• Kashyap Sriram

Monthly rollup | October 2021

Stocks Mentioned: Vizsla Silver (VZLA.V), Sabina Gold & Silver (SBB.TO), Skeena Resources (SKE.TO), Marathon Gold (MOZ.TO), Integra Gold (ITRG), Aurion Resources (AU.V), Discovery Silver (DSV.V), Marathon Digital Holdings (MARA), Bitfarms Ltd (BITF.TO), Euronav NV (EURN), Frontline Ltd (FRO), DHT Holdings (DHT), International Seaways (INSW), Hafnia (HAFNI)

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October 01 2021

The Weakness in Fundamental Analysis

My wife and I stopped at a supermarket and stocked up on everything we wanted, had dinner at an Asian fine dining place where the food was flawless, and stopped by at a patisserie and got everything we wanted. That's when it hit me that my experience out here in the third world stands in stark contrast to the stories I'm hearing of shortages and price inflation in the US. What gives? Is India in fundamentally better shape than the US of today?

Of course not. The answer lies in thinking through the seen and the unseen. In my city, the population has thinned out as the marginal workers who could no longer afford the cost of living have moved back to their hometowns. Demand has absolutely collapsed. A city which previously housed 11.2 million people now houses say 8 million or lesser. Naturally, it feels as though there's an abundance of resources, when in reality, people have actually become poorer and lowered their standard of living. You just don't see them on the streets because they're no longer there.

It's the same case in the US. The after-effect of the government reaction to the plandemic is shortage of goods as containerships are backed up, and shortage of workers as universal basic income and immigration control has destroyed the supply of low-skilled labour.

In the US, government intervention is showing up directly in price inflation and shortages. In India, it's showing up as a surplus of goods and stable prices in the cities.

I bring this up because there's a lesson in this for fundamentals based trading. I could have stopped my narrative anywhere in the first few paragraphs and arrived at a different fundamentals-based view. I could go on with the narrative and perhaps form a different fundamentals-based view altogether.

And that's really the weakness of fundamental analysis. It cannot account for human action, which often ends up changing the fundamentals. A fundamentals based view must incorporate human action in order to correct for this weakness.

In the real world, that's not easy. Fortunately in the world of trading, it is really, really easy. What incorporates human action and tells us how people have actually reacted to what they believe to be the fundamentals? Price and volume. It's really that simple. If you consider yourself a fundamentals based investor but refuse to acknowledge price and volume (i.e. human action), you're really only constructing abstract hypotheses unconnected to reality.

Which is the problem I see with most gold bulls today.

I absolutely think gold should do great in the current environment. But it hasn't. Human action, as expressed by the price and volume action, has shown that the market actually doesn't agree with the gold bulls on the fundamentals. From 2012-18, the market disagreed with the gold bulls on where the price of gold should be. That's just how markets are.

Some market gurus consider themselves geniuses because they have a fundamentals based view which flies in the face of the price

action. They know, with absolute certainty, that

their view is right and the market is wrong. They double down on bad calls. They make themselves miserable by piling on losses, seek solace in the losses of like-minded masochists, and become bitter because fellow human beings who view the world differently are making money while they aren't. How can that idiot Robinhooder make money while I, the know-all market wizard who predicted everything, am losing money?

Yes, the markets are manipulated all the time. By human action. It's evident in the price and volume action. If human action runs counter to one's pet fundamental theory, is the theory wrong or is human action? It doesn't matter. The right question to ask is - if my fundamental theory isn't helping me make money, do I stick with it or alter the theory to help me make money?

Fundamentals get a bad rap because the practitioners never alter their pet theory. Those pet theories aren't about fundamentals at all, and should be recognized as such. The market gurus who boast about their contrarian predictions making 1000% gains aren't actually making those kind of gains in their portfolio. If they were, they'd be billionaires. And they would definitely not be selling their predictions.

Fundamentals isn't about predictions or pet theories. It's about looking at the world and forming an opinion (or theory, since that sounds better). Trading is figuring out how best to use those theories as a basis for making money.

I have a fundamental view on every sector and security I look at. It's important to my style of trading to have that view. However, I do recognize the inherent weakness of using fundamentals. When the price action runs counter to my theory, I alter it. I'll be wrong often - but I'll make money. I won't be wedded to one side of the market on a single asset class until death (or bankruptcy) do us apart.

Below, I express my fundamental views on gold, uranium, crypto and shipping.


I have to admit I'm stumped. The GDXJ is the absolute worst performer ytd, down 28.2%. Even Chinese Tech (CQQQ) has fared better, at down 20%. The only positive factor is that gold has not yet taken out its March low of $1683.

I wouldn't buy the GDX or GDXJ at these levels. Bottom fishing is a luxury afterall. However, I do have an allocation to the gold explorers. In a sense, the explorers move with the price of gold, especially when sentiment gets extreme, but overall they march to their own fundamentals. And quite a few of them now present a compelling value proposition, just as Vancouver IR get back to their desks and gear up to clog the newswires with a flurry of press releases highlighting the positive developments at their companies. We're going to see a lot of assay results, announcements on progress in economic studies, news of financings and famous investors buying in, large cap miners taking stakes or acquiring juniors, etc. As long as sentiment doesn't remain extreme forever, the exploration sector should rebound with the end of the summer doldrums.

My favourites among the gold/silver explorers, in that order: Vizsla Silver (VZLA.V), Sabina Gold & Silver (SBB.TO), Skeena Resources (SKE.TO), Marathon Gold (MOZ.TO), Integra Gold (ITRG), Aurion Resources (AU.V) and Discovery Silver (DSV.V).

Fundamentals, in brief:

VZLA.V - The company is exploring the Panuco silver district in the state of Sinaloa in Mexico. The company has completed 75,000 meters of drilling, is cashed up to drill another 100,000 meters and deliver a maiden mineral resource estimate in Q1 2022. This is a very successful drill play which has already delivered tremendous growth and is poised to deliver more.

SBB.TO - Sabina owns the Back River project in the Nunavut, Canada. The project is in between feasibility and development. Short of putting up a For Sale sign in front of the company's HQ, Sabina's management has done everything necessary to attract a takeover bid. The only problem is nobody seems willing to buy this project, given the remote location and lack of infrastructure. The stock is most influenced by sentiment on whether or not the company will get a bid, rather than any other fundamentals. At C$1.45, I think it's good for a pop. Whether Back River becomes a mine remains in question, but buying at current prices should make money.

SKE.TO - The company has two properties in British Columbia, Snip and Eskay Creek. I have been following the story since the early days and I love the growth they have already shown. The story now is all about Eskay Creek, which has a 2021 PFS highlighting an after-tax NPV of C$1.4 billion and IRR of 56% using $1550 gold and $22 silver. The initial capex of C$488 million is quite manageable, considering the company's market cap of nearly C$800 million. This team has shown that it can deliver, and I expect them to continue to do so. Fundamentally, I see this as a low-risk trade.

MOZ.TO - Just buy, wait for a takeover offer. Any week now...

ITRG - This is among my riskier trades. The company owns a low-grade deposit in Idaho. I like it because the 2019 PEA on its flagship asset highlights an NPV of US$534 million and IRR of 60% using a gold price of $1600. Drilling completed since then has demonstrated the potential for higher-grade pockets that should improve the overall grades, and thus the project economics. The company is also proving up a couple of other projects. The company is currently in the penalty box because it committed the sin of announcing a financing at a discount to market prices. The dilution is over, and the downside from here should be limited. However, management can continue to surprise me by figuring out new ways to destroy shareholder value, so I'd consider it high risk, even on top of the risks involved in owning a small cap explorer.

AU.V - Every so often I become roadkill make a contrarian bet. Aurion is one such bet. The company has a lot of prospective land in Finland, and made waves in early 2017 when it announced eye-popping grades from grab samples. The company's neighbour Rupert Resources (RUP.V) went from nowhere to being worth over a billion dollars (Canadian) last year, on proving up its Ikkari property. Ikkari shares a property boundary with Aurion's Kutuvuoma. Aurion has already shown there may be some mineralization on its property. A smart promoter would have looked to ride Rupert's coattails. Even if nothing came of it eventually, at least the company could have drilled a few holes and promoted its closeness to Rupert. They did the opposite - reporting crappy results from properties nowhere close to Ikkari, and doing no drilling near Ikkari. 'Cos covid. 'Cos no helicopters available. The Chairman mentions all their excuses in a shareholder letter. Still, I'm hopeful that this company will one day get its act together and surprise the market. Alternatively, if Rupert thinks there's gold on their property, it buys them out or at least does an earn-in deal which revalues these shares. This is the kind of long shot I like to buy cheap. If fundamentals change, this is an easy 2-3x.

DSV.V - The company owns the Cordero silver deposit in Chihuahua, Mexico. This is a Tier I project with a 29 year mine life, according to the 2018 PEA. Shares move with silver prices. With silver hitting 52-week lows, I consider this a bottom fish. I like it because it's cheap and the fundamentals for their project are great (and improving). Bottom fishing is an expensive pastime, but I'm happy to indulge when it comes to having a single bottom-fish pick in my entire portfolio.


I've said everything I wanted to say on uranium in my article Sidestepping the Uranium Bubble. Nothing that has happened since then changes my view. I wrote the article on 9/14, and the next day marked the top. I didn't "predict" that. I just closed my last remaining long position and sidestepped the rest of the rally. I wouldn't go short now, since I expect a lot of news-driven sideways chop. The long-term fundamentals will become clear in a month or two when the Sprott Physical Uranium Trust sputters and runs out of fresh capital. Or if there's a regulatory action like I expect. Until the picture becomes clearer, I'd simply stay out of this sector.


China has 'banned bitcoin' several times in the last decade. It's part of the regular charade, creating panic and liquidity so the whales can scoop up more bitcoin without moving the price around. What this ban has done is create an opportunity for North American crypto miners. They get to buy discounted Chinese mining equipment and become a bigger % of the global hash rate. The drop in difficulty also means they are mining more bitcoin.

I like the bitcoin miners overall, and have an allocation to Marathon Digital Holdings (MARA) and Bitfarms (BITF).

MARA - The biggest US-listed bitcoin miner. I like buying the biggest name in a space simply because that's where the liquidity flows to first.

BITF - I like this company for its growth and valuation. The company's hash rate (computing power, which influences the number of bitcoin mined and hence the topline) is set to grow from 1.4 exahash/second currently, to 3 exahash/sec by Q1 2022 and 8 exahash/sec by year-end 2022. From January to August 2021, the company produced 2102 bitcoin. The company is currently mining approx. 10 bitcoin per day. At that run rate, without accounting for growth in hashpower, the company should end the year with production of 3302 bitcoin. Using an average annual bitcoin price of $45k, the company's 2021 revenue forecast is $148.6 million. Assuming 25% net margin, the company is trading at a PE multiple of 22.5. These numbers are just for illustration - the company isn't actually going to report that kind of net income or trade at a 22.5 PE. The growth in capex as they add miners and data centers will see a commensurate increase in depreciation, operating costs, and added G&A. Costs will also rise as they expand from their current operations in Quebec to a new data center in Paraguay. The price-to-sales ratio provides a better metric to value a growing company. At the $45k annual average bitcoin price, the company's P/S ratio is 5.6x. Changing the annual average price to $60k lowers the P/S ratio to 4.2x. Add in expected growth to the 2022 topline, and you can arrive at an even lower P/S multiple. Everything depends on the assumptions. If Quebec bans bitcoin mining, the company's probably not going to be worth more than the price they can get for their equipment, which in turn will depend on whether other Canadian provinces or the US ban mining as well. Intrinsic value is a misnomer, there's no such thing.

There's another stock I like in the crypto space - Voyager Digital (VOYG.TO, VYGVF). Founded by E-trade veterans, the company is attempting to attract crypto investors to trade and hold crypto through its smartphone app. You can earn a yield simply by holding tokens on their platform. Check out their rewards program. I have no idea if they will be successful and what the right valuation is. I believe in the business model and in management and have taken a small position to reflect that. I believe the price decline is influenced by the news on the SEC's tiff with Coinbase. If so, I expect it to blow over as crypto regulations get hammered down and the industry gets back to business as usual. If not the stock, their rewards program is definitely worth checking out.


I have covered ZIM and CMRE earlier (see five trades for AAO). If you buy them or hold them already, everything now boils down to risk management.

Something interesting happened in the shipping space last week - the oil tankers started to turn up.

From ShipBrief: "Since the start of September, four VLCCs, three Suezmaxes, and two Aframaxes have been sent to the beaches, removing over 1.5 million DWT of capacity - making it the busiest month in a long, long time."

The fundamentals for this sub-sector of shipping have been bullish since IMO 2020 regulations came into force last year. However, the price action hasn't been particularly bullish since April 2020, when shares peaked in response to the news on tankers being used for storing excess crude oil inventory. With vessel values rising, scrapping picking up, and the overall shipping sector getting some love, perhaps now is the time the oil tankers have their day in the sun. I currently own EURN, FRO, DHT, INSW, Hafnia (Oslo) and ASC and am looking to increase my allocation to the sub-sector.

EURN - Biggest listed crude carrier, with a fleet of 2 V-Plus vessels, 48 VLCCs, 30 Suezmax and 2 FSO vessels (50% owned).

FRO - Second biggest listed crude carrier, with a fleet of 17 VLCCs, 29 Suezmax, and 22 LR2/Aframax. Management is considered to be the best in the industry. Hemen Holdings is a controlling shareholder, but that's seen as a good thing.

DHT - Fleet consists exclusively of VLCCs, which means this company is poised to really benefit from a recovery in demand for long-haul crude transport. The company owns 26 VLCCs with an average age of 6 years. Consistent history of profitability; profitable every year since 2014. That's a track record that really appeals to me, given that a lot of these stocks used to be value traps ever since shipping peaked early in the last decade.

INSW - The company used to be a dog until it acquired Diamond S Shipping earlier this year. Their fleet of 102 vessels is a mix of both crude and product tankers. I am not bullish on product tankers per se but the valuation of this stock is compelling (0.6x NAV according to a shipping analyst I follow) and the break above $17.19 triggered a technical buy signal. I would consider this among the riskier bets in this space.

Hafnia (Oslo) - The company's primary business is owning and operating product tankers. The company owns 98 vessels and manages 184 vessels through its commercial pool. Fundamentally, I am not very bullish on the core business but the valuation is again quite compelling.

ASC - This is a small-cap with unique fundamentals. The company is in the tanker space, but it also transports chemicals and vegetable oils in addition to refined products. From 2017 to Q2 2021, the company reported a cumulative net loss of $3.05 per share. I don't expect a sudden turnaround to profitability. This is primarily an asset play.

Vessel values are rising because of backlogs at shipyards and increase in steel prices. The company calculates that the depreciated replacement value of its vessels amounts to $10.88/share. Depreciated Replacement Value ("DRV") is based on estimated resale price for a newbuild vessel

depreciated for the age of each vessel (assuming an estimated useful life of 25 years on a straight-line basis and assuming a residual scrap value of $300 per tonne which is in line with Ardmore's depreciation policy). The company's estimates of DRV assume that its vessels are all in good and seaworthy condition without the need for repair and, if inspected, that they would be certified in class without notations of any kind.

Vessel prices are currently higher than the numbers used in this illustration. The technical entry for this trade is a buy stop at $4. I think it'll get there very soon.

Other stocks worth a look in the tanker space: NAT, TNK and STNG. Each has its own set of problems, which makes them even more highly levered to a recovery. I would trade these names but not look to own them for any substantial duration.

I'll update on any of the stocks I mentioned here in the live Telegram group if there's any significant change in fundamentals. I'll also maintain coverage in the monthly AAO newsletter.

Other Notes

The 'Five Trades for AAO' are all about risk management. I don't see the need to add anything further on them.

The unusually cold winter this year is great for nat gas and heating oil. We may even see demand for coal increase to make up for the nat gas shortfall. Refinery stocks like VLO, which I covered in the 'Five Trades for AAO' report, should benefit as well.

I don't have any recommendation to play this trend, although it does make it more likely that Tellurian (TELL) will obtain project financing for the Driftwood LNG export terminal. Exporting LNG is 'greener' than flaring nat gas at the wellhead. TELL appears to be breaking out and may be worth a look, but I don't know enough about the fundamentals to comment.

Update on Open Trades

Short NFG.V - NFG went up 13.6% on Friday on news that the company is seeking a New York listing. That should make it easier to short. Shares will list on the NYSE as NFGC on the 29th of this month. I outlined my rationale for this trade in the June issue and continue to maintain the short recommendation. I'd watch for the pop on the first trading day in the NYSE to enter a new position.

Short CACC - I recommended entry on 9/15 in the live group. Shares closed at $601.75 on that day and will mark my official entry.

Short REMX (closed) - Stopped out at $115 on 8/30.

That's it for now. Happy trading!

October 05 2021

ZIM and DAC took a huge hit yesterday in response to China FUD on container rates. We saw the same thing two weeks ago with the dry bulkers on Evergrande news. Valuations are still attractive but I see more upside in the oil tankers where price action is bullish.

October 26 2021

I just got back from a trip and I'm moving house so haven't been looking at markets in a while. Yesterday, Aurion Resources (see Oct 1 newsletter) went up 31.6% on news that JV partner B2Gold's drilling intersected decent-grade gold over long widths, similar to those reported by neighbour Rupert Resources. The company did manage to surprise the market, which was my reasoning for adding it to the gold exploration list. There's no guarantee this success will continue (the company has a track record of screwing up a good thing), but IF things are different this time, we're headed towards a quick double or triple.

October 30 2021

This content was originally published as part of Against All Odds Research.