Monday, December 31, 2012

The Haiku of Finance for 12/31/12

Fiscal cliff is here
No one wants to admit it
We can't pay our bills

Financial Sarcasm Roundup for 12/31/12

The waning hours of 2012 have reached the Pacific coast and I'm blogging away into the new year.  Here comes one final blast of sarcasm to close out this calendar.

The U.S. Senate and the White House have made a fiscal cliff deal, but the House of Representatives took a breather until tomorrow.  The lower house of Congress is missing all the fun.  I hear there's free booze for anyone who sticks around and passes the anti-cliff bill tonight.  My theory is that someone started a rumor that a "bungee jump" off the fiscal cliff meant a real bungee cord would be installed on the Capitol, and the House adjourned early when they didn't see jump platform around.  Tomorrow they'll figure out that the actual "bungee" is the retroactive provision they can write into the deal that will take back any harsh spending cuts or tax increases that will occur on January 1, 2013.

The French aren't having any more success with their own fiscal mess.  The 75% tax on the super-rich is now null and void, so Gerard Depardieu can breathe easier during his self-imposed exile in Belgium.  I think France should cut the subsidies its wine makers get from the EU.  French wine is overrated anyway and California wine can definitely compete in quality.  I don't drink French wine but if the euro collapses the EU will try to hyperinflate it back to life, and then French wine would be dirt cheap measured in my dollars.  

Here's wishing you all a happy 2013.  It will be happy for me as long I'm sarcastic.  

Silvercorp (SVM) Questions Remain

Silvercorp (SVM / SVM.TO) was under a cloud for some time due to questions about its accounting practices.  Those questions should have been settled in late 2011 but I'm still concerned given some recent news. Silvercorp changed their auditors, ostensibly to avoid higher fees.  They are also the target of a class action lawsuit, filed today, for the period in which their financial information was under scrutiny.  These two developments would mean little for most normal companies, but in the context of Silvercorp's past they give me pause.

Silvercorp's fundamentals look impressive.  Their FCF is positive and they are free of long-term debt.  Their EPS growth and ROE are both strong.  They even pay a dividend.  So what's not to like about a mining company run by geologists?  I can't get the accounting questions out of my mind.  I also can't reconcile how they continue to report extremely high grades of silver at several projects.  I swore off China exposure in 2012 and I'm staying away from it in 2013.

Full disclosure:  No position in Silvercorp at this time.  

Orocobre Ltd. (OROCF) Looks at Lithium

Orocobre Ltd. (OROCF / ORL.TO) is a junior Australian company moving into lithium development.  Normally I think of kangaroos and Crocodile Dundee when I hear about Australia, so this means I need to broaden my perspective.

The company's page describing its leadership does not explicitly identify the CEO.  Maybe I missed something, but titles like "general manager" don't necessarily mean CEO.  Exactly who is in charge here?  Even their financial statements aren't clear on that one.

The Salar de Olaroz, Argentina project has MII resources and their Borax Argentina division is producing revenue.  They are also developing three other early-stage projects.  I have a difficult time understanding their quarterly financial statement dated March 31, 2012 because its format is unlike the U.S. and Canadian statements I usually read.  Since their business model is a mix of developmental and established projects, it's fair to consider their fundamentals from a value investing standpoint.

The bottom line on Orocobre is that their earnings and ROE are still negative, so the revenue from their borax operation contributes isn't enough to subsidize their ambitions for other properties.  That's why I'm not investing in this one.  The major lithium producers have more than enough capacity to satisfy world demand.  Junior explorers in lithium are redundant.

Full disclosure:  No position in Orocobre Ltd. at this time.  

Alfidi Capital New Year Resolutions for 2013

I resolve to be controversial and provocative.

I resolve to post blog articles that are obnoxious and hilarious.

I resolve to make stupid people angry.

I resolve to bad-mouth liars, thieves, and miscreants.

I resolve to satirize incompetence from Wall Street and other financial centers.

I resolve to associate with people who appreciate my extraordinary wisdom and to avoid wasting time with losers who can't understand what I say.

I resolve to remain financially independent and strive for even greater wealth.

I resolve to share my extreme genius with the world, especially at investment conferences.

I resolve to remain stunningly handsome and irresistible to attractive women.

In other words, I resolve to keep going exactly what I've been doing my entire life, especially since I started this blog.  Happy New Year for 2013.

Sunday, December 30, 2012

The Limerick of Finance for 12/30/12

This year has wound down to an end
A "fiscal cliff" deal still not penned
Some plan will get done
That will please no one
More posturing just 'round the bend

South American Silver Corp. (SOHAF)

South American Silver Corp. (SOHAF / SAC.TO) is looking for silver in Chile.  I've never been down there, nor have I eaten Chilean food or dated Chilean women.  I suspect the latter two are quite spicy.  Mining isn't so spicy but someone has to do it.

The CEO was educated as a mining engineer but doesn't mention who employed him on any of the projects he worked in his career.  His LinkedIn profile says he is currently the VP for Project Development at PolyMet Mining, and doesn't mention his position with South American Silver.  He ought to update his LinkedIn bio; meanwhile South American Silver's press release announcing his hiring sheds a little more light on his background.  I'm harping on this because the CEO's decisions in an exploration-stage junior mining company depend very much on an understanding of geology.  Other disciplines matter more in later stages.

The Escalones project has an Inferred Resource grade for Cu of 0.41%, which is toward the lower averages of most commercially successful copper deposits in the 21st century.  One compensating factor is that this is a fairly large deposit.  The equivalent grades of the other minerals are negligible.  Reading the project's drill and surface sampling highlights gives me the impression that the ore grades are highest nearer the surface and not very deep.

The company is also contesting the Bolivian government's revocation of its subsidiary's mining concessions.  It's unrelated to the property above but nonetheless casts a cloud over the company.  This Malku Khota project is potentially very valuable but the company absolutely must resolve the legal dispute in its favor.

Check out their financial statements for Q3 2012, dated September 30, 2012.  They had US$29.5M cash on hand and have a burn rate of about US$1M per month.  That gives them more than two years to realize value from their projects.

I am not investing in South American Silver Corp. because I prefer mining companies that have de-risked their projects by establishing 2P reserve data.  I also prefer spicy women, as I hinted in my opening paragraph.

Full disclosure:  No position in South American Silver Corp. at this time.

Imperial Metals (IPMLF) Is Not The Miner For Me

Imperial Metals (IPMLF / III.TO) has two operating mines and several developmental and exploration properties.  I'd prefer to analyze them using value investing criteria since they are not a startup mining company, but some details of their properties deserve mention.

Their Mount Polly mine is operating but its 2P reserves are very low grade.  I'd say the same for their Huckleberry mine.  The MII resource grade at their Red Chris developmental project is similarly unimpressive.  What are their cash costs of production?  I have no idea, but I wonder whether these projects  would be worth doing if the price of gold were half of what it is today.  The Sterling project, however, has a very impressive 7.41 g/t Au, so here's hoping they get it started.  It's too early to tell whether their three exploration properties will pan out.

Imperial is earning positive net income but their five-year EPS growth is negative and their five-year ROE is below the mining sector's average.  Those are reasons enough for me not to own this stock, besides the low ore grades for their active mines.

Full disclosure:  No position in Imperial Metals at this time.

Saturday, December 29, 2012

Friday, December 28, 2012

The Haiku of Finance for 12/28/12

Tax people to death
Don't be surprised when they leave
Fair-tax state is great

SouthGobi Resources (SGQRF) And Mongolian Coal Adventures

SouthGobi Resources (SGQRF / SGQ.TO) is a junior coal miner focused on Mongolia.  It has historically been part of Turquoise Hill Resources' project portfolio but Rio Tinto's backing of that parent company has new implications for SouthGobi.  Aluminum Corp. of China (aka Chalco) failed to acquire Turquoise Hill's stake in SouthGobi due to Mongolian political concerns over resource security, so Rio Tinto may decide to accelerate whatever development plan it has for SouthGobi.  More bad luck came SouthGobi's way when their legal counsel also ran afoul of Mongolian politics.  Mongolia's political spasms are typical of a resource-rich emerging market.  I blogged about Turquoise Hill Resources recently and noted that doing business in places Mongolia has a fair share of risk.

The CEO and VP Investor Relations have complementary backgrounds, but IMHO they should switch jobs because their respective backgrounds make them better suited for such a move.  Think about it; a sales dude should do external relations and a mining engineer should make decisions on mining operations.  Rio Tinto wants them there, so ultimately they will execute their part of a much larger plan.  The ultimate strategy for the Ovoot Tolgoi project is to ship coal to China.  Infrastructure for rail shipment and coal washing won't be problems.  They have MII resources but I would like to know their estimated cash cost of production.

Rio Tinto is now stuck with this project and I am not clear on how hard they will press for full development in light of SouthGobi's recent problems.  That's why I'm not an investor.

Full disclosure:  No position in SouthGobi Resources at this time.  

Thursday, December 27, 2012

The Haiku of Finance for 12/27/12

Hail future farmers
World diet will demand more
Millions to be made

Ivanhoe Australia (IVHOF) Continues Multi-Metal Exploration

Ivanhoe Australia (IVHOF / IVA.TO) is digging for copper, gold, and other metals in, well, you guessed it, Australia.  It's still majority-owned by Turquoise Hill Resources, and you can read my analysis of that company.  I like the Ivanhoe Australia management team's breadth of experience in mining, and the CEO is a hot chick (not that it matters, but it's nice to see hot chicks anywhere).

Their Osborne Operation is producing; their Mount Elliott project has MII resources (but with low grades); their Merlin project has the potential to be an important source of rhenium (and has some existing infrastructure); and their Mount Dore project is still in exploration.  I would like to see more clarity on 2P reserves.

Their financial statements for September 30, 2012 show $17M cash on hand and net losses of $7.7M/month that quarter.  I didn't average that burn rate with their nine-month rate because it is significantly lower than what they burned for the entire nine-month period, representing a qualitative shift in their operations.  It remains to be seen whether this reflects an effort to conserve cash for future exploration and infrastructure development.  Besides, they have little to worry about because they recently had a very successful capital raise.

I'm not investing in this company because I'm not clear on which of their projects will ultimately be successful enough to drive the company's valuation.  I'll wait for more definitive results.

Full disclosure:  No position in Ivanhoe Australia at this time.

Ivanhoe Mines Is Now Turquoise Hill Resources

Name changes happen all the time in the junior resource sector.  Turquoise Hill Resources (TRQ / TRQ.TO) was known as Ivanhoe Mines until August 2 of this year.  This capped off a series of corporate changes set in motion when Rio Tinto backed a $1.8B credit facility to support their Mongolian projects.

The entire management team is now a slate of Rio Tinto top shelf talent.  I can easily forgive the lack of specificity of their mining backgrounds because they are obviously setting a much larger plan into motion.

The technical report for the development of their Oyu Tolgoi copper-gold project in Mongolia is thorough.  If Rio Tinto is confident enough in its potential to operate the project as a strategic partner then there's probably something big there.  Their production plan assumes a long-term average price of $850/oz for gold, which is about $200 higher than gold's real average price for the past 40 years.  The projected mine life of 27 years (potentially 59 years) is huge, but their estimated grades of Au are shockingly low.  It's even more shocking in light of the plan's estimate that mining can recover 79% of the Au, below the typical industry expectation of 85%.  This is a bet on the size of a deposit rather than grade.

One look at TRQ's option chain tells me that someone is very optimistic about the company's long run valuation, with hundreds of open positions in January 2014 calls at strike prices of $10 and up.  That is a very welcome development in light of the Rio Tinto backing.

I'm not sure about going long TRQ given the riskiness of doing business in Mongolia.  The Mongolian government owns 34% of the Oyu Tolgoi project.  Counting on credits from gold production to subsidize the cash cost of producing copper is also a risk, as those two metal prices don't necessarily move in tandem.  They also have other exploration projects that may or may not pan out.  Still, the momentum behind the Mongolian project is undeniably large and may very well sustain the entire company's valuation.  I may decide at some point to sell cash-covered puts under TRQ now that the Oyu Tolgoi project is ready to contribute earnings.

Full disclosure:  No position in Turquoise Hill Resources at this time, although that may change in the near term.

Strata Minerals And Australian Phosphate

Strata Minerals (SMP.V) wants to mine phosphate in Australia.  I have concerns about the management team's experience.  The CEO and other key team members are primarily from the finance and beverage sectors; some of them have mining sector "experience" but that appears to be confined to corporate development work and not actual mine operations.  The company either needs to specifically articulate the relevant mining operations experience of these people or get some new people who have that experience.  Mining company managers absolutely must know how to pull rocks out of the ground.

Their Cardabia, Australia project probably has a transportation cost advantage over phosphate from Morocco, but this is less compelling than a production cost advantage.  I'm even less confident about their Savory Basin project, which has no modern exploration history.  SEDAR has their NI 43-101 report dated July 4, 2012; it identifies no resources but recommends a Phase 1 exploration budget of AUD$500-650k and Phase 2 exploration of AUD$2-3M.

A quick check of their SEDAR financial statements reveals whether they can fund such exploration programs.  Their quarterly statement dated September 30, 2012 shows C$138k cash on hand with a burn rate of about C$154/month (averaging the two different quarters presented.  They opened a private placement solicitation in October that can cover the proposed Phase 1 budget, and they successfully closed the offer 15 days later for the full amount.  Strata's exploration program is clearly on track but their financial position leaves little room for unexpected delays.

It is too early to tell whether Strata Minerals will succeed in finding economically viable phosphate deposits.  They deserve another look in a year or so when their exploration program has quantifiable results.

Full disclosure:  No position in Strata Minerals at this time.  

Wednesday, December 26, 2012

The Haiku of Finance for 12/26/12

Phosphate and potash
Agribusiness needs inputs
Fertilizing crops

Stonegate Agricom (SNRCF) And Its Phosphate

Stonegate Agricom (SNRCF) is developing phosphate projects.  I need to figure out just what's going on here.  Morocco dominates the worldwide market for phosphate and can dictate prices across the entire production chain, so any production change from that country will impact the valuation of any phosphate producer in the world.  One thing limiting the ability of Morocco to hold prices down through overproduction is the rising demand for fertilizer worldwide.  Emerging market consumers want more meat in their diet and farmers need more fertilized cropland to meet that demand.  Phosphate concentrate is probably the better part of this business sector to operate because fertilizer producers want more of it.

The CEO has a background in mining engineering but hasn't worked in that field in several years.  Technology and processes do change.  The good news is that the general managers at each major project are qualified engineers with experience in phosphate and coal projects.  A coal background is useful because coal deposits have uniform geologies that resemble phosphate deposits.

The company's Paris Hills, Idaho project has road access to a Union Pacific rail line a few kilometers from the property.  Their Montaro project in Peru also appears to have ready access to a rail line.  Having logistics in place is always good news.  Both properties have NI 43-101 reports on their MII resources, but of course I need to evaluate 2P reserves to make an investment decision.  Phosphate producers should monitor a project's calcite, minor element ratio, and chlorides but those don't appear to be significant problems for Stonegate Agricom.

Two economic factors determine the viability of any resource extraction project in the world:  the spot price of the commodity in question, and the cash cost of extracting the resource.  The price of phosphate right now is about US$185/ton.  Expanding the date range on that Index Mundi chart to 30 years reveals that the worldwide long term average price of phosphate ranged from $31-45/ton until 2007, when it spiked to over $400 and then crashed to $90 in 2009.  I do not know what happened in that time frame to cause such a spike.  This is important to note, because if the new normal price floor for phosphate is now over $90/ton then previously unprofitable deposits outside Morocco will be economically viable.  The risk for any producer is the possibility that Morocco could flood the world phosphate market with production that drives the cost under $90/ton.

The Paris Hills 43-101 report estimates a cash cost of $73/ton, with an upfront capital cost of $149M.  That cash cost definitely makes the project viable at present market prices and it will probably remain viable over the entire life of the mine (unless of course Morocco pulls the rug out from under the world price).  Funding the capex is a different story.  Stonegate Agricom's most recent quarterly financial statement on SEDAR is dated September 30, 2012.  They had C$7.3M cash on hand on that date; averaging their three-month and nine-month net losses gives them a monthly burn rate of about C$700k.  They can survive until late July 2013.  Raising capital may not be a problem for them if they continue to secure loan facilities from Sprott Resource Corp. as they did on August 21, 2012.

A lot of junior explorers and producers want to hit it big in phosphate and potassium/potash plays.  These companies are a lot riskier than the big producers like PotashCorp that dominate this sector.  Meanwhile, Stonegate Agricom will probably keep chugging along in pursuit of capex funding for Paris Hills.

Full disclosure:  No position in SNRCF or other companies mentioned at this time.

Gold Resource Corporation (GORO) Producing Extremely Cheap Mexican Gold

Gold Resource Corporation (GORO) has the distinction of being a junior mining company that pays a dividend.  I'd like to figure out how they became healthy enough to do that.  Management is led by two senior gold executives.  I'm extremely pleased to see that serious professionals are running this show.  

They have an NI 43-101 report for their flagship El Aguila project, although as a U.S.-listed corporation they really don't need one.  I find it interesting that the report only addresses MII resources (no 2P), yet this company is operating a producing mine at El Aguila.  They also have four other properties in development but are returning cash to shareholders as a dividend rather than holding it to fund future development.  I couldn't see the logic behind such a decision until I looked at their operating costs.  I am very intrigued by the 43-101 report's estimate that the project's operating costs are US$136/oz of Au equivalent.  That is extremely cheap gold!  No wonder the management was so confident about beginning operations before 2P was confirmed.  They can afford to return money as dividends because they save so much cash in production.

I normally consider a junior mining company's ability to stay alive, but since this one has an established operating history it's more appropriate to use the fundamental screening criteria for a mature company.  They were profitable in 2011 but not in the two years prior.  It's good that they have no long term debt and positive free cash flow.  It's bad that their five-year ROE has been negative.  That number is a legacy of the losses incurred in the years prior to production.  Producing gold at $136/oz makes their main mine profitable at any of gold's historic annual price averages in the past three decades.

Gold Resource Corporation may very well have turned a corner in 2011.  The two co-founders did so well with their previous venture, U.S. Gold Corp., that famed Canadian investor Rob McEwen put his own name on it.  I am really going to keep watching GORO to see if there's a repeat performance.

Full disclosure:  No position in GORO at this time.  

Coeur d'Alene Mines (CDE) Disappoints Me

You'd think that a major silver producer like Coeur d'Alene Mines (CDE) would be able to write its own ticket with silver prices in the stratosphere.  Think again.  The company has manageable long-term debt so long as they can maintain their present net income.  That is in doubt; they suffered major losses in 2009 and 2010, and the quarter ending September 29 showed another loss.

Their free cash flow is positive but their five-year ROE and EPS growth rate are atrocious.  What went wrong?  Maybe it's bad karma from their legal dispute with Rye Patch Gold over a claim in Nevada.  Their net metals sales and OCF have grown significantly since 2008, so this should have translated into net income given their declining capital expenditures.  The trouble at the Kensington mine undoubtedly hurt them.

The fundamentals just aren't compelling enough for me to dig deeper into the company's problems or wait for a turnaround.  There are other silver producers in the resource sector that deserve my attention.

Full disclosure:  No position in CDE at this time.

Cap-Ex Ventures Ltd. (CPXVF) Seeks Iron In Quebec

Cap-Ex Ventures Ltd. (CPXVF / CEV.V) is focused on discovering iron in Quebec.  Their CEO has no education or background in mining.  Their previous CEO had some experience in mining but he was moved up to the board when Cap-Ex made a management services agreement with Forbes & Manhattan in December 2011.  I wonder about management changes that go from some relevant experience to zero relevant experience.  There's only one mining engineer with project experience on the team at present.

Their main projects are concentrated around Schefferville, Quebec.  None of their projects appear to have any NI 43-101 compliant confirmation of 2P reserves.  That's my main driver and I don't see it.  There is a railroad through their Block 103 and a major multinational steel firm has a plant nearby that could probably handle milling, so infrastructure is less of a concern with these projects.

They haven't posted any financial statements to their website as of today, so I had to search SEDAR for their annual statement dated August 31, 2012.  They had C$2.9M in cash on had at that time and had a net loss of C$4M.  Since then they raised a private placement in three tranches (C$3.5M, C$1.36M, and C$740k). This C$5.6M in cash should keep them around for another year, but it's hard to make more than a guess without seeing how their burn rate changes in subsequent quarterly financial statements.

Cap-Ex's share structure frankly scares me to death.  They've already issued almost 76 million share and they'll need a lot more capital to make it through further exploration before they even get to a production decision.  Shareholders can expect more dilution after future fundraising rounds.

Cap-Ex Ventures isn't for me because I need to see definite 2P reserves and solid management in a junior resource company.  It's interesting to note that the share price has crashed from about a buck to around US$0.27 today ever since Forbes & Manhattan entered the picture a year ago.  Nice work, folks (I'm being sarcastic).

Full disclosure:  No position in Cap-Ex Ventures Ltd. at this time.

Financial Sarcasm Roundup for 12/26/12

It's one day after Christmas and I'm not any less sarcastic than I was yesterday.

The fiscal cliff is approaching and the relevant parties just can't stop launching trial balloons to impress the folks back home.  Both parties want to lower corporate tax rates in the name of competitiveness.  There's no way such a complicated reform will get done this year but that won't stop the preening and posturing.  Lowering the corporate tax rate while eliminating deductions probably won't raise revenue but it will make CFOs' jobs easier, so maybe some grateful corporate treasuries will step up their giving to super-PACs.

Japan is going nuts.  Their ruling political coalition has voted specifically to destroy the yen with monetary stimulus.  That's like putting some anemic patient on a cocaine diet in the hope that it will accelerate their metabolism.  Forget about structural reforms.  I'm so glad I don't own Japanese stocks or yen.

Some New Jersey union pension fund is suing to block the NYSE-ICE merger.  Come on already.  They should be grateful anyone wants to buy an American exchange at what is likely the high point of the U.S. equity market.  That means ICE is probably at its high-water mark too, and competition from dark pools and internal crossing networks make this merger all the more fortuitous for both exchanges' shareholders.

Here comes the mother of all re-fis.  The Administration is considering a refinancing handout to even more borrowers, along with nationalizing the rest of the secondary mortgage market.  I knew all along that Washington was going for it but it's still thrilling to see my suspicions confirmed in print.  I invite my readers to search my blog articles throughout 2011 and 2012.  You'll find several articles where I propose that large-scale mortgage modification programs would be a transmission mechanism for a wage-price spiral if the federal government flooded them with cash.  If this latest policy boondoggle is enacted, the necessary mechanism to launch hyperinflation will be in place.

The primary Treasury dealers are dumber than ever.  They're hoarding bonds and reducing sales to the Fed. This is the wrong thing for a dealer to do with the U.S. bond market at an all-time high.  The smart thing to do is unload winning positions onto the last sucker in the room - the Fed, of course - and shift the bank's business lines into things like non-dollar debt from emerging markets.

Shoppers didn't come through for retailers this year.  I've been waiting for a downturn in retail activity and this one's been a long time in coming.  Better late than never.  The average American probably has enough unused stuff in their closets and storage sheds to equip several emerging market households, and yet buying more stuff is in our cultural DNA.  The silver lining to any hyperinflationary period is that ordinary folks will be cured of their impulse to consume with abandon.

Finally, the SEC gets my Alfidi Capital award of the day (okay, there's no such thing but it sounds generous) for innovation.  The agency charged with regulating our capital markets is finally acquiring a system that allows it to watch the capital markets.  Funny, I've been using ordinary financial websites and online brokerages for almost two decades.  In true government contracting fashion, they bought a complete system rather than subscribe to terminals and feeds from Bloomberg and Dow Jones.  I recall reading during the financial crisis of 2008 that the Treasury Secretary had the ability to monitor credit markets in real time from his desk.  I don't have to name the Wall Street players who have a vested interest in the keeping the SEC blinded, in exchange for future private employment for the agency's top investigators.  In that context, I expect the SEC's new market monitoring system to work exactly as intended, especially since initial access to the system will be limited to a handful of people.  Read between those lines.

Updating The Alpha-D for 12/26/12

The stock market was on a reduced hours schedule on Monday and I didn't make any portfolio adjustments until today.  I figured even my brokerage's computers need a break for a few microseconds.  Here's what I did with my money today.

My short covered calls on GDX expired unexercised, so I renewed them.  I'm willing to risk seeing that long position sell off if it breaches the strike price.  Gold of any kind will prove to be a poor hedge by itself against the inflation we'll see at some point in the U.S.  A position in gold stocks is probably okay as a cash-generating hard asset position, but I am considering other hard assets to add to my holdings.

I also sold short some cash-covered puts under GDX.  Given that security's recent decline in price, I wouldn't mind picking up some more near its 52-week low.

I made no changes at all to my positions in FXA, FXC, and FXF.  I will continue to hold the currencies of countries with well-managed fiscal policies and non-inflationary central bank monetary policies.  I am particularly encouraged by recent public statements of the central banks of Australia and Canada.  Those countries will probably stay on their low-inflation courses while the euro and U.S. dollar fall apart.

I am not at all interested in dollar-denominated fixed income holdings.  Inflation will destroy cash, CDs, and bonds but that's what the Bernanke Fed is trying very hard to do.  I will commit cash to equities in energy, resources, and related hard asset sectors when I see some bargain prices.  That's all for this month.

Tuesday, December 25, 2012

The Haiku of Finance for 12/25/12

Christmas time is here
Time to add up all your bills
Mine are all paid off

Olympus Pacific Minerals Is Now Besra Gold

Sometime in the last five months, Olympus Pacific Minerals changed its name to Besra Gold (OYM.TO).  I have no idea why they did this and I don't even care.  I only care about a company's fundamentals.

The management bios they have on their corporate site are the least descriptive of any mining company I can recall in recent memory.  Nowhere in the CEO's blurb is any description of exactly which positions he's held in the resource sector.  His bio sketch does inform us that he's an avid oarsman.  Wait, there's more.  The group exploration manager's bio says that"he knows what he's talking about" when it comes to geology.  Another guy's bio says he loves grilled cheese sandwiches.  Another guy says he holds a "Batchers degree."  I can't take this seriously.  My own corporate FAQ and professional biography are probably the least serious of their kind in the finance sector, but that's because I can afford not to care what anyone thinks of me.  A junior mining company is in a different position, especially if it has to raise capital.

They have properties all over Southeast Asia.  Only their Phuoc Son property in Vietnam has both proven and probable reserves at this time.  That site has some really compelling grades but I can't find the 43-101 report anywhere on the corporate site that provides confirmation.  They have one quarterly financial statement as of September 30, 2012.  Besra lost US$3.7M in that quarter and has US$4.4M in cash on hand.  These folks are hanging by a thread.

Hey, Besra people.  If you're serious about mining then please polish your executives' bios.  Also, show us all the actual 43-101 reports you used to create that summary table.  Oh, BTW, try to make a profit.

Full disclosure:  No position in Besra Gold (or whatever it's called) at this time or any time.  

Colossus Minerals (COLUF) In Brazil

Colossus Minerals (COLUF / CSI.TO) wants to mine gold and PGMs in Para, Brazil.  The best things that have come out of Brazil IMHO are Pele, churrascaria cooking, and string bikinis.  Maybe this mining company can throw something else into that mix.

The management team has a CEO from a finance background.  Being the treasurer at a miner is not the same thing as running a mine.  Having a mining engineer as COO almost makes up for that but not quite, since his experience is mainly in running mature projects rather than greenfield development.  BTW, that COO is Chairman of Tembo Gold, another junior I blogged about today.  They at least have a couple of other team members who've worked in Brazil.

Their Serra Palada property has an exploration history.  Their preliminary drilling shows unbelievably high ore grades, which begs the question of why the historical open pit that operated there was ever closed (I'll let that go unanswered since I don't know the backstory).  Aerial photos of the site show an internal road network and accessible water (those are good things BTW).

Their quarterly financial statements for September 30, 2012 show over C$101M in cash on hand, a phenomenal amount.  They'll need it with a burn rate of about C$4M/month, but they can hang in there for another two years.

Colossus has a lot of confidence in itself based on the infrastructure they've emplaced so far.  I await the publication of the initial 43-101 report to see whether the astonishingly high grades they obtained in sample drilling will translate into MII resources.

Full disclosure:  No position in Colossus Minerals at this time.

Tembo Gold Corp. (TBGPF) Explores In Africa

Tembo Gold Corp. (TBGPF / TEM.V) is digging up Africa, specifically Tanzania.  That country is ranked 102 out of 174 on Transparency International's Corruption Perceptions Index for 2012, with an absolute score of 35 out of 100.  Tanzania also ranks 110 out of 179 on the Heritage Foundation Index of Economic Freedom for 2012, with an absolute score of 57.  This translates into a huge political risk that investors must bear in mind.

The CEO is a geologist with a long history of operating in Tanzania.  Good news.  He'll need that local knowledge given the high level of corruption and low level of freedom there.  I'll give the rest of the team good marks for knowing stuff about mining.

Their Tembo property may have promise.  I think they did something brilliant by overlaying plotted artisanal mine activity onto their aerial magnetic survey results.  Tembo's 43-101 report from July 2012 does not reveal any MII resources but does recommend a $12M follow-up exploration program.  I wonder how they're going to fund this next phase.

Tembo Gold's financial statements for June 30, 2012 show C$426k in cash on hand, plus C$4.6M in short-term investments.  The notes to their financial statements do not reveal any encumbrances tied to those investments, so I will consider that as part of a total cash reserve of C$5M.  Their burn rate is about C$520k/month (averaging their three-month and six-month net losses), and they closed a financing round for C$4M in November.  This gives them enough cash to survive until the end of December 2013.  It is difficult to determine how much of this raised cash will be devoted to their follow-up exploration.

Some of Tembo's drill samples show some incredibly high grades but that's not enough to entice me to invest.  Let's see some 2P reserves first.  Oh, BTW, Tembo should hope the Tanzanian economy becomes more transparent.

Full disclosure:  No position in Tembo Gold Corp. at this time.

Financial Sarcasm Roundup for 12/25/12

The capital markets are closed for Christmas but Alfidi Capital never sleeps.  The holidays are a perfect time to get sarcastic.

The stealth nationalization of health care payments will really get going in 2013 with new tax increases.  I fully expect employer-sponsored health insurance plans to be taxed as the equivalent of income.  I admit the principle of taxing a benefit makes sense; after all, if cash compensation from employment were higher then workers could pay for health insurance out of pocket.  Employees really don't know the difference because this tax break encourages companies to enroll their workers in plans.  The health insurance sector will love this tax but most small businesses will hate it.  I also expect small businesses to accelerate the transformation of full-time positions into part-time jobs to avoid providing health care and paying this tax.  The insurance sector has begun its sea change toward a system with the federal government as single payer.  You will be forced to pay a premium for routine access to an overstressed system because the government isn't the least bit interested in controlling costs.

Unionized labor is about to deliver a very unwelcome post-holiday gift to the economy.  Stupid ILA dockworkers are about to launch a Maine-to-Texas strike that will curtail or shut down shipping at every East Coast and Gulf port for weeks.  Even dumber, the ILWU is threatening to strike at Northwest grain ports.  Midwestern farmers ought to be up in arms about the prospect of their grain being shut out of Asian markets.  The National Retail Federation isn't taking the ILA threat lying down; they urge the Administration to force workers to stay on the job under Taft-Hartley.  Fat chance.  This Administration is a big friend of organized labor and is not at all inclined to use the law as it was intended.  I expect a strike, and a big hit to the stock prices of carriers transporting containerized cargo.

It's hard to ignore the scary headlines about no fiscal deal forthcoming in Washington.  Hitting the fiscal cliff would be good for America so we can all get the shock of living within our means and living with reduced benefits from our government.  Politicians don't want that to happen but don't want to explain anything to folks back home.  The real deal will still get done in a couple of days, just like the last debt-ceiling emergency, and everything will be fine until the bond market boycotts a U.S. Treasury auction.

I hope you're all enjoying this year's winter solstice. That's what Christmas used to be before Emperor Constantine foisted monotheism upon the Roman Empire and politically appointed clergy began appropriating pagan holidays.  I celebrate today with the original intent in mind, devoid of late-Roman innovations.

Detour Gold (DRGDF) Gets Ready To Shine

Detour Gold (DRGDF / DGC.TO) deserves applause for moving toward production.  The management team is mature.  The CEO is a geologist and the rest of the team has experience in project development and mineral processing.  I don't think I could ask for more from the leadership of a growing mining company.

The company owns its Detour Lake project outright and their 43-101 report data is available.  This site has almost half a billion tons of 2P reserves at an average grade of 1.05g/ton.  That's not bad given declining grades worldwide, so full production is justified.  They estimate the total cash cost of production at C$749/oz, which is about $100 higher than gold's long-term average price.  This mine is clearly viable so long as the world market has elevated expectations for the price of gold.  Any bullion price crash would hurt Detour Gold's valuation.  BTW, their projected IRR of 12.4% after tax is far below the 25% threshold favored by major institutional investors in the resource sector.

Shareholders should be concerned about the possibility of dilution.  Detour Gold has issued 117M shares but this can be diluted to 139M with options and convertible notes.  The most significant short-term concern is the set of options expiring in less than one year with a weighted average strike price of C$10.25.  Those option holders will probably get very lucky if the share price is still over C$23 one year from now.

The company is viable for now but it isn't enough of a home run for my money.  I would need to see a higher IRR and lower cash cost of production in a mining stock.

Full disclosure:  No position in Detour Gold at this time.

Monday, December 24, 2012

The Haiku of Finance for 12/24/12

Holiday shopping
Real bargains come in new year
It pays to delay

Lake Shore Gold (LSG) Produces And Explores

Lake Shore Gold (LSG / LSG.TO) is a junior mining company that is actually producing gold.  The CEO is a mining engineer.  That's good.  The rest of the team has an interesting mix of mining-related experience.

Since they're in production at their Timmins West project, the important factor now is the cash cost of production at $970/oz.  The good news is that Timmins West's extraordinarily high grade of 5.21g/ton makes production very much worthwhile.  The bad news is that this cost is far above gold's historical average price.  Inflationary central bank policies that keep the gold bull market roaring will drive this company's valuation until they can reduce those costs to a sustainable level.

The stock is still low-priced because the production at Timmins West can potentially subsidize their other exploration properties.  That's fine as long as Lake Shore Gold delivers positive earnings overall.  They have not done so yet.  Their Q3 financial statements for 2012 show net losses of about C$2.6M per month (a rough average of their three-month and nine-month loss rates).  It's good that they have C$83.5M in cash in hand, enough for more than two years.  Investors shouldn't have to wait that long for the company to either find decent grades at its other exploration properties or drop them and focus on Timmins West.  I await the outcome of that decision.

Full disclosure:  No position in Lake Shore Gold at this time.

Prophecy Platinum (PNIKF) Digging In For Long Haul

Prophecy Platinum (PNIKF / NKL.V) was spun off as a stock dividend to holders of Prophecy Coal, the subject of my most recent blog article.  Let's see what these folks are doing.

The CEO is a geologist, and he has run projects in the development stage and during full production.  Wow.  That's pretty much what I want to see at a junior miner.  The rest of the team has decent bench strength in the mining sector.

They have a convenient summary of their projects' 43-101 reports.  It's really nice to see a complete set of initial reports for an entire company's project portfolio, and I don't think I've seen that for any multi-project junior I've analyzed this year.  The Shakespeare project is the only one with probable reserves.  Given the low grades of gold and base metals at Shakespeare, I think it's safe to say the market prices of the platinum group metals (PGMs) will drive this company for the foreseeable future.  Platinum is over $1550/oz and palladium is around $680/oz, different from the prices used in the Shakespeare feasibility studies.  Those metal prices have been on a tear for several years.

Their Q2 for fiscal year 2013 ended on September 30.  Prophecy Platinum's current burn rate is about C$700k/month and they ended September with C$4.3M in cash on hand.  They can survive until the end of March 2013 but they will need to raise more capital.

Prophecy Platinum is still drilling and surveying its projects.  Their updated feasibility study for the Shakespeare project was published in 2008, and four years later they still haven't commenced production.  The study predicted that production would have begun by now and didn't anticipate delays of special equipment deliveries longer than three years.  These delays won't be resolved until they have 2P reserve data for their Wellgreen project (which already has some road infrastructure) and/or sufficient capital to build out the Shakespeare project.  I don't invest in companies that suffer interminably long delays.

Full disclosure:  No position in Prophecy Platinum at this time.

Prophecy Coal (PRPCF) Bets On Mongolia

Prophecy Coal (PRPCF / PCY.TO) is trying to make a go of the resource sector in Mongolia.  It's too bad Genghis Khan isn't around today or he'd whip that whole country into shape.  In the meantime, folks have to do business the modern way.

The management team has experience in everything but coal mining.  It's nice to have local connections in Mongolia, but at some point after your local contacts have accelerated your permit applications you'll have to demonstrate the ability to pull coal out of the ground.

Their main project is coal from Ulaan Ovoo.  Their 43-101 report from 2009 reveals MII resources but no 2P reserves yet.  The single most important number at this stage is their estimated cash cost of production at $56/ton.  That is an extremely high figure, far above the preferred threshold of the lowest quartile on the world's cash cost of production curve.  Mongolian utilities would be better off importing coal from Indonesia, where the average cash cost is about $35/ton.

Their proposed power plant at Chandanga has been permitted but they have not begun construction.  The coal project at Chandanga that is supposed to fire this plant has a 43-101 report, estimating the cash costs of production here at under $38/ton and declining in future years (according to their latest update dated November 2012).  That is a far more price-competitive project than Ulaan Ovoo.

Prophecy Coal does have other projects but the key takeaway is that they all have 43-101 summaries of MII resources.  None of the properties they're exploring or developing have 2P reserves, so more exploration needs to de-risk this enterprise.

The company's most recent financial statements for Q3 in 2012 show C$4.5M in cash on hand as of September 30.  Note that this does not include the C$10M in restricted cash the company has pledged to obtain exploration licenses from Tethys Mining LLC; that cannot be used to cover operations.  Prophecy Coal's burn rate is about C$1M/month, so they will have to raise more capital before their cash runs dry in mid-March 2013.

Their plan seems to be to initially sell coal directly to Mongolian power plants, but Mongolia is a small energy market.  I've never heard of a penny stock building a 600MW power plant; that's something a large utility would normally do.  They will have to raise a tremendous amount of money to build that power plant and extract coal.  That's a bit too risky for me.

Full disclosure:  No position in Prophecy Coal at this time.  

Sunday, December 23, 2012

Pan Global Resources Goes For Lithium

Pan Global Resources (PGZ.V) wants to mine lithium in Serbia.  There's a global supply glut for lithium right now, with the world's top three producers more than able to meet the world's needs from their existing reserves for the forseeable future.  This company's valuation will be driven by its borates, not its lithium.

The CEO's background is hard to understand.  A degree in science does not necessarily include a focus on geology.  Directing business development and regional exploration are the kinds of things an MBA guy like me could do.  Directing a mine from exploration to production is something else.  The directors have diverse mining backgrounds but they're not the ones doing the work or making daily operational decisions.

Two of their projects have NI 43-101 reports.  Further development of Jadar West and Valjevo will require US$585k each, or $1.17M if you can't add.  Neither report contains verification of any MII resources so there's nothing to justify a higher valuation yet.

Check out their most recent financial statements, specifically Q2 for 2012.  Pan Global had $1.6M in cash on hand at the end of July and their burn rate is about $250k/month.  Their exploration program is progressing but at that burn rate they would have run out of cash  in January 2013 were it not for their successful non-brokered financing on December 11.  That $1M will keep them alive until the end of May 2013.

I do not know whether they will complete their drill program next spring with sufficient data for a 43-101 report on MII resources.  That uncertainty, plus the world market's oversupply for lithium, makes me shy away from this company.  Maybe their borates will prove to be worth something.

Full disclosure:  No position in Pan Global Resources at this time.

VLOV Inc. (VLOV) Chinese Clothing Pumped By "Fitzroy McLean"

Some weeks or months ago I got a mailed teaser from someone calling himself Fitzroy McLean from an outfit named Without Borders.  This dude claims to be a former U.S. Army Ranger and CIA operative, which of course makes me wonder what any of those things have to do with stock picking.  The guy's LinkedIn profile makes me wonder when he would have had time to serve in the CIA's Clandestine Service as he claims in his mailer.  If he graduated from West Point in 1988, his five-year active duty service obligation would have expired in 1993, which means he would have had less than a year with the CIA before becoming an investment banker in 1994.  "Fitzroy McLean" is welcome to contact me any time he likes to discuss his bona fides.  I'm hazarding a guess that he's a fake, taking his name from the real Sir Fitzroy MacLean, a real-life covert operative.

Anyway, this article isn't about him or his assumed identity.  It's about the stock he's pumping, specifically VLOV Inc. (VLOV), a Chinese clothier.  I am not an expert on the Chinese clothing market.  Big deal.  China's headed into a recession just like the rest of the developed world and your average Chinese upper middle class consumer will be hard-pressed to buy upscale clothing.

This stock did a reverse split last September to maintain its exchange listing in the U.S.  Reverse splits are generally a bad sign.  BTW, this is the second reverse split the company has done in a year.  I would ordinarily consider a company with an EPS higher than its market price to be an unbelievable bargain, but I emphasize the "unbelievable" here.  The share price has absolutely cratered in the past few months despite the extremely healthy earnings VLOV has reported.  I cannot understand that action.

I swore off investing in China months ago.  I don't need to revisit that decision, and I certainly won't do so at the behest of a penny stock mailer.  I wonder if Dr. Fu Manchu wears VLOV stuff.

Full disclosure:  No position in VLOV at this time.  


‘Twas The Night Before Christmas At Alfidi Capital

‘Twas the night before Christmas, and all through my head
Not a stock pick was stirring, ‘cuz the market was dead
The blog posts were published on the Web with no care
In hopes that some readers would soon be aware
My female admirers were home in their beds
While visions of Yours Truly danced in their heads

When on CNBC.com there arose such a clatter
I clicked on live streaming to see what was the matter
I zoomed to full screen view and turned up the sound
In case some “money honey” was hanging around

When what to my wondering eyes did appear
Why, it’s ol’ Ben Bernanke, smirking from ear to ear
More rapid than QE, his big banks all came
He read off the ticker and called them by name
“Goldman Sachs!  Morgan Stanley!  JPMorgan and more!
Wells Fargo, Bank of America, more bailouts in store!
To the top of the market!  To the top of the charts!
I’ll bail you all out with fancy monetary arts!”

So out of my laptop the big bankers flew
With a sleigh full of cash, and Helicopter Ben too
He was dressed in Brooks Brothers, a well-tailored suit
No doubt it was paid for with middle-class loot

He demanded I hand him my brokerage account
I told him “No way!  I’ll give you no such amount!”
He pleaded on behalf of some fat banker elf
He was shocked when I told him, “Go eff-yourself.”
Ben remained indignant, he wanted to know
Why I wouldn’t relent, so I told him so
“I work hard for my money, and I save and invest
I pay some in taxes and keep all the rest
I’m tired of bailing out bankers and fools
You don’t know what you’re doing, even with all your tools.”

I gave him the finger, right in front of his nose
He turned on his heel once he knew he was hosed
He slumped in his sleigh, to his team gave a whistle
They flew back to the Fed, like a heat-seeking missile
But I heard Ben exclaim, ‘ere he drove out of sight
“Christmas won’t be so merry once there’s capital flight!”

Saturday, December 22, 2012

The Haiku of Finance for 12/22/12

Notre Dame football
Covers up players' actions
Corrupt like Wall Street

Mkango Resources (MKA.V) And Rare Earths

Mkango Resources (MKA.V) is chasing one of my favorite things - rare earth elements.  Their CEO has an analyst and transactional background in the mining sector but is not a geologist or miner himself.  Uh-oh, that's not good for a junior explorer.  The non-executive director with the professional background at Randgold was there long enough to take it from exploration into full production.  That is invaluable experience but the team needs more people like that.

Their Songwe project in Malawi has a 43-101 report.  Good for them but I would like to see a final report with 2P reserves.  Photos of the site show a scratched-out dirt road but it's unclear whether it connects to the nation's larger transportation network.  They need C$1.6M to complete the next phase of drilling, modeling, and economic estimation.

It's hard to tell whether they have the financial strength to move forward with that plan.  The most recent financial statement they show on their website was for a company previously named "Alloy Capital."  Searching SEDAR reveals interim financial statements for Mkango dated September 30, 2012.  These statements reveal C$645k in cash on hand at the end of September, and with a burn rate of over C$100k/month they'll run out of cash by March 2013 unless they raise capital.  Shareholders can thus expect serious dilution unless Mkango is willing to option out part of the 100% ownership of its Songwe property.

Management deserves kudos for keeping expectations realistic, and I'm not about to compare them to Mountain Pass until they have a firmer understanding of their ores.  Since they only have one key leader who has gone all the way to production, they don't have the bench strength to go it alone in this corner of the world.  The driver of Mkango's future valuation will be the quality of whichever strategic partner they bring in prior to a production decision.  That uncertainty, plus the lack of clarity for their financial health, makes them too risky for me.

Full disclosure:  No position in MKA.V at this time.

Friday, December 21, 2012

The Haiku of Finance for 12/21/12

Rich want tax increase
They can just write off more gifts
Poor people cannot

NovaGold (NG) Going For Gold

NovaGold (NG) is all about one thing - gold.  Specifically, they want to make their Donlin Gold project viable and have stated their intent to divest their interest in their Galore Creek project to stay focused on gold.  The Galore Creek property's grades of gold, silver, and copper don't look very promising anyway, so that's a good strategic move.

I like the fact that the CEO has a background in mining.  You've heard me state before that a prefer a geologist at the helm of a young company, but with a company that's ready to make a production decision it's better to have a mine operator.

NovaGold has a 43-101 statement for its Donlin Gold project.  The proven and probable resources have a grade of Au 2.09 g/t, which is pretty dog-gone attractive considering the declining grades miners are finding worldwide.  I am very intrigued by that report's estimates of the projects cash costs of production, which are significantly less than gold's historic average price of $615/oz.

Their Q3 financial statement for 2012 shows C$267M cash on hand at the end of August.  Their net losses amount to a little over $6M/month, so this burn rate gives them a life span of over 44 months.  They can survive more than twice that long if they sell the Galore Creek property at its $381M book valuation (yeah, I know, these kinds of things can get written down but they'll get something for it).

The most attractive aspect of this company for me right now is its beaten-down share price.  It's trading over four bucks a share right now, pretty far from its 52-week highs.  The fact that Barrick Gold retains a 50% interest in the Donlin Gold project indicates its attractiveness.  I haven't made a decision yet to go long because the company still needs a mature infrastructure at the site.  I am nonetheless interested in watching this one.

Full disclosure:  No position in NG at this time, although that may change in the near future.

Curis Resources (PCCRF) and Copper

Curis Resources (PCCRF / CUV.TO) is part of the Hunter Dickinson family of companies.  Curis wants to mine copper in Arizona.  Let's see what they're doing about that.

They're pursuing a novel approach to copper recovery from their Florence Copper project in Arizona.  They plan to use in-situ water injection into wells that will force copper-laden solutions to the surface for processing.  Photos of the site show sufficient infrastructure in place (water, power, roads).  This may very well be the most environmentally benign mining operation I've seen in several years of examining junior mining companies.

The headache I often have with these types of companies is with the way they structure their project.  They bury the project information so deep in the Florence Copper website that it's difficult to identify the management team or ascertain whether there's a 43-101 report with proven and probable resources.  That means I can't pass judgment on whether this copper project can live up to whatever potential it may have until I find those items.  I also can't find any SEC filings for Curis Resources, which is odd for a publicly traded company.  Let's see some verifiable facts besides the typical brochure stuff.

Full disclosure:  No position in Curis Resources at this time.

Thursday, December 20, 2012

The Haiku of Finance for 12/20/12

Transparency rank
Check it before you invest
Avoid corruption

Cardero Resource Corp. (CDY) Tries To Do Something

Cardero Resource Corp. (CDY / CDU.TO) is part of the Cardero Group.  Don't confuse the names.  I'll be talking about the junior explorer today and not its parent.  This company is out looking for coal, or iron, or something.  The thing with families of prospect generators is that they must move along quickly if they can't find anything worth mining at a given project.

The CEO knows his coal, so at least they put the right person in charge.  Their corporate structure is unique; they have separate wholly-owned coal and iron companies presumably to accommodate the properties they're exploring.  I don't often see that in a company that was itself created from a prospect generator parent.

Now, about those properties.  Carbon Creek is an aptly-named British Columbia coal deposit that is showing some progress.  They released a pre-feasibility report for that property in November 2012 and yet the share price has slightly declined since then (hint:  not a good sign of market confidence).  Read that study yourself.  It estimates the project's cash cost of production at $74/ton.  Their base case assumptions on what this product can earn in the world market might be optimistic.  Look at the EIA's data on sales prices of coal by mine size in the U.S. for 2011.  Cardero's cash cost is barely breaking even with mid-range mine sizes.  The spot coal price for the U.S. is currently under CDY's cash costs.  Maybe that's why the stock market's not impressed.  If they plan to sell the coal to non-U.S. markets where the spot price is higher, they'll have to build out the rail and power infrastructure at the site.

Check out their Sheini Hills iron project in Ghana.  They've got a local JV partner but that doesn't impress me much.  That partner's CEO is also running several other Ghana-connected companies, so perhaps he could explain how he can manage all those different entities.  Ghana currently ranks 64th on Transparency International's corruption index.  The political climate for a project is extremely important if it is to successfully avoid corruption or nationalization.

They've also got a Minnesota project.  They already have two 43-101 reports from January 2012 that conclude the two properties merit more work.  The good news is that their Q3 financial statement for 2012 shows over $10M in cash on hand as of July 31.  The bad news is that they also lost almost $3M that quarter.  They'll still be spending money to prepare the Carbon Creek project for production, so they'll need to raise more capital next year.  Existing shareholders should expect further dilution.

Cardero Resource Corp. is a risky bet on the viability of Canadian coal outside the North American market. It's also a bet on unproven resources in Ghana and Minnesota.

Full disclosure:  No position in Cardero Resource Corp. at this time.

Wednesday, December 19, 2012

The Haiku of Finance for 12/19/12

Keep drilling dry holes
Exploration waste of time
Throw money away

Rye Patch Gold Corp. (RPMGF) Marches On

Rye Patch Gold Corp. (RPMGF / RPM.V) is one of those ubiquitous gold exploration companies that makes the investor relations rounds.  I first blogged about them in October 2010 when I noticed they had leased out geothermal rights to generate some cash and loosen its rocks.  Here's an update on how they're faring.

You wouldn't know it from the way their management biographies are currently written, but the CEO is a geologist.  That's a plus in my book and they do make a "qualified person" statement.  

Their Rochester project is the subject of a legal battle with another company.  Their Wilco project has an NI 43-101 report from 2008 showing extremely low grades on site and an estimated cost of over $1M to continue drilling.  Their other projects also show discouragingly low grades from exploratory drilling in 2008 with little follow-up exploration since that year.  

The company seems to have enough cash on hand for at least another three quarters but their lack of success in exploration raises questions about what they can do with this money even if the Rochester question is settled in their favor.  Note 1 in their Q3 2012 financial statements admits that their continuance as a going concern depends upon raising more capital.  BTW, I don't see any financial statements for Q1 of this year.  

Maybe Rye Patch will get lucky with one of these properties, but I won't stake my own money on such an outcome.  Maybe they can keep leasing out land to geothermal explorers.

Full disclosure:  No position in Rye Patch Gold Corp. at this time.  

Tuesday, December 18, 2012

The Haiku of Finance for 12/18/12

Find a magic goose
Feed it inflation diet
Lay a golden egg

Cerberus Makes Hasty Exit From Freedom Group

Investment decisions should always take fundamentals into account.  I say "should" because sometimes a portfolio manager's fiduciary duty to satisfy a client's whims take priority over a sound investment in a healthy, market-dominant company.  Cerberus is selling its stake in Freedom Group because that will satisfy CalSTRS' demands.  This decision has nothing to do with whether the investment in question has been a winner.  The chief product of this particular sector has seen record-breaking sales in 2012.  Cerberus is a middle step between institutional investors and the capital markets.  It has to pay as much attention to future rounds of fundraising as it does to the performance of present holdings.  Satisfying CalSTRS now assures a future audience for Cerberus' fund offerings.

Some investors let emotions rule their thinking.  Big news events that hit close to home have an impact that financial models can't measure.  Bad news about one school can upset teachers anywhere, and their plan sponsors' money managers are paid to listen.  A state pension plan forcing its money manager to leave a healthy firm should be able to explain to its pensioners why it won't be able to pay their benefits if it can't achieve its target discount rate.

Full disclosure:  No positions in entities mentioned.

Monday, December 17, 2012

The Haiku of Finance for 12/17/12

Debt would make some sense
Buying a cash-flow asset
To hedge inflation

Financial Sarcasm Roundup for 12/17/12

It's been some time since my last blast of outright sarcasm.  That's too long.

The U.S. has finally enacted permanent normal trade relations with Russia, more than two decades after the Cold War ended.  Uncle Sam sure takes his sweet time recognizing reality.  The Jackson-Vanik legal regime was a Cold War blunt instrument intended to hold the Soviet Union and its Warsaw Pact allies accountable for their human rights violations.  Now Russia's internal freedom is on par with that of the West, which says more about the West than it does about Russia.

Uncle Sam will probably be just as slow in recognizing the weak demographic assumptions underpinning entitlement spending.  The slowdown in legal immigration due to the prolonged recession is probably offset by the large numbers of illegals who remain here and have kids.  The irony of illegal immigration is that our own government encourages illegals to apply for benefit payments while they are paid off-the-books income that can;t pay into Social Security or Medicare.  Illegal immigration makes the unfunded entitlement problem worse and no one in our business or political elite even cares.  My solution is simple.  If you apply for benefits, please include your U.S. birth certificate or naturalization papers with your application.

Meanwhile, private equity firms have learned nothing since 2008.  They are using more leverage than ever to buy companies whose earnings will be destroyed in the next round of the recession.  Borrowing at record-low interest rates isn't such a great idea when the earnings needed to pay back those debts won't be there.  I'll be watching the headlines for the first private equity firms that go bankrupt next year.

Sell-side analysts have learned nothing from last decade's master settlement.  Some Morgan Stanley banker got his firm smacked for coaching Facebook on how to materially mislead analysts.  That $5M fine is peanuts, so this is hardly going to hurt anyone other than that one banker.  State regulators are paying attention while the SEC is asleep.  My readers should be grateful that all of my articles reference facts already in the public domain.  Anyone idiot can mislead analysts on a conference call.  Only a genius like me can tell the truth.

I think I'm losing my touch.  These boring news items aren't getting me fired up enough to be truly sarcastic.

Sunday, December 16, 2012

The Limerick of Finance for 12/16/12

Crony capitalists shout hooray
For bailouts the rest of us pay
There will be some more
So quit keeping score
Just wait for the reckoning day

Some Things You'll See While Driving Along a Mining Stock S-Curve

I sift through a lot of materials on mining stocks looking for anything that fits my risk tolerance.  A lot of movement in a junior mining stock's price is defined by an S-curve often attributed to Pierre Lassonde, a legend in the mining industry.  The Lassonde Curve posits that a mining company's life cycle has four stages:  exploration, feasibility, construction, and production.  Valuation is the vertical axis and time is the horizontal axis.  A company's valuation climbs rapidly during the exploration phase until it peaks with a pre-feasibility study, at which time it troughs during the feasibility and construction phases as the market realizes just how difficult it is to raise the large amounts of capital needed to make it to production.  The valuation bottoms out at the end of the construction stage, when the bulk of the company's capex budget has been spent.  Once in production, the valuation starts to climb again.

A lot of random stuff can drive an S-curve's movement.  Mr. Market can have his way with a junior stock's valuation.  Sometimes macroeconomic news clobbers a stock even if it showed progress with an NI 43-101 report showing above-average 2P reserve grades.  Announcements of positive developments like a pre-feasibility study, successful financing, and permitting approvals can "de-risk" a junior stock and make the S-curve jump northward.  I think the term "de-risk" is overused.  I chuckle when I hear exploration-stage companies say they've de-risked a project simply by walking around the site or looking at a map of old claims.

Juniors like to say they're exploring a Carlin-type mineral trend, but there's only one such trend in the world.  Nevada has a well-known geology and mining techniques useful there may not be applicable elsewhere in the world.

I'm a big fan of aeromagnetic surveys, especially if they save money by accelerating a drill program.  I've noticed that some old-school prospectors view them skeptically, possibly because such surveys pose a threat to their careers.  Exploration companies that use the hot spots from geospatial data to focus their drilling programs can reduce the possibility of striking dry holes.  One key limitation of these surveys is their usefulness only in areas with layers that generate contrasting magnetic signatures.  A uniform geology won't yield much useful data from the air.

LIDAR surveys can come in handy after an ore body has been mapped, so engineers can estimate the feasibility of mining with a given topography.  Competent mining executives can put these surveys in the proper order.  That's why I need to see a geologist as the CEO of an early-stage mining company.  I don't mind seeing a mining engineer running the company at a later stage once they have enough data and money to begin constructing a mine.  I don't ever want to see a mining CEO whose sole background has been finance or consulting, because that tells me the main investors and board members just want to flip a hopeless property to bag-holders.

Engineering studies can produce isometric models of an ore body.  These are pretty to look at but mining executives can easily gloss over them in presentations to non-engineer audiences.  It's easy to say "veins are open in all directions" because that's what investors like to hear.  It's harder to point to a vein and explain why that part of the geology leaves it open.  It's also easy to ignore now complex the geology can be while drilling down into an ore body.  More complexity means a higher cash cost of production; that S-curve's movement upwards will be slow and sticky.

Driving along a mining stock's S-curve is a little bit like driving a coastal highway.  It can be thrilling and nail-biting.  The difference is that the highway's curves are defined on a map but the stock's valuation curve always changes, even after you've convinced yourself it shouldn't.  The long-term trend of a junior's S-curve should be upwards if they are prospecting good grades, because that's what major producers want to acquire.  There's an old truism:  "If you've got grade, you've got it made."

Friday, December 14, 2012

"Sovereign Man" Simon Black Reveals Lack of Military Budget Knowledge

I need to address something that a blogger going by the moniker of Simon Black, a.k.a. "Sovereign Man" posted on his blog.  His credibility rests partly on his claims of having been a military intelligence officer in the United States armed forces before becoming an globe-trotting investment guru.  Today he posted an article in which he claims he was tasked to make long-term budget forecasts for his military unit when he was a second lieutenant.  I have problems with this story.

It is possible that a 2LT could be asked to assist with a budget forecast if he were a battalion staff officer but the battalion executive officer (XO) would not have handed off such a task without some detailed guidance on where to look for data.  Sovereign Man's other posts have hinted that he was independently deployable for much of his early career, which makes little sense if he were fresh out of a military academy and initially assigned to a battalion staff.  If he were leading a platoon or detachment, which is what he would have had to do to be eligible for his exotic adventures, it is very unlikely that he would have been tasked to work on the battalion's budget.

Anyway, what really unnerves me about the substance of his claim is that he states he was "responsible for requesting how much money my unit would need to operate… 2, 3, 4, 10 years down the road."  That is simply impossible.  I have over 17 years of military experience at every echelon of the United States Army from platoon to theater, both active and reserve component.  I have participated in numerous budget planning sessions both as a commander and staff officer.  Not once did any of my MTO&E or TDA units ever prepare a budget forecast that extended past a single fiscal year.  Battalions and lower echelons have no way to estimate their budgetary needs farther than a year in advance, and certainly not the "2, 3, 4, 10 years" that Simon Black claims he did.  This is because Congressional appropriations for Operations and Maintenance (O&M) accounts that fund tactical units are tied to a one-year fiscal cycle.

I'd like to hear Simon Black tell us all exactly which unit he served with and how he reconciled his duties as acting budget officer with whatever fantastic James Bond mission schedule he claims he executed.  He can reach me at my business email address.

Wednesday, December 12, 2012

Tuesday, December 11, 2012

"Strong" Estate Tax Targets Middle Class And Ignores Super-Rich

Warren Buffett wants a strong estate tax.  This has a populist, common sense appeal in light of his advocacy for higher income taxes and generous charitable giving pledge.  Uncle Warren's argument is that plutocratic-enabling tax policies harm democracy.  Let's consider the circumstances of today's plutocracy to determine whether any changes in tax policy will really weaken their hold on power.

The estate tax plan from United for a Fair Economy, which Mr. Buffett has endorsed, reduces the estate tax exemption threshold from $10M to $4M.  This will harm the middle class and those who try to raise their status into the upper middle class more than it will harm billionaires.  The ultra-rich who signed up for Mr. Buffett's big giving pledge have already structured their estates to pass into tax-free foundations and giving vehicles they control through trust agreements.  George Lucas' designation of the proceeds from Lucasfilm's sale to a charity he favors is a classic example of how the ultra-rich can always avoid estate taxes.  Giving your own money to a non-profit you control is a legal way to continue paying your living expenses.  The aspirational middle class may not have access to the same kinds of estate-preservation strategies unless they can afford very competent wealth managers and tax attorneys.  This is why the proposed policy's endorsement of a strong graduated tax on larger estates is meaningless.

True estate tax reform would begin with the elimination of the tax deductibility of charitable contributions.  That won't happen, of course.  Non-profit executives who derive their funding from endowed foundations would lobby against it and so would wealthy donors who fund political campaigns.

I'll give you a plan for real, comprehensive tax reform.  Have the U.S. Treasury study the history of tax collection in the U.S. and identify the point on the Laffer Curve that maximizes gross revenue.  I suspect it's somewhere between 16% and 19%, which means Warren Buffett probably isn't undertaxed at all if he pays 17.4%.  Once we've identified that optimal point, make that the flat tax rate for all income with no deductions, exemptions, or carry-overs for any reason.  Taxing earned income, unearned income, capital gains, and estates at that one rate will enormously simplify the government's operations.  It will also render redundant the hordes of accountants and attorneys who perform little productive work.  Tax planners represent as much of an overhead burden for the economy as tax collectors.  I know the federal government will never adopt my plan because I can't bundle as many campaign contributions as Warren Buffett.