Portfolio Update March 2012

By largest positions first:

#1 – QXM and XING (see writeup).

Very shady, very undervalued if it isn’t a complete fraud like most Chinese reverse merger stocks.

#2 – Premier Gold (PG.TO)

I own this because Hardrock Resources was taken under by Premier.  I plan on selling everything at a higher price than what it is now.  I don’t really see crazy undervaluation here and this is a bet on higher gold prices.  I am happy to make that bet, though higher gold prices haven’t worked out well for those who own gold stocks… not yet anyways.

#3 – KWG Resources (CVE:KWG)

Cliff’s (CLF) bought out Spider Resources after a bidding war with Noront (there is bad blood between the two companies… they snipe at each other in the press all the time).  Cliff’s was also trying to buy out KWG and they are almost certainly in negotiations to do so.  In the future, I would expect Cliff’s to buy out KWG and Noront to consolidate the area.  Noront is moving towards a plan to build a winter road to its nickel deposit with a slurry pipeline to move ore concentrate.  It is probably more economic for one party (e.g. Cliff’s) to consolidate the area and to build a railroad to Noront’s nickel deposit and the chromite deposits in the area.  According to a PEA (Preliminary Economic Assessment, which are usually fudged) the railroad would cost somewhere around $900 million.  Now KWG is saying that it will cost $2 billion.  So who knows what the NPV of their deposit really is.

However, Cliff’s has presumably done due diligence when it bought Spider Resources.  KWG has also sold a royalty to the chromite deposit to Anglo Pacific Group for $18 million… so there’s another party that has likely done its due diligence.  In my unqualified opinion, it is extremely likely that the deposit will turn into an economic mine (several years from now).

I like the management at KWG.  They are actually buying back shares, though they probably won’t buy back very many shares and have said so (because junior miners always find themselves undercapitalized).  Selling the royalty is a good move as it raises capital without diluting shareholders while the share price is so low.

#4 – Canada Lithium (CLQ.TO)

Their asset is a marginal lithium mine.  Hardrock sources of lithium typically have higher costs than producing lithium from brine sources.  In theory, Canada Lithium is highly leveraged to an increase in lithium prices.  If electric vehicles with lithium batteries proliferate, then demand can outstrip supply.  With only a few dollars worth of lithium in every car battery, there is a lot of headroom for the price of lithium.

As for the company itself… there is a lot of drama.  Its original resource estimate was performed by Michelle Stone.  (I get the feeling that companies hire her because she is very aggressive at fudging the resource estimates higher; just look at East Asia Minerals.)  Canada Lithium later had to issue a press release stating that there would be a “material reduction” in the resource estimate (and then the press release didn’t say much else… basically regurgitating old facts).  This happened not so long after Canada Lithium raised a huge amount of capital.

Currently, they have a lot of cash on hand and you aren’t paying a lot for the deposit.  Canada Lithium has been able to secure a $70 million loan to finance the project… presumably it is economic.

#5 – Long natural gas through shorting HND.TO

This is a large position because I have been getting killed on my short.  This is mostly speculation on natural gas prices.

#6 – Selwyn Resources (SWN.TO)

Their 50% share in their Yukon project may be worth $100 million.  (Their Chinese JV partner paid $100M for a 50% stake, though they sort of own more because they have certain rights in regards to concentrate sales as they own smelters and want to process the ore.)

Selwyn paid $10M for its project in Nova Scotia.

$100M + $10M = $110M.  Selwyn has a market cap of around $60M.

The CEO has been successful before (Selwyn split off from Yukon Zinc; Yukon Zinc was bought out and its project turned into an operating mine) and has previously bought shares of Selwyn on the open market.

#7- Northfield Capital

Excellent management… better than 99% of mutual funds.  Trades at around a 30% discount to liquidation value.

#8- Stocks I sometimes own

Contango Oil & Gas (MCF):  Excellent management.  The CEO invested his life savings of $400K into his company and now his net worth is a few hundred million.  Unfortunately, natural gas is getting killed and Ken Peak (the CEO) hasn’t been able to put capital to work.  If he has his way, he would’ve gone crazy drilling in the GOM and sold off producing assets (Contango’s historic bread and butter).  They were supposed to spud one of their wells several months ago.

Apple:  It’s hard to find a company that has grown faster than Apple (even in small cap land).  For a growth stock, Apple is cheap on a PEG basis.  At the Eaton Center here in Toronto, Apple and McDonald’s are the two companies with stores that are consistently jam packed (Sephora too is very busy).  Yes most of the people in the Apple store are there just to steal free Internet.  But, every employee is talking to a potential customer (unlike all their competitor’s stores).  They are the market leader and it’s usually the market leaders than make almost all of the money in a given industry (and have long periods of consistent earnings growth).  And unlike their competitors, people will line up to buy Apple’s latest products.  They have the strongest brand.

If I was smarter I would have bought Apple LEAP options when volatility was cheap and held onto them.

#9- Short term trades

POT calls.  Bet on the agricultural boom (with higher crop prices, more fertilizer increases yields and makes economic sense).  People in India and China will eat more food (more meat, which takes more farmland to produce) as wealth increases.  And the growing use of biofuels will increase demand for crops.
The economics of potash mines are attractive with potash prices so high… every potash miner is expanding their mine.  Eventually there will be a wave of overbuilding but I think that it is several years away.

RIMM.  They will lose to Apple and Android.  Their products aren’t getting as good reviews and they will lose the app/software ecosystem race because their platform is difficult to develop for (they are already losing the app race).  The Playbook has very mediocre reviews and was released too early.  But there is a price where a second-rate company is undervalued.  The ex-CEO is buying… and I am copying.  RIM generates strong free cash flow relative to its market cap (I ignore RIM’s reported profits as its patent settlement should be expensed, not capitalized).  And for a while it will probably continue to grow with the growth in the smartphone market.  If the company goes into harvest mode and returns earnings to shareholders, then shareholders should be able to make a reasonable amount of money.

QMI.TO (Queenston Mining).  Agnico Eagle has a strategic stake in Queenston (bought at $5.30) and their deposits will likely turn into a mine.  I dislike that management gave away free money by extending warrants.  I’m probably going to sell this if it goes higher and buy more KWG.

Short positions

#1 – St. Joe (JOE) puts.  Read David Einhorn’s presentation on the company.  I have nothing to add.

#2 – AGNC puts.  If interest rates go up or down a lot, they will lose money (it says so in the 10-K).  Otherwise their magical 17% yield will continue (after the 1% management fee; of course insiders aren’t going to put their own skin into the game and chase these magnificent returns).  This is a longshot bet.  Unfortunately for me, they keep raising capital and the party continues.

#3- TLT common stock and puts.  Short long-term US treasuries.  Duh.

—The following are very small positions—

#4- Tesla Motors (TSLA) common stock.  The negative rebate sucks.  Shorting this unprofitable company and trying to short the US consumer, which can no longer use their house as an ATM.

#5- Imax (IMAX) common stock.  RealD has a product with superior economics.  (An Imax setup has much higher capital costs and reduced seating.)  So how is Imax making money?  Free cash flow is very weak, insiders are selling, and Imax historically has negative retained earnings.

#6- DLR, IOC, PSUN, GMCR common stock.

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