August 2009 Archives

Today I went long Exxon Mobil Corporation (XOM). I indicated in a prior article, I had no position. Since that article, I have traded Exxon Mobil long and short.

Exxon has performed poorly this year. On 2 January 2009, the stock was at 81.64, and today it closed at $66.55, down about 18.5%. Oil prices are about $67.22, which is a reasonable and healthy oil price for most integrated oil companies to perform well.

Please note that you can click through the above chart to see a full-sized chart and that the data for 17 August 2009 is not shown.

Of course, I am unsure whether today's market selloff is the beginning of a larger correction or simply random noise. I am less sanguine on the overall economy than most pundits and economists. However, with the Fed running its nuclear powered printing presses at full power, I am fearful of inflation and bullish on commodities. Time will tell if I jumped the gun today by getting long Exxon Mobil too early.

In this past weekend's lead story Quality Counts for Barron's (subscription might be required), Exxon Mobil is highlighted:

The oil giant is the industry's clear leader, with the highest returns, strongest balance sheet, best management and most stable earnings among the "super majors." Exxon shares normally command a sizable premium to those of such peers as Chevron, Royal Dutch Shell (RDS-A) and BP (BP), but that gap has shrunk this year as Exxon shares have fallen 14%.

Exxon doesn't look cheap, trading for 18 times projected 2009 profits of about $4 a share. The stock, however, looks more reasonable based on 2010 earnings. The consensus calls for $6 in earnings next year, but one energy maven tells Barron's that profits could hit $7 merely if futures-market expectations for energy prices pan out. A forward P/E of 10 isn't bad for one of the world's best-run big companies.

I had been thinking about going long Exxon Mobil, and today's broad market selloff seemed to be a good opportunity to establish a long position. Should Exxon Mobil go down further, I might increase my long position.

Disclosure: I am net long with respect to Exxon Mobil Corporation. I am long shares, long puts, and short puts.

I took the photograph titled Great Throw on 12 July 2009 when I went for a bike ride across Prince's Island in downtown Calgary. The young woman has a great arm for throwing amazing spirals. She is good at catching footballs too. If you click on the above photograph, you will taken to my picture at my Flickr account, where you can see more of my pictures.

I will discuss the Pan American Silver Corp. (PAAS) second quarter conference call held on 12 August 2009 by providing the conference call's major themes in point form. In listening to the conference call, I did not place heavy emphasis on detailed financial information. For example, I am not too fussed about such items as noncash foreign exchange losses. Instead, I listened to how the company performed over the last quarter and expected to perform for the duration of the year. For example, I am focused on the company's silver cash cost. Because I believe the company is well managed by seasoned and competent professionals and because of my concern with potential inflation, Pan American Silver remains one of my core holdings.

In addition to transcripts of the company's conference call (see Seeking Alpha for the transcript and company's website transcript (PDF, 76 kb)), I used the company's press release (PDF, 47 kb). The press release is reasonably and well worth reading for a quick snapshot.

General Comments

• New quarterly production record of 5.8 million ounces of silver, a 28% increase year on year;
• Gold is the company's most significant byproduct at 18% of total revenue;
• Consolidated cash cost remains at $5.99 per ounce of silver;
• $23.5 million in operating income;
• Cash flow from operating activities was $32 million or $0.37 per share; and
• Quarterly adjusted net income was $13.5 million or $0.16 per share.

Manantial Espejo, Argentina

• Outperforming projections in large part because of additional gold output;
• Over 1 million ounces of silver at a cash cost of negative $0.93 per ounce, which is the result of about 18,500 ounces of gold production that more than covered all operating costs;
• Although the plant experienced some mechanical problems, it processed over 144,000 tons of ore, which is nearly 80% of plant design capacity; and
• Named Argentine 2009 Mining Company of the Year by the primary Argentina Mining Press and Argentina’s association.

Peru

• Produced slightly greater than 1.9 million ounces of silver, which was slightly ahead of target;
• Cash costs were much higher at $10 per ounce than the expected $8 per ounce;
• High costs were attributable to Doe Run smelter shut down;
• Anticipate producing slightly above 2 million ounces per quarter at our Peruvian operations for the second half of 2009 at approximately $9.50 per ounce; and
• Company awarded 2008 Peruvian Company of the Year from the Peruvian Association of Civil Companies.

Mexico

• Alamo Dorado mine produced 1.4 million ounces of silver at a cash cost of $4.23 per ounce;
• Smelt over 4,000 ounces of gold production that was forecasted at 3,300 ounces;
• Alamo Dorado overcame the five day suspension of operations in May because of the influenza outbreak;
• La Colorada mine produced 835,000 ounces of silver at a cash cost of $7.23 per ounce, 12% below expectation; and
• Expect continued solid performance from both mines.

Bolivia

• Startup of our San Vicente project in Bolivia yielded production of over 616,000 ounces of silver at a cash cost of just over $9 per ounce;
• Projected cash costs to decline to below $7 per ounce in Q3; and
• Mine is operating well and Company looks forward to better results in the near future.

General Comments

• 2009 silver production forecast is 21.5 million ounces, excluding Quiruvilca mine, which is moving toward care and maintenance;
• Cash costs are forecast at $6.00 per ounce of silver;
• 2009 gold production forecast is meet or exceed 85,000 ounces;
• Continue to ramp up San Vicente mine in Argentina; and
• Drill and develop the La Preciousa project, within an hour's drive from Durango, in Mexico.

Questions and Answers

I found only two noteworthy questions and answers.

• Company might engage in acquisitions to keep growth continuing; and
• For the La Preciousa project, a feasibility study might be ready within three years.

My Overall General Impressions

Wrapping up, I am long Pan American Silver because I believe that it is an extremely well managed company. As mentioned in my prior articles, I further believe that there is a strong chance that with central bankers printing money as fast as they can, there will be inflation once the true recovery takes hold. Higher inflation will cause higher commodity prices, including higher silver prices. Put differently, there will be a greater increase of dollars in circulation tomorrow than an increase of gold and silver in existence. And that should bode well for the shareholders of Pan American Silver.

Unless my fundamental outlook changes or Pan American Silver begins disappointing, it will remain a core holding. That said, it is a volatile stock, and those that are able to aggressively trade might wish to pick their opportunities. For example, on 13 August 2009, the day after the earnings release and conference call, Pan American Silver jumped $1.94 or about 10% to $20.74. Moreover, as I write this article, the stock is down $1.93 or about 9.5% to $18.37.

Disclosure: I am long Pan American Silver Corporation shares.

Approaching Downtown is the title of the photograph above, which is hosted at Flickr. I took this picture while biking and approaching downtown on 12 July 2009. The weather was great with temperature in the high 20s, low 30s C, (~85F). If you click on the picture, you will be taken to where you can view a larger version and see even more of my pictures.

Last Saturday and today, I went for long bike rides. Each time, I rode for about 75 kms (~50 mi) through Edworthy Park, Glenmore Park, across Fish Creek Park, Carburn Park, Inglewood Bird Sanctuary, parts of downtown, Calgary Zoo and back to Edworthy Park.

For both rides, the weather was great with temperature in the mid 30s C, (~95F). For the most part, the bike and pedestrian paths were not busy. The busiest locations were in the downtown core and at Edworthy Park.

The circuit takes between four to five hours, depending on how fast you want to go as well as how often and how long you want to break. I am not a speed demon and go at moderate speeds, though I tend to take few breaks.

As mentioned, the route is not busy, except for a few locations. Even then, it is great to people watch. It is a large circular route, so I don’t double back on any paths and I get to see a large portion of the city. And, for a large portion of the circuit, I am traveling through various scenic parks, especially through Glenmore and Fish Creek parks. It is a fun, reasonably quiet, and scenic ride.

If you decide to travel this route, I encourage you to stop frequently in Fish Creek Park to check the maps. It is a large park and it is easy to lose your way. You can always ask people nearby for directions. Last week I took a few wrong turns and explored more of Calgary than I anticipated. That, however, is part of the fun.

Also, make sure you have a bell on your bike and use it. Unless the person ahead of you signals that he or she has heard you, you should assume that the person is wearing an iPod. Slow down and provide lots of room. Watch for dogs, as they often move in an unpredictable fashion. Furthermore, wear sufficient sunscreen to protect yourself.

Even though it was hot both Saturdays, I didn’t drink a lot of water. I brought one water bottle with me and refilled at Fish Creek and Edworthy parks.

A great resource for those who enjoy biking is the Calgary Pathway and Bikeway Map - 2006. The map can be purchased online for two dollars plus an additional dollar for delivery. If this link is broken in future years, try going to the City of Calgary website and then finding the online store. From there, search for paper maps. For the pathway and bike map, according to the website, you can contact Guy Beavers by email or by phone at 403.537.7560.

You can also view the maps online at Calgary eMaps. In addition, I encourage using Google Maps to get a sense of your route. I like having a visual idea of various markers before heading out.

The photograph above of Pretty Woman With Orange Pants And A Big Black Dog was taken while leaving the downtown core and on my way to Edworthy Park. I have stopped at this particular location a few times because it offers a great view of downtown. The pictures are hosted on Flickr, and if you click on the top picture, you will be taken to Flickr where you can see more pictures.