous purchasing opportunity created from a temporary setback.
The company has taken on new debt to fund operations. San Bartolome can be seen as a positive or negative depending on your view of Bolivia. I believe the 85% political risk insurance policy negates much of the political risk involved with Bolivia.
Bolivia may adjust tax policies for Mining companies profits.
The price of silver may go down
My view:
Due to my bullish stance on silver, Coeur’s low P/E, strong cash position, ROE, ROA, and expansion opportunities, I view Coeur as a good long-term investment. Shares of Coeur can currently be bought at under $4. I believe this is an extremely positive entry point. If shares drop below $3.75 I will likely add to my existing position.