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 a 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.

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.

The Haiku of Finance for 12/29/12

Medicare is broke
Don't count on getting any
Bills will go unpaid

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.  

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.