Pullback in precious metals stocks offers opportunities

Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) continues to be a mixed bag. Operations are on track at most mines, other than Chapada; despite the Chapada shortfall, the company says it remains on track to meet its production guidance around 1.3 million ounces. The company is taking steps to reduce its debt, selling a small mine, Mercedes. It is also looking at selling part of its Aqua Rica mine. Exploration, particularly around existing mines, has been promising, while its Argentinean properties could see some advance, given the change in government. If Yamana can deliver, the stock could see a rerating, since on many metrics it is undervalued relative to its peer group. But there always seems some stumble with Yamana. It missed the opportunity to sell its Brazilian assets, announced with fanfare last year. The problems at Chapada, representing a quarter of the company's asset value, were unexpected. We will hold, waiting lower prices and evidence of improving operations and balance sheet.

Short sellers give us a great buying opportunity

Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX) is much the same story, but the last several months have clearly demonstrated the stock's tremendous leverage to higher gold prices, moving from 27 cents at the beginning of the year to a high of over $2 in June. The move was exaggerated by two newsletter recommendations. Disingenuously, one of these letters that pushed it up then turned and recommended shorting the stock, which—partly—led to the stock plunging. This trade might look good on paper for the letter to boast about, but I wonder how it worked in practice for many of its subscribers!

At any event, the stock fell over 50%, to under $1, before today's rally. And the short interest has shot up, from well under 100,000 for most of the past year to a current high of 1.3 million. Remember, these shorts will have to cover, and this will provide both some downside resistance as well as an exaggerated move when the stock starts to recover and the shorts rush for cover.

Vista has a solid balance sheet, with working capital of $33 million, including $27 million in cash, following an early August $17 million equity raise. This provides the company with considerably more time to execute on Mt. Todd, but also allows the company to advance the project. With annual running costs around $6 million, there was no imminent need to raise so much cash, representing 15% dilution. I suspect we will see a feasibility study on Mt. Todd as well as other action advancing the project. And more work will allow the market to give a more realistic valuation on the project in Vista's stock price. The cash also puts the company in a better position to undertake some M&A transaction of its own. Vista has said it is looking but has found nothing yet.

Vista is a buy here; I wouldn't chase the stock, but under $1.05 is a good price.

Solid long-term holding with upside

Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) has seen higher revenue, as expected with high gold and silver prices (offset partly by the lower production as Penasquito, expectedly to be only temporary). Silver Wheaton has a good project pipeline and available resources for future acquisitions. Though cash is only $103 million against debt of about $1.5 billion, the debt is very serviceable and a line of credit is available as needed.

SLW is trading at only a modest discount to industry leader Franco Nevada (just 2% if the reserves for the Canadian tax dispute are eventually used for that purpose). But of course, should Silver Wheaton win the case, there is considerable upside. Given the rally in the stock price, the risk from lower silver prices, and the valuation, we are holding.

IN THE REAL WORLD

The Treasury Department and banking regulators have put out a paper to "dispel certain myths" around new anti-money laundering regulations. They note that 95% of "compliance failures" are resolved without penalties. In theory, much of what they say could be true, but in the real world when banks are told to "assess the risks" of relationships with foreign banks and customers, are instructed to "request additional information" on individual transactions, when banking regulators are breathing down their necks and they watch other banks receive multibillion fines for violations, is it any wonder that more and more banks decide not to do business with certain customers? It hardly matters if a matter is resolved without a fine if the banks have to answer money-laundering charges. Even the IMF and World Bank have complained to the U.S. about the impact the rules are having. This is the story with more and more government by regulator where the plain wording of new rules, whether the Treasury or the SEC or numerous other regulators, tells only a small part of the story.

Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."