By Christopher Briem, on May 16th, 2012
So most skipped over the story of how Neil Bluhm may be buying out the remnant of the late Don Barden’s ownership group down at the Rivers Casino.
Don Barden had a diverse mix of equity ownership, but it was still highly leveraged and in the end the collapse of some Lehman Brothers financing undid his ownership of the enterprise.* At its nadir Neil Bluhm came into the picture provided the capital to keep the enterprise going, but with Barden and his ownership group becoming a very minority owner.
Who had Don Barden recruited into the original mix? One of the more interesting players was the Retirement System for the City of Detroit. They originally were not directly equity owners but had this loan guarantee which made them some $$ if their backing was never needed. Of course it didn’t work out that way. When all imploded, their loan guarantee cost them money and in return they got a small bit of the equity already well diluted in Don Barden’s shell. Just last year the ownership of that group was restructured and the Detroit pension system had to put up $54 million in cash. See: Investor’s Double Down on Rivers Casino.
I can’t tell from the reporting if the latest machination includes Bluhm buying out the equity of the pension system or not. Below is the picture of how the refinancing/recapitalization worked out. Only a dotted line out to the Detroit Pension folks. Beware the dotted line may be one lesson. Who knows what the Detroit pension funds are holding the remaining casino investment for on their books. If the pension system’s equity does get bought out, one thing that likely will result is that they will have to reconcile the value of the asset on their books; likely a small fraction of what they put in at any point. It is a loss that has already not gone unnoticed in Detroit.
Given that it the pension system’s investment started as a loan guarantee, it was in a sense a highly leveraged derivative not all that much dissimilar to what has put JP Morgan the news of late. Sort of like they sold a put they never expected to be in the money. They could pocket the up front premia and walk away. As much as I can tell from the superficial reporting on the JPMorgan fiasco, I think they were selling selling credit default swaps with a presumption they would not be needed and in a nearly idential way the bet turned sour.
The result is that the pension system’s IRR must be a big negative percentage of their original ‘investment’ at this point. Will we ever know what their potential % loss was? Even though the Detroit Pension system has a lot more openness than say the City of Pittsburgh’s pension system.. probably not. Speaking of openness, note that the city of Pittsburgh has not put out for public consumption any investment info since 2010. In Detroit at leastyou can read their monthly or more frequent board minutes.
So what eh? The City of Pittsburgh isn’t actually violating any law or regulation in putting out so little information. Pennsylvania has literally over 3200 individual pension funds out there. … It remains a big mystery not only why the public knows so little about what the specific investments are in all of them… but why nobody ever cares to ask. I have to bet that if there was a comprehensive look at all the specific investments made by all those plans there may be a few surprises in the details.
* as disclosure I once worked at Lehman Brothers, though I couldnt begin to tell you who put money into casinos. Straight LIBOR derivatives is all I got close to.
By The Energy Report, on May 16th, 2012
 The landscape of the junior oil and gas industry has changed significantly over the last five years. What will the playing field look like five years from now? These are the questions that ATB Financial’s Bruce Edgelow will discuss at his upcoming SEPAC Oil & Gas Investor Showcase keynote address, but in this exclusive interview with The Energy Report, Edgelow gives us a sneak preview. Read on as Edgelow examines which industry trends are likely to continue, and what it will take for juniors to attract investment capital in an increasingly competitive market. The only constant investors can expect, Edgelow argues, is change.
The Energy Report: Bruce, what major changes do you see under way for junior explorers and producers (E&Ps)?
Bruce Edgelow: Juniors have begun to transition from drilling moderately priced individual vertical wells to drilling much more capital-intensive resource plays. For example, in 2000 the cost to drill and complete one well in Pembina was ~$330,000. By 2010, the cost had ballooned to ~$2.75 million (M) due to horizontal drilling and more complex completion techniques. This trend is expected to continue as resource plays become increasingly dominant and as larger budgets, bigger capital bases and higher production become more commonplace. As such, access to capital will be more vital for juniors than it has been in the past.
We expect consolidation to occur as a result of the critical mass needed to meet these increased capital requirements. Liquidity-challenged small producers may be attractive targets for larger, well capitalized companies looking to expand their asset bases. In this landscape, juniors will need to be nimble early movers. Those that can jump on a niche emerging resource play and pioneer economic extraction techniques will have an advantage.
TER: Which resource plays will remain hot spots for junior E&Ps?
BE: Development plays such as the Cardium, Viking and Bakken shales should continue to dominate the oil and gas landscape. These repeatable development-style plays require ample land inventory to provide sufficient drilling opportunities. Given increasing operating prices, juniors will need enough capital to fund full-cycle economics. Moreover, drilling and completion costs are likely to further increase as even more advanced technology will be required to unlock the full resource potential.
On the other hand, demand for conventional plays with smaller pools bearing exploration risk is reducing. The appetite to fund natural gas activity is virtually non existent unless the producer is in a niche play that can still be economic at current depressed prices. Investors and capital providers will need to develop an increasingly keen eye toward overall corporate economics in order to determine if a company has the scale, talent and asset profile to exploit the opportunities available.
TER: You’ve addressed the higher costs associated with horizontal drilling. How are revolutionized extraction techniques benefiting juniors?
BE: The industry is reporting fewer dry holes. Technological innovation has made previously uneconomic plays much more viable. Five years from now, one can expect significant advances in fracturing technology to have further increased economies of scale. It is expected that there will be a significant uptick in the number of plays that are not even on the radar screen at this time. Going forward, the industry will likely find that larger pools are repeatable and that the technology being deployed is increasingly efficient.
TER: Can you tell us more about full-cycle economics and why they matter?
BE: The full cycle growth story will be the preeminent method whereby juniors thrive in a changing marketplace. This includes organic growth, acquisitions, farm-ins and joint ventures. As in the past, juniors will continue to drill using cash flow, available debt and equity to grow with the end goal being a corporate sale to a larger company with excess capital looking to diversify. Full-cycle economics refers to this entire trajectory from small- to mid- or large-cap companies. Investors will have to assess a junior’s ability to progress to the next few stages.
TER: What kinds of business strategies will boost a junior’s odds of making the leap to the next market-cap level?
BE: A land accumulation strategy could be a viable and successful method for a junior company over the coming years. For instance, with the Duvernay in its infancy and largely unproven at this time, a junior might choose to assemble a strong land base and sit on it without expending the large capital requirements to drill. It may be able to wait for better-capitalized players to prove up the regional play with the exit strategy to sell their land at higher values.
TER: You’ve placed a lot of emphasis on organic growth and scalability. Are the days numbered for small companies out there?
BE: Junior oil and gas companies will still be very active in this space in five years. However, there will likely be fewer of them as a result of consolidation and incrementally higher entry costs. We expect that the overall environment for juniors will be made more difficult as significant equity support will be imperative for juniors. We expect a $10M starter kit will not meet the capital needs of a junior going forward. To have a greater probability of success, a junior may require $100M or more to sustain an adequate capital program for one to two years. To receive this backing from investors, juniors will need to deliver top-quartile reserves, production and cash flow growth on a per share basis. If they don’t perform at these levels, investors will be much more likely to deploy their capital to more stable mid-cap companies that yield a higher risk-adjusted return, including dividend income.
The number of juniors in the defined universe has increased nominally in recent years in comparison to significant growth in revenue and capital spending [see table below]. As I alluded to earlier, we expect this number to reduce due to consolidation and further increased capital requirements.
TER: So what will it take for an undercapitalized junior E&P to attract investment?
BE: For a junior oil and gas company to thrive in an increasingly competitive market, numerous attributes will be critical. A quality, experienced management team will be more important than ever before. It is crucial that management maintains a strong balance sheet and keeps capital spending within board-approved budgets. Furthermore, maintaining an optimal capital structure with reasonable and serviceable debt levels will be of the utmost importance. We expect to see a greater number of juniors succumb to high debt, while others will risk the company on the success of a few high-risk wells. Executives will need to manage risk appropriately in terms of effective deployment of capital as well as hedging commodity price fluctuations. They will also need to plan for potential higher-interest costs on debt and manage those costs through a stand-alone interest-rate hedging program.
TER: Currently, natural gas prices are lagging far behind oil prices. Do you think this trend will continue?
BE: The commodity pricing environment will likely dictate that plays be oil focused with strong netbacks. Notwithstanding, juniors will likely require multiple core areas of strong assets that each add economic value and the ability to increase reserves, production and cash flow on a per share basis. Finally, a company must not fall in love with their assets, but be willing to adapt quickly to changing market conditions. But who knows? With all the conversion to oil activity and some recent positive signs for natural gas demand, it may not be too soon before there is a swing back into the currently abandoned natural gas space. Time will tell.
TER: Thank you for sharing your thoughts on what’s to come in this space.
BE: Thank you for having me.
Bruce Edgelow is responsible for helping to build ATB Financial’s energy business and capabilities. His team consists of industry specialists in all aspects of the energy industry, including drilling and service, pipelines, utilities, midstream, exploration and production. Before joining ATB, Edgelow was a senior Royal banker and has more than 39 years of experience with a focus on the oil and gas industry. He is a Fellow of the Institute of Canadian Bankers, has attained the ICD.D designation, and is a very active participant in community and church activities. He also serves as a director for the Calgary Counselling Centre and sits on SAIT’s Board Advisory Council. Edgelow has also been a speaker at numerous oil and gas industry seminars on finance.
By Simon Grey, on May 16th, 2012
Here’s another sign that the United States are toast:
Mr. Saverin, who now lives in Singapore, decided last year to renounce his U.S. citizenship, a decision that was made public a few days ago. The move sparked an outcry among some tax experts who suspect he’s aiming to save on taxes. [Ya think?] Although Mr. Saverin will have to pay a hefty exit tax for renouncing his citizenship, based on some calculation of his assets, Singapore is a relatively low-tax jurisdiction, particularly for foreign investors, and does not levy capital gains tax. Thus he could save in the longer term.
Here’s a hint: it’s no longer the “land of the free” when citizens find it less taxing to live somewhere else.
By B.P.T., on May 16th, 2012
The Mortgage Bankers’ Association purchase index will be released at 7:00 AM Eastern time, providing an update on the quantity of new mortgages and refinancings closed in the last week.
At 8:30 AM Eastern time, the Housing Starts report for April will be released. The consensus is that construction on 690,000 new homes were started last month, which would be an increase of 36,000 from the previous month.
At 9:15 AM Eastern time, the Industrial Production report for April will be released. The consensus is that there will be an increase 0f 0.5% in production and an increase 0f 0.4% in industrial capacity utilization.
At 10:30 AM Eastern time, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.
At 2:00 PM Eastern time, the FOMC Meeting Minutes will be released, which will provide insight into how the Federal Reserve board governors and bank presidents view the economy.
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By Simon Grey, on May 15th, 2012
“A cynic is a man who knows the price of everything and the value of nothing.”
—Oscar Wilde
I had no idea that in 2001 an elementary school in New Jersey became America’s first public school “to sell naming rights to a corporate sponsor,” Sandel writes. “In exchange for a $100,000 donation from a local supermarket, it renamed its gym ‘ShopRite of Brooklawn Center.’ … A high school in Newburyport, Mass., offered naming rights to the principal’s office for $10,000. … By 2011, seven states had approved advertising on the sides of school buses.”
Seen in isolation, these commercial encroachments seem innocuous enough. But Sandel sees them as signs of a bad trend: “Over the last three decades,” he states, “we have drifted from having a market economy to becoming a market society. A market economy is a tool — a valuable and effective tool — for organizing productive activity. But a ‘market society’ is a place where everything is up for sale. It is a way of life where market values govern every sphere of life.”
Why worry about this trend? Because, Sandel argues, market values are crowding out civic practices. When public schools are plastered with commercial advertising, they teach students to be consumers rather than citizens. When we outsource war to private military contractors, and when we have separate, shorter lines for airport security for those who can afford them, the result is that the affluent and those of modest means live increasingly separate lives, and the class-mixing institutions and public spaces that forge a sense of common experience and shared citizenship get eroded. [Emphasis added.]
In a post on the autism of economics, I theorized that economics had lost its way by basically trying to put a price on everything. I now think that this mindset has already made its way into the broader culture. I’m not sure why this is the case, but I think that this tendency to put a price on everything is indicative of a social disease. As Friedman notes, the message is that everything is for sale. In a sense, this is true. But that should not necessarily mean that everything can be purchased with money.
Getting back to the disease, I think the biggest problem society faces is that of materialism. Everyone is focused on getting things and having stuff. As with above, schools want money, presumably to buy things for students and teachers. The idea is that having more pay for teachers, or having smartboards, or having more ergonomically-designed desks, or having whatever else is theorized to improve students’ scores will lead to a better educational process. In each case, though, the root assumption is that things lead to better results, not people. Ultimately, this mindset is one that is predicated on denying people’s humanity. Students are not individuals with their own personalities, quirks, strengths, weaknesses, and interests. They are merely throughputs in the industrial machine of public education. Thus, if there is a problem with students, it is not because the system is flawed, but because the system doesn’t have the right blend of educational components. The solution, then, is to buy more components, even if that means raising money by selling naming rights to the school.
Now, my lament is not that the state should “do something” about this problem—from what I can tell, the state is actually at fault for a good portion of the problem—nor do I actually care what a school is named after. In fact, the problem of selling naming rights of schools is not actually of much interest to me, since school names tend to be arbitrary anyway. No, what concerns me is that everything is being reduced to a number.
This is, I suppose, an extension of the science fetishist mindset, wherein everything has to be made into objective, sortable, analyzable data. The science fetishism of modern society pervades every aspect of society, as everything and everyone has to be broken down into their base elements and converted to an equation. Students cease to be humans and instead become numbers: test scores, subject grades, and desk rows. Teachers are also turned into numbers: salaries, average student test scores, and so on. Likewise with principals, schools, districts, administrators, and so on. People—human beings—are reduced to easily digested statistics, which are then bandied about by the politicians and talking heads, as if simple numbers adequately represent hundreds of thousands of human beings, their drive, their ambitions, their talents, their abilities, their strengths, and their weaknesses. When people become mere numbers, it should come as no surprise that everything else is reduced to numbers as well.
Thus, the fact that schools are turning their schools into giant billboards indicates not only has the world gone mad with materialism, it has gone so completely mad with it that even students and teachers are reduced to mere objects—throughputs and inputs for the assembly line of modern education. Everything has a price, but nothing has value. Everything is reduced to a number, to a statistic.
I suppose that this is the inevitable result of a society where everything is increasingly centralized. Small business is hampered by federal laws, which are often enacted at the behest of major corporations. (Incidentally, small business owners are far more personal and personable than CEOs of giant corporations, probably because they interact with their employees and customers on a daily business, and get to know them as humans and not mere numbers.) The role of educator has been mostly stripped from parents and given first to state governments and, increasingly of late, to the federal government. Even the religious world emphasizes centralization, embracing mega-churches and extremely hierarchical organization: those who make the rules and those who have to live by them often do not know each other personally, at least in churchianity.
Quite simply, the personal is frowned upon. The large-scale, central organization is worshipped. Leftists worship big government (who else can so efficiently save people from their humanity?); the right worships big-business (because economies of scale are so efficient, which is why the government has to subsidize them with regulations and special market protections). Everything must be big, which means the end of the personal.
I suspect that we would not suffer all that much if we scaled back everything. Government would be more accountable if those who ruled lived next door to their subjects (imagine suggesting this to Obama or Romney). Businesses would be more concerned about quality of products and services if owners lived next door to their customers* (having worked for a Fortune 100 company and a couple of small business owners, I can testify that this is indeed the case). Education would be more effective if parents and administrators lived next door to each other.
Actually, education would be more effective if parents and administrators were the same people. The reason why homeschooling is so effective is simply due to the fact that most parents who homeschool do so because they care about their children as fellow human beings. Personally, I can testify that while my parents were concerned about me mastering, say, long division and spelling, I could always rest assured that at the end of the day, my teacher (mom) and principal (dad) would still love me and take care of me regardless of what I scored on my math test. Quite simply, I mattered to them. I was not merely a number to them, but an actual human for whose intellectual, social, moral, emotional, and spiritual development they were responsible. Try getting that from a public school teacher who spends as much time attending worthless seminars and filling out trivial paperwork as she does actually interacting with two dozen students.
At the end of the day, society is built on personal relationships. When those relationships erode, so does society. And when everything becomes reduced to a number, it is safe to say that society has become increasingly impersonal, and is thus in the beginning stage of decline.
* I will have more to say on this in a future post.
By The Gold Report, on May 15th, 2012
 Trotting the globe in his unrelenting quest for investing opportunities, Bob Moriarty had just completed a 21,000-mile travel-a-thon when he picked up the phone for this exclusive interview with The Gold Report. He liked a lot of what he saw, found plenty of bargains along the way and is willing to name names. Ever the contrarian, he is picking up stocks when everyone else is dumping them; he plans to cash in when the mass of sellers morphs into a mass of buyers and drives prices up.
The Gold Report: We’re hearing many people these days warning that it’s not a good time for investing in junior mining stocks. The TSX Venture Exchange has been experiencing some of its lowest volumes in six to nine months. What do you believe investors should do this summer?
Bob Moriarty: Anybody following my website for years will be familiar with me saying this: You can ignore technical analysis. You can ignore seasonality. You can ignore fundamentals. The only thing you can ever absolutely make money in is being a contrarian. Some very big names in the mining industry, including Rick Rule and Eric Sprott, have said, yes we’re in the bottom but it’ll be several months before you should invest. Where were they April 25 last year, when I said we’d reached the top in silver? For months afterward, the very best place to be was in cash. You have to look at what people say and when they say it. Very few people got it last year, but I clearly was one of them.
We are at a major bottom in gold and gold shares. The fact that some of the biggest names in the business are telling investors to bail out or keep their hands on their wallets if they’re tempted to buy is a buy signal. If you have a hundred people in a room and every single one of them was a bear, the next trade would be up because you would have run out of sellers. The fact that the volume is so low speaks volumes all by itself. There are no buyers—only sellers, and we’re about to run out of those. When that happens, the very next trade will be up.
It’s a chicken-and-egg situation. Which came first? In this situation, was it the bottom or the news? Everybody hears, “The Dow went up 200 points today because of xyz.” They try to connect news with action and it’s exactly the opposite. When gold and gold shares go up, they’ll say it’s because of Iran, or Israel, or Osama bin Laden or Ron Paul. It’s nonsense. It will go up because we’re running out of sellers. When you have no sellers, you only have buyers. It’s that simple. Too simple for most people to understand. But those who do will make a lot of money. Dawn follows the darkest hours.
TGR: But suppose the government announces quantitative easing (QE) 3, for instance, or some new European debt problems crop up. Wouldn’t such news prompt investors to buy junior gold and silver shares?
BM: Absolutely not. What you hear on the radio, read in newspapers and most of what you see on the web is not news. It’s propaganda. We have the equivalent of QE3 in Europe, something like $6.7 trillion, and gold, silver and equities have been going down. There’s no connection between news and action. We have been spring-loaded to believe that the news is important and it’s not. It’s meaningless. Six people control 95% of the news media and you’re being told what they want you to believe. That doesn’t mean it’s news.
TGR: So you have to divorce yourself from the news if you really want to be a contrarian in investing in mining stocks?
BM: Absolutely. Every time I call a silver or gold top and I’m perfectly correct, a hundred people immediately write to tell me how stupid I am in calling a top when in fact they’re always dead wrong. They never tell me a month later; they always tell me as soon as I say it. Well, I’ve called tops and bottoms correctly for 10 or 11 years now. To be able to do that, either I have to know something other people don’t or I have to be the guy doing the manipulation. And believe me, I’m not the guy doing the manipulation. All markets are manipulated and that makes manipulation as close to meaningless as you can get.
The mere fact that shares are hard to sell and there’s very low volume is a buy signal all by itself. If you want to make a fortune in the junior mining segment, buy when nobody wants to buy and sell when everybody wants to buy. If that were all you did, you’d make 100% a year. Juniors have a 200–400% range every year. Buy when things hit a new low, sell when they hit a new high and ignore all the “gurus.”
TGR: You talked about calling silver’s high last April, and you’ve again been looking at silver and gold assets around the world. Do you consider yourself more of a silver bull or a gold bull? Or neither?
BM: I’m an agnostic. As for what I look for, I don’t look for silver or gold or boron or natural gas. I look for opportunities. The Argentex Mining Corp. (ATX:TSX.V; AGXM:OTCBB) silver property we visited two weeks ago is a hell of an opportunity, and I said so.
TGR: That’s in the Santa Cruz Province in Argentina, which has been a hotbed of exploration activity over the last several years.
BM: Yes, I was actually down there visiting four years ago. I liked the stock when it was $1.34/share. It’s trading at about $0.38/share now, but two weeks ago it was trading at $0.25/share. If you’re buying shares in silver at $0.25, you’re effectively buying silver equivalent at $0.11/oz. If silver goes down to $15/oz, you’re still going to make money.
Argentex will release a new NI 43-101 any day now, and they’ve doubled the amount of drilling, so it wouldn’t surprise me to see the resource almost double. But in any case, when silver was selling for $5/oz, there were silver company shares selling for $1/oz in the ground. So, $0.08, $0.11 or $0.20—that’s pretty cheap for an ounce of silver.
TGR: Do you look at certain jurisdictions or provinces that are particularly good for mining activity and then bet on some of those areas? Or is it always company specific in your view?
BM: It’s actually management-specific. You need to look at a lot of factors, of course, but the most important is management. The country or province is absolutely important. I’m going to write an article shortly and will call it “The Miners’ Lament.” It’s about having a gold or silver or boron project and the price of the commodity goes up. As soon as the price goes up, governments get greedy. That’s happened in Peru, Bolivia, Ecuador and Australia. To a certain degree it’s happening in Argentina, because the government has started getting greedy and claiming a bigger piece of the miners’ pie.
TGR: On May 4, Argentina’s Congress passed a bill to nationalize Repsol YPF SA (REP:BMAD), the biggest oil company there, expropriating 51% of Repsol’s shares. Although not entirely unexpected because President Cristina Kirchner had announced her decision to nationalize YPF a couple of weeks earlier, the action—pretty much effective immediately—sent shockwaves through the resource investing community. Do you think this news makes investing in Argentinian juniors more risky?
BM: There are a couple of different issues to address here. One is the stupidity of government in Argentina. In 1914, Argentina had the third-highest GDP in the world. Based on agriculture and metal wealth and the educational level of its people, Argentina still should be one of the wealthiest countries in the world. It’s not, and hasn’t been for 100 years now. The reason is 100 years of incredible stupidity in government.
The resources are there. The people are there. The climate’s wonderful. The wine’s good. Buenos Aires is a lovely city to live in. Yet Argentineans suffer economically. For the government to seize YPF is especially stupid. The excuse was it was not making enough money out of it—in much the same way that the power company in South Africa wasn’t making a profit because the government imposed limits on what the power company could charge for the power it sold.
Governments believe they’re smarter than the economy and they can repeal or modify the laws of supply and demand. They can’t. The last 6,293 times governments have tried to show they’re smarter than the economy, they’ve screwed it up. Governments just get in the way of people making money. If you go to Switzerland, you don’t even see government. In Sweden, government’s in the background and that’s a welfare state. But, government doesn’t figure into every newspaper article and everything you hear on the radio. In China, I don’t have a clue how the government works; I just know it’s an exciting place to make money.
So let’s go back to whether it’s safe to invest in Argentine juniors. I think it is because the juniors are in the exploration stage and they’re bringing money into the country. It would be especially stupid for the government to get involved at this point. I don’t think it will fool around with the production companies yet, either, but there’s no limit to the stupidity of governments.
TGR: Santa Cruz Province in particular seems to be a fantastic jurisdiction for exploration—great roads, nearby power, supportive locals. I was impressed.
BM: I was quite impressed too. And I know that you went to see another project. I saw Netco Silver Inc. (NEI:TSX.V; NTCEF:OTCBB), which is on the Chilean border. It has a similar series of sheeted veins and high silver grades. The company has been totally ignored by the market.
TGR: Tell us a little bit more about Netco.
BM: When I look at a property, I try to figure out the limits. I saw a series of sheeted veins, similar to what we saw in Santa Cruz at Argentex. I think Netco found 10, 12 or 15 kilometers in strike length. Netco has two problems. First, it’s one of the most god-awful names I’ve ever heard and, second, the management hasn’t done or said anything for five years, so the market has totally ignored it. However, that’s exactly what I look for—opportunity.
Every project I’m going to see now has low-hanging fruit just begging for somebody to come along and pluck it, take it home and eat it. How can you beat silver at $0.11/oz? Netco has 2,000–3,000 gram silver intercepts over meters and nobody’s ever heard of them before, including me.
There are so many companies out there now that you could invest in the biggest piece of crap stock in the universe and it will be up 100% or 200% in a year. Really good stories, from Argentex and Netco in Argentina to Tembo Gold Corp. (TEM:TSX.V), Canaco Resources Inc. (CAN:TSX.V), Kinross Gold Corp. (K:TSX; KGC:NYSE) and Keegan Resources Inc. (KGN:TSX/NYSE.A) in Africa—you could name 100 companies and they’re going to be up 400% to 500% in the next 18 months.
TGR: Well, Bob, let’s go off and harvest some of that low-hanging fruit. You travel the world. Tell us about some of your favorites.
BM: One of the real low-hanging fruits has to be Canaco, which went from an $800 million (M) market cap a year ago to about $80M or $100M now. The stock has gone from $8/share down to $0.88/share and the company has only about $0.60/share in cash. But it’s worth $800M. Its intercepts are fabulous. No question whatsoever, it’s going to be a mine. It has no particular issues.
Tembo did a financing at $1/share last year, made its initial public offering in February, and its stock went up to $2.20 or $2.30/share shortly afterward. I think it’s trading at close to $0.90 now. Tembo’s project in Tanzania is located right next to Barrick Gold Corp.’s (ABX:TSX; ABX:NYSE) Bulyanhulu gold mine, and the same team that ran Bulyanhulu is now at Tembo. They’re coming up with intercept after intercept and know exactly what they have. With a 97,000-meter drill program scheduled, Tembo’s going to have millions of ounces. And the company’s being given away.
TGR: How do you view Tanzania in terms of jurisdictional risks?
BM: The real issue there is the infrastructure. Mining provides most of the country’s export income, so it’s as important in Tanzania as it is in Peru. If you want to talk about jurisdictional risk, look at Peru and think again about “The Miners’ Lament.” Newmont Mining Corp. (NEM:NYSE) is trying to build a $4.8 billion mine in Cajamarca Province. The president of Cajamarca Province is demanding a $780M slush fund that only he has access to for “environmental” purposes. I can guarantee it’s a bribe and he wants 1.5% of the purchase price to let Newmont get into business.
Peru’s smart enough. It gets 60% of its export earnings from mining and now has a process in place whereby some of these idiots can be thrown out, and I think the local people in Cajamarca are about to throw him out. There’s so much corruption in Peru. It’s like Ecuador and Bolivia—there’s no rule of law.
North of there, Corazon Gold Corp. (CGW:TSX.V) operates in Nicaragua. Its stock is going for one-third of the price from two months ago, and I’m picking up some for myself. Corazon was smart enough to walk away from the Santo Domingo concession in central Nicaragua because the terms weren’t very attractive. But just a few weeks ago, the company picked up three excellent new properties, contiguous concessions along the Rio Coco in northern Nicaragua.
TGR: Going back to Africa for a moment, are there any other names you like there?
BM: Abzu Gold Ltd. (ABS:TSX.V; ABZUF:OTCQX) has some world-class projects in Ghana and absolutely fabulous management. In fact, it shares management with MAG Silver Corp. (MAG:TSX; MVG:NYSE), which is one of the big success stories of the last 10 years. I’ve not visited Abzu, but I’ve been to the adjacent mining property. And getting back to your earlier question, from geological and jurisdictional points of view, both Ghana and Tanzania are excellent places to work.
TGR: What are some of the North American stories you like, Bob?
BM: First, let’s talk about the difference between Canada and the United States. Canada is a wonderful place to work. I think it’s the most favorable mining community in the world. There’s some invisible line you cross when you go from the U.S. into Canada and all of a sudden, you become sane. The people in the U.S. amaze me with their ignorance of politics, economics and everything that’s going on in the world. They’re so insular; they just don’t pay attention.
Canada, on the other hand, is still an international country. The miners and geologists in Canada travel all over the world, and like Johnny Appleseed, they’re spreading goodwill and knowledge wherever they go. There is no mining anywhere in the world without an abundance of Canadians, and by the same token, no mining area anywhere else in the world has an abundance of Americans except America.
That said, from a geological point of view, there’s enormous opportunity in the United States, but the government’s still being especially stupid. At some point, somebody will realize you can’t keep spending more money than you take in. The United States is borrowing $0.41 out of every $1 it spends today. That’s insane. Some 88 million Americans are unemployed or underemployed—88 million people who aren’t working and we have only 64% employment among those who should be working. At some point, Americans will have to produce something besides hamburgers and new regulations and idiots in politics.
TGR: How does that relate to getting projects in Nevada, Montana and Arizona permitted and into production?
BM: It’s going to get easier. I went to see Trueclaim Exploration Inc. (TRM:TSX.V; TRMNF:OTCQX) in Arizona. Silver nuggets, which are extremely rare, were supposedly found on its property, and the whole story about the Lone Ranger firing silver bullets apparently came from there. It’s a perfect example of a wonderful project in a wonderful area. Arizona was settled because of mining in the first place. But the property is unfortunately on U.S. Forest Service land, which means jumping through 67 hoops and stumbling through a bureaucratic minefield to get anything done. That has to change.
TGR: Let’s get back to some of the other names you like.
BM: I like Comstock Mining Inc. (LODE:NYSE.A). I was visiting its properties in Nevada about a year and a half ago. Of course, it has the Comstock Lode, enormously rich in both gold and silver, and a lot of money in the till. But Comstock isn’t moving as fast as I’d like; I’d like to see things speed up there.
Evolving Gold Corp. (EVG:TSX; EVOGF:OTCQX; EV7:FSE) is really an interesting story. It has a joint venture on its Rattlesnake Hills project in Wyoming with a subsidiary of Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), which has agreed to spend $75M to earn half the project. So if half of Rattlesnake is worth $75M, the other half owned by Evolving Gold should also be worth $75M. But you can buy the whole company including its Carlin properties for $29M. Go figure. I visited its Carlin project in December. I think it’s very close to a major intersection where it has been drilling in the Carlin Trend.
I visited Gold Standard Ventures Corp. (GV:TSX.V; GDVXF:OTCQX) on the same trip, right next door to Evolving Gold. I said in December that Gold Standard may have already drilled a home-run hole on a major new deposit and not even realized it. In fact, that was the case, and its stock has gone from $1/share to about $2.50/share. Evolving Gold, on the other hand, is in the $0.22/share neighborhood, so cheap it’s insane. It was as low as $0.15/share in 2008, but up to a couple of bucks in 2009–2010.
TGR: To have new discoveries cropping up in Nevada is pretty exciting when you consider how much exploration has been done there. It’s amazing what Nevada is producing in terms of mining opportunity and wealth.
BM: I’m extremely familiar with the Carlin Trend and what’s been going on there in the last five years, and it’s the juniors who are making the bigger discoveries. I don’t even bother talking to the majors. They aren’t developing as many ounces as they’re producing, and they’re all going to be out of business in 10 or 15 years. You just can’t conduct your business doing it that way. But with someone like Gold Standard’s Vice President of Exploration Dave Mathewson doing the exploration, the juniors are coming up with these multimillion-ounce deposits that nobody dreamed of because they never tried drilling there before.
TGR: Obviously, you feel like it’s a shopper’s paradise in junior stocks. Are there any other opportunities that you’re particularly keen on that you’d like to talk about?
BM: Anything related to energy is an opportunity. Natural gas is being given away. And, from a contrarian point of view, it’s a gimmie. Potash is absolutely a big opportunity and graphite is another one.
TGR: So you don’t think all the buzz about graphite means it’s a bubble, a flavor of the month?
BM: It absolutely is the flavor of the month. But you get a bubble when about 450 companies are in a space, and now there are only about 30. I don’t expect all 30 to succeed, but I own about five of them. I’m quite happy to because I think there’s a wonderful opportunity there. When it gets to 450 companies, I’ll probably start selling some of my shares. Every investor should be familiar with Hobson’s Choice.
TGR: How so?
BM: Hobson was an innkeeper in rural England back in the 1700s. He was very lazy. If someone came to him asking for a trotting horse to ride around the village for an hour or two, he’d fetch the first horse nearest to the door of the stable. It might be a plow horse. So Hobson’s Choice was no choice at all or the best of a bad lot.
We live in a financial environment in which every bank in the United States has been bankrupt for four years and everybody is still pretending they’re going to survive. In Spain, 52% of the young people are unemployed. We are so close to a global revolution, it terrifies me. In that situation, you have to go to safety. So investors have no choice, really. And believe it or not, I don’t see anything safer than juniors—gold or graphite or boron or natural gas or potash. If you are faced with a choice of investing in U.S. T-Bills or Greek bonds or Spanish bonds or resource juniors, what would you invest in?
TGR: People always have to eat and need a way to trade.
BM: You’ve got it. But they must have something of value to trade. I don’t know whether the gold price will be $500/oz or $5,000/oz or $50,000/oz, but I can tell you that in two, three or five years, if you have a 10-ounce bar of silver in one hand and a 1-ounce gold coin in the other, you’ll know you’re holding something of value. Marc Faber says everybody should buy a $1M T-bill, put it in a nice frame, hang it on the wall and in 10 or 20 years when the grandkids visit, they can point to it and say, “See that? That used to be money.” Paper money is already a relic. It’s not a prediction—it’s here now. [Faber, who produces a monthly investment newsletter, Gloom Boom & Doom Report, chatted recently with The Gold Report.—Editor.]
TGR: You’ve given us some good stuff to chew on, Bob. Thanks so much for your time.
Convinced that gold and silver were at their bottoms, and wanting to give others a foundation for investing in resource stocks, Bob and Barb Moriarty brought 321gold.com to the Internet 11 years ago, and later added 321energy.com to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy. Both sites feature articles, editorial opinions, pricing figures and updates on the current events affecting both sectors. Before his Internet career, Moriarty was a Marine F-4B pilot and O-1C/G forward air controller with more than 820 missions in Vietnam. A captain at age 22, he was the youngest naval aviator in Vietnam and one of the war’s most highly decorated. He holds 14 international aviation records, and once flew an airplane through the Eiffel Tower’s pillars “just for fun.”
By B.P.T., on May 15th, 2012
At 7:45 AM Eastern time, the weekly ICSC-Goldman Store Sales report will be released, giving an update on the health of the consumer through this analysis of retail sales.
At 8:30 AM Eastern Time, the Empire State manufacturing index for May will be released. The consensus is that the index value will be 10, which would be 3.44 points higher than the value reported in the previous month.
Also at 8:30 AM Eastern time, the Retail Sales report for April will be released. The consensus is that retail sales were 0.1% higher last month, after an increase of 0.8% in the previous month.
Also at 8:30 AM Eastern time, the Consumer Price Index report for April will be released. The consensus is that CPI was unchanged last month, and there was a 0.2% increase in CPI when food and energy are removed.
At 8:55 AM Eastern time, the weekly Redbook report will be released, giving us more information about consumer spending.
At 9:00 AM Eastern time, the Treasury International Capital report for March will be released, showing the flow of capital in and out of the United States economy.
At 10:00 AM Eastern time, the Housing Market Index for May will be announced. This index is created from a survey of home builders, so it shows the confidence that the sector has in the overall economy and their business.
Also at 10:00 AM Eastern time, the Business Inventories report for March will be released. The consensus is that inventories increased 0.4% from the previous month.
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By Christopher Briem, on May 14th, 2012
Big day Monday up at the other end of Cleveburgh. Some day someone is going to have lots of fodder for a paper on the spatial patterns of local casino markets. What do I mean? Up in Detroit the headlines are all about how: Ohio’s new casinos could cost cash-strapped Detroit $30 million a year, analysis predicts. The analysis comes from Mckinsey and it is not alone. It is the same concern up in Erie. In Pittsburgh before it was built the notional new local casino here was expected to draw most of its business from a cachement area of 150 miles or less. How close is Cleveland? or more importantly, how much of population within 150 miles of Pittsburgh is also within 150 miles of Cleveland? Break out the compass and dividers.
According to the AP, it is such a big deal that: Cleveland Casino may begin Rust Belt revival. Really? They are not dumb up the turnpike there, they know full well what some of the indirect economic impacts are likely to be. They also know some of the odds. Once they get going it is going to be interesting to compare the payout rates for slots up there vs. here.
In the end it may all be about the food. One thing that may be a real competitive advantage up there…. the spread. Speaking of competitive advantage, the bit of underappreciated news from last month is that down in West Virginia they seem to have implicitly voted for keeping their casino instead of having to move it to attract the ethylene cracker that was big news here. Voting with their (virtual) chips is one way to describe it.
And Inspector Renault may not be as prolific as Yogi Berra (Happy Birthday Yogi!) but he was just was wise. Funny how they are already squabbling over the money the new casino may bring in up in Cleveland.
A bit non sequitur, but speaking of Cleveburgh… from last year, but after my oped on Cleveburgh that was in the Cleveland Plain Dealer, I didn’t notice this very anti-Cleveburgh piece from NE Ohio: This idea is the Pits. All I can say is folks read some things a bit too literally. I saw some commentary back then on the piece that suggested I was proposing some sort of Cleveland-Pittsburgh government be formed and how bad that would be. Yeah, that is what I was proposing??
By The Gold Report, on May 14th, 2012
  Toronto-based hedge fund managers Jerome Hass and Jimmy Chu of Lightwater Partners discuss their strategic approach to taking long positions on gold, zinc and tungsten opportunities around the world. In an exclusive interview with The Gold Report, the Lightwater principals reveal several precious and base metal plays in which they have purchased stakes and define their criteria for limiting risks when taking on junior mining investments.
The Gold Report: Does Lightwater Partners have a regional bias when looking at precious and base metal equities?
Jerome Hass: Yes, we do have a preference for Canada- or U.S.-based investments, largely because of the political stability and the rule of law. By that, we mean a stable legal jurisdiction, which is important if things go wrong—as investors are discovering currently in places like Mongolia or Argentina. That said, not all of the North American states and provinces are equally mining friendly. We are cautious about gold companies based in British Columbia or Montana. We look far more positively on projects located in Ontario, Québec or Nevada.
TGR: Do you favor junior mining firms that are directly engaged in exploration and operation, or enterprises that buy and hold properties until it becomes feasible to sell them to more practiced developers?
Jimmy Chu: We rarely look at exploration plays, because we just don’t find the risk-adjusted return to be attractive. We prefer to look at near-term developers, but not at those that are actually building a mine. For us, the value-added proposition is in proving up the economic case for a mine, but not in construction or operation. However, we will look at a company that has already built a mine, is operating it and is exhibiting good management skills.
TGR: How do you assess management skills?
JC: We meet directly with the managers. We look at management’s track record and at how it has delivered against investor expectations.
TGR: Do you have a strategy for hedging on gold and precious metals and base metals?
JH: Hedging is tricky for most junior mining or gold companies. There are a number of options available. One option is to use physical gold as a means to short a position. The problem with that strategy is that positions in physical gold and equities rarely move hand in hand. Another option is to short the equities themselves. But, this is a real problem when the entire junior gold industry views itself as a potential takeout. That’s a big risk when you’re a short seller.
Large-cap stocks are easier to short as there is less of a takeout risk. Of course, large-cap and small-cap stocks can react differently depending on market conditions.
Another option is to use a proxy for junior gold ore on the Toronto Venture Exchange, such as a Canadian stockbroker, because a lot of its profitability and revenues come from junior mining issuance and corporate finance. We tend to use all four approaches to hedging, although no one of them is perfect.
TGR: What gold ventures excite you today?
JH: We rarely look at exploratory ventures. We do focus on companies with near-term catalysts. For example, we like Oromin Explorations Ltd. (OLE:TSX; OLEPF:OTCBB). It is more of a developer than an explorer. In fact, we recently met with Oromin’s managers. They said that acquisition negotiations are ongoing for its joint venture group in Senegal.
Interestingly, Oromin is only covered by one analyst on the Street. Its story is not well known. It should receive its environmental approval in Senegal within the next couple of weeks. And, once that is done, its project will be construction-ready. Given that Oromin has access to 3.3 million ounces (Moz) gold, as indicated in an NI 43-101 compliant document, we think it’s quite attractive.
Also interesting is a nearby property held by Teranga Gold Corp. (TGZ:TSX; TGZ:ASX). Teranga operates a gold mine equipped with an underutilized mill. There are obvious synergies between Oromin and its potential mine and Teranga and its existing mill. On top of that, IAMGOLD Corporation (IMG:TSX) and Randgold Resources Ltd. (GOLD:NASDAQ) operate gold mines in the same region.
TGR: What about Oromin’s Canadian ventures?
JHs: Oromin’s main asset is in Senegal. The Canadian operations are minor, and we attach zero value to them.
TGR: How do the costs of mining production in Africa, including environmental and labor costs, compare with those in Canada?
JH: The operating costs are lower in Africa. Of course, the cost of capital is the same, given that Canada is the principal financial center for mining and mining capital.
TGR: What junior gold mining firms interest you in Canada?
JH: Auriga Gold Corp. (AIA:TSX.V) is revving up its Maverick gold project in Manitoba. That is a very safe jurisdiction—a mining friendly province. Maverick is an advanced stage project, with infrastructure already in place from a past-producing mine. Auriga is restarting Maverick’s mill, which is in good condition and worth $25 to $50 million (M). That alone translates into $0.50 to $1.00 per share, and compares to a $0.25 share price.
But even if there were no ore body to exploit, Maverick is still an attractive deal strictly from the perspective of the mill. Adding value is a shallow open pit with a very low strip ratio at surface. The combination of the existing mine and the very shallow ore body makes Maverick a highly economic project. It should be up and running by early 2013 at a cost of only $18M.
I can’t think of another project around the world that can get up and running for only $18M in capital expenditure. The payback is only 20 months, and the cash flow is projected to be $130M over the mine’s projected life of 7 1/2 years. The internal rate of return on the initial phase of the project is 88%, which is extremely nice.
TGR: Who do you favor among mid-cap gold stocks?
JH: Looking for near-term catalysts, we like Seabridge Gold Inc. (SEA:TSX; SA:NYSE.A). Surprisingly, it has an $636 million market cap and 38 Moz gold in reserves, yet there’s not one analyst that covers it on the Street. The reason for that is the business model: Seabridge hasn’t had to raise equity. Consequently, the Street’s not paying attention to it.
In 1999, when gold was $300/ounce in 1999, the Seabridge principals saw opportunities where the capital markets just weren’t interested. Seabridge scooped up gold properties knowing that when gold rose in value it would benefit. The Seabridge business model is to develop these properties to the stage where they should be built, but they don’t build them out themselves. What we find attractive is that Seabridge has clearly recognized its own management strengths: drilling and proving the economics of a mine.
By way of catalysts, in mid-May, Seabridge is scheduled to produce an updated pre-feasibility study on its Kerr-Sulphurets-Mitchell (KSM) project in British Columbia. KSM is probably the largest undeveloped ore body in the world. The study is the second to last stage before putting the company up for sale. Seabridge intends to find a joint-venture partner within 12 months of the release of the updated prefeasibility study. The final catalyst before going up for sale is approval of the environmental application. That will probably happen in September. At that point Seabridge will have a mine plan ready for a major buyer.
TGR: What about the local mining infrastructure? Can it handle KSM?
JH: KSM is close to cheap power and close to a highway. It has year-round port access, a very low strip ratio and a projected long mine life. All the things you want to see in a mine. The problem is that it’s so huge that there are a limited number of players who are big enough to develop it. Pulling this off will require a firm along the lines of Barrick Gold Corp. (ABX:NYSE; ABX:TSX), Newmont Mining Corp. (NEM:NYSE) or Freeport McMoRan Copper & Gold Inc. (FCX:NYSE).
TGR: What about base metal mine development? Does that sector fit your risk-adjusted portfolio?
JC: We tend to shy away from base metals, with the exception being a small company that is a pure play on zinc. That’s Tamerlane Ventures Inc. (TAM:TSX.V). It owns a zinc-lead mine called Pine Point in the Northwest Territories. It’s a restart of a mine that was operated by Cominco Ltd., which is now owned by Teck Resources Ltd. (TCK:NYSE; TCK.A:TSX).
TGR: Pine Point was closed, but it is now being revitalized? How so?
JC: Teck had shut down the mine because it had developed its Red Dog mine, which is one of the world’s most prolific high-grade zinc mines. There’s no question that Red Dog is the better ore body, but Pine Point is also attractive based on its fundamentals and valuations. It will provide an independent source of zinc concentrate, which is very much in global demand by both smelters and traders.
TGR: Does Lightwater invest in other metal commodities?
JH: We like tungsten. Its fundamentals are attractive from a supply and demand point of view. China stopped exporting tungsten concentrate in 2000; at the same time demand for tungsten increased. The tungsten fundamentals have improved for non-Chinese producers globally.
Tungsten is used as a composite material because of its hardness—it is second only to diamonds. Because tungsten is heat resistant, it’s used in high-speed cutting tools, jet engines and light bulb filaments, as well as a replacement for lead in certain applications. Overall, there is a nice combination of increasing demand and tightening supply.
It is worth mentioning that Warren Buffet’s Berkshire Hathaway has recently invested in the tungsten space. That has focused investor attention onto this rather obscure market.
TGR: Are there any companies that you’re attracted to in tungsten?
JH: We like a pure play on tungsten through a company called North American Tungsten Corporation Ltd. (NTC:TSX). It has the Cantung mine in the Northwest Territories. It’s small, but it accounts for 4% of world tungsten production. Its output is improving due to the purchase of Caterpillar equipment, which has really helped operational reliability because it is located in a remote region, and temperatures can plunge to minus 40 degrees.
TGR: What is the quality of the Cantung tungsten?
JH: The Cantung grade is very high by global standards: about 1.1% on average. The global average is about 0.3%. American Tungsten tested the mine’s old tailings and found a grade of about 0.3%. That means that the company can enhance Cantung’s mine life by processing those tailings. But, what’s even more exciting is North American Tungsten’s new development project called the Mactung deposit. It’s one of the world’s largest undeveloped high-grade tungsten deposits. Permitting is ongoing.
TGR: That’s all good information. Do you have any names to add, Jimmy?
JC: A company called Orbite Aluminae Inc. (ORT:TSX) has patented a new technology to extract alumina from aluminous clay deposits. There was a lot of controversy surrounding certain overstated claims in Orbite’s preliminary economic assessment in late March and trading was briefly suspended. But those issues seem to have been resolved. We have met with Orbite management on numerous occasions and we flew out to Gaspé, Québec, to see their pilot plant. It’s potentially a game changer.
TGR: Thank you for your time.
JH: Thank you.
Based in Toronto, Canada, Lightwater Partners is an asset management firm specializing in alternative investments. Partner Jerome Hass has 16 years of experience in the financial industry. He joined Lightwater from Epic Capital Management. Previously, he was a portfolio manager and head of international equities at Montrusco Bolton Investments, where he managed $450 million directly, co-managed large global funds and oversaw $1 billion in private wealth. Partner Jimmy Chu has 10 years of experience in hedge and investment funds. At Lightwater he focuses on developing detailed financial models for existing and potential equity investments, which are used as a tool for making investment decisions.
By Simon Grey, on May 14th, 2012
The continued expansion of the welfare state is a grave concern to me, now more than ever. I fear the expansion of the welfare state because I believe it infantilizes society. By this I mean that citizens of the United States become more dependent on the federal government’s largesse, and in so doing become less inclined to behave responsibly, secure in the knowledge that if all else fails, the government will be there to save.
Now freed from the main concerns of life, such as finding food and shelter, and now freed from having to constantly be working to afford these things, people will be increasingly able to enwrap themselves in their own little petty dramas. In a panem et circenses world, this will mostly take the form of eating junk food and watching mindless entertainment, which is what a large number of US citizens already do anyway. The more serious minded might make an effort to watch and read the news, but the news is still entertainment, although more deceitfully packaged. Ultimately, the infantile society is one where innovative risk is discouraged, moral risk is subsidized, and the pursuit of leisure and entertainment becomes the point of life.
This is not healthy, and is indeed a form of arrested development, for people will not be expected to worry too much, nor will people be expected to work hard, at least in the sense of doing labor. The emphasis will be on being compliant citizens and, above all else, being safe. This emphasis on safety is the most infantilizing action of all. Consider, for example, how risk-averse boys are treated by their more adventurous peers: they are often called babies. And the more risk-averse men are often called boys by their peers. The idea is that there is some shame to be found in prizing safety above all else, and that aversion to risk is a hallmark of youth, wherein one lacks the resources to deal with the risks that adults often face.
What’s interesting about this infantilization of society, though, is how it is self-perpetuating. The childish mindset belied by the focus on safety—which is very much in full effect in the United States, as evidenced by the DHS, among a variety of other safety-oriented federal agencies—is often accompanied by another childish mindset: tattling.
And here is how it all works: citizens are treated like children, and they eventually come to act like children: dependent ignorant, unthinking, and hedonistic. They are unduly focused on safety, being generally unable to provide it for themselves, and they are told that they can only be safe if they obey The Rules. Nothing enrages the infantile mind more than disobedience to the rules; it is as if the fundamental justice of the universe has been called into question if anyone ever disobeys The Rules. They are in place to keep us safe, after all, and therefore everyone must comply with them.
Therefore, when the infantile-minded of society observe someone disobeying the rules, like running a red light or holding gold when it’s forbidden to do so, the infantile-minded will have no qualms about tattling to the paternalistic government because they perceive themselves to be acting in the best interest of society. In reality, the tattlers are nothing more petty tyrants who wish to exercise power over others, in the guise of acting in everyone’s best interests.
Nonetheless, that is how the paternalistic society works and self-perpetuates. Citizens are treated as children, then act as children, and eventually take on the vices of children. And then society collapses on itself.
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