Portfolio updates Feb 2013

KB Home (KBH):  The stock ran up (around $19.57).  Originally I said that they should sell stock… now they are doing exactly that.  This is somewhat bad for the shorts (~34% of the float is short) as intrinsic value will move closer to the secondary offering price.  I plan on waiting to see if the short thesis plays out.

Tesla (TSLA):  Added to my position via put options.  The implied volatility on the longer-dated out-of-the-money put options is in the 50s so the price isn’t excessive.  Tesla raised the prices on its Model S, which may indicate that they are having margin problems.  In theory, Tesla wants/needs to sell a huge volume of cars so that fixed cost leverage will make them profitable.  Tesla’s supercharger network would definitely benefit from higher volume.  More cars can pay for more supercharger stations.  More supercharger stations would make long-distance trips a lot more convenient/practical.  (Currently long-distance trips can be complex as battery life is sometimes lower than what the car reports.)  A higher volume of sales can put Tesla closer to a critical mass needed for profitability.  At the very least, Tesla may convince shareholders that it is close to profitability and be able to raise more capital.  I see the price increase as a sign that Tesla is having margin and therefore profitability problems.

I am excited about Tesla put options.  The company has consistently lost money, may have margin/profitability problems, and has the DOE loan that is due soon (unless repayment on the loan gets pushed back).  There is a high chance that it will collapse soon- characteristics of an ideal short.  However, nothing is certain here and Tesla may actually become profitable or the Elon Musk hype machine could keep the company’s share price high for a long time.

EDIT:  The DOE loan is due between now and Dec 2017, with most of it due in 2017.

Premier Exhibitions (PRXI):  No news on the Titanic auction.  I see this as being a good sign for the short thesis.

Altius Minerals (ALS.TO):  The share price has run up and share repurchases have slowed down.  It makes the most sense to buy Altius when they are repurchasing shares; now may not be the time.  Altius has a major stake in Alderon Iron Ore (shares and a royalty).  Alderon has extended the deadline for Hebei to make an investment in Alderon (this is like giving away money because they are extending Hebei’s option)… this suggests to me that Hebei is having cold feet.  Iron ore prices have plummeted and then rebounded somewhat; companies like Cliffs are selling their iron ore assets and cancelling expansion plans.  Sentiment is poor at the moment.  Investors will have to wait(/hope) for iron ore prices to stay high and for investment sentiment to improve.  Otherwise, Alderon’s flagship project is worth nothing if a mine is not built.  One the other hand, Alderon could be worth one to two billion dollars if iron ore prices return to their previous exuberant levels (current market cap is around two hundred million).

The reason why Alderon gives away free money is because (A) they badly need the financing and (B) it is arguably cheaper to extend Hebei’s option to invest than to pay for underwriting fees and all of its associated costs.  Of course, giving away free money is bad for shareholders.  I believe the reason why Altius is obsessed with royalties is because the royalties are insulated from these problems and sometimes even benefit from them.  But Altius does own Alderon shares and is affected by the perverse behaviours at the equity level.  Altius has two seats on Alderon’s board so it is unlikely that Alderon will do something that is terrible for Altius shareholders.  However, Altius and Alderon shareholders are somewhat hurt by the fact that almost everybody who works for Alderon has an extremely high salary.  Many part-timers at Alderon (e.g. board members from Altius) are paid at least a million dollars according to SEDAR filings.  The junior mining world is very perverse.  If and when Alderon’s Kami project is fully financed, I am pretty sure that Altius will look to unload its Alderon shares (and Altius board members may eventually be replaced by Stan Bharti / Forbes and Manhattan cronies).

Contango Oil and Gas (MCF):  Natural gas liquids prices have crashed and production from Contango’s wells has been disappointing (Contango had to write down one of its wells after revising its reserves).  Eventually natural gas prices should rebound (because the industry is losing money at current prices and reducing supply) and Contango should make a killing.

As of June 30, 2012 the 10-K lists the present value of Contango’s reserves at $513M after tax.  Strip prices for natural gas are far higher than the spot price at the time ($3.13 natural gas, $96.07 oil and $59.39 per barrel of NGLs).  Using a discount rate less than 10% would increase the present value.  Contango should be close to fairly valued as its current market cap is $668M if not a little undervalued.

A small ~9% adjustment should be made to the reduced estimates to Ship Shoal 263 (9.2 Bcfe decrease) and Vermilion 170 (11.5 Bcfe).  As of June 2012 Contango had 256,567 Bcfe in reserves.  In the next 6 months, reserves dropped 35.5 Bcfe due to production (13 Bcfe) and the two drops in reserve estimates.

Management at Contango should continue to be excellent without Ken Peak.  Contango’s exploration partners used to work for Zilkha Energy and Zilkha’s ex-CFO is now Contango’s CEO.  This is a great business (but only due to management) at a fair price.

Insiders have been buying small amounts of stock.  Ken Peak, the former CEO and Contango’s founder, has been selling (but he may die soon and can’t take his money to his grave so I don’t read too much into it).

Noront:  RCF and Baosteel were buying Noront shares at CAD$0.52/share in May 2012 (Baosteel has been an insider and major shareholder for a long time).  Currently Noront shares are selling at almost half of the private placement price (e.g. $0.28/share).  Noront has enough liquidity to last for at least another year so it doesn’t have to do anything drastic to stay afloat.  I have added to this position at $0.285.

There are other stocks in my portfolio (e.g. INTC, ASPS, etc.) but I don’t have much to say about them.


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