Thursday, September 03, 2015

The Haiku of Finance for 09/03/15

Offtake agreement
Promise to buy production
Signal to lenders

True Gold Mining Has True Problems

True Gold Mining is losing money. I just thought I'd say that right off the bat so we don't waste any time beating around the African bush. The company has been around in some form since 1987 according to Yahoo Finance. That's plenty of time to get out of the market's basement and generate some wealth.

Their current CEO is a former investment banker, and his bio on the company website says nothing about academic qualification as a geologist or specific operational success. I see this over and over again in junior mining companies. The company's Yahoo Finance profile says their chairperson is making an obscene amount of money for a company with no revenue in several years. Guess what, when you put a bunch of investment bankers in charge of a mining company, don't expect to see a bunch of metal coming out of the ground.

The Karma Project in Burkina Faso is their big show. Burkina Faso is ranked 85 out of 175 on Transparency International's Corruption Perceptions Index and 102 out of 178 on the Heritage Foundation's Index of Economic Freedom. Its absolute scores in those rankings are abysmal. Demonstrations forced True Gold to halt its Karma Project in January 2015. Unrest has a funny way of messing up business in a poor, corrupt country.

I read the Karma Project's NI 43-101 preliminary economic estimate dated August 10, 2014. The indicated and inferred resources are decent grades and sizes, but I believe their assumed gold price of $1557/oz is too high given present gold market conditions. The probable reserve grades average to 0.85 Au g/t; that's still decent but not inclusive of proven reserves. I also wonder why they chose a gold price assumption of $1250/oz for their economic analysis that differs from the $1557/oz assumption for the resource estimate. Adding their estimated cash operating cost of $630/oz and capital cost of $207/oz gives us a total cost of $837/oz, unless I'm missing something. That is below gold's current spot price but above its long-term average historical price, so the project is very vulnerable to a prolonged bear market in gold.

The Liguidi Project in Burkina Faso is their side show. The project's fact sheet includes some sample drill results but I don't see anything that resembles a 43-101 report. The final Liguidi results will have to wait for daylight if Karma ever gets going. All of the international ranking data on corruption and freedom apply to both projects with equal validity.

The former investment bankers running True Gold need to raise US$132M to bring Karma into full production. I reviewed their consolidated financial statements dated June 30, 2015. The company's burn rate of $1.4M/month and cash on hand of $23M means they can survive for about 16 months before needing another capital raise. Shareholders will experience dilution if True Gold raises a big chunk of that $132M at some point. The accumulated negative retained earnings of -$81.3M shows how little progress the management made towards productively employing capital they raised in the past.

I will not invest in True Gold. The main project looks decent enough but it's in a bad neighborhood called Burkina Faso. Investment bankers should learn about geopolitical risk before they agree to run mine exploration companies.

Full disclosure: No position in True Gold Mining (tickers TGM.V and RVREF) at this time.

Wednesday, September 02, 2015

The Haiku of Finance for 09/02/15

Good copywriting
Content driving conversion
Get word data first

Copywriting Language Zingers In Content Marketing

There's a whole bunch of conventional wisdom sloshing around the Interwebs about how to craft text that captures an audience's attention. Zinger phrases are the copywriting bridge from eyeball capture to audience commitment. Those of us who live and die by Web traffic need hard core facts to support our content marketing.

I did a Google search of "compelling subject lines" and came up with a lot of recycled blog posts saying the same things. Action words that promise life-changing benefits and force decisions are no-brainers that have been around forever. The new twist is in the delivery through social media. Linkbait farms are full of links saying "10 Best Ways To Do Something You Need Right Now" next to pictures of Grumpy Cat and Kim Kardashian. Grumpy and Kim are not doing something you need right now, so feel free to ignore them.

Any MOOC copywriting course would be a cool bag of tricks if it were co-branded with a reputable business school. Everyone would have access to that top material but only the A-grade students would use it effectively, just like they would in a traditional school. Leading with a title that starts with a number, like those "10 Best Ways" articles, is all the rage on social media sharing sites. Rather than link to copywriting how-to blogs that come and go, I would rather search Google for "copywriting academic research" to find the peer-reviewed proof of workable tactics.

The marketing community does not have a doctrinal definition of how long copy should be to get attention, or maybe I just couldn't find one because I don't have the marketer's secret decoder ring. Conventional wisdom now favors short-form copy that matches people's abbreviated attention spans. I cannot find research that determines whether short-form copy is truly more effective than long-form copy at getting either attention or compliance with a final pitch. It may not matter if the power words punch the reader out up front in the copy headline.

I searched the Harvard Business Review and Knowledge@Wharton for "copywriting" and found next to nothing that would validate any best practices. One Wharton article is "Marketers Turn to Metrics to Measure the Impact of Their Initiatives." It discusses the need for hard metrics but offers none. The market is thus wide open for the kind of unverifiable folk wisdom that ad agencies have always purveyed. Copywriting is still in the Mad Men era. Modern content marketers are welcome to dive into academic journals in search of proof that phrasing, word length, tone, and alphanumeric variation truly drive conversion rates.

Fear and greed still drive audience response in a highly evolved digital age. Pushing an elevator pitch like "How to make 10x more money, go 2x as fast, save 50% on your bills, and be 3x more attractive, all within 24 hours" would be a copywriter's dream. Yeah, people really believe that stuff. Delivering on that promise is the product developer's problem. Alfidi Capital offers no such promises. The zinger content you see here is in a class by itself.

Tuesday, September 01, 2015

The Haiku of Finance for 09/01/15

Megadonor waste
Incumbents make for best bets
Campaign investing

Seabridge Gold Has A Bridge To Two Projects

Seabridge Gold leaves me puzzled. It has been around for many years, long enough to have discovered and developed significant mines by now. The stock's profile page on Yahoo Finance shows the top executives making serious six figures. Executive pay is not a marker of enterprise success. It is nice to see that the CEO is a trained mining engineer and that the rest of the team has been around the block with other mining companies.

They have two serious projects now. The Kerr-Sulphurets-Mitchell (KSM) project in Canada has several iterations of NI 43-101 reports. I read the preliminary feasibility study (PFS) for 2012, and the reserves are not much to crow about without the deposit's size. Consider how low the 2P reserves grade of 0.55 Au g/t would be without the 38.2M oz of metal to make it interesting. It is notable that the 2P reserves grade is about the same as the measured and indicated resource grade, a positive sign given the tendency of reserve grades to be lower after more engineering work. The project's estimated IRR is only 11.5%, less than half what Sprott's Rick Rule uses as a rule of thumb for viability. It's good that their assumed total operating cost of $597.60/oz is so low, even lower than gold's long-term average historic price. They must still raise the $5.3B initial capital cost.

The Courageous Lake project also has a PFS from 2012. This project looks a lot more desirable than KSM due to its 2P reserves grade of 2.2 Au g/t, but it only has 6.5M oz of metal. They only have to raise $1.52B in capital to make it work, but the estimated 7.3% IRR is even lower than the KSM project. The total operating cost of $1123/oz is also higher than KSM, and higher than gold's long-term price.  Priority funding for Courageous Lake would make more sense in healthier economic times. The hard times in mining worldwide now make KSM the more attractive candidate for initial development.

Check out Seabridge's Q2 10-Q report dated June 30, 2015. They had cash and short-term deposits of almost $CAD14.7M. That should be enough to operate for over one year given their present burn rate, once they have paid their current liabilities. Their fundraising success in April 2015 of $16.3M is very noteworthy. It is also noteworthy that the financing was executed at a share price of $10.17. Shares of Seabridge closed today at $6.22. General market conditions are dragging down many companies but Seabridge's private investors continue to have sufficient faith that their investment is worth the premium they pay.

Seabridge is viable if a major partner wants to contribute billions of dollars to starting its two major projects. The market is bidding up this company's share price based on its ore body estimates rather than its operating history. These kinds of lower-grade projects make sense now that high-grade ores are running out worldwide. The mining sector will have to adjust to a new era of permanently lower IRRs with companies like Seabridge Gold.

Full disclosure: No position in Seabridge Gold (ticker SA) at this time.

Monday, August 31, 2015

The Haiku of Finance for 08/31/15

Vendor finance ploy
Force credit terms at low rates
Weakest will pay first

Sunday, August 30, 2015

The Limerick of Finance for 08/30/15

Fed's interest rate plan is a tease
Raising just once could be done with ease
Dollar strength makes it tough
Bond market would get rough
Once more, quantitatively ease

Saturday, August 29, 2015

The Haiku of Finance for 08/29/15

To be or to do
Decide honesty daily
Escalate the truth

Ethics And Escalation

I will throw a few thoughts on ethics out at the blogosphere for some weekend musing. Have at them with gusto. Marcus Aurelius was not the only one to jot down his meditations for all to see. People tell me I am a genius.  Here is some proof.

One can never be more honest or more competent than one's boss. The moment you outshine your boss is the moment you become a threat to their career. Most humans are sufficiently insecure about their own place in a pecking order that they will sabotage or steal from capable underlings. The remaining minority could be a lot more productive if they work for themselves. Supervisors behaving badly can fake it for a long time if their subordinates stick around out of desperation.

Everyone who works for a large enterprise will eventually be forced to choose between career success and personal integrity. We all choose one or the other. These are mutually exclusive choices. If you avoid making the choice, your boss will make the choice on your behalf, and your acquiescence is the moral equivalent of concurrence. Choosing personal integrity usually leads to negative career consequences. Repeatedly choosing integrity eventually guarantees a path to either self-employment or starvation. Choosing career success means immediate monetary rewards, plus long-term legal risks that no one can hide forever. Col. John Boyd, America's greatest military theorist, framed the choice as "to be or to do" for his acolytes. Being means choosing extrinsic rewards of money and glory. Doing means choosing intrinsic rewards of moral clarity and professional productivity.

Escalating a decision to one's boss means surrendering moral responsibility for the outcome. Sometimes this is unavoidable. Enterprise policies often define escalation triggers, especially in crisis management. Junior employees can learn from watching seniors handle the escalation even if the results remain hidden.

Humans owe a duty of loyalty to their superiors at the beginning of a professional relationship. This duty grows stronger or weaker over time based on the superiors' behavior. Bosses who demonstrate ethical lapses deserve progressively less loyalty as their deficiencies become obvious. Prolonged exposure to a superior who is unethical or incompetent is a career hazard. Never hitch a wagon to a dead horse. Escaping from unethical people is a moral imperative, not to mention a salve for one's sanity.

That is all for tonight. I will be up in Santa Rosa tomorrow, watching a charity polo match. Wineries will have their wares on display. I may bring home a bottle or two.

Friday, August 28, 2015

The Haiku of Finance for 08/28/15

Disappointing mine
Uneconomic hole grades
Ore stays in the ground

Vista Gold Is A Disappointment

Vista Gold (ticker VGZ) has a management team with obvious experience in mining operations.  It's always good to see geologists and engineers running a junior mining company.  I would have more confidence in this company's potential if their operational results matched the C-suite's pedigree.  A producing mine would justify their high salaries.  Check their pay yourself on the ticker's Yahoo Finance listing.

One Mt. Todd, Australia gold project is their primary live option at this time, with other projects that may pay royalties if other partners have their acts together.  The Mt. Todd site's most recent NI 43-101 report is dated July 7, 2014.  Its key findings are disappointing.  The 2P reserve estimate is 0.84 Au g/ton for the Batman deposit and 0.54 g/ton for the heap leach pad.  Those are very low ore grades compared to profitable mines worldwide.  The MII resource estimates for Mt. Todd aren't any better.  The initial capex estimate of almost US$1.05B means they need a large mining company as a serious partner.  Their base case assumption of $1450/oz as the gold price is too optimistic because gold closed at $1133/oz today.  I looked at their base case scenario of operating costs at $756.11/oz and capex (presumably spread over the mine's life) at $292.33.  Adding those up to $1048.44/oz gives us the minimum gold price that makes this mine economically viable.  Gold's long-term average price is far below that level, and a lot can happen over this mine's projected 13-year life.

Financial statements matter.  I reviewed Vista's latest 10-Q dated July 31, 2015.  They had US$3.8M in cash on hand at the end of June, plus $11.1M in short-term investments.  That would ordinarily be a mother lode of cash for a junior mining company.  I have to wonder why they are representing positive net income with zero operating revenue.  Their research and development grants from the Australian government (mentioned in note 10 of the 10-Q) are no substitute for a live mine, so it's more appropriate to doubt these grants' usefulness as recurring revenue.  Consider Vista's negative retained earnings of -$410M to know how much investor capital has disappeared down dry holes.

This stock has traded below one dollar since the summer of 2013.  Since it now trades around $0.29, anyone who bought it in the past decade is severely underwater.  I see these kinds of companies all the time on the investor relations circuit, clamoring for attention and waving term sheets at private investors.  Whatever potential that may have appeared in Mt. Todd's earliest 43-101 reports has never materialized.  That is why Vista Gold does not belong in my portfolio.

Full disclosure:  No position in VGZ at this time.

Thursday, August 27, 2015

The Haiku of Finance for 08/27/15

Crisis planning team
Preserve enterprise from threat
Protect life and wealth

Hip-Pocket Ruminations For Crisis Management Teams

I participated in a crisis management tabletop exercise today courtesy of the San Francisco Bay Area InfraGard Chapter.  The local chapter of the Business Recovery Managers Association (BRMA) joined the fun.  I was familiar with the structure of facilitated scenario-based role playing from many years of US Army Reserve staff training.  The injects kept us thinking about how unpredictable a crisis gets for an enterprise.  My genius ruminations are below.

Knowing how critical business processes will cross functional silos is a key to assembling the crisis management team (CMT).  Prioritizing the processes that the enterprise must immediately sustain helps determine the resources the team will allocate in its earliest decisions.  Having a single senior person designated as the communications manager ensures that all messaging themes are centrally routed before release and that all senior executives stay on message.

Outsourcing some of the response effort in public relations (PR), third party logistics (3PL), or business intelligence (BI) means the enterprise gains a surge capacity to meet an existential threat.  One outsourcing risk is friction if the hired partners' IT systems are incompatible with the enterprise's systems, but the risk is worth taking.

The rehearsed crisis management plan should have escalation triggers in place so the CMT knows when decisions are beyond its authority.  Sending the big decisions to the C-suite keeps the enterprise's strategy in mind.  The business process recovery (BPR) team activates after the CMT has begun its work.  The CMT minimizes damage from ongoing problems, and the BPR team fixes what is broken as the crisis passes.

Crisis managers have plenty of resources for planning and training.  ISO standard 22301 governs business continuity.  Several competing organizations offer certifications in business continuity planning, so the choice may come down to which one adheres most to the ISO standards and is the least costly.  Having some members of a CMT get a couple of affordable certifications would not hurt.  Joining the US government's public-private partnerships like InfraGard, the Domestic Security Alliance Council (DSAC), US-CERT, and the National Council of ISACs (NCI) allows access to open-source threat intelligence.  Searching Google for case studies of the 1982 Tylenol crisis provides managers with the gold standard response.

Preserving an enterprise from a surprise threat is what boards pay executives to do.  Protecting employee lives and shareholder investments means designated crisis managers must write plans and run drills for multiple scenarios.  I no longer work for large enterprises but this InfraGard/BRMA joint exercise reminded me of how teams should work together.  The Alfidi Capital crisis management plan is to be as brilliant as possible while Armageddon rages all around.

Wednesday, August 26, 2015

The Haiku of Finance for 08/26/15

Get uranium
Just find the highest grade ore
Cash glows in the dark