Portfolio Update Nov. 30 2012

Queenston Mining (QMI.TO) – closed at a profit

Sold Queenston Mining at $5.27ish for a nice profit.  Osisko announced a takeover of Queenston (0.611 Osisko shares for every Queenston share).  I sold because it seemed to me that Queenston was close to fair value.  At this point in time, a competing bid seems unlikely to me.  One reason is that Osisko’s bid has a non-solicitation clause that Queenston management agreed to.  Agnico Eagle Mines, which has a strategic investment in Queenston, will not be bidding on Queenston as it struck a deal with Osisko.

Altius Minerals (ALS.TO) – added to this position

I used the proceeds from Queenston to buy more shares of Altius, so currently Altius is the largest position in my portfolio.

Short JC Penney (JCP) – closed at a profit

I covered this at around ~17.3 due to my impatience.  I made a nice profit but this was never a big position.

Long Contango Oil & Gas call options (MCF) – adding to this position

I had a large call option position on Contango but unfortunately they were 0 for 2 with their wildcat wells.  Currently Contango seems to have sold off due to Mr. Market’s mood swings.  Contango has announced a new CEO, who is the former CFO of Zilkha Energy.  Contango pretty much copied Zilkha Energy’s business model (explore at a low cost, flip developed assets into cash so you can do more exploration).  It also “stole” Zilkha’s star explorationists (Brad Juneau used to work for Zilkha).  I think that Contango will continue to have above-average management since the ex-Zilkha CFO can be credited for a sensible business model of focusing on high rates of return.

On the other hand, the special dividend is a head-scratcher.  Share buybacks (especially when Contango is trading near the 2008/2009 lows!) and investment in new oil&gas assets would make more sense.  The only explanation I can think of is that Ken Peak wanted cash fast… for him to sell shares right now would be awful for him.

Genie Energy (GNE) – new position

They are doing a quasi-share repurchase and recap.  What Genie has done is to announce a tender offer where shareholders can exchange their common shares for preferred shares.  The preferred shares are similar to junior junk bonds (high-ish interest rate, not at the front of line in bankruptcy).  I believe there is (essentially) a call option on the preferred shares so Genie has an option of wiping out the expensive debt 5 years from now if it is favorable for Genie common stock shareholders.  This makes the preferred shares less attractive.  Management will NOT be tendering its shares… so it looks like a no-brainer that you should stick to the common stock.

Genie consists of two businesses: (A) a residential energy business and (B) a shale oil business.  The shale oil business is very difficult to value.  What they are doing is figuring out how to extract oil from shale formations economically.  They are going to do a lot of tests to optimize their recovery process and hopefully they will hit the point where their shale oil property is economic.  Looking at the technical side of things, their process looks similar to the SAGD (steam assisted gravity drainage) process used to extract heavy oil from bitumen.  Bitumen deposits are currently being exploited with SAGD.  I am guessing that oil shale will be higher up on the cost curve than SAGD/bitumen and become the new unconventional oil.  Genie’s shale play seems to be a bet on technology driving costs down enough, low natural gas prices, and high oil prices.  Genie could potentially make several times its investment if it works out… with a very high chance of oil shale being a 0.

I don’t really understand the technology and this is inherently speculative so this is a small position for me (100 shares).  In terms of management, the company is more or less controlled by Howard Jonas.  In terms of Jonas’ ethics, some of the things that have happened at Jonas’ various IDT companies have a hint of John Malone (e.g. the spinoffs of CTMMA/CTMMB from IDT and their subsequent tender offers).  The preferred share tender offer is a little John Malone-like as it seems to be using obscurity and complication against shareholders; unlike Malone, shareholders are not put into a position where they are strongly nudged into making a mistake.  In my opinion, Jonas is a little higher than Malone on the ethics scale.  (John Malone actually invested in IDT a long time ago because IDT was doing a lot of things that were changing telecommunications.  Malone got out of IDT ahead of the secular decline in telecom profits for calling card companies like IDT.)  There is pretty good management behind Genie Energy.

Noront Resources (NOT)

Noront is going to spend millions of dollars on advancing its deposit.  It’s quarterly MD&A (one should skim these every quarter as juniors often disclose important information in them) states:

The Company is planning on moving forward on pre‐development work which would include starting
detailed engineering and mobilizing equipment up a winter road to start construction of an exploration
decline under an advanced exploration permit provided permitting and financing can be obtained.

Unfortunately for Noront, it doesn’t have much cash on its balance sheet so expect it to raise capital soon.  Possibly because Noront did not generate a lot of fees for the brokerage community, all analysts have dropped coverage of Noront.  Noront’s share price is currently very depressed.  Noront might potentially turn to Resource Capital Fund to raise capital.  In the past, Resource Capital has made deals that were highly advantageous to itself and not so great for other shareholders.  So, shareholder dilution may be imminent.

Noront’s current market cap is lower than the sum of the exploration and development costs already spent on Noront’s properties.

Intel (INTC) – adding call options

Intel is cheaper now so I have added to my position.

As far as the Intel thesis goes, I would have to make some revisions:

  1. Intel will not use its manufacturing advantage in the smartphone market.  The Medfield chip is manufactured on a 32nm process (without finFET transistors).  Competing chips use a 32nm or (slightly superior) 28nm process.  I believe the reasoning for this is that Intel is dedicating its best fabs towards higher-margin non-smartphone products that need the best power/performance.  Smartphone SoCs are generally lower-margin items with less than half the number of transistors of a high-performance CPU.  What Intel has done in the past is to dedicate its best fabs towards its cutting-edge products (e.g. the ones with the highest transistor counts).  Older fabs are used for less demanding products and budget parts (e.g. smartphone SoCs would be suitable for older fabs).
  2. Price competition is a massive headwind against semiconductor companies.  This headwind is stronger in the memory business.  When the RAM manufacturers engaged in price fixing (they were later caught and fined), RAM prices went up dramatically along with the profitability of the industry.  This brief episode of price fixing is an aberration in an otherwise terrible industry.As far as Intel versus AMD goes, AMD has never been in such bad shape financially.  This should be good for Intel as price competition should be lower.  As of Sept. 2012, AMD has a book value of $989M compared to Intel with $49,269M.  The short sellers smell blood as 26.9% of the float is sold short.  Ever since the dot-com bubble, AMD has been slowly bleeding off its profits and currently has negative retained earnings.  AMD’s weakness could potentially bode very well for Intel if AMD decides to focus on profitability and starts raising its prices.  On the other hand, AMD may not do so and it currently does not look like processor prices are going up.
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