Why I Grabbed Gains on Oil Companies & Bought More Gold & Silver Miners

I exited four of my energy positions today, and added two precious metals positions. Here's the skinny on why ...

Watch the Dollar

It sure looks like the US Dollar Index is going lower. It is probably getting hammered by delayed expectations of tapering of the Fed's quantitative easing program, though it may also be reflecting Chinese desire to shift away from dollar-denominated trades to trades in other currencies.

(Updated chart)

Support at 79 needs to hold. If not then we will likely see a test of 78.70, and then, well, it's toes-dangling-over-the-abyss time for the once-mighty greenback.

I think 79 will draw the dollar like a magnet, and after that, we'll see.

For a while, oil was the anti-dollar. In fact, for a while, oil was more the anti-dollar than gold.  But in the very short term, gold has gone back to being the anti-dollar, while oil is joining the dollar in its slide lower. In the last 10 trading days, the dollar is down 1.6%, while oil is down 5.7%.

Why is this? It seems to be simple supply and demand.  

• The Energy Information Administration reported Wednesday that crude stockpiles rose 5.2 million barrels for the week ended Oct. 18.
• This was higher than expectations of 3 million barrels. In fact, crude oil inventories have risen more than expected for five weeks in a row, for a total of 24.1 million barrels.
• The latest supply climb lifts total crude stockpiles to within 20 million barrels of the record highs the market saw earlier in the year.

So, since oil is under pressure, I decided to exit four of my energy positions that were getting whacked today. I sold Rex Energy Corp. (REXX) for a 0.5% gain, PetroChina (PTR) for a 0.3% loss, SPDR S&P Oil & Gas Equipment & Services (XES) for a 1% gain, and Devon Energy (DVN) for a 6.8% gain.

These aren't the big gains I had in mind when I added these positions, but with oil going lower, it seems the wiser choice. And I still have my three strongest energy positions -- EEP, PKD and TAN.

I can always add more energy positions when oil finds new support.

Gold Is The Anti-Dollar Again

Meanwhile, gold looks better and better. It's not giving back much of yesterday's gain.

(Updated chart)

So, I decided to add a gold miner and a silver miner ETF.

First, Primero Mining ...

(Updated chart)

My subscribers at Weiss had the opportunity to make money on Primero a few times. I still like the story. Primero is a miner working in Mexico. It has a market cap of $660 million.  It trades at a slight discount to book value, but probably not for long.  

Primero has been increasing production at its flagship San Dimas mine, which has more than 100 mineralized gold-silver veins. Production at San Dimas rose 9% in 2012, and should hit ~130,000 gold equivalent ounces this year. The company stated that it expects its full-year all-in sustaining costs to average $1,050-$1,150 per ounce. Continued expansion of the mine is projected to bring production up to ~165,000 ounces by 2014.

Primero also own 70% of another project, Cerro del Gallo, in Guanajuato State. Goldcorp owns the remaining 30%. I've been to mines in Guanajuato; that area has a rich mining tradition and the government is mining friendly. Cerro del Gallo should start production in 2015. 2016 will be its first full year of production, and its targeted production is 60,000 ounces a year for the first year.

Primero has a little over 600,000 ounces in reserves and a million and half ounces in resources. The company says it expects to convert 90% of those resources to reserves. The company is spending money on exploration, something that other companies are putting off these days.

The company has $32 million in debt, due by the end of 2015, and it looks payable. Also, Primero received a favorable tax ruling from the Mexican government: Now, Primero no longer has to pay taxes based on the spot price of silver that they sell to Silver Wheaton. Silver Wheaton buys silver produced at San Dimas at a price of $3.90 per ounce. In 2012, Silver Wheaton bought 5.9 million ounces of silver from San Dimas.

When it bought the mine, Primero assumed the obligation to sell Silver Wheaton the first 3.5 million ounces of payable silver produced per year plus 50% of any excess at $4.04 per ounce (plus 1% inflation) until August 5, 2014. 

After that, Primero will sell Silver Wheaton the first 6 million ounces of payable silver produced per year plus 50% of any excess at $4.20 (plus 1% inflation) per ounce.

If you don't like Primero's side of that arrangement, you can always buy Silver Wheaton instead (and I might).

I like Primero, and today's pullback seemed like a good opportunity to add it. 

My other pick was Global X Silver Miners ETF (SIL) ...

(Updated chart)

SIL gives me exposure to a basket of companies across the silver mining industry. It tested its downtrend yesterday and is pulling back today. I think the US dollar is going to fall, silver and gold will rise, and SIL and PPP will rise with them.

To be sure, my entire market thesis could be wrong. Or maybe just a part of it will be wrong.  But when I go shopping in precious metals, I'm buying great companies at big discounts.  It helps me sleep better at night.

These are not official recommendations. I am not your investment adviser. You should not buy something just because some guy on the Internet likes it.  Do what is best for your own investing purposes. And you have at least until tomorrow morning to do your due diligence on anything I mentioned here.

Oil & Gas -- The Next Bakken?

On September 24, a friend forwarded an article to me, an article written by John Mauldin, but it was really a promotion for Casey Research.

And here's where some of you roll your eyes and say, "Oh, here we go." 

 Shaddup!  And don't paint with too broad a brush. Casey's Jeff Clark is always a good read, for example. I value his opinion. 

Some of the other Casey guys, well ...

Anyway, this article was titled: "A way to participate in the NEXT Bakken?" And a snippet of it reads ...

 " ... entrepreneurs armed with breakthrough drilling technologies solved the geological puzzle of the Bakken's "tight rock," and in so doing unlocked billions of barrels of oil.
As you can imagine, in the process a lot of folks have made a lot of money. Which brings me to my reason for writing.
The energy team working for my friends at Casey Research firmly believe they have identified a relatively unknown company sitting on top of what could be the "Next Bakken"-a massive oil formation with every bit as much potential as the original."

There's more, but you get the gist.

Since I write about energy and the Bakken, my friend wanted my opinion. 

Here's what I wrote to her ...

I can't know for sure, but dollars will get you chocolate-glazed donuts that Mr. Maudlin is talking about the Illinois Basin. Why? Because it's the only American oil basis without a horizontal oil play (yet). And it sits smack dab over the New Albany Shale. It looks very similar to the Bakken, and it’s almost in the middle of the country.

Here's a nice chart showing the Illinois Basin's extent.

But what company would Mr. Maudlin and the Casey Research Team be talking about, eh? 

If your targets are micro-caps, the obvious choice would be Strata-X (SXE on the TSX-V). It has a market cap of $60 million -- very small, but do-able. And it has 123.9 million shares outstanding. Insiders own 22% of the company (usually the more insider ownership the better for these small companies, because the stock is in "strong hands"). Company chairman Ron Prefontaine has a track record of success -- he sold his last two companies for a combined $4 billion.

The unfortunate thing is that it's already getting some buzz disproportionate to its small size. That makes its chart look like this ...(updated chart)

Holy stock-spike, Batman, look at that chart in the last week! Why, it's almost as if someone been buying the stock in advance of Mr. Mauldin's article. 

Whaaaaaa?

OR, it could be the fact that Strata has 48,000 acres in the Illinois Basin. They paid 1/5 the price that acreage is going for now.
Strata is drilling their first well in Illinois right now.  Speculators expect them to hit paydirt. "And then," the sharp-eyed folks will tell you, confidentially, "this stock could easily double!" Except it already doubled. Damn ... damn, damn, damn.

But wait a minute.  Strata could more than double, if Rex Energy is a guide.

Who?

Rex Energy is the OTHER company working in the Illinois Basin.  It only has 33,000 acres compared to Strata's 48,000. BUT it has a market cap of $1.2 billion, only 52.56 million shares outstanding, and its earnings should climb 80% over the next year.  Oh, and the company just drilled its first horizontal well in the Illinois. That well, owned by Rex Energy has an IP30 (the first 30 days' initial production) of 222 barrels of oil per day. That well produced a peak IP of 367 bpd. The day that news came out, Rexx's stock jumped over $1 a share.

Oh, and Rex is listed on the Nasdaq, so it's much easier to buy.
(updated chart)

Yeah, the trend in Rex is pretty obvious.

Rex is very busy in the Utica shale, and other plays in the Northeast,including "super-rich" Marcellus and Devonian plays. Rex has grown its reserve base to over 100 MMboe and its liquids portfolio makes up 40% of that. Rex is considered a liquids producer, not a gas producer. In Q2, it produced a record production of oil and natural gas liquids (NGLs).

All this helped Rex beat earnings estimates (by a penny) in the most recent quarter. 
There are other Illinois Basin plays. But I'd avoid the OTC stocks that no one should waste their time with. Ha, look at me say that and they will turn out to be winners. 

Personally, I think Rex Energy is the one I would go with.  I also like Gastar (GST). I would buy either one on a pullback.

These are not official recommendations.  I'm not your investment advisor. You are in charge of your own investing destiny.

UPDATE:  Tommy alerts me that the stock Mauldin was talking about was PRD Energy (PRD on the TSX-V), which ... well, you might want to think hard before you buy it at present prices.  I still like REXX.