Saturday, January 28, 2012

Bought LSG @ $1.47

I bought shares in another Canadian gold miner yesterday. This one is Lake Shore Gold Corp (LSG) which trades on the AMEX exchange. My purchase price was $1.47.

This first chart is a weekly of LSG and uses the slower 'trending' setting of the True Strength Index (TSI) indicator set at (25,13). The TSI rendered three BUY signals which I regard as strong confirmation this stock has turned the corner on its downward momentum and should see better days ahead soon.

Click on any chart to ENLARGE

The next chart is a daily and compares the price performance of Lake Shore Gold (LSG) with gold (XGLD) and the Junior Miners ETF (GDXJ). Here we see the familiar TSI BUY signals, as on the weekly chart above - trend line break, positive divergence and ZERO crossover - and note that this stock has severely underperformed both XGLD and GDXJ beginning last May, 2011. We also note that Lake Shore Gold now trades at just 60 cents on the dollar with respect to its book value.

I have done several hours of due diligence to learn what explains the sky dive from $4.50 per share to $1.05 in the past 9 months. The company has several mines in Canada with one that went into production beginning January 2011. The expectations for the amount of gold they could process were lowered by the company at about this time and that triggered several analyst downgrades. Add to that the general swoon one can easily see in the GDXJ beginning last May and the recipe for price to move to the opposite extreme was put into action. 

My interest in this stock begins with its ridiculously under priced stock market valuation and is sustained by the technicals (TSI) that suggest it is a candidate for price appreciation in the near future. Also, the current book value of Lake Shore Gold is $1 Billion and it began trading on the AMEX exchange last August. 

Price projections are usually tough to get real excited about because they are often overly optimistic, or so my experience has led me to believe. But, for what its worth, here is what the 11 analysts who follow this company think about its prospects for future price appreciation (Jan. 26, 2012).


  1. Sir, this is a very interesting sector to buy stock in, but I was wondering: how do we know whether they will actually find enough gold to be profitable? Do the miners publish some type of evidence showing there's gold in them thar hills? Thanks kindly, -Steve

  2. Thanks again John. Both LSG and CGR look very interesting, I may have to nibble. Still holding CDY from a .96 average though starting to get a little nervous after Friday.

  3. Steve - yes, miners do have very strict rules for what they can claim are gold in them 'their' hills.
    The AMEX and other stock exchanges, and the SEC, also have very strict rules about what they can claim
    on their balance sheets as proven reserves.

    The question for me becomes, as somewhat suggested by your question, at what price can they extract the
    gold - and not question the fact that they have scientifically proven how much, and at what grade, they
    have gold in their property.

    Further, the scale of the potential operation comes into consideration - similar to how Walmart is able to
    sell to its retail customers more cheaply than your corner grocery store. And does the company have the management
    expertise, financial deep pockets and will to press their project towards achieving optimal recovery rates and
    minimizing the cost per ounce of production.

    I remember that back in 2008 when the miners took an incredibly steep nose dive, one of the primary problems they
    faced was not so much that the price of gold was lowered but rather that the credit markets had totally imploded.
    Miners simply could NOT get any financing to carry forward their production from mining operations, let alone shake
    free some money for the continued exploration of their 100% owned properties nor was there money for the acquisition of
    other companies. The banks would not loan to them and as the stock market collapsed (SPX 1500+ to 666) there was no
    ability to raise money from the issuance of their stock.

    A case in point was a stock that I owned at the time - US Silver (USSIF). The company was really getting very close to
    going into production after spending years and untold sums of money to get its Idaho, USA silver mines ready for production.
    The company needed funding to proceed - but could not obtain any support. The stock I bought at 44 cents per share eventually
    bottomed at 2.5 cents per share. Of course, the financial crisis of 2008 did not last forever and US Silver was able to hang on
    long enough to get the financing it needed to start showing profits from production. Today US Silver is trading around 45 cents
    per share and reached a price in excess of 80 cents last April.

    I guess my point is that the stock market does not exactly value small mining companies fairly. In my view, understanding this
    is critical to understanding when the market is giving away something for nothing. The next step is to recognize when the market
    is just beginning to figure out that the price of the stock is way wrong. If you can catch the market making this critical change
    in its view an investor can do well to just get a position and watch the show as it unfolds.

  4. Hi John,

    Your CGR and now LSG trades, are these long-term buys or what is your time-frame?

  5. ND - yeah, that's kinda what I am thinking. If gold does what I think it will do
    both of these stocks should easily double in less than a year. Some of the best money
    I have ever made was to buy and sit, contrary to my passion for trading.

    My focus on these two will be to keep an eye on the companies - make sure they do not spoil
    their own party with surprising and unpleasant news - and keep an eye on the mining index to
    make sure I am not sitting in the 2008 scenario where everything, including miners, gets flushed
    down the toilet.

    My expectation is that the stock market will eventually not be able to continue higher, while miners
    will separate from them, continuing higher with gold. But, as I obviously do not have a crystal ball.
    I will have to keep my eyes open and try to continue sorting things out as we go.

    I would add that the behavior of the US Dollar is going to be critical in understanding which of these
    two paths miners take. At present the dollar has made a lower low. When it turns up, if it is not able
    to then make a higher high then that will confirm it is game on for gold in a big way. At that point
    I expect the mining index will show its cards and if they continue higher with gold, that works for me.

  6. Good evening John,
    Wow! You've got my attention with Lake Shore Gold. I remember owning this stock Almost 30 years ago. I wonder if it's the same company and why I haven't noticed them til just now when you mentioned them. I'll have to take a closer look. I've sworn off buying individual company's but this one was lucky for me. I remember I made money. Thanks for scouting this out for me. I got a good feel about this one. M

  7. Thanks John,

    Sounds like a solid plan! I'll be joining you on the trade this week as the stock market finds its DCL.

  8. Hi John,

    I'm trying to track the lows on the gold 4 hr chart, but it's been difficult to find the 40 bar lows since the December 29 low. Have you been able to do so, and if so, where do your lows end up?

    I have the following:

    Jan 8 - 34 bars after 12/29 low
    Jan 13 - 27 bars after 1/8 low
    Jan 20 - 30 bars after 1/13 low
    Jan 25 - 20 bars after 1/20 low
    This morning's low - 17 bars after 1/25 low

  9. Jan 8 8:00 pm 34 bars
    Jan 18 8:00 am 46 bars
    Jan 25 8:00 am 31 bars

    Currently on
    Jan 30 8:00 pm bar 22

    This should be the final 4 hour cycle of the current daily cycle.

  10. Hi John,

    Long time reader, first time comment. I've been following DHT for the past few months and there appears to be a breakout in progress. Not sure if you do 'requests,' but I would love to see you do a bit of TA on it and to see what your TSI is indicating. Thanks in advance!

  11. DHT - owns oil tankers, trades at o.3X Book Value with 66 cents per $1.09 share in cash, sports an 11.1% dividend, past 6 quarters green, next 2 quarters projected green earnings, NYSE, 64.5 shares outstanding, price blasted up through 50 dma.

    TSI on weekly and daily is BUY.

    Tom - I'm not sure what the catch is. At the moment I don't see one. Nice find!

  12. Great, Thanks John! Slight pullback today on DHT, but still looks bullish to me. Bought into some LSG yesterday so we'll see how that plays out. Thanks for all your analysis!