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Endeavour Silver Corp. Message Board

  • TonyTSE_99 TonyTSE_99 May 23, 2012 8:19 PM Flag

    Metals down - Miners UP! - my take on it.

    OK, I figured out what's going on (thanks to Norcini on the KWN blog).

    The hedge fund play (long metals - short miners) is falling apart - thanks to good management at profitable miners (Thank You Bradford Cooke!)

    As most of us here know, the play goes like this. Take a spread position : Long Metal, Short mining shares. If/When the metals prices go down, then the shares go down even more. Close out the short position (take profits), and use the profits to buy metals on the cheap. When the price of metals goes up, then short the shares again. Rinse and repeat. In this way, you can acquire more metal over time.

    But this ignores the fact that mining companies have an active (read intelligent) management - who makes profits (which accumulate over time, even with volitive metal prices, as long as the prices are above break even), and re-invest those profits back into the company.

    It is only natural for management to spend profits on infrastructure, increasing production, efficiencies, and acquiring metal in the ground at dirt cheap prices. In this way, they lower the cost of mining, and make more profits.

    EXK is best of the breed. They've exceeded expectations (0.22 EPS vs 0.16 expected) - and decided to spend their money in bank in the wisest manor possible - increasing production (up 19% in silver, and 26% in gold), and acquiring new property.

    As a result, the hedges are finding themselves caught out in the latest round. Metals have been pushed down, but the miners (due to profits, cash in the bank, production increases, better than expected earnings, etc.) are doing much better. As a result, the hedges have to SELL their long metal position, and CLOSE OUT their short miners position (lest they be exposed should a rally occur).

    Finally, with the hedges selling metal, we're seeing China take the other side of the trade (which also reduces their dollar exposure).

    So Thank you Bradford Cooke (and all the other good management at silver miners)!


    PS: If you think it could be something else, let me know. :D

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2.74+0.11(+4.18%)Jan 30 4:03 PMEST

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