Talking a Gold Processing Penny Stock, Trudeau’s Budget Bungle, and a Great Call on an Energy Service Small-Cap Stock
In light of this week’s 2017 Canadian Budget release and ballooning deficit, I will start with a bit of a rant on political promises and accountability. In our Your Stock, Our Take segment we take a question from a listener about Dynacor Gold Mines Inc. (DNG:TSX), an unconventional gold company which produces gold and silver from the processing of purchased ore in Peru – we let you know if the stock is a buy or sell. Our star of the week is, Dominion Diamond Corporation (DDC:TSX) , a Northwest Territories based Diamond Miner, which jumped this week after receiving an unsolicited takeover bid. Our dog of the week is a former star which we recently sold for a 200% gain in our Canadian Small-Cap Research, High Arctic Energy Services Inc. (HWO:TSX), which dropped 8% this week and is down over 15% from recent highs.
If this is your first time listening, then thanks for stopping by. This podcast is produced every week for your enjoyment and show notes are found at www.keystocks.com. Come back often and feel free to add the podcast to your favorite RSS feed or on iTunes. You can also follow us on Twitter @KeyStocks and on Facebook. Or listen to us on our 24-hour PennyStocks streaming radio station Pennystocks.fm for coverage of US and Canadian Small-Cap stocks.
I would like to welcome again, myhost, KeyStone’s Senior Equity analyst, father of 1, and a man who was so inspired by the Federal Liberal budget’s $15 billion overspend announced this week, that he promptly declared to his wife, “there is no longer a need for him to worry about his spending habits – their budget will balance itself”, Mr. Aaron Dunn.
First-off, we say that you will be on Money Talks Radio Saturday March 25th at 9:05 Pacific – should be a great segment as always.
We should also talk briefly about our upcoming Vancouver and Calgary DIY Seminars on April 4th and April 11th.
Learn to Build a Simple Stock Portfolio to Crush the Market
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For the past 18-years KeyStone has been helping thousands of Canadians build simple 10-12 stock portfolios composed of cash generating and underfollowed stocks. We stress quality stocks over quantity in an effort to beat the market long-term.
In our DIY Investment Seminar, we share our strategies as well as a couple of recent stock selections to get you started on your path towards financial independence.
How many stocks should I own?
One of the more important decisions you will make is the structure of your equity (stock) portfolio. Diversification can be your friend but it can also be your enemy. To beat the market, you cannot just be the market. Our strategy stresses quality over quantity and will give simple and effective number of great stocks to help you build two critical equity portfolios – growth and income. In the end, these two mini-portfolios will help you build a winning formula for your overall DIY stock portfolio.
What stocks to buy?
The most critical element in equity investing is knowing which individual stocks to buy and which to avoid. In this segment, we will focus on the basic fundamental criteria we use to look at any stock as a potential investment. From revenue, earnings, cash flow, and balance sheet considerations to the industry, near and long-term growth catalysts, valuations to management – we cover our successful strategies.
When to buy?
Our DIY portfolio strategy involved staggered purchases over a 12 to 18-month period. We help you build a concentrated portfolio of high quality growth and income (dividend paying) stocks. Purchasing 1-2 stocks each month over a year will help prevent you from purchasing your shares at a near-term market top.
Perhaps most importantly, when to sell?
Investing is not just knowing what stocks to buy, it is also about knowing when to sell. We take your through our sell process included the primary valuation considerations, outlook and the nature of the stocks business (cyclical vs. non-cyclical). We also review the strategy of selling partial positions – SELL HALF for example. The decision to sell can also become more difficult when you are dealing with a good company. To illustrate, we take you through a couple recent SELL examples from stocks in our active coverage.
Insight into our Methodology
We introduce you the methodology that has allowed us to uncover both unknown growth and dividend stocks that have produces tremendous returns including;
Canadian & US Growth Stocks
The Boyd Group Income Fund (BYD.UN:TSX) – up over 3,700% and still a BUY.
WaterFurnace Renewable Energy Inc. (WFI:TSX) – SOLD for a 2,561% gain.
Enghouse Systems Ltd. (ENGH:TSX) – up 600% and still a BUY.
Janna Systems Inc. (JAN:TSX) – taken over for a 4,185% gain.
Recent (Past Year)
Photon Control Inc. (PHO:TSX-V) – 221% gain and counting.
Applied Optoelectronics Inc. (AAOI:NASD) – 222% gain and counting.
Canadian Income (Dividend) Stocks
Brookfield Infrastructure Partners L.P. (BIP.UN:TSX) – 221% gain and counting.
Exchange Income Corporation (EIF:TSX) – 250% gain and counting.
One of Justin Trudeau’s primary election promises was to run, and I quote him here, “a modest short- term deficit” of less than $10 billion for each of the first three years and then a balanced budget by the 2019-2020 fiscal year. Trudeau also went on to say that the budget would essentially balance itself.
If I said that to my accountant or in my household I would be likely receive a strange look at best or be promptly bludgeoned and forced to run out of the room.
Some believe the promise helped the Liberals win the 2015 election. It could also have been just time for a change from a long Conservative run in power.
First off – I love to see the terms “modest” and $10 billion in the same sentence – but his plan simply stated called for budget deficits of;
$10 billion in 2016.
$10 billion in 2017.
10 billion in 2018.
A balanced budget in 2019.
Has he delivered?
Trudeau’s Report Card
Actual Deficit 2016: $23 billion – D
Projected Deficit 2017: $25.5 billion – D
span style=”font-size:14px;”>Projected Deficit 2018: $24.4 billion – D<
Zero realistic timeline on a balance budget – come again, it has yet to balance itself. Curious.
That equates to a 130% or $13 billion dollar overspend in 2016, a 155% or $15.5 billion overspend in 2017 and a 144% or $14.4 billion dollar overspend in 2018.
And the plan for a balanced budget has just been swept under the rug.
The budget has little tax breaks for regular Canadians or businesses – in fact public transit users and those who want to have a beer after work are now paying more. There are many Canadians that would flatly say “those evil corporations should never get a break” – they make gobs of money and are disgusting. The fact is, we analyze 1,000s of company’s each year that are run by good people that started small and now employ millions of Canadians, create good jobs with great salaries and benefits each day and pay a butt-load of taxes – those who paint all businesses with this type of rhetoric should give their heads a shake. Seriously? Be careful what you wish for in this environment.
From a small to large business perspective, this budget has done basically nothing to address what is a competitive world environment that will likely see our neighbours to the South give their businesses (both tiny and large) a, to quote Donald Trump, “huge” competitive tax advantage with lower rates across the board.
Look, if there was a financial calamity such as the 2008-2009 crisis – running a significant deficit could be more justified – but that is just simply not the case here.
Nominal GDP in the fourth quarter of 2016 rose 7% annualized, the best since the first quarter of 2013. For 2016 as a whole, real GDP grew 1.4%, while nominal GDP was up 2.1%, both improving from the prior year’s pace.
Canada’s GDP expanded at an annualized pace of 2.6% in the fourth quarter of 2016. Adding to the good news were upward revisions to the second and third quarters of 2016.
To me it looks like the Federal government does not have a revenue problem (there is no need for more taxes), they have a spending problem.
While the Conservative government under Harper ran a balance budget in at least one year facing far worse economic conditions, the sad thing is their overall deficit running record was not much better.
One of a governments basic responsibilities is to take money in through taxes and responsibly management and spend those dollars efficiently and effectively. No society will survive or thrive in the long-term if you continually spend more than you take it – it is irresponsible and short-term thinking.
We are burdening our children with too much debt – plain and simple. Our Prime Minister call us a rich society – I ask you – how are we rich if we keep spending more than we take in?
If my business continually spend more than it took in it would soon go bankrupt. The same can be said for my household and yours – we all have to live within a budget and live up to our promises in that regard or we face personal bankruptcy and the reality that we would not be able to put food on the table for our families.
From a monetary perspective, it would be wise to start looking at our country from a more business like perspective or at the very least in the same manner each individual Canadian family has to live within its means. If, as a country, we are not taking in enough money to fund a special interest project, we cannot pay for it. If I cannot afford a new TV or vacation to Hawaii, we do not get to have it. Apparently, politicians live in an alternative reality.
Canadians should demand more from their politician – particularly more accountability.
Your PennyStock, Our Take – PennyStock Dynacor Gold Mines Inc. (DNG:TSX)
Active in Peru since 1996, Dynacor is an unconventional gold company which produces gold and silver from the processing of purchased ore and the exploration of its mining properties located in Peru. Dynacore purchases its ore from government registered ore producers from various regions of Peru and then processes it at its wholly owned milling facility located in Huanca, Peru to produce gold and silver which is sold internationally at market prices. The company has the potential for commercial extraction of gold and other precious metals. Dynacor owns the rights on three mining properties which are in the exploration stage, including its flagship exploration gold, copper and silver prospect, the Tumipampa property (Tumipampa), and does not have any properties in commercial production.
How is this Profitable Small-Cap Performing Financially?
For its third quarter the company reported gold production of 19,131 ounces (52,462 ounces for the nine-month period ended September 30, 2016), compared to 15,607 ounces in Q3 2015 (47,760 ounces for the nine- month period ended September 30, 2015), a 22.6% increase over Q3 2015 (increase of 9.8% over the nine-month period ended September 30, 2015). EBITDA for the quarter was $3.2 million ($7.7 million for the nine-month period ended September 30, 2016), compared to $1.7 million in Q3 2015 ($6.3 million for the nine-month period ended September 30, 2015), an increase of 85.4% between quarters (increase of 22.1% over the nine- month period ended September 30, 2015). Cash on hand of $7.0 million at September 30, 2016, compared to $6.1 million as at December 31, 2015.
Recent Developments: On January 12th, 2017, Dynacor reported record fourth quarter gold production at the new Veta Dorada ore processing plant in Chala, Peru. Production reached an all-time quarterly high of 21,014 ounces gold. Total gold production in 2016 was 73,476 ounces, a 9% increase as compared to 2015 (67,603 ounces in 2015). In 2017, Dynacor is embarking on a new era as it targets its best year in the company’s history, with a gold production estimate of 88,000-92,000 ounces. The gold production target for 2017 is based on the current price of gold and operating conditions. Processing rate will increase in 2017 as the company steps up the plant’s processing capacity to 360 tpd. No significant problems were encountered during the start-up of the new plant. Response from ore providers has been enthusiastic according to management. Dynacor has also increased its ore purchasing teams on the ground and successfully opened up new ore purchasing areas.
KeyStone’s Take: Dynacor’s Q3 2016 results marked its 22nd consecutive profitable quarter. The company has a solid business and trades with a relatively, but not cheap EV/EBITDA multiple of around 9.5. The company is looking for a solid uptick in terms of processing in 2017. It is a slightly lower risk option for investing in the gold market, but may not have the upside some other traditional producers do.
Overall, a decent speculative option for high risk investors who like exposure to gold in a unique manner.
Small-Cap Star of the Week – Dominion Diamond Corporation (DDC:TSX)
Canadian diamond mining company with ownership interests in two major producing diamond mines. Both mines are located in the Northwest Territories in Canada. The company operates the Ekati Diamond Mine, in which it owns a controlling interest, and also owns 40% of the Diavik Diamond Mine. It supplies premium rough diamond assortments to the global market through its sorting and selling operations in Canada, Belgium and India.
Jumped 43.3% this week.
4 –days ago, The Washington Companies Disclosed an All-Cash Proposal to Acquire Dominion Diamond Corporation for US$13.50 Per Share
US$1.1 Billion Proposal Would Provide Substantial Premium to Dominion Diamond Shareholders
The Washington Companies, a group of privately held North American mining, industrial and transportation businesses founded by industrialist and entrepreneur Dennis R. Washington, announced that it has made a proposal to the board of directors of Dominion Diamond Corporation (TSX: DDC, NYSE: DDC) (“Dominion”) for a transaction in which Washington would acquire all of the outstanding common shares of Dominion for US$13.50 per share in cash, representing a 36 percent premium to Dominion’s closing stock price on March 17, 2017 and a 54 percent premium to the price when discussions ended on March 15, 2017.
Prior to the unsolicited offer, While negotiations had been ongoing, the talks broke off as a formal offer to either Dominion or its shareholders was not made and Dominion and Washington were at odds over the conditions of the offer. Dominion Diamond Corp.confirmed that it received an unsolicited takeover offer from the Washington Companies
Analysts are speculating that Dominion Diamond is now fully in play.
It has been speculated that Rio Tinto PLC (RIO:NYSE) could be another logical suitor – but that remains pure speculation.
The 40+ percent rise gives Dominion Diamond our coveted Star of the week.
Small-Cap Dog of the Week – High Arctic Energy Services Inc. (HWO:TSX)
The stock lost 8% on the week and is off just under 20% from recent highs. At one point it had dropped 15% on the week, before recovering.
High Arctic is a company we are very familiar with. In fact, it had been a very strong performer in our Focus BUY Portfolio, in a weak oil market over the past several years. We recently recommended selling positions in the stock with the shares in the $6.20 range and providing gains of over 200% since our original recommendation to clients.
What lead to the drop this week?
Fourth Quarter 2016:
While revenue in the fourth quarter increased 7% to $62.3 million from $58.0 million in the fourth quarter of 2015, adjusted EBITDA declined 12% to $18.3 million from $20.8 million in the fourth quarter of 2015. The drop was due to reduced activity from High Arcitic’s Drilling Services segment.
The drop in EBITDA near-term was part of the reason we recommended selling shares and crystallizing our excellent profits. For its industry, High Arctic is doing a great job managing through a very tough period and holds one of the best balance sheets in its segment, but we do not see a need for exposure to energy service stocks at present given the recent pullback in oil prices and the low relative activity levels in the sector in the Western Canadian sedimentary basis. We also note that management appears to be eager to continue on its acquisition path and may look to add another Canadian service business over the near-term. This may be a long-term positive if you are in the camp that believes energy prices will recover to significantly higher levels. But in the near-term it would at a service company will low utilization and likely reduce overall EBITDA margins.
We continue to monitor the stock for potential entry points when oil recovers but have not seen sustainable indications of this near-term.