By The Gold Report, on April 5th, 2011
Jared Sturdivant, portfolio manager and managing partner of O-Cap Management, LP, likes to find special-situation investment opportunities, which include companies that have “good assets and bad balance sheets.” When he finds them, he digs deep to ascertain their value and looks for the catalyst that will turn them into attractive investment opportunities. In this exclusive interview with The Gold Report, Jared talks about which companies in the metals sector look good to him now.
The Gold Report: Jared, welcome to your first interview with The Gold Report. Could you share how O-Cap Management works?
Jared Sturdivant: We are an investment fund, really a hybrid between private equity and a traditional hedge fund. We take a long-term approach to investing in public equities and pre-IPO private situations, as well as distressed debt or structured financings. Our investors have to be qualified.
TGR: Because you delve into private equity, do investors have to commit for a predefined period of time?
JS: Yes, we basically have a three- and five-year class. Generally, anything we own that is private is on its way to becoming public within 12 months or so; or in the case that it’s a debt security, matures within roughly 24 months.
TGR: So, you don’t commit to liquidate the fund at some future point?
JS: No. It’s an open-ended fund structure.
TGR: How did you get interested in private equity?
JS: My background is in bankruptcy and distressed investments. When the world started melting down in 2008 and 2009, we saw a real opportunity to buy great assets ahead of what we thought would be the perfect storm for an inflationary environment down the road. We decided to focus on hard, tangible assets—metals and mining, energy, real estate and infrastructure.
A lot of the traditional folks who invest in public markets typically can’t do illiquid investments. We wanted to structure a fund that could capture what we saw as a big part of the value chain, which is to own something that may be a little illiquid (quasi-private) or pre-IPO.
We also structure credit investments. A lot of times that involves structured, one-off financing that requires the ability to hold something illiquid. That’s really how O-Cap has gotten to my areas of interest. I’ve always had a fascination with investing and kind of cut my teeth on the distressed side, where we looked at companies that may have great assets but a bad balance sheet.
TGR: One more question about private equity before we move on. Is the main advantage the fact that these firms don’t have to report to investors every 12–13 weeks?
JS: Yes, it’s a big advantage. When a company is public—for better or worse—Wall Street’s always knocking on the door. It always has to be aware of what Wall Street is saying. They have to hold conference calls. Some public companies take on the burden of giving guidance, which is a bit of a distraction when it comes to running a business. We like it when we have great management teams that can really focus on operating assets instead of meeting the latest Wall Street estimates.
TGR: As I understand it, distressed opportunities could appear either as private or public equity. Do you have a favorite type of distressed asset?
JS: We love what we call “good assets, bad balance sheets” companies. When you restructure or recapitalize these companies, you can really garner a lot of value. You can right-size the company’s balance sheet with its assets. We’ve seen, over time, that you can create a lot of economic value for shareholders. Part of it has to do with timing. We really like to be the last dollar or financing before a mining company moves from exploration to production and, therefore, self-funding.
TGR: Those are stories where you have to go in and create the value. Is that right?
JS: Yes. You buy deep-value assets that wouldn’t have value if you weren’t restructuring the balance sheet. But a big part of the value-creation process is how the debt is restructured.
TGR: Do you short stocks?
JS: We do short stocks. I’d say the predominance of what we do is long biased.
TGR: Do you use derivatives?
JS: We do a little bit. Not a whole lot.
TGR: What’s the first thing you do when you’re beginning to perform due diligence on a new company?
JS: When we come across a company that we think is interesting, we do a data dive. We read the 10K and the Q and read as much as we can about the company. We read all the analyst reports, and then we set up a call with the management team. That’s our basic approach.
TGR: How often do you get to that point and realize you’d like to replace a company’s management?
JS: Unfortunately, we do come to those situations. I’d say 10%–15% of the time you come across situations where management is sort of the issue. From that point, you have to decide whether to go ahead with a bad management team, try to effectuate change or pass.
TGR: For the rest of our conversation, I’d like to talk about public companies because those could be of value to our readers. Do you have examples of companies that meet your criteria that you’ve taken a chance on?
JS: Sure. We look for two underlying components in an investment: Value and a catalyst. Typically, the catalyst is a restructuring of some sort. One company on the gold-/silver-mining side is Comstock Mining Inc. (OTCBB:LODE). What was interesting about Comstock (formerly known as GoldSpring) is that it had assembled a large area of land around the historic Comstock Lode Mining District in Nevada. Since the 1800s, that district has produced 8 million ounces (Moz.) of gold and 190 Moz. silver. Comstock put this big property together through debt financing. However, it was a penny stock and it was headed for bankruptcy.
Then, an investor by the name of John Winfield bought up a lot of the debt, consolidated and converted it into a preferred structure. He could’ve filed bankruptcy for Comstock but restructured the company and kept it public instead. He effectively transitioned that debt to a preferred stock, which prevented a Chapter 11 process. Shortly thereafter, the company did a major refinancing. It financed US$35M of new convertible preferred stock to outside investors. This, along with hiring new CEO Corrado De Gasperis, was a major game-changer. It saved the company from bankruptcy.
Corrado laid out three aggressive targets, which we thought were very attractive. The first was to increase the gold-equivalent ounces (Au Eq.) from 1 Moz. to +3 Moz. The second was to enter production in the second half of 2011. And, the third was to get 2012 production up to 24 Moz. Au Eq.
What we really like about the situation is that you’re buying an exploration company that is converting to a producing company that’s growing resources substantially. We think it will have cash costs of $450–$500/oz., so Comstock could do US$20M in cash flow next year very easily. And, the company’s got two projects. The Dayton Phase 1 drilling program is now hitting bonanza-type grades, so there’s a lot of resource upside as the property continues to get drilled.
We looked at this and said, “Wow this is interesting.” Not only do you have a company going from an explorer to a producer, but also you have a new management team with great plans for a resource upgrade. Comstock also has an AMEX listing coming in May, which is another tangible catalyst.
When you look at the valuation, if Comstock gets valued like a producer, you’ve got multiple upsides from here. If the company continues to grow the resource base, once it starts producing 3, 4 or 5 Moz., Comstock really starts showing up on the radar of acquirers. We think that’s attractive.
TGR: Will Comstock have to go back to the market for financing?
JS: No, the company is fully financed. Its last financing for US$35M provided all the financing it’ll need to take Comstock through production and even provides another US$15M for additional exploration. If this company gets valued at US$200/oz., which is pretty conservative, and gets to its 3.25-Moz. target that Corrado set, you’re talking about a US$7 stock.
TGR: And that would be before a takeout premium.
JS: Right, that’s not a takeout premium. What we saw is a situation wherein a company was transitioning from an exploration to a production company and had restructured its balance sheet with no further capital needs. That gives you a chance to be the last dollar in before it makes that transition. We think Comstock will be valued like a production company, eventually, and you’re going to get that upside. So, we’re pretty happy with that transition.
TGR: Is there any significant risk?
JS: Anytime you’re with a resource company, it’s probably not a good thing if the commodity price goes down. We think this project has been derisked. It is in a historic mining district that has produced a lot of resource, and recent drilling has firmed up the resource base. We don’t think there’s a lot of risk to the resource per se, but commodities always carry risk.
TGR: Assuming, for the sake of argument, that gold could slide to US$1,000/oz., could Comstock still have upside?
JS: Yes. When your cash costs are US$450, you’ve got a big margin and you’re a relatively low-cost producer.
TGR: Very good. Can you tell us about another opportunity that meets your criteria?
JS: Sure. One company that’s a bit of a complicated situation is Palladon Ventures Ltd. (TSX.V:PLL). This is an iron ore holding company that owns a minority position in CML Metals, Inc. (a private company). CML Metals has the largest and highest-grade iron ore deposit west of the Mississippi. Its Iron Mountain project is located west of Cedar City, Utah. Again, it’s another historic mining district that used to be controlled by U.S. Steel Corp. (NYSE:X) and the Geneva Steel Mill. Since 1869, 80 million metric tons (Mt.) of iron ore have been pulled out of this project. It has a great asset base. Palladon has resources of 40 Mt., grading 45% iron at its Mountain Lion deposit. The company has an even larger +100 Mt. resource at some contiguous deposits.
Up until March 2010, this was a bankruptcy candidate. It had great assets but, due to a previous CEO who had a habit of overpromising and under-delivering, the company took on debt and didn’t execute on the logistics to get the ore moving. Eventually, it defaulted under its term loan. The term-loan owner did a debt-for-equity exchange, which diluted the public shareholders. Now, the original shareholders own a minority piece—roughly 18% of the actual assets.
TGR: This is quite diluted. So, the only way to play it is to own the holding company?
JS: That is correct. You need to own the holding company. So now, Palladon has no debt because the exchange took care of it.
I should say that the company is shipping run-of-mine ore. It’s just pulling it out of the ground and shipping 2 Mt./year and making a little money on that. Palladon also has first-class partners; it ships to Chinese counterparts that market to Chinese steel companies. And it ships out of the West Coast, using Union Pacific as its rail line—all top-notch partners.
Recently, the company announced new financing by Credit Suisse to build a concentrate plant onsite. When it gets this asset in place by the first quarter of 2012, it should have positive cash flow and will make a margin of US$60 –$80/ton. With that kind of margin on 2 Mt., you have a company doing US$120M–$160M of EBITDA (earnings before interest, taxes, depreciation and amortization).
Even when you adjust for today’s ownership of just 18% of that, you’re buying in at about 1.5x EBITDA. This is for a company that we think is highly attractive as an acquisition candidate, as well. If you look at Cliffs Natural Resources Inc. (NYSE:CLF), which recently announced the acquisition of Consolidated Thompson Iron Mines, Ltd., another iron ore company, for about 6.5x EBITDA, we think there’s tremendous upside here.
TGR: So, how much will its margins increase by owning more of its own supply chain?
JS: Currently, the company’s margins are roughly US$5–US$10 per ton. That will go to US$60—$80/t by owning the concentrate facility.
TGR: Very interesting. Any other names you’d like to mention?
JS: For those who are willing to look at pure exploration companies, we think Paramount Gold and Silver Corp. (TSX:PZG; NYSE.A:PZG) is attractive. Last year, the company bought X-Cal Resources, which brought it the historic Sleeper Gold Project in Nevada. Its other asset is the San Miguel Project, in about 465,697 acres in the Sierra Madre Occidental Gold and Silver Belt in Mexico. San Miguel has a resource of about 2.6 Moz. of gold. Coeur d’Alene Mines Corp. (TSX:CDM; NYSE:CDE) is developing a contiguous property with 3 Moz.
We think the Sleeper Project has a lot of blue-sky potential and has the potential to hit real bonanza grades. An interesting little tidbit is that the Sleeper Project owns the water rights to Fronteer Gold Inc.’s (TSX:FRG; NYSE.A:FRG) Sandman Project, which Newmont Mining Corp. (NYSE:NEM) just bought. When you look at the total combined resource of nearly 5 Moz., we think Paramount will make a nice takeout candidate for Newmont, Coeur d’Alene or another company down the road.
TGR: So, Paramount has the geographic tie-in. . .
JS: Right. It’s in the mining-friendly districts of Nevada and the San Miguel district of Mexico. The properties are contiguous to two large companies that we think would consider the company an attractive acquisition. We’re seeing that big companies like Newmont need to feed their mills. They have to do acquisitions to keep their mills active. It’s a big operating cost to have a mill that’s not running at full capacity. That is one of the reasons we think Newmont bought Fronteer’s Sandman Project. Paramount is a little more speculative, but we think it has a lot of potential as an exploration-upside takeout candidate.
TGR: Why do you consider Paramount more speculative?
JS: Paramount will need another financing round, at some point. It’s a pure exploration company, and exploration companies have a habit of spending cash and needing more.
TGR: You have a very interesting business model, Jared. I hope we get another opportunity to speak with you in the future.
Jared Sturdivant is portfolio manager and managing partner of O-Cap Management, LP, an opportunistic investment vehicle focused on special situations investing in both public and private markets. The firm has ownership interests in the U.S., Canada, Brazil and Western Europe, with a particular focus on hard-asset industries, including energy, metals and mining, infrastructure and real estate. Previously, Mr. Sturdivant was a managing director at JANA Partners, a multibillion-dollar investment fund, where he focused on global special situations and distressed investing. He graduated with a BA in finance from the University of Texas at Austin.
By B.P.T., on April 5th, 2011
At 7:45 AM EDT, 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 8:55 AM EDT, the weekly Redbook report will be released, giving us more information about consumer spending.
At 10:00 AM EDT, the ISM non-manufacturing index for March will be released. The consensus estimate is that it remained at a value of 59.7, and will continue to signal economic growth as it remains above the mid-point of 50.
At 2:00 PM EDT, 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 The Energy Report, on April 4th, 2011
 The peripatetic Mercenary Geologist Mickey Fulp explains that even if all under-construction and planned nuclear facilities are suspended, not enough uranium is being mined currently to supply ongoing demand. In this exclusive interview with The Energy Report, Mickey reveals a number of companies poised to benefit from this long-term fundamental upside.
The Energy Report: What impact will the damage to the Fukushima nuclear facility in Japan have on the spot price and/or market valuations for uranium companies?
Mickey Fulp: Currently, it is unknown what the fallout (pun intended) from this nuclear incident will be both economically and geopolitically. At the very minimum, Japan has lost a significant portion of the energy output from one facility. Eleven nuclear reactors out of the country’s 55 are shut down currently and at least two will never produce electricity again. That energy capacity will need to be replaced by other electrical sources.
Globally, this is the third nuclear plant incident in more than 30 years. The first was Three Mile Island. While nothing of real consequence happened, it did change the perception of nuclear safety. The second incident was Chernobyl where the reactor melted down, resulting in serious environmental and health impacts. That reactor was an obsolete and inadequate design with no containment vessel and was never used in the West. Although Japan’s Fukushima plant was using some older technology and we still don’t know what the full damage will be, it will not be anything near the Chernobyl disaster.
Anti-nuclear organizations will be emboldened by this situation while pro-nuclear concerns likely will remain so. Looking forward, who knows what the impact will be? Will we see some older reactors come offline? Probably, however, most countries can’t afford to shut them down because electrical demand will not decrease. Will we see some reactors in the process of construction stop construction? Perhaps. Will we see nuclear facilities that are planned but not yet started be delayed or waylaid? That seems likely.
TER: If reactors under construction or planned are postponed or abandoned, how much will that impact the demand for uranium? Could we see a uranium price crash?
MF: It wouldn’t surprise me if we saw a drop in the spot uranium price and stocks. I don’t think it will diminish much uranium demand in the short or midterm, because the fundamentals haven’t really changed. There is still a shortage of uranium. We haven’t mined enough uranium for 25 years and our current mine supply deficit is 30% of total yearly demand. We’ve been operating on depleting private and sovereign stockpiles and the conversion of Russian warheads to nuclear fuel rods. The Russian program ends in 2013 and stockpiles are getting depleted to low levels. So, even if all the reactors under construction, planned and proposed, are scuttled, we’d still need more uranium for the reactors that are online currently than we are presently mining.
TER: Do you see any scenario in which the Japan incident will impact uranium prices significantly?
MF: We saw spot prices crater to a low of $49/lb. on March 16 before recovering to $60/lb. on March 21. There will be a price impact but, as for significant damage to the nuclear energy industry, it is way too early to tell. Frankly, I do not know. I do know that current reactors need to replenish stockpiles of uranium periodically and that we don’t mine enough at this time. Demand, most likely, will still be there over the short, mid and long term.
TER: Will other energy commodities increase due to this nuclear scare? Specifically, I was thinking about natural gas, which is in abundance and really cheap.
MF: We have a mixed bag of energy prices now and lots of volatility. As the uranium stocks sold off, solar, wind and natural gas stocks took off briefly before reality set in. Solar cannot provide baseload electricity because of night and wind cannot because it does not blow constantly at the same velocity 24 hours a day, 7 days a week for 365 days a year. We don’t have the natural gas transportation, storage and filling infrastructure to convert electrical plants or vehicles quickly.
Coal has been the real winner in 2011 with supply disruptions causing rapid rises in price, but it is our dirtiest form of energy and a major pollutant worldwide. Oil prices are high at over $100 a barrel and major volatility is likely to continue due to Middle East turmoil. We also have the ecofascists who preach “clean and green,” but then launch lawsuits to stop solar plants in the Mojave Desert and offshore wind farms on the East Coast. What do the NIMBYs (not in my backyard) want, all of us to just freeze in the dark?
In my opinion, we desperately need a viable domestic uranium industry as we strive to reach energy independence in the U.S. I trust that the American people and its politicians and policymakers will continue to ensure that all forms of energy, including nuclear power, play a part in this mix.
TER: You have written that your two favorite uranium companies are Strathmore Minerals Corp. (TSX:STM; OTCQX:STHJF) and Mawson Resources Ltd. (TSX:MAW; OTCPK:MWSNF; Fkft:MRY). Let’s talk about them. In your December Musing, “The Mercenary Geologist’s Uranium Review Q410,” you felt that Strathmore Minerals was the most-undervalued uranium developer listed on the North American exchange. You wrote, “Rest assured, given the current time and price that I am not selling.” The stock chart shows it’s been jumping around a bit since December. Can you give us an update?
MF: Strathmore is continuing to work toward a feasibility study at Roca Honda in New Mexico and a mine permit application in Gas Hills, Wyoming. The company likely will monetize some of its other seven non-core development assets in the next 12 months. I still expect the consolidation of uranium developers in New Mexico within the next year or two. A private European investment fund divested of its Strathmore holdings in early 2011, and that depressed the stock price. It took a while for the company to chew through this, and then it went as low as $0.63 in the four-day selling frenzy after the Fukushima incident. STM has recovered nicely in recent trading sessions and is now trading at about $0.75.
TER: You mentioned that your other favorite company in the uranium sector is Mawson Resources. You alerted readers about Mawson on November 17 and those who acted on your alert got more than a double in four days from $1 to over $2. What’s in store for Mawson in 2011?
MF: Mawson had a phenomenally quick double based on project news, my BNN appearance, a Mercenary Musing alert and the San Francisco Hard Assets show that allowed the company to show off its wares. After the initial run-up to $2.68 and profit taking that took it back to about $2, it ranged between $1.75 and $2.25 before dropping to $1.16 in the aftermath of the Japan disaster. Mawson recently announced final 2010 surface sample results from the Rompas project in northern Finland. The results are impressive, with bonanza-grade gold and uranium values. The stock moved when the company received permits for shallow drilling and is once again in the $2.10 range. Rompas could be a major new discovery or perhaps just a curious surface anomaly; more likely, it will be something in between. Now, we will wait for results from the drilling and what the old truth tool will tell.
TER: Do you have any new ideas in uranium space?
MF: Of course, I am always looking for beaten-up stocks that have strong fundamentals and solid underlying value. My recent favorite is Uranium Energy Corp (NYSE.A:UEC), a new in-situ recovery (ISR) uranium producer in South Texas. Although still early on, its first quarter of production came in with cash costs of $18/lb. Given uranium’s current spot price of $60, it looks like a potential winner to me. It is the one stock I am accumulating on sector weakness for long-term investment and anticipate a plan to grow this junior producer into something bigger in the near future.
TER: In your last Mercenary Musing, which is available to your free email subscribers, you wrote, “Putting in stink bids and patiently accumulating as the market rises and falls is always a legitimate strategy.” In general, what constitutes a “stink” bid—20% from the recent price, 25% off the price?
MF: To me, a stink bid is a bid lower than the stock’s normal or recent range that implies a lack of interest, a market correction, some sort of selloff, a dormant period with no news or, perhaps, breaking below the 50- or 200-day moving average. Rest assured, I am now closely watching the uranium space for contrarian opportunities.
Michael S. “Mickey” Fulp is the author of The Mercenary Geologist. He is a certified professional geologist with a B.Sc. in earth sciences with honors from the University of Tulsa and M.Sc. in geology from the University of New Mexico. Mickey has more than 30 years experience as an exploration geologist searching for economic deposits of base and precious metals, industrial minerals, coal, uranium, oil and gas and water in North and South America, Europe and Asia. Mickey has worked for junior explorers, major mining companies, private companies and investors as a consulting economic geologist for the past 23 years, specializing in geological mapping, property evaluation and business development.
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By Simon Grey, on April 4th, 2011
I came across this other day when stumbling around In Mala Fide:
God may be dead, but the cubicle jockeys and castrated middle-class drones of this land still think of themselves as part of a warped Calvinist elect. To them, their willingness to have their humanity stripped away day by day sucking at Mammon’s teat is proof that they are God’s chosen people. Anyone who questions the presuppositions of the American cult of “hard work” and “self-reliance” is ostracized from polite society…
The biggest flaw in Puritan doctrine, as I see it, is that there is a worship of work. Being a worker is a false idol unto itself. Yes, man was created to work. And yes, man is to put his best effort into his work. The problem, however, is that the Puritan work ethic has been twisted into a doctrine of worshiping workaholics, and, with that, a doctrine of materialism.
Perhaps this is another reason why America has started its decline: materialism is being used as a substitute for spiritualism. Everyone in America is told, from childhood onward, to be a good student, to get good grades in school, to get into a good college, to get a good job, to be a good worker, and then all the rewards in life will be given to you. And this message always takes a turn for the ruthless.
Good now becomes best, and everything becomes cutthroat. Lots of people begin to compete for limited elite pre-school slots, who in turn compete for elite primary school slots, elite middle school slots, elite colleges and universities, and finally elite jobs. And all these things start to get treated as entitlements (if I go to a good college, I deserve a top position in a Fortune 500 company, etc.) All these things are pursued with intense rigor, as if having an elite education or an elite job is the most meaningful thing in the world.
There’s a reason this is a cliché: “no one sits on their deathbed, wishing they spent more time in the office.” We have allowed our education and jobs, and little beyond that, to define who we are. In reality, though, we’re more than a sum of numbers attached to us by teachers and bosses. Each one of us, at the least, is someone’s child. We’re someone’s spouse, parent, sibling, or friend. We belong to families, to churches, to civic groups. And yet we define our worth by what we make and where went to school.
Now, it is true that our jobs/careers play some role in defining us. We can’t fully escape that. But we don’t have to let our job or our education be the sole (or even main) component of self-definition. Instead, we should let go of this materialistic mindset, and embrace our spiritual and social side. Maybe that’s what we need to do to get rid of the social cancer called materialism.
By Ajay Shah, on April 4th, 2011
Sadly, India abstained.
In India, we’re quite gloomy about the place that has been given to organised labour. But these questions are not closed elsewhere in the world. See Robert Barro on the appropriate place of trade unions, and Matt Bai in the New York Times magazine on a politician taking on public sector trade unions.
Manoj Mitta has written, in the Times of India, about the new world of a Supreme Court headed by S. H. Kapadia.
Censorship.
Maybe the time will soon come to close down this blog.
An editorial on the questions that face U. K. Sinha as the new SEBI chief. And, Anirudh Laskar has an article in Mint about concerns about SEBI suffering a big upheaval.
Deepak Shenoy in Pragati on Paypal’s problems in India.
A new opening act by Ila Patnaik, in the Indian Express on 2 March 2011, on the announcements in the budget speech on capital controls.
S. S. Tarapore in the Hindu Business Line, on the FSLRC.
Joel Rebello in Mint on the internationalisation of India’s investment bankers.
Ashish Dhawan on his leaving the firm and what he will do next.
Good reporting in Mint by Sumeet Chatterjee about the potential for distress at Reliance Communications.
Ashish Khetan has a great story in Tehelka about the 2G scandal.
India is chipping away on removing visa restrictions.
Remya Nair and Surabhi Agarwal in Mint on post offices selling insurance products. Also see.
Why does China have a SOB-dominated financial system while India has a market-dominated financial system? Writing on Project
Syndicate, Mark Roe has a clue.
A great lecture by Stan Fischer at the RBI.
Why I write, by George Orwell.
Felicity Barringer looks back at Chernobyl.
The revolutions of the Arab world are endlessly fascinating. Read Volcano of Rage by Max Rodenbeck and The revolution is not yet over by Yasmine El Rashidi on the New York Review of Books blog. On Libya: Omar Ashour on Project Syndicate.
Yuriko Koike on Project Syndicate, on the evolution of production chains in Asia. The end of China’s cheap denim dream by Malcolm Moore in the Telegraph. Michael Pettis on the prospect of shorting a country that has $3 trillion in reserves.
Dubai on empty by A. A. Gill in Vanity Fair.
Football betting is a good place to measure the extent of wisdom of the crowd. In a paper titled Information and Efficiency: Goal Arrival in Soccer Betting, Karen Croxson and J. James Reade argue: In an efficient market, news is incorporated into prices rapidly and completely. Attempts to test for this in financial markets have been undermined by the possibility of information leakage unobserved by the econometrician…. sports betting markets offer a superior way forward: assets have terminal values and news can break remarkably cleanly, as when a goal is scored in soccer. We exploit this context to test for efficiency, applying a novel identification strategy to high-frequency data. On our evidence, prices update swiftly and fully.
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By B.P.T., on April 4th, 2011
At 12:00 PM EDT, Federal Reserve Chairman Ben Bernanke will give a speech on Community Banking in a Period of Recovery and Change to the Independent Community Bankers of America in San Diego.
By The Gold Report, on April 1st, 2011
 Despite confusing short-term undulations in the price of gold, the shaky foundation under the U.S. dollar could result in long-term opportunities for gold and silver juniors, says Midas Letter Publisher and Editor James West. In this exclusive interview with The Gold Report, James shares some of his top-15 companies to watch.
The Gold Report: James, Comex gold futures hit an all-time high yesterday before falling back to about $1,431/oz. We’re seeing dramatic daily swings in the gold price of $20–$50 regularly. How do you explain the volatility?
James West: The gold market is about as neurotic as a schizophrenic Hollywood starlet hooked on coke. Trying to keep abreast of daily price fluctuations is an exercise in futility. My favorite line on the gold and silver markets is, “He who focuses on the bobbing cork loses sight of the rising tide.” That really sums it up beautifully. All of the negative macroeconomic factors on the stability of the U.S. dollar that started the precious metals bull market back in 2000 are now stronger by a factor of at least 10. The U.S. economy has crashed twice since then as a result of too much liquidity in the system, causing asset-class hyperinflation, which, in turn, causes price collapses that engender general market panic.
The first pro-gold/dollar-negative fundamental was the excess commercial and residential real estate inventory based on former Federal Reserve Chairman Alan Greenspan’s easy money policy. The result was bank leverage:capital ratios that exceeded 100:1 in many cases. Retail lenders ended up with so much capital they had to reduce the difficulty of borrowing money for individuals with questionable credit histories. Otherwise, the money would just sit there doing nothing—and that is not a tenable situation for bank capital. It has to keep moving. Real estate exceeded inventory, people bought cars and recreational vehicles, took trips and built second homes. Yes, that created the appearance of a robust economy, but it was built on credit that was not going to be repaid.
Just as the Fed set the example by making it so easy for banks to leverage their balance sheets, consumers started to do the same thing. The major difference was that the banks were bailed out, whereas the consumers were thrown a rock to keep them from drowning. That is why we now see two distinct tiers in our economy. The retail consumer is trying to tread water carrying this massive debt rock, while the banks, granted a pair of wings in the form of bailouts and quantitative easing, are busy finding a new generation of retail consumer suckers to encumber with debt.
New home prices in the United States just established an all-time low since the crisis began, so all this nonsense about the economic recovery, obviously, is meadow muffins. The only thing that is up is the stock market thanks to the financial services sector, which was the primary beneficiary of exponential increases in the amount of U.S. dollars in the market. Issuing more currency against a deteriorating asset base and shrinking real GDP (not nominal GDP as is generated by measuring the massive numbers resulting directly from the multiplication of ersatz dollars through derivatives trading) is counterfeiting. How can you print more money when, technically, you are in a state of default on your current obligations? The only reason that a default hasn’t been declared is because the two biggest holders of U.S. debt—Japan and China—don’t dare upset the global economic apple cart by pulling the rug out from underneath the USD. That would have dire implications for their own economies and central bank balance sheets. Three times as many U.S. dollars are in circulation today than in 2000. That should result in a gold price at least three times higher than a decade ago.
The severe instability of the entire Middle East and, by extension, implied instability within any country that is not a democracy (i.e., China, Russia, Saudi Arabia, Venezuela, Sri Lanka, Indonesia, Mexico, Bolivia, Argentina, Zimbabwe, Yemen, Sudan, etc.), the safe-haven demand for gold and silver is multiplied theoretically. So to answer your question—yes, absolutely. There is daily volatility, but it’s meaningless. All that matters in the price movement of monetary metals are the macro movements, which are both heading upward fundamentally and technically.
TGR: Recently, the Portuguese government rejected proposed austerity measures and Portuguese Prime Minister Jose Socrates resigned. Portugal is facing financial collapse and will likely need a bailout from the European Union (EU). At first blush, that would seem to be good for the gold price. However, weakness in the euro generally pushes the USD higher and that leads to weakness in precious metals usually. How do you see the Portuguese situation affecting the gold price?
JW: There are two primary reasons why gold will not be influenced positively by Portugal’s collapse. First, the whole idea of the dollar as safe haven makes sense only to people who don’t perceive the riskiness of the USD. During the last crash in 2008, everything went down except the U.S. dollar. That demonstrated, in no uncertain terms, that the USD was perceived to be a safer place for value preservation than even gold (in the absence of any speculative market). And that showed clearly that the world’s largest capital positions fail to comprehend that the U.S. dollar and its excess capacity is the largest catalyst causing asset bubbles and general economic instability in the world. The supposed ’smart money’ is actually the dumbest money on earth. The U.S. dollar is the cause of the majority of our global economic pain.
This perverse paradox is going to correct itself when the penny finally drops in the very limited imaginations of the economists who drive such decisions. Like Pavlov’s dog in the famous conditioned-reflex experiment, markets respond when they see familiar situations arise. So, although Portugal’s problems should be mildly bullish for physical gold demand, they will in fact manifest as a dollar-positive/gold-bearish effect.
The second reason that the gold price performs less like a safe haven than it should is because the gold price is determined by futures markets, which lead the spot price rather than the other way around. Futures markets long ago ceased to be the price-discovery mechanism they were intended to be, and instead are a way for the biggest banks to influence the direction of the spot price. That gives them the ability to profit from the extreme volatility such massive capital positions can have in a relatively small market. The size of the futures market—which now functions as a betting mechanism for price direction—is infinite, whereas the size of the actual physical gold market is limited by how much gold can actually be moved around. So, the future price of gold is a separate number than the actual price of gold even though the actual [spot] price is influenced by the future price.
TGR: With inflation creeping up and the economy stutter stepping forward, we hear whispers of further quantitative easing (QE). What are you hearing? And what effect would QE3 have on gold and silver?
JW: In the news this past week, we’ve heard that St. Louis Federal Reserve Bank President James Bullard said the Fed should review whether to complete the $600 billion purchase of T-Bills, which is QE2, because the economy was looking so strong. Now we know that the various Fed branches suffer from persistent irreconciliation based on what is happening both within the Fed and in the economy, so it’s not much of a surprise that the St. Louis Fed believes the chairman needs to rethink his strategy. Such statements really just confuse the general public. It doesn’t matter one iota what the various Fed governors think. All that matters, and all that becomes U.S. central bank policy, is what Chairman Ben Bernanke and the president’s economic advisors decide they are going to do. So, while Bullard might not be cognizant of the fact that the positive economic indicators that led him to think the economy is improving is a direct optical result of QE, there is no doubt that Chairman Bernanke is aware that the only thing propping up the stock market—and, therefore, the appearance of improving GDP growth—is quantitative easing. That’s why there’s no question that the U.S. Federal Reserve’s policy of kiting checks to itself through the U.S. Treasury absolutely must continue. However, I also think the Fed is cognizant of the fact that the term “quantitative easing” is now perceived as negative in the mainstream financial media; thus, it will transition to an unnamed feature of U.S. monetary policy.
TGR: James, you recently sold your equity position in a Peruvian mine to focus on the Midas Letter and to be involved in a precious metals fund based in Luxembourg. First, why Luxembourg? And what are the fund’s criteria for investing in companies?
JW: I’m a portfolio advisor to two corporate investment groups. I also launched a fund based in Luxembourg. Combined with the expanded publication products offered by Midas Financial Publishing Group, this is forcing me to streamline my obligations in the interests of time management, which is to say, I still want to have a life outside of work.
The first reason we elected to domicile the fund in Luxembourg is that the private family wealth offices that are the primary sponsors of the fund prefer its very tough regulatory framework, which is managed by the Commission de Surveillance du Secteur Financier. If the bank where the fund is held in Luxembourg goes belly up for whatever reason, the assets of the fund are protected in their entirety, including all cash. The second reason is that these private wealth groups are excellent long-term shareholders, which means we can bring a higher-caliber shareholder to the companies we invest in.
In terms of criteria, we invest only in opportunities brought to us by A-List capital markets entrepreneurs with serial track records of value creation for shareholders. They do this through premium access to projects and superior financings that provide a lower-weighted average cost of capital to the companies, which result in better-retained earnings for the fund in the long run and, therefore, its unit holders. We hold no more than 9.9% of any company and no more than 40% of our holdings will be pre-IPO or private.
TGR: What are your goals for the fund in 2011?
JW: The number one goal is to deliver the best performance possible to unit holders. We achieve that by capturing the absolute best of pre-IPO investment opportunities, as well as IPO and secondary financing opportunities, in the resource sector with particular emphasis on gold and silver explorers and near-term producers. The Midas Letter has access to these companies because we’ve been around for as long as we have and deliver triple-digit returns consistently, based on the superior product in our portfolio.
TGR: Tell us about some companies in your top-15 holdings.
JW: My top-15 includes Prodigy Gold Inc. (TSX.V:PDG) and Cap-Ex Ventures Ltd. (TSX.V:CEV). Prodigy has a 2.1 million ounce (Moz.) resource at its Magino gold property near Wawa, Ontario, where it recently announced an infill drill hole of 261 meters grading 1.13 g/t gold. Within that hole was a 104.6-meter strike length that graded 2.06 g/t gold. That’s just the first group of holes from a 20,000m program now underway that is designed to increase the size of the resource, as well as the category of existing resources. With a market cap of about $75 million—that’s less than $40/oz. in the ground, making it very cheap. There likely will be more fantastic results like that, which could take the stock much higher.
Cap-Ex is a fantastic iron ore story in Quebec, and we’re in for 100,000 shares or so at about $0.80. If you look at other iron ore deals in the area and consider the average grade and tonnage of properties on trend, in view of the company’s geophysical data, its market cap should increase dramatically when drill results come in late spring or early summer.
Colossus Minerals Inc. (TSX:CSI) in the Serra Pelada pit in Brazil is another favorite. It is the site of an incredible deposit of super bonanza-grade gold, silver and platinum group metals (PGMs). Some of the ore there is worth hundreds of thousands of dollars per ton, and the company is not going to bother with an NI 43-101 resource estimate—it’s going straight to production. The market discounts CSI for that reason; so, even with a $700M market cap, my feeling is that Colossus is vastly undervalued still and, therefore, an excellent buy. We first got in at $1.41, so it’s been a huge win for us.
In Brazil’s Mato Grosso area, Thomas Obradovich of Aurelian fame is heading up Lago Dourado Minerals Ltd (TSX.V:LDM). He has what I consider a better-than-average chance at a discovery, especially because its flagship property, essentially, is 10 sq. km. of garimpeiro production with persistently high surface gold values.
A Colombian gold story that we love, Sunward Resources Ltd. (TSX.V:SWD), is focused on developing large porphyry gold-copper projects in Colombia. Core assets include the Titiribi project, which hosts an NI 43-101 inferred resource of 3.7 Moz. at a 0.3 g/t cutoff, along with the storied Mande Norte (Murindo) project in northern Colombia.
As the vehicle for acquisition in Colombia for Toronto investment force Power One Capital Markets, Waymar Resources Ltd. (TSX.V:WYM) has a very rosy future. Its current flagship property, Anzá Project, hosts a producing gypsum mine that has exposed a volcanogenic massive sulphide (VMS) system underneath, from which we eagerly anticipate drill results.
Gold Canyon Resources Inc.’s (TSX.V:GCU) Springpole Gold Project is a deposit that just keeps on giving. The project’s 100.5m at 7.23 g/t gold assay near Red Lake Mining Camp is just one of the most recent intercepts that points to a deposit that could reach 10 Moz. or more. We think Gold Canyon, one of the real home runs for our portfolio at a $1.43 entry level, has the potential to give us tenbagger returns.
Wildcat Silver Corp. (TSX.V:WS) was trading at just over $0.50 when we first wrote about it in March 2010. Here it is a little more than one year later, and it’s better than 400% higher—just the kind of vindication we like to see when we cover a deal that nobody else will touch. Recent drill results of 100m at 4.5 g/t silver with lots of coincident manganese, lead, zinc and copper means the company’s Hermosa property (formerly known as Hardshell) located in Santa Cruz County, Arizona, is going to be a big winner.
Meanwhile, Revolution Resources Corp. (TSX:RV) is expanding on the apparent gold revival in North Carolina. Its Champion Hills Property has multiple historic pits and workings within a 25-kilometer long trend in North Carolina. The project occurs within the Carolina Slate Belt, which hosts most of the major gold mines in the southeastern U.S. Significant deposits include Newcrest Mining Limited’s (ASX:NCM) Ridgeway Mine, which produced 1.5 Moz. gold from 1988 to 1999, and Romarco Minerals Inc.’s (TSX:R) Haile Mine project.
Evolving Gold Corp. (TSX.V:EVG; Fkft:EV7) is probably one of the best stories, in terms of having an undervalued major discovery in the U.S. The company suffers from lousy shareholders and an incoherent communications strategy as a result of a revolving company-leadership door, which we hope will be solved with the addition of William Gee as CEO.
Two others are African Gold Group, Inc. (TSX.V:AGG) and Continental Gold Ltd. (TSX:CNL). African Gold’s recent step-out drill results 4.3 km. north of the relatively well-defined Zone 1 area comprises 10% of the 12 km. gold anomaly at its 200-km.2 Kobada gold project in Mali. Essentially, this new zone is distinct from Zone 1 at this point and demonstrates grade continuity over long intercepts from surface.
Continental Gold recently announced results of the underground sampling of parts of the San Antonio subzone/vein set, yielding indications of a strong and continuous high-grade system at its Buriticá project in Antioquia, Colombia. We’ve covered Continental Gold since its IPO at $1.75 and expect the company to continue performing strongly as it moves closer to full commercial production.
NioGold Mining Corp. (TSX.V:NOX; OTCPK:NOXGF) has been working in the Cadillac-Malartic-Val-d’Or region in Quebec, close to Osisko Mining Corp. (TSX:OSK) and now has a $20M joint venture agreement in place with Aurizon Mines Ltd. (TSX:ARZ; NYSE.A:AZK), which needs to replace production and is looking to expand on the back of strong cash flows.
Golden Hope Mines Ltd. (TSX.V:GNH) has suffered negative press from individuals who have never set foot on the property but who, unfortunately, have an audience among those ill-equipped to recognize bad information. We’re still believers in the 20-kilometer trend theory, as are numerous others in the region that includes a company with management in common with Osisko.
TGR: What excites you today, in terms of equity investing?
JW: The thing that excites me the most at this juncture is the incredible as-yet-unrecognized opportunity in junior gold and silver explorers and producers (E&Ps), as well as in some select oil and gas plays. Increasingly, other asset classes are becoming less attractive, in terms of speculative returns. I think, in the not-so-distant future, the only game in town worth playing will be TSX- and TSX Venture-listed exploration plays.
James West, publisher and editor of the Midas Letter, is an independent capital markets entrepreneur and investor. He has spent more than 20 years working in such capacities as corporate finance advisor, corporate development officer, investor relations officer and media relations and business development officer for companies involved in mining, oil and gas, alternative fuels, healthcare, Internet technology, transportation, manufacturing and housing construction.
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By Simon Grey, on April 1st, 2011
The opponents rely on a litany of horribles. The Violence Policy Center in Washington claims that since May 2007, individuals licensed to carry guns killed 286 private citizens and 11 law enforcement officers and committed 18 mass shootings. This gory record, it asserts, destroys the myth that permit holders are generally law-abiding folks who behave responsibly.
In fact, VPC’s own data, when inspected closely, doesn’t dent the case for gun rights. Over the past four years, there have been more than 60,000 homicides in the United States. The slayings carried out by permit holders amount to fewer than one of every 200 murders. For every licensee who killed someone, there are more than 20,000 who didn’t.
Nor does the evidence indicate that allowing people to carry pistols causes crime. Many of the shootings done by permit holders took place in their homes—where you don’t need a concealed-carry license to keep a gun.
Some of the killings weren’t even done with firearms: Among the cases cited by the VPC is a 2008 strangling in Florida, allegedly by a man who was licensed to carry. How can strangulation be blamed on a concealed weapon permit? If a fisherman kills someone, do we ban fishing rods?
Often, notes Florida State University criminologist Gary Kleck, the murders were premeditated or committed during the course of other serious crimes. In those cases, the license was irrelevant—unless you assume that someone willing to break the laws against murder or rape would not be willing to break another law by packing a sidearm.
What is extremely rare is a homicide committed by a permit holder in a public place in a fit of anger. Reviewing an earlier two-year database compiled by VPC, Kleck found only five cases “where possession of a carry permit may have contributed to the occurrence of the killing.” Such episodes are not quite flying pigs, but almost.
Leftists are primarily concerned with population control, but it would be politically suicidal to forthrightly admit this. Therefore, they are reduced to making utilitarian arguments against gun ownership and concealed carry permits, and this story highlights several flaws in the leftist anti-gun argument.
The biggest problem is the analytical filters. As noted in the linked article, it is absurd to suggest that concealed carry permits play a causal role in strangulations or home shootings. While there may be a correlative role, it is insane to even suggest that depriving people of concealed carry permits would have prevented these killings from happening. The problem, in this case, is motive, not irrelevant means.
In addition to failing to account for causation, the leftists make quite a hullabaloo over absolute numbers instead of relative numbers. Two measures are key: The percentage of murders that occurred because concealed carry permits were used to commit the crime and the percentage of concealed carry permit holders that commit crimes where concealed carry was integral to carrying out the crime.
Let’s say, in a hypothetical scenario, that there were ten thousand crimes in the past year, twenty thousand people had concealed carry permits, and concealed carry permits were integral part of twenty crimes. The relationship between concealed carry permits and crime would have a correlative factor of .002 and the relationship between concealed carry permit holders and crime would be .001. This means that there is a .2% chance that a given crime was committed by a concealed carry permit holder and that there is a .1% chance that concealed carry permit holder committed a crime. As can be seen, the correlation between crime and concealed carry is relatively weak in this scenario.
From what I can tell, it’s even weaker in the real world. Ohio alone issued more than 60,000 concealed carry permits in 2009. The carry rate of the population is roughly .54%. If we extrapolate this to the country in general, then approximately 1,691,000 citizens had concealed carry permits (since the data is, to say the least, incomplete during the two years of the aforementioned study, I will hold the concealed carry rate constant). Furthermore, the total murders committed during those two years are assumed to total 31,683 (I used the Murder and nonnegligent manslaughter data from the FBI’s CUS database for the years 2008 and 2009). Thus, the correlation between murder and concealed carry permits is around .000158. The correlation between concealed carry permit ownership and murder is .00000296. T
In addition, there have been plenty of people, most notably John Lott Jr., who have argued that there are plenty of benefits to having a populace that carries concealed weapons, most notably in the form of lower crime. There are plenty of people who dispute this work, of course, but it is clear that concealed carry, at the very least, does not lead to higher crime. It is therefore anti-crime or neutral.
As such, concealed carry permits offer a strong potential for upside, with minimal costs. Even if concealed carry doesn’t provide a significant reduction in crime, it is obvious that it will not contribute to it. Therefore, the utilitarian argument against concealed carry is null.
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By B.P.T., on April 1st, 2011
The figures for motor vehicle sales in March will be released today. The consensus estimate is that 10 million domestic autos were sold last month, which would be a decrease of 200,000 from the previous month.
At 8:30 AM EDT, the Employment Situation report for March will be announced, and the consensus for non-farm payrolls is an increase of 200,000 jobs compared to a gain of 192,000 in the previous month, the consensus for the unemployment rate is that it will remain at 8.9%, the consensus average hourly earnings rate is expected to increase 0.2%, and the consensus for the average workweek is 34.3 hours.
At 10:00 AM EDT, the Construction Spending report for February will be released, and the consensus is that there will a decrease of 0.3% in spending compared to the previous month.
Also at 10:00 AM EDT, the ISM manufacturing index for March will be released. The consensus estimate is that it decreased 0.2 points last month to a value of 61.2, and will continue to signal economic growth as it remains above the mid-point of 50.
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