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The danger in holding shares of a single mine company was illustrated by Victoria Gold ($VGCX.TO) yesterday, when the stock plunged 80% with no opportunity for a stop loss to kick in. Due to the trading halt, it was impossible to get out. The green shaded portion on this chart shows where I'm still long.
The company reported a heap leach incident, and the market expected the worst. Recall back in February when SSR Mining (SSRM) fell over 50% in a day on similar news.
Except, the SSRM issue resulted in loss of life. 9 mine personnel are dead, with the bodies of 4 of them having been recovered so far. The Turkish government has opened a criminal investigation and detained company employees, with intent to prosecute.
Victoria Gold's case looks very different, thus far. Here's the full text of the press release announcing the heap leach pad incident:
"Victoria Gold Corp. (TSX-VGCX) (“Victoria” or the “Company”) announces that, this morning, the heap leach pad (“HLP”) at the Eagle Gold Mine in Yukon experienced a failure. Operations are temporarily suspended while the site operations team along with management continue to assess the situation and gather information. At this early stage, it can be confirmed that there has been some damage to infrastructure and a portion of the failure has left containment. There have been no injuries to personnel associated with the incident. The Company will provide further information as it becomes available."
Is the market overreacting?
Is the company downplaying?
Is the company being honest and they have yet to comprehend the full extent of the damage?
Will this mine be shut down forever?
As investors, it is not necessary to have an answer to these questions. The only relevant question is: What has the market priced in?
Victoria ended the day at a C$92 million market cap. No doubt investors expect this to be a serious, long-term problem for the company. According to a mining.com article, satellite images taken before and after the incident confirm this is a massive landslide.
“Judging by the satellite image, the landslide is large – about 1,430 metres from crown to toe (along the landslide track) and a maximum of about 370 metres wide,” -blogger Dave Petley says in a posting that compares before and after satellite photos.
Everyone has already priced in bankruptcy, and the stock is trading like a call option. Given the nature of the move, my stop loss didn't work to protect me. What did work was position sizing. This was a high conviction top 6 position for me, accounting for 4.3% of my stock portfolio at cost (NAV was higher given open profits). I'm down 78% on this position, which was a winner - up ~18% - right up to the announcement.
If this is the end for this company, my max loss is 4.3% of my portfolio (on a cost basis, I'm not counting the open profits given back. Offtopic: when a trade is open, that's always a possibility, which is why I prefer banking my gains when I need cash for expenses and never borrow against assets). The sizing was deliberate, a reflection of my 9 years of experience in trading mining stocks. These hits come along more often than you'd think.
At this point, there's no point in selling. Let it play out. It was different in the case of Amplify Energy (AMPY). My stop loss was able to kick in because there was no gap down.
I'd not suggest averaging down on Victoria, since the stock could very well end up being worth zero. I know several mining investors who fell in love with a stock called Pure Gold Mining and rode it all the way to zero. My ex-boss at TDV rode Nautilus Minerals all the way down to zero, averaging down over several years. I never fall in love with a story because I've learnt from the experience of others who do. Long-time readers know this - I was long two of the failed US banks, Silvergate Capital ($SI) and Silicon Valley Bank ($SIVB), and got out of both of them (SI at a loss, SIVB at a gain).
Never fall in love with a stock.
My recommendation now is to just hold. That said, I didn't follow my own recommendation. I YOLOd shares in a separate account at C$1.27 yesterday. I can tell myself I didn't average down, that this is a separate trade. Worst case scenario, I threw very little good money after bad, and made myself feel better in the process. Handling emotions is important as a discretionary trader.
I will update more on this situation as it evolves. If you're following my trades, I recommend subscribing to the paid newsletter while it is still priced at US$1500/year. The price will go up once I officially launch.
Good Trading!
Kashyap