Eastmain Resources (EANRF) Has Been Around Awhile

Eastmain Resources (EANRF / ER.TO) is another low-priced gold miner, with the stock barely moving past a dollar for many years.  I started looking at this company to figure out why their stock is at such a low price.  I then began to wonder why they've been in the gold exploration business for so long.

You'd think that after two decades of existence they could have had some real success by now and broken out of the bush leagues.  They have plenty of unofficial and inferred resource data.  The Clearwater projects are the company's flagship missions.  Its other efforts are ancillary at best and may be of interest as spinoff properties.

Their Eastmain mine site is their other truly prominent property.  Its main value at the moment is as a leased base camp for a developer contracted by the Quebec government to build infrastructure for Plan Nord.  The smart thing for Eastmain to do would be to use this lease revenue to fund a final assessment of its most desirable projects.   Too many discovery-focused gold companies just use whatever cash they raise to finance more acquisitions of properties that have little ultimate hope of production.

Goldcorp owns over 7% of Eastmain and is their largest shareholder.  Both Clearwater and Eastmain have excellent mine-ready infrastructure, so there is no physical reason why the company can't explore a JV with Goldcorp or some other big producer to start serious work on developing those two areas as working mines.  The problem IMHO seems to be inertia.  The company has been a prospector for so long that it may not realize the time is right to shift to development.  All of the mining types in the management team have strong prospecting backgrounds, so changing the corporate orientation to JV development may require a push from outside.  Goldcorp, give these folks a call and tell them you're ready when they are.

Full disclosure:  No position in Eastmain (or Goldcorp) at this time.  


Addendum as of 05/18/12:  Eastmain Resources did in fact release a 43-101 compliant report on April 26, 2011.  I stand corrected.  

Simple Math For The Permian Basin and RainChief Energy (RCFEF)

I get annoyed when a news headline doesn't reflect the content of an article.  Here's one on the Permian Basin's supposed value of $2T.  At first glance I thought the title was alluding to some projected future value of production from some brand-new source in the basin, which is why I clicked on it in the first place.  Reading the whole article leads to a different kind of discovery.

The article specifies that historical volume of the basin's oil deposits would be worth $2T at current market prices of over $100/bbl.  That's a neat trick, projecting today's prices backwards in time onto oil that was originally pumped in the 1920s.  The article admits that the basin's proven reserves are currently 4.5B bbls.  Multiply that figure by the WTI price of $105.68 for March 20, 2012 (the most recent one available from EIA) and we have a total present value of $475.56B for the basin's proven reserves.  Hey, that's a lot less than $2T; in fact it's only 23.78% of the big number.  Do the same math comparing the 20B bbls already pumped to the 4.5B remaining.  It pays to understand that when oil producers talk about a basin that's over 76% depleted, the easily reached oil was pumped decades ago.  The remaining stuff will cost more to extract, and the cost of production hasn't even been figured into the simple math in the article.

I get even more annoyed when reputable sites like PennEnergy pass on articles like this that originated as PR pieces.  The originator, RainChief Energy (RCFEF), is a penny stock that hasn't made a profit.  It was formerly known as "Black Diamond Brands Corporation" doing who knows what.  The math for this company is even simpler than my math above, with only one non-producing well on their property.  There's plenty of oil left in the Permian but right now RCFEF isn't pumping any of it.

Full disclosure:  No position in RCFEF or other companies mentioned in the puff-piece.  

The Haiku of Finance for 03/22/12

Fed officials clash
Public statements contradict
Delay the QE

OncoSec Medical (ONCO) Struggles To Pierce Market

I first became aware of OncoSec Medical (ONCO) about a year ago when it was struggling to make an indentation (a pun on its tech) in the medical device market.  I noticed this month that it's now being touted in a free mail teaser from Trinity Investment Research.  Feel free to peruse my many posts mentioning that outfit and how it touts low-priced stocks that later go nowhere.  You should know that shops like Trinity make their money from companies that pay for publicity.  The first page of Trinity's pump letter shouts that this $0.75 stock deserves a $59 buyout bid.  Let's look at facts to see if that wish holds up.

I've learned one very important thing from being an early stage investor in a medical device company (not OncoSec) that is succeeding in business.  The CEO of a medical device company must be an executive who has deep experience in the sector, preferably in product development and marketing.  Serial entrepreneurship really helps.  The CEO of OncoSec is someone who has been a law clerk and intern analyst.  His previous responsibilities have been in harmonizing merged companies rather than building companies from the ground up.    His most recent leadership experience was with Inovio Pharmaceuticals (INO), a penny stock that has lost money for years.  It's notable that OncoSec's chairman was a VP at the venture capital firm where OncoSec's CEO had been an intern.  The chairman seems to have brought him over from Inovio in March 2011, where the OncoSec chairman is also Inovio's chairman.  Are these two guys related?  Anyway, the chief business officer and director of clinical operations have relevant experience.

OncoSec's core technology is an electroporation application.  The basic tech has been around since the 1970s and a competing product is available from Bio-Rad.  I don't see how OncoSec's application is so radically different from solutions offered by Inovio for DNA treatment or MaxCyte for cell lines.  OncoSec has applied to protect its IP but at this stage the technology is protected primarily by its status as a trade secret.  I also wonder about the history of this company, which until March 2011 (the time the new leadership team came over from Inovio) was known as Netventory Solutions.

The company is still losing money but that's to be expected for something still in its developmental stage.  I just don't see how anyone can claim OncoSec deserves a $59/share buyout while it has no revenue and still awaits IP protection for a commonly used technology.

Full disclosure:  No position in ONCO (or other companies mentioned) at this time.  

Greece Only Paid 0.015% For The Big Swap

I'm surprised that Greece paid a really tiny fee to its bond swap advisors.  I'd like to know how they got away with such a tiny payout given the protracted length of the negotiations, epic deal size, and complexity of the offer.  There's more to this than meets the eye.  I wonder whether Lazard Freres stands to make anything on CDS payouts if the swap unravels.  Greek elections will put that to the test.  

The Haiku of Finance for 03/20/12

Ben hates gold standard
Thinks QE is better tool
Paper doesn't shine

Thoughts On Master Limited Partnership ETFs

The prospect of hyperinflation demands due consideration of hard asset alternatives in a portfolio.  I've been exploring master limited partnerships (MLPs) to see if they fit my investing style.

I spend my daylight hours hearing roadshow pitches from oil and gas prospectors who explore producing wells one property at a time.  These wells are difficult enough for a small company with limited finances.  Pooling single wells into MLPs aggregates their production and enables partners to allocate capital where it can add the most to production.  Pipeline MLPs are intriguing for a related reason.  Their cash flow is the result of amalgamated production in large regions, regardless of how poorly a single well may be performing at any time.

Applying some Boglehead theory to MLPs leads to the conclusion that MLPs arbitrage away risks specific to single wells and pipelines.  It follows that an ETF of MLPs would arbitrage away risks of local geography and single MLP structures, leaving an investor with broad exposure to a flow of hard assets.

I will posit that the cash flow generated by an MLP ETF is a rough substitute for the cash flow generated by fixed income investments.  One crucial difference can make all the difference in a hyperinflationary environment.  Inflation gradually destroys the principal value of a fixed income security and reduces the real value of its coupon payments.  Even TIPS may not be immune to this destruction if their principal resets are not frequent enough to keep pace with inflation, or if the resets are based on artificially suppressed CPI calculations.  A hard asset ETF such as an MLP ETF may not suffer such a deficiency.  Its cash flows are derived from the nominal value of payments made for resource flows, so its value should theoretically hold during hyperinflation if it is rapidly marked to market.

The only MLP ETF I am currently considering for this role in my portfolio is the Alerian MLP ETF (AMLP).  I have not purchased it yet for several reasons.  First, it trades at a multiple of 22 times earnings, pretty pricey given the economy's long term average P/E of 14.  Second, its expense ratio is frighteningly high at 0.85%.  Finally, it has only been around for two years, and has not paid enough coupons for me to find its value using something like my REIT ETF valuation methodology.  I believe that methodology is applicable to an MLP ETF because REITs must pass through their cash flows as dividends to shareholders, just like MLPs.

I like that AMLP is optionable, so that if I did own it I could write short puts under it while inflation drives it up.  Other MLP substitutes like ETNs don't have that flexibility.  Come to think of it, I may decide to buy into it despite my reservations above if inflation really does get going.  Bargain or not, hard assets that generate cash flows bring the best of many worlds when hyperinflation starts destroying the value of everything else.

Full disclosure:  No position in AMLP at this time; this disposition could change with the onset of high inflation in the U.S.

The Haiku of Finance for 03/19/12

Sell yourself panels
First Solar bought its own stuff
Ex-Im Bank misuse

Apple Throws Away Cash Hoard On Dividend; Smart Grid Would Be Smarter

Oh, for crying out loud.  Steve Jobs' ghost has barely begun to haunt Cupertino and his company has begun to risk everything he rebuilt in the last years of his life.  Apple has elected to start paying out its massive cash hoard as a dividend.  I hinted at my own preference yesterday but now I can be more forthright.  Paying such a large dividend now sets unrealistic expectations for later dividend increases at a time when consumer spending on tech worldwide (specifically in North America and Europe) is very vulnerable to another recession.

I could understand starting out with a token amount, say $0.01/share just to establish a dividend policy and leave room for future growth.  The danger in announcing such a large-scale payout is that, in any future downturn, Apple will be forced to consider cutting its hefty dividend to conserve cash.  Wall Street almost always interprets dividend cuts negatively.

Tech companies are not "widows and orphans" types of stocks because their monopolies are by definition based on technologies subject to rapid change.  Most true monopolies (like utilities and some Class I railroads) are geographic monopolies and are thus able to extract true monopolistic rents because their customers can't just pick up and move if they don't like rate increases.  Technology companies can't extract the same kinds of rents because there's always the threat of other upstart technologies just around every corner.  Monopolistic rents contribute to stable dividends more than anything else in a business model.  Just ask Warren Buffett.

Apple could have used its massive cash pile to embark on a truly monopolistic development.  It could have leveraged both its brand reputation for user friendliness and its knack for building robust platforms into a user interface for in-home smart-grid technology.  One growing roadblock to smart-grid adoption is the concern that Big Brother, whoever he is, could sweep up data on household electricity use into something nefarious.  The retail consumer's interaction with this "last inch" interface will determine its ultimate penetration.  An Apple interface on in-home smart grid meters could do wonders for enabling local energy conservation and for alleviating common fears about scary new technology.  It could also tie Apple permanently to to the monopolistic models of energy utilities, securing its dividend forever.

It's unfortunate that Apple is counting on many years of growth from a mobile computing market that is rapidly maturing.  It is about to bet its dividend policy on a curious business model.  Users trade in old iPads for new ones one-for-one; net income growth thus comes solely from higher prices in a fixed market while competitors introduce progressively lower-priced substitutes.  This is a recipe for a dividend policy that will eventually collide head-on with a mature market where easy substitutes are available from low-cost producers.  GM and Chrysler learned that lesson to their detriment.  My suggestion for "Apple smart meters" above is the kind of out-of-the-box thinking Steve Jobs would have eventually used if he had lived longer.  Maybe I'm channeling his spirit.  Call it the iGrid or iMeter and it's a winner!

Full disclosure:  No position in AAPL at this time.  

Alpha-D Updates for 03/19/12

Hey folks, here comes my portfolio update following an options expiration weekend.  My covered calls all expired unexercised, so I renewed the call positions I typically have over GDX and FXI.  The value of GDX has fallen so far from its high that I'm willing to risk adding a little more involuntarily, so I wrote some puts under GDX with an expiration date next month.  I have the cash to buy shares if the strike price is triggered.  Picking up a little extra gold in the ground may prove useful as the U.S. edges closer to a hyperinflationary environment.

Speaking of hyperinflation, I remain on the lookout for equity positions in hard assets or sectors that serve hard asset production and distribution.  This can cover a broad gamut of things including energy production, energy distribution, railroads, pipeline operators, oil and gas MLPs, mining, and certain types of real estate.  This approach only seems broad when you consider that it excludes wide swaths of the larger economy that will probably not perform as well during hyperinflation.  I plan to stay as far away from consumer retailers, residential real estate, and consumer technology as I can for the next few years.

I still have my small holdings of California municipal bonds and I count off the days until they mature.  The return of my principal will give me the opportunity to see if an allocation to the TIP ETF will maintain a fixed income position that can adjust to hyperinflation.

The rest of my liquid portfolio is in cash.  I await the European trigger for a broad market correction.  I do not believe I am waiting in vain.

Full disclosure: All positions are noted.  

The Limerick of Finance for 03/18/12

What will Apple do with its cash?
Shareholders are eyeing this stash
If recessions return
Apple needs cash to burn
Dividends would rip balance sheet gash

Visiting Cloud Connect 2012 Santa Clara

Last month I went down to the Cloud Connect 2012 conference in Santa Clara.  If you're wondering why it took me a month to write up a synopsis, it's because cloud computing is pretty far afield from the business topics I usually cover on this blog.  I had to take the time to understand just what all this cloud stuff is about.  I'm not some tech-addicted early adopter; I prefer to see how new developments shake out before I think about jumping in.

I'm all about keynote speakers, and there were plenty of them on the platform.  Steve Wylie, Cloud Connect's general manager, set the stage for us.  Hey, what happened to the gal who promotes other UBM events?  She must be busy.  Anyway, Steve briefly mentioned that cloud's main effort has shifted from defining its existence to building a practice.  I guess we can look forward to more intermittently employed IT professionals calling themselves cloud consultants.

First up was Alistair Croll, currently with Bitcurrent.  He described the evolution of measurement from feet to horsepower and later conventions to argue that computing power as a unit of measurement is becoming obsolete.  IT professionals must add value with virtualizations because infrastructure is moving to IaaS: Infrastructure as a Service.  That was the first of several terms I learned at this conference, all of which seem hard to define because they bleed into each other.  Like, where does IaaS end and PaaS (Platform as a Service) begin?  Hire a cloud consultant and they'll explain it all to you.

Lew Tucker from Cisco told us that clouds come in public, private, and hybrid flavors.  The cloud model that an IT practitioner prescribes for a client has to fit.  I saw some similarities in Lew's design perspective with what Alistair presented.  I grabbed Lew's thoughts as fast as I could:  IT pros build apps on several layers of abstraction; open source development helps build clouds; having a "network service" provides linkages as a translation layer between complex physical infrastructure and user experience; controlling host names and IP addresses is the key when creating virtual isolated networks in a multi-tenant environment.

Bill Gillis from Beth Israel Deaconess Medical Center said that losing paper charts would be a critical problem in patient care, so building system access was a key thing.  Building a private cloud maintained the center's control over patient information (aha, IT pros, your private clouds are attractive for a sector very focused on the confidentiality of sensitive information).  Government stimulus money has pushed private practice physicians to migrate patient records to the cloud.  Hmmm, I wonder if that's a Medicare mandate now.  Anyway, Bill also said that many hosted apps have known security flaws, so virtual patching can apply fixes.  If you really must know, virtual patching establishes rules for a firewall that don't alter the underlying code.

Jan Jackman from IBM was up next.  BTW, IBM is all over the cloud space and I suspect their hidden agenda in sending representatives to cloud events is to find technology they may want to acquire.  That's what I'd do if I were them but I have no way of knowing whether they consider any of the vendors here to be acquisition targets or potential JV partners.  Anyway, Jan said there's no one way to view monetization.  Content providers can pay for only those parts of the cloud service they actually use.  IBM uses an open source ecosystem of many partners.  Multiple ecosystem partners participate in every step of the cloud development lifecycle model.  I wonder whether adding too many partners inhibits topline revenue growth for a cloud value chain.  I mean, at some point your number of partners becomes unmanageable and monetizing them all may not be worth the effort if they don't all deliver.

Geva Perry, author of Thinking Out Cloud, said CIO magazine surveys from 2009-2011 showed a gradual adoption of cloud computing.  Organizational "creep-up" showed that adoption started at the bottom with developers.  The phrase "CIO is the last to know" shows how top IT executives don't drive cloud adoption. IMHO the irony there is that CIOs are the ones who ultimately determine capital spending budgets, so the legacy architectures they approved must have had sufficient bandwidth and internal flexibility to enable the proliferation of a cloud ecosystem.  Anyway, Geva mentioned the federal government's own apps store, which I didn't know existed.  Geva said vendors should design and build products that enable viral adoption by the rank and file people in an enterprise.  IMHO, the lesson for corporate honchos is that small, nimble cloud apps will move faster than a big IT project that has to go all the way up to the CIO for approval.

Jesse Robbins from Opscode was my favorite speaker at the entire conference.  The brilliant hits just kept on coming from this dude.  I'm going to restate his best points without interpretation.  He said every company learns that complexity increases with scale and that latency can cause many failures.  Designing for failure allows resilience.  Large-scale fault injection across multiple systems is called "resilience engineering," putting people first.  IT pros should expect system failures and plan periodic scenarios that anticipate failures.  Physical safety standards and building codes are products of what structural engineers have learned about building failures.  Applying this to IT means living through failures can help design improvements.  Cloud pros shouldn't rely on one-time load balancing; instead they should build incident management tools around routine daily processes.  "Infrastructure as code" gives you many knobs and levers to control systems.  Mean time to recovery (MTTR) is a better metric than mean time between failure (MTBF).

Alistair Croll made a repeat appearance.  He said that up to now content creators have made their money from scarcity but consumers want content immediately.  Merging content with software and devices is messy for providers but consumers like to copy and tweak.  I had to reflect on this from my perspective as an amateur user of web content.  IMHO the demand side will eventually win unless bad laws (SOPA!) interfere with the market's natural evolution.  I'll never forget a mantra I heard in the 1990s during the Internet's early days:  "Information wants to be free."  Just as I was beginning to digest this stuff, Alistair threw out a curve ball by mentioning the Thingiverse.  OMG, it's a whole mess of open source designs for 3D objects!  That is exactly the kind of resource a System D entrepreneur could use in desktop manufacturing!  Anyway, I'm pretty sure Alistair mentioned it as an example of an open source approach to growing cloud architectures.  Alistair finished by saying that stepping away from "root" ability to hack/open/meddle in content will be an attack on general purpose computing and toward monopoly.  Users and developers should fight for the freedom of computing.

I missed a couple of early Wednesday speakers but the panel was cool.  The panel's consensus was that open source architecture is the way forward.  Architectures face a choice between open/complex versus closed/simple, so don't get trapped in one that's not adaptable.  Service providers with closed models will eventually see the benefits of breaking down firewalls to allow outside apps.

Zorawar "Biri" Singh from HP said "hybrid delivery" spans three areas:  non-premise private cloud; managed cloud (i.e., a delivered service for a customer's specific need); and public cloud.  I suspect this taxonomy is HP's way of branding its service offerings across the cloud spectrum.  Anyway, Biri gave us a pretty good definition of "open stack" as information layered upon apps that are in turn layered upon infrastructure.  That's as good enough of a rule for me as I try to sort through SaaS, PaaS, and IaaS.

The final keynoter I cared to hear was Robert Holleyman from the Business Software Alliance.  He thinks Japan has the best regulatory model and that Europe is an excellent export market for U.S. cloud providers. IMHO we won't be exporting much cloud stuff if we have to rely on Indian and Chinese IT pros who are increasingly returning to their home countries after their education and initial training here.  Anyway, Robert thinks that Brazil and China will be large, growing cloud markets but may not be open to the U.S.  That makes sense; why should they be open to us if they have grown their own IT talent for a generation?  Robert emphasized three things the U.S. needs to compete effectively:  consistent privacy policies; government buying power used constructively on the best technologies; and prevention of cybercrime and IT theft.  I say good luck getting any of those from government agencies that will soon be starved for funding.  If the cloud industry wants coherent policy and funding from Washington, they need to lobby for it and find those lawmakers who truly "get it" outside of Silicon Valley.

These keynotes filled up the mornings so I had to find something to do in the afternoon for the two days I had a free expo floor pass.  The booth people were cool but frankly their explanations of what their respective companies do went over my head.  Microsoft had one of the coolest booth configurations.  Some other purveyor of cloudiness brought in a 1950s-style aluminum camping trailer.  I learned a few of the basics of this emerging subset of computing but I'll leave the heavy lifting to the hard-core IT community.  I did score some free T-shirts from a few vendors.  I was also grateful that a few vendors staffed their booths with some attractive women.  That's reason enough for me to return to Cloud Connect next year.  

The Haiku of Finance for 03/17/12

Fed stress test mistake
Foreign mortgages don't count?
They will in Europe

Chicago Fed Blows Smoke About Fed Juice

Don't worry about the confusing title of this blog post.  I can explain everything, as usual.  See, the Federal Reserve Bank of Chicago is arguing that the Fed needs to continue its insane policy of zero interest rates to avoid risks of . . . okay, what exactly?  Stagnation risk has already been realized, with real unemployment (courtesy of Shadow Government Statistics) surpassing 20% for the past three years and not declining.

Yeah, Fed dude says there's little risk of inflation spiking past 2%.  He needs to read today's BLS news release, showing the CPI-U for the past 12 months has already grown 2.9%.  Federal Reserve officials know pretty dog-gone well what the real numbers are and how their ZIRP policy makes them worse.  They can't let up because, like any political actors, they desire reappointment and want to stay in the limelight.  Being publicly visible and keeping the perks of power are no doubt addictive.  It's hard to walk away from positions that keep one's name in the headlines unless Goldman Sachs makes a far better offer than Uncle Sam.

There is no recovery in the U.S.  The Fed knows this but won't admit it; to admit error now would invite scrutiny, blame, opprobrium, and loss of power.  Dysfunctional policy thus continues until such time as a bond market revolt makes real interest rates too ugly to ignore.  

The Haiku of Finance for 03/15/12

Critical metals
Ripe for consolidation
Who will be bought out?