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Weekly rollup | June 20-26 2022

Stocks Mentioned: Chesapeake Energy (CHK), Dorian LPG (LPG), Champion Iron (CIA.TO, CIA.AX), Seanergy Maritime Holdings (SHIP), Lundin Gold (LUG.TO), Ecopetrol (EC), iShares MSCI Colombia ETF (ICOL), Peru ETF (EPU), Grindrod Shipping (GRIN), EuroDry (EDRY), Alexco (AXU), Lundin Gold (LUG.TO), Fortuna Silver (FSM), Roxgold (ROXG.TO), Kinross (KGC), Great Bear Resources (GBR.V), StealthGas (GASS), Antero Resources (AR), Cheniere Energy (LNG), Tellurian (TELL), Weyerhaeuser (WY)

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June 20 2022

Natural gas is at $6.727 (July contract), below the 20 week EMA. The volatility has gotten so crazy over the past year that even the ATR indicator has gone parabolic. When the moves are of this magnitude, the fundamentals of supply and demand for nat gas are no longer in the driver's seat. What matters now is how traders are positioned. A look at the COT data shows commercials are heavily net long, which I consider an indication that we continue to be in a long-term bull market. Over the weekend, I also read that Australia has suspended its electricity wholesale spot market after acknowledging that it had become impossible to operate the spot market while securing reliable electricity for its consumers. If I had to take a one year view of all things energy, I'd say we go much higher. However, one year views and five years views are of no use in trading. All that matters is the weekly and monthly P&L (daily is too short a timeframe for me).

A move below 6.4 and nat gas will breach the 100 DMA. I think that's probable. Keep in mind that the Freeport LNG terminal fire means there's now an abundance of nat gas in the US which has to move through the domestic market instead of being exported as LNG to Europe. Dutch TTF prices can continue to soar while NG continues to decline. As for TCE rates for the LNG carriers, it's a toss up. Europe needs to import more LNG from other sources to make up for lost US supply, but TCE rates can continue to decline until cargoes are fixed.

The mixed short-term fundamentals, along with the crazy downside volatility, tells me it's time to trim my exposure to LNG/LPG and await events. Why trim? I still believe TELL, BWLPG.OL and LPG offer tremendous value at current prices, but I can't justify an 8.4% allocation knowing the volatility is getting crazy and stops are being hit. Alternatively, I could hedge my exposure by shorting Chesapeake Energy (CHK). I'd pick CHK over a stalwart like EQT or even AR since the company recently emerged from bankruptcy and I consider it a narrative driven stock. I'm not keen on that idea since I'd rather just free up capital by trimming my LNG longs and watch for other opportunities.

The main opportunity I'm looking at now is picking up Champion Iron (CIA.TO, CIA.AX) dirt cheap. Plunging iron ore prices in China has sent the stock into freefall, down 11.44% in Australia today. Between holding through a decline in nat gas and iron ore, I'd favor iron ore. Perhaps even use the opportunity to allocate more to dry bulk, especially a capesize pure-play like Seanergy Maritime Holdings (SHIP) which I've been watching for a while but avoiding since I consider it a value trap. Recent management moves (they offloaded an old vessel onto a new public listed co) add confirmation to my notion it's a value trap, but it would be a good short term trade if I can get in at/around the bottom in iron ore prices.

These are all just ideas for now. With US closed today, I'm just watching and waiting.

Nat gas COT data. Source here

Iron ore. Can natty do the same? That's my worry and reason for trimming exposure.

Am I nervous about owning Lundin Gold (LUG.TO)? Not really. Ecuador is still okay for now, but the rising risks in South America are the reason I'm not invested in gold explorers in these countries.

June 21 2022

While Ecopetrol (EC) is down 8.3% pre-open on this news, the MSCI Colombia ETF (ICOL) is only down 1.26% pre-open. They're both attractive short candidates, and should open below the 100 week MA today if the pre-open is any indication. As tempting as the idea is, the news is already in the market so this is a scalp trade for today at best. Also something to keep in mind, the Peru ETF (EPU) bottomed a couple of months after the election and rallied from a low of $23.88 (week beginning 8/16/2021) to $38.13 in April 2022. These trades don't always work as they are supposed to. If I can get a good entry, I'd short ICOL or EC, but I wouldn't put on a swing trade today.

Exited Grindrod Shipping (GRIN) at $19.25 pre-open. Based on 1/24 entry at $14.54 and including the quarterly dividends of $0.72 and $0.47, that's a gain of 40.6% in a little under 6 months.

The reason? Iron ore prices and anecdotal evidence of plunging scrap steel prices. GRIN actually owns smaller vessels which should be less affected by iron ore and steel demand (as compared to Capesizes), but deteriorating fundamentals, coupled with the Breakwave Dry Bulk Shipping ETF (BDRY), which tracks dry bulk rate futures, down 11.1% pre-open, firmly below the 100 week MA to hit a 14-month low made me decide to exit GRIN. While smaller vessels benefit more from an uptick in rates, the inverse is also true. The Q1 EPS of $1.52 is good, but not great. Q2 results should be worse. Valuations are ridiculously low across the dry bulk space (SBLK trades at a PE of 3.4, GOGL at a PE of 4.2). But earnings will take a hit this quarter and maybe the next. If the ISM manufacturing index continues to drift lower, perhaps TCE rates for dry bulk stay lower for longer. No way to tell. There are easier speculations. I'll continue to watch for a re-entry point on GRIN, but I'm done with this trade for now.

I'm still holding EuroDry (EDRY) as my sole dry bulk exposure.

Exiting WY for a loss of 15.4%. As I mentioned last weekend, a break down below a trading range is not a good sign.

June 22 2022

Alexco (AXU) press release today: "it is also apparent from results to date that the rate of improvement in the advance of underground development remains insufficient to achieve the necessary number of production headings to sustain 400 tpd feed to the mill before the end of 2022. To rectify this imbalance, the Company has elected to temporarily suspend milling operations for five to six months and to focus all efforts on advancing underground development... Ore extraction and milling operations will be restarted in January 2023."

The press release goes on to express management's view that "cash self-sufficiency" will be achieved in Q1 2023. In other words, they may just stop lighting cash on fire by then. In the meantime, since the company has negative working capital of $4.5 million, additional financing will be required. Management wants to let shareholders know how much they will get diluted, but they haven't figured out that part yet - so stay patient, bagholders!

Alexco is down 29% to 57.5 cents as I type this. We got out at 74 cents at a huge loss. I bought the stock on the expectation of a potential turnaround. It didn't happen, so I took the loss and got out. Alexco was the biggest loss percent-wise since I started writing for Against All Odds Research last June. Today's news makes me glad I pulled the plug on this trade instead of holding on through deteriorating fundamentals.

"In data for April, [China's NBS] consumer sentiment slumped to 86.7 from 113.2 in March. In context, in its fall below the neutrality of 100 that separates optimism and pessimism, April’s number was the weakest level since the data was first published in 1991. Further, the drop of 26.5 points from March to April is also the sharpest fall on record." - Bands Financial

Action. Consequence. The effect of China's zero covid policy and a CCP hell bent on destroying the tech and fintech industry, is plunging consumer and business confidence.

June 23 2022

Lundin Gold (LUG.TO), my sole pick in the gold producer space, is down 10.8% today and is today's worst performing gold producer above $1 billion market cap. No fundamental news from the company itself, but Ecuador is being rocked by protestors demanding lower fuel prices, farm loan subsidies, the usual socialist demands. Strangely, they also want to halt oil production and mining even though less oil and less jobs equals more misery. I'm not worried about Lundin Gold. If Ecuador fares poorly, imagine the miners with operations in places like Peru, Argentina, Colombia, Bolivia, Guatemala etc. Someone is bound to buy LUG, if only to diversify their much worse country risk profile. It's why Fortuna Silver (FSM) bought Roxgold (ROXG.TO) and Kinross (KGC) bought Great Bear Resources (GBR.V). Even a takeover at a measly 10% premium puts us ahead on this trade.

I'm holding and waiting for the takeover announcement.

Time for another trade in StealthGas (GASS). Natural gas is down 9.3% while GASS is only down 8.8%. Even the worst performing nat gas producer Antero Resources (AR) is only down 9.3%, while the best performer EQT is down 5.5%. If this is the end of the natty long trade, you would expect worse performance from these stocks. Even Cheniere Energy (LNG) has barely moved, down a mere 16.6% from all-time highs.

I'm looking at this as a mean reversion trade, not expecting a fresh uptrend. Stop at the 20-week EMA of $2.75, which means a move above $3.5 from an entry at $2.89 gives a 1:5 risk:reward. A lower stop works too. Given the volatility in this stock, it's highly likely it doesn't move back into the old trading range.

Why GASS and not some LNG pure play? We also own Tellurian (TELL) so that's covered, in a way. Also, without a firm view on LNG fundamentals, I wouldn't jump in to either buy or short the US nat gas producers.

June 25 2022

The premium for spot zinc over the metal’s futures soared to its widest since 1997 this week, with LME inventories plummeting to their lowest on record, at 19,825 tons, equal to half a day’s worth of global consumption.

The last time cash-to-futures spreads were this wide, namely $199.85 per ton on Thursday, Glencore was accused by Chinese traders of distorting the market in 1997, deliberately squeezing stocks.

The tightness in the Atlantic Basin stands in stark contrast to China where zinc inventories have been increasing due to the lockdown-induced demand declines, with Shanghai exchange warehouse stock doubling in 2022 so far to some 160,000 tons.

Considering the steep backwardation, the unprecedented pressure on LME inventories could be alleviated by increasing deliveries from China, the last resort of European zinc smelters.

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