Thursday, September 30, 2010

The Haiku of Finance for 09/30/10

AIG's TARP plan
Swap for common stock to sell
Might net a few cents

Wednesday, September 29, 2010

The Haiku of Finance for 09/29/10

China currency
U.S. wants sanctions that hurt
Headed for trade war

Truckers Lost Speed In August

Yesterday I had something halfway decent to say about the prospects for LTL truckers like YRC Worldwide and Arkansas Best.  Today gives us news that's less than halfway decent.  Truck tonnage just declined mightily:

The American Trucking Association's for-hire truck tonnage index fell 2.7 percent in August from July, its largest month-to-month drop since March 2009.

That's not good for those two companies because they just raised their rates.  Oops!  The economy just slammed on the brakes; doing that in a big rig can make it jackknife.  Tonnage for the last mile is going to get scarcer as evidence mounts that shippers will face weak demand going into peak shipping season.  Retailers must have re-stocked inventories to the point where they have all they need and then some.  They can see the handwriting on the wall for the Christmas shopping season as consumers default on their debts.  No more credit-driven holiday shoping splurges for those folks. 

It's going to be a "blue Christmas" all right, especially for companies in the supply chain.

Full disclosure:  No positions in YRCW or ABFS. 

Tuesday, September 28, 2010

Teamsters Knuckling Under At YRCW?

YRC Worldwide may be on the cusp of doing something right for a change.  Their Teamsters have tentatively agreed to . . . well, something.  The substance of the agreement will be telling once revealed.  If it's an indefinite delay in the resumption of pension plan contributions, then YRCW may keep enough cash to make it into 2011.  If it's more union greed manifested in demands for contributions, then YRCW stays a troubled penny stock.  The union vote will come just in the nick of time to impress the NASDAQ's delisting committee, so maybe the rank-and-file drivers will show some common sense by preserving their employer. Unions are prone to doing dumb things, like these Philly longshoremen shutting down NY/NJ ports even in the face of an arbitrator's decision. Let's see if truckers are smarter than dockworkers. 

It's no wonder William Zollars wants to retire as soon as possible from the CEO job.  Putting up with the Teamsters' endless huffing and puffing would eventually grate on any businessperson's nerves.  He did have the nerve to raise YRCW's rates, but that move speaks more to the improving health of the entire LTL sector since ABF Freight System is following suit with its own rate increases.  Short haulers are hoping for a bright Christmas. 

Full disclosure:  No position in YRCW or ABFS.

The Haiku of Finance for 09/28/10

States expect more cash
Rising tax take should pay debts
So will spending cuts

CEOs Batten Down The Hatches

Take it from captains of industry (at least the ones who didn't have the top job handed to them by their parents).  CEOs are pulling out their worry beads:

U.S. chief executive officers' view of the economy darkened in the third quarter, with top executives saying they were less willing to hire new workers as they fear sales growth will slow.

The data is from the Business Roundtable, which can sometimes sound like an echo chamber where CEOs magnify the concerns they share only among themselves.  That caveat makes their reports seem like overreactions but the general lessons they tease out are still useful.  These big shots aren't willing to throw away cash on new workers that they'll need to pay their bills as conditions worsen. 

People at the opposite end of the compensation ladder from CEOs are showing similar nascent signs of despair.  Consumer confidence is slipping back into doldrum land:

The Conference Board, based in New York, said its monthly Consumer Confidence Index now stands at 48.5, down from the revised 53.2 in August. Economists surveyed by Thomson Reuters were expecting 52.5.

Those numbers also show once again that consensus forecasts from economic experts aren't worth the hot air expended in their generation. 

Forget the recovery!  It's not here!  Go look for it in Versailles-on-the-Potomac instead where federal government salaries now exceed private sector salaries

Monday, September 27, 2010

Three Big Deals Make It Merger Mania Monday!

Wow, there's plenty of deal action to blog about today. 

Wal-Mart wants to buy Massmart for $4.25B.  Let's run some basic numbers on Massmart (MMRTY.PK).  ROE is a whopping 36%, holy canole, and quarterly growth is an eye-popping 27%.  Unfortunately the P/E is 28, astronomical for a retailer.  Wal-Mart (WMT) is looking to shove their global supply chain into African wallets. 

Unilever wants to buy Alberto Culver for $3.7B.  Funny, I've never heard of Alberto Culver (ACV).  Let's see what they're all about.  Their P/E of 25 is almost at Massmart's nosebleed altitude.  Are they worth such a premium?  Their ROE of around 12% is less than the 15% I'd prefer.  At least their net income is steady and healthy, and big kudos to them for whittling their long-term debt down to under half a million dollars.  That's unheard of for a company with a market cap in the billions. Unilever (UL) likes what it sees, so this may be a halfway decent deal if they can get that ROE up after some serious cost-cutting. 

Southwest wants to buy AirTran for $1.4B in cash and stock.  Well, what's so desirable about AirTran (AAI) all of a sudden?  Their ROE is a paltry 6.26%, which must look good to Southwest (LUV) whose own ROE is an even more lousy 4.15%.  Southwest is assuming AirTran's debt, which could jeopardize its long run of profitability if a renewed recession hurts air travel.  Finally, AirTran's P/E has climbed into thin air at almost 44.  I wouldn't pay $44 for dollar's worth of earnings anywhere, certainly not up in the wild blue yonder. 

All of these deals have something in common.  The acquirers seem to be paying a premium for market share in mature industries driven by consumer spending.  That is not at all a smart move if the world economy is headed for zero growth or a double-dip.

Full disclosure:  No positions in any company mentioned at the time this post was published. 

Sunday, September 26, 2010

The Limerick of Finance for 09/26/10

Some traders are playing both sides
For rebates a market-taker hides
This makes stocks volatile
In just a short while
Penny stocks will get taken for rides

Saturday, September 25, 2010

Bailing Out Credit Unions

Some folks may still think the credit crisis is behind us.  Here's a wake-up call:

Federal regulators took over three key lenders to U.S. credit unions, after losses on mortgage investments threatened to topple them. The move was a reminder that parts of the financial system are still burdened by the toxic assets two years after the financial crisis peaked.

Taking over busted credit unions won't be enough to stop the bleeding.  That's why Uncle Sam has offered an $80B backstop to the remainder of the nation's credit union network.  I had thought credit unions were a safe alternative to banks up until now, thanks to their avoidance of leverage.  Most of them still are.  These actions are designed to ensure that back-office functions supporting the entire industry will still function if a major credit union fails. 

There's still plenty of systemic risk left.  Let's see a show of hands of anyone who wants to go long ANY financial institution right now.  My hands are down at my sides (after I'm done typing). 

Thursday, September 23, 2010

China Uses Rare Earths As Economic Weapons

China has just escalated its diplomatic standoff with Japan over ownership of the East China Sea.  The Middle Kingdom has just decided that rare earth metals will not be available to Japan at any price:

Sharply raising the stakes in a dispute over Japan’s detention of a Chinese fishing trawler captain, the Chinese government has blocked exports to Japan of a crucial category of minerals used in products like hybrid cars, wind turbines and guided missiles.

Any high-tech manufacturers with part of their supply chain in Japan will be very concerned about this news.  Toyota's strategic plan of ensuring it can obtain sufficient rare earths for its projected Prius sales is now in doubt. 

The ongoing China-Japan spat is about more than just China's assertion of historical hegemony in Asia.  The China Development Research Foundation, a Chinese government think tank, published a report concluding that the urbanization of 400 million migrant workers over two decades will cost $300B per year.  This commitment to development is absolutely essential if China is to maintain its internal stability.  China has a short window in which to decide how it will pay for the infrastructure improvements it needs to meet the rising expectations of its people.  Its options include offshore resource development in places like the East China Sea.  Alternatives to that option include curtailing the amount of money China spends buying U.S. Treasury bonds. 

This development gives renewed urgency to U.S. efforts to develop alternative sources of rare earths from Mountain Pass, California and elsewhere.

Tuesday, September 21, 2010

Fed Tries To Ease Quantitatively And Quietly

Shhhhhh . . . don't tell anyone, but the Fed is trying to execute a slow-motion, low-intensity form of inflation to speed the erasure of the enormous federal debt.  It includes signals like this:

The Federal Reserve signaled Tuesday that it's worried about the weakness of the recovery and is ready to take further steps to boost the economy if needed.

This comes on the heel of announced MBS purchases disguised as innocent cash management techniques.  The Fed is walking a very thin tightrope.  If it prints money too slowly or not at all, the economy slips into a noticeable double-dip and asset deflation resumes its destruction of Baby Boomer retirement assets.  If it prints too quickly, China gets spooked and unleashes the nuclear option - an immediate selloff of Treasuries that causes a run on the dollar. 

The Fed has no good options left and the Chinese central bank knows it.  Other foreign investors are starting to figure out the impossibility of the Fed's success at this act, which is why the U.S. is sinking as a place to invest in this Bloomberg poll of finance professionals.  We will see whether the Fed's tightrope strategy is working if the next Treasury auction has full Chinese participation.

Monday, September 20, 2010

The Haiku of Finance for 09/20/10

Fed ponders bold move
What is the right thing to do?
My hint:  Raise your rates

Updating The Alpha-D for Sept. 2010

Today marked the first day of a new month for a short-duration options refresh.  First things first.

My GDX went north of the strike price for the covered calls I wrote.  I bought most of them back and will realize a long-term capital gain on the portion I did not repurchase.  Cash proceeds will stay in cash.  Yes, I'm waiting for the next leg down.  It's just around the corner, sooner or later. 

Now for the options updates.

I renewed covered calls and cash-covered short puts on GDX.

I renewed covered calls on FXI.  No short puts this time, as China is overheating thanks to real estate flipping and insane leverage.  I won't go long any more China / FXI for a while but I'll hang onto what I have and keep writing call options. 

One new options position I opened was to write cash-covered puts under TDW at a strike price of 40.  I still think Tidewater's intrinsic value is a lot higher than that so I wouldn't mind being forced to increase my stake.  The covered calls I wrote on TDW last month will expire in Oct. 2010.

Now let's talk fixed income.  I put a little bit of cash to work by going long Treasuries that mature in October.  I also decided to give the State of California some confidence by going long California state munis maturing in Sept. 2011.  I did this after months of considering the likelihood of repayment for state GO bonds, and I find that to be quite high. I believe the state government will starve every other program - including education - before it considers nonpayment of muni bond interest. 

I keep looking at FLIR but I'm not ready to pull that trigger just yet.

That's it for this month.

Sunday, September 19, 2010

Friday, September 17, 2010

Possible Gray Swans

Here ya go Hondo:


US vs. China trade war.

Wave of municipal bankruptcies in US.

More supply shocks in Russia (grain or oil) force spikes in commodity prices.

Succession crisis in North Korea puts South Korea and Japan on war footing, sinking both their stock markets and sending CDS on their sovereign debt parabolic. 
 
Pirate activity in Straits of Malacca interrupts one of the world's most important trade lanes, impacting shipping costs, major insurers, oil price, and the Christmas shopping season.
 
Nota bene:  These are thought experiments, or flights of fancy if you will.  None of the events mentioned are guaranteed to occur. 

Thursday, September 16, 2010

Saudi Arabia Buys Peak Oil Insurance With $60B Arms Deal

Saudi Arabia is seeking the U.S. government's approval for the largest foreign arms sale in U.S. history.  It wants to buy $60B worth of advanced fighter aircraft and helicopters.  That's significant enough to set tongues wagging inside the Beltway and elsewhere.

Media discussion centers on Saudi Arabia's supposed desire to counter potential threats from Iran or serve as a competing regional hegemon that can offer a security umbrella to other Gulf Arab states.  Other commentators speculate that these weapons could be used against Israel.  The historical record speaks otherwise.  Saudi Arabia contributed a token ground force to the Arab-Israeli War of 1948, a token number of aircraft to the Six-Day War in 1967, a token force to the Yom-Kippur War in 1973, and has been absent from all other Arab wars against Israel.  The Saudi armed forces have yet to demonstrate the competence in combined arms offense within an Arab coalition that would be required to successfully strike at Israel, so that interpretation is unrealistic. 

A more realistic use for these weapons would be against a much weaker Gulf sheikhdom or against the Shiite region of southern Iraq.  Energy analysts wonder at Saudi Arabia's lack of transparency in reporting its oil reserves.  One of the hottest topics in the petroleum industry right now (thanks to the late Matt Simmons) is a guessing game over the peak production date of Saudi Arabia's supergiant Ghawar field.  If Saudi Arabia had to obtain new reserves in a hurry, the quickest way would be through military intimidation of a smaller neighbor. 

Oil is the kingdom's only real export and the revenue it produces is the only thing sustaining modern Saudi life.  Diversification into alternative sources of income will prove extraordinarily difficult.  The House of Saud must have noticed that the Dubai experiment in building high-entropy resorts in a wasteland is a miserable failure. 

Saudi Arabia's supergiant fields, particularly Ghawar, will face peak production at some point.  If the kingdom uses its new weapons to extract oil and gas concessions from weaker Gulf states, we will know that Saudi oil production has peaked.
Nota bene:  Anthony J. Alfidi has no investments in Saudi Arabia. 

Wednesday, September 15, 2010

Gold Goes Gonzo While Greece Gets Kudos

Gold hit another record high today.  I guess when the forex market is faced with Japan pushing down its own currency and a dollar held down by ZIRP that no other store of value looks quite as good. 

Meanwhile, the IMF is giving Greece kudos for sticking to its austerity diet.  That's nice to hear, but Greece still has major problems.  Its most recent debt auction went well but two details considered together should give investors pause.  First this auction's bids were 4.5x times the amount of bonds offered, stronger demand than the last auction's 3.64x.  Despite this stronger demand, yields increased to 4.82% from 4.65%.  That's the opposite of what should have happened; the yield should have dropped if the bond prices were rising to meet the increased demand.  That is counterintuitive and unhealthy, and more bond investors should be nervous as those priced yields get closer to the EU's bailout offer of 5%.

The global economy is waiting for the next shoe to drop.  That's why gold is still heading up. 

Full disclosure:  Long GDX with covered calls and cash-covered short puts.

Monday, September 13, 2010

Correspondence With An Inquiring Investor And Opera Aficionado

I regularly attend the annual opening night gala of the San Francisco Opera, which took place last Friday.  It's a great excuse to have fun and be seen hobnobbing with folks who matter.  Plus it's a giant boozefest for my fellow members of the SF Opera's BRAVO! Club who are destined to take the reins of power in The City when the old geezers running things now are no longer around. 

This year at the Gala I met a fellow private investor with a background in the military.  People like that are just naturally drawn to the extremely intense wisdom of yours truly, and I was more than happy to share my extraordinary knowledge.  He asked me for background knowledge about portfolio diversification with ETFs and analyzing the BRIC economies.  My response is below.

(begin genius language)

It was good to see you enjoying the Gala. Hopefully you made a good impression on the high school students you were meeting. 

I do try to put an original spin on financial analysis. Using your own money to learn about investing is fine as long as you have a solid philosophy. Read "Buffettology" for hints at how a master thinks about stocks, and read John Bogle's books to see why most professional money managers fail. There is a lot of baloney and deliberate misinformation published in financial services thanks to analysts and others who are too lazy, inbred, spoiled, or conflicted by bonuses tied to sales of certain products. Ignore almost everything you see on CNBC and in rags like SmartMoney, as those are mere vehicles for advertisers. Think long term, don't get emotional, and keep your costs and trading frequency as low as possible. 

The BRICs are tough to analyze as their reported statistics on growth, unemployment, etc. are distorted by their governments' desires to appear attractive to investors. China is seriously overheating right now thanks to a real estate bubble. 

Check out http://us.ishares.com/home.htm. I like ETFs because they are low-cost and often come with call and put options (useful in risk management).

The key to analysis is reading, just as the key to intelligence is a collection effort. Country analysis means looking at reported macro-level stats (even if distorted) and regional data from sources like the World Bank and OECD. Sector analysis means picking an industry you find naturally attractive, or else you won't be excited about following its stocks. For me, that's primarily defense and logistics thanks to my background. I get regular email alerts from journals in those industries with links to articles I can scan for insights. 

One final word on careers in business. I discovered to my chagrin that Corporate America is mostly indifferent or hostile to the qualities that veterans bring to the workplace. Perhaps a few ex-officers each year grab the brass ring by parlaying a top-ten MBA or law school sheepskin into a job at Goldman Sachs or some fast-track program in the Fortune 500. I've found that self-employment is the only way to have both professional success and personal integrity, while in the corporate world those eventually prove mutually exclusive. You never have to surrender either if you work for yourself.

(end genius language)
 
See what happens when you meet Tony Alfidi in person?  You end up as the owner of some amazing, mind-blowing, one-of-a-kind wisdom that will make you almost as smart as I already am. 

Sunday, September 12, 2010

India Prepares For Trade Growth

Here's a brief note on one of the BRIC economies.  India's government is getting ready to spend some serious money to expand capacity at its ports.  They'll need all of that throughput ability if the recently signed Japan-India free trade agreement results in more cargo traffic through South Asia's sea lanes.

I've been a China bull up to now but India deserves further study.  These two ancient cultures are IMHO soon to become serious regional rivals. 

Full disclosure:  No holdings in any Indian investments.

The Limerick of Finance for 09/12/10

Now banks must increase their reserves
'Cause bank failures get on our nerves
Going down the wrong road
Will make them implode
A bad bank gets what it deserves

Saturday, September 11, 2010

The Haiku of Finance for 09/11/10

Chinese inflation
Food costs spike due to flooding
It's temporary

Railroad Salad Days In Q3 2010

The good news for major rail carriers just keeps on coming.  Bulk rail volumes have hit their second peak this year.  Carriers can thank Russia's embargo on grain exports for the surge in grain loads (waterway operators on the St. Lawrence Seaway can be just as thankful).

Smart carriers are adding capacity as fast as they can.  Norfolk Southern just completed modifications to its Heartland Corridor that will enable it to carry double-stacked containers all over the middle parts of the U.S. of A.  Not to be outdone, Canadian Pacific Railway is adding capacity cheaply by increasing the number of intermodal and grain cars hauled per train.  Carriers and lessors are responding to high demand by pulling idle railcars out of stored fleets

It's a good time to be a railroad carrier, but I wonder about the sustainability of all this action as we enter the second part of this big recession.  Rail traffic is peaking in the face of macroeconomic negatives like persistent unemployment and record increases in the number of working-age people below the poverty line.  This is a contradiction that won't last long. 

Thursday, September 09, 2010

Bad Loans In Bad Banks

Watch the cognitive dissonance at work as someone at Moody's who should know better tries to explain why bad loans are now just a bad memory:

"It is clear to us that bank asset quality issues are past the peak," said Moody's Senior Vice President Craig Emrick. "However, charge-offs and non-performers remain near historic highs."

I can't make this stuff up.  Bad loan writedowns cannot by definition be finished if non-performing loans are at all-time highs.  No wonder Moody's wouldn't look at my resume.  I would have posed a threat to their resident experts.

Once the non-performing loans go far enough down the drain we ought to treat our banks the way Ireland is treating Anglo-Irish Bank by splitting it into good and bad parts.  Will it actually happen?  Don't count on it.  Failing to take prompt corrective action against systemic fraud is one of the reasons the U.S. is slowly losing its competitive preeminence.  Businesses don't like operating in banana republics. 

Wednesday, September 08, 2010

The Haiku of Finance for 09/08/10

Fed surveys slow growth
Spreading across more regions
Headed straight for you

YRCW Headed For Delisting Decision

Here comes another non-surprise in the continuing FAIL that is YRCW.  The NASDAQ has officially notified YRC Worldwide that its stock is about to be delisted from the exchange for its failure to consistently maintain a bid price over a buck.  The company's management is of course doing the right thing for its shareholders by appealing this notice.  Since the appeal is scheduled for Oct. 7, the final delisting decision will come about a month later.  I'm pretty sure I know how that's going to turn out.  The company's last 10-Q was published on Aug. 9, so its next quarterly report will be due just about the time the appeals panel will be formulating its delisting decision in early November.  YRCW will need to show a massive upward earnings surprise in that report for its share price to make any meaningful recovery.

What are the chances of such a surprise?  Slim to none, but Slim hasn't left town just yet.  Steadily falling fuel costs can give truckers like YRCW some healthy tailwind.  Executing a long-rumored reverse stock split would be the Hail Mary pass that buys YRCW a little time, perhaps another quarter at best, but management will have to pull the trigger right about now for the split to take effect by the time the NASDAQ panel meets.

Watching YRCW continue its slow march to dissolution is about as painful as watching one of its big rigs jackknife on the highway.  If you don't own its stock, just be glad you're not along for the ride. 

Full disclosure:  No position in YRCW.

Tuesday, September 07, 2010

Poorly Aimed Mini-Stimulus Arrives

Versailles-on-the-Potomac can't disabuse itself of the notion that further Keynesian pushes will accomplish something noteworthy.  It is launching a new research tax credit presumably to win back businesses burned by health-care reform's new tax burden.  It's also trying to goad lenders into writing off 10% of a troubled mortgage. 

I'll say it right now.  Both of these ideas are a waste of time and money.  The R&D thing is a net zero, as it will be paid for by rolling back other corporate tax loopholes.  The mortgage write-off plan is DOA as soon as banks realize that writing off 10% of a loan that's more than 10% underwater will destroy their balance sheets. 

I will give some credit to the proposed $50B infrastructure stimulus provided that it is actually spent on those assets in the public commons that only government can influence:  ports, river locks and gates, railway rights-of-way, and such.  If it's wasted adding sidewalks on roads to vacated suburbs, forget it.  That's where the last stimulus effort mostly went (with a few exceptions like upgrading barge locks on the Mississippi River).

I read about stuff like this because I need amusement.

Monday, September 06, 2010

Clueless Hedgies Do Startup Investing In NYC

Oh, this is definitely not going to end well.  Hedge fund gamblers with plenty of money to throw away are jumping on the Web 2.0 bandwagon:

However, New York City is awash in capital for early stage startups looking for smallish (under $1 million) sized rounds. There's a lot of "hedge fund guys" looking to invest in tech startups in New York right now, says one New York investor.

Brilliant!  Hedgies' core skills lie in building trading algorithms, not mentoring executives in marketing and operations.  How are they going to help with executing product roll-outs if all they know how to do is gamble at high speeds?  I love answering my own questions:  They can't.  Startups measure their progress over years, not quarters, and the entry of hedge funds into their capital structure makes it more likely that inexperienced investors will force startups into early exits or shutdowns. 

The anonymous NYC investor quoted in the article is undoubtedly as dismayed as I am that hedgies are rushing in where "quality capital" is absent.  If we define quality capital as an investor class that is patient and focused on things like product delivery, operations, smart hiring, and the many other things needed to grow a company from zero to success. 

Maybe the hedge fund folks have drunk the Swensen Model Kool-Aid too many times and are looking for another asset class to play with.  They'd better look at how Silicon Valley does venture investing before they write one more check. 

Sunday, September 05, 2010

The Limerick of Finance for 09/05/10

Future jobs will require high skill
Complex roles will prove quite tough to fill
Other jobs will exist
At a wage to subsist
Low-end work would only make me ill

Saturday, September 04, 2010

Double-Dip Trial Balloons

You mean to tell me the U.S. economy could actually get worse?  Of course it can, and journos are finally doing their part to prep the reading public with the appropriate memes.  The only caveat I would suggest with that linked article's "five doomsday scenarios" suggestions is that they're all actually unfolding right now at varying speeds.

One doomsday scenario has already come to pass.  Craigslist has caved in to pressure and shut down its adult services.  What's up with that?  Illicit fun is one sector of the economy that definitely flourishes in a downturn as desperate housewives and work-study co-eds offer up some action just to make ends meet.  I'm disappointed.  Sex workers could do their part to get the stubborn unemployment rate down if we could only see them advertise their services on places like Craigslist.  They might also be able to help kick-start sluggish growth in the service sector, if you know what I mean. 

Friday, September 03, 2010

The Double-Dip And Its Discontents

The double-dip has begun in earnest.  One indicator is the slow upcreep in joblessness:

Job losses continued to mount in the U.S. economy last month, though at a more modest pace than expected, putting further pressure on policy makers to take action to spur growth and employment.

The Washington economic wizards are hard at work to find some way to stop this slide:

Administration officials have been huddling almost continuously during the past week, brainstorming for ideas that would boost employment without hiking the massive federal deficit — with Treasury Secretary Tim Geithner rushing to the West Wing for further consultations late Thursday.

This is the same team that is about to hand a financial loss to taxpayers on the upcoming IPO of GM.  The car market's maturity combined with the onrushing double-dip means the stock market will underperform for years to come, so unwinding the rest of Treasury's GM holdings will deliver nothing but losses to taxpaying suckers.  Thanks for nothing, Uncle Sam.

One official admits she is not an economist but says "jobs are out there."  Tell that to the millions of Millennials who will underemployed for a decade thanks to boomers who saved nothing for retirement. 

Fighting economic currents is like fighting a force of nature.  The best strategy for success is to plan for survival and rebuilding after the storm passes rather than trying to stop the storm itself.  We need meteorologists, not economists.  They'd probably forecast stormy weather.

Wednesday, September 01, 2010

Mixed Lending News For Miners

In recent months I've listened to several investor relations pitches from junior mining firms, primarily gold and oil explorers.  Something they should all spend more time elaborating upon is how they'll handle the environmental risks of their projects.  Banks are already looking at those risks and are declining to take any chances:

After years of legal entanglements arising from environmental messes and increased scrutiny of banks that finance the dirtiest industries, several large commercial lenders are taking a stand on industry practices that they regard as risky to their reputations and bottom lines.

In the most recent example, the banking giant Wells Fargo noted last month what it called “considerable attention and controversy” surrounding mountaintop removal mining, and said that its involvement with companies engaged in it was “limited and declining.”


Banks already take big risks in lending to exploration firms that hit nothing but dry holes for years.  They are reluctant to revise their risk tolerance upward in an environment where credit is constrained by the banks' own weak balance sheets. 

The mining community will have to adapt.  Here are some points I'd like to hear mining executives discuss in their presentations. 

The effect of lending restrictions on the cost of capital.  This doesn't just mean setting a higher discount rate in your mine's NPV.  It means incorporating sensitivity analysis on the effect of loan covenants that lenders may demand if a project hits unexpected environmental problems. 

Emphasize your track record in environmental stewardship.  Junior mining investing is a lot like venture capital behind a startup; it "bets on the jockey, not the horse."  Mining executives with twenty or thirty years of experience in finding ore are great to have running the company.  Mention that they also have years of experience in mitigating spills and pollution.  Talk about how you've avoided or resolved EPA complaints. 

Have an environmental remediation plan for your sites.  Investors like to see a prospective site that has access to three things:  roads, water, and electricity.  The company's environmental impact statement always takes into account the condition of the local environment before work begins.  The firm should also publish a preliminary mine / well closure plan that addresses how they will restore the site at the end of its expected life. 

The good news is that this presents a golden (pun intended) opportunity for exploration and extraction firms that make environmental stewardship into a core competency they can trumpet.