I don’t think that these are great trades but they are ones that I have made.
Barkerville Gold “Mines” (BGM) is the poster child for everything that is wrong with the junior mining sector. Insiders are overpaid, G&A costs are excessive, and they issue inflated technical reports. The stock is currently halted as their latest technical report was massively inflated. The halt was a little late but at least regulators did something for once. The technical report claimed that Barkerville had a Bre-X sized deposit in the tens of millions of ounces and that it had the geological potential for 65-90 million ounces. That would correspond to the largest gold deposit ever found by man. Apparently Barkerville still has credibility.
Sprott Resource Corp is somewhat similar to a publicly-traded closed-end fund. It is a vehicle for generating asset management fees for Sprott Inc. (SII.TO). SCP is currently buying back its shares as they are trading at a ~21% discount to NAV. Normally I like situations where undervalued companies are buying back their shares. However, I’ve been learning (the hard way) that management matters. While SCP’s management is not the worst in the business, I am not enthusiastic about it.
KWG and Cliffs have been embroiled in a legal battle over the surface rights for a transportation route to mineral deposits in the Ring of Fire. On Sept. 10, the Ontario Mining and Lands Commissioner released its decision (you can download it from KWG’s website) and KWG won. It wasn’t a close decision judging by the wording:
[…] the law is clear; the application must fail.
Cliffs could find an alternate route, though it could cost hundreds of millions more. It makes more sense for them to buy the rights from KWG. KWG is sitting on an asset that is worth tens of millions of dollars to Cliffs, if not more.
This year could have been better since none of my major short positions worked out. The long side is doing well mainly because of Altisource (up 45% since I wrote about it on Jan 10 at $93.57). The junior mining-related part of my portfolio happen to be up even though the TSX Venture is down a quarter year-to-date.
National Research corporate does surveys for healthcare-related organizations. The operating business has grown around 14%/year over the last decade. Its CEO is obviously a Warren Buffett fan and (in my opinion) has higher integrity than Buffett.
Recently, National Research has performed a recapitalization that has created an A and B share structure. There is some uncertainty as to the relative economic interest between the two share classes. The B shares should be worth anywhere from 6X to 1X that of the A shares if voting rights and illiquidity are ignored. This is a huge range. Because of the uncertainty over the relative value of the two share classes, there are two different possible trades:
- Arbitrage. Go long the B shares and short the A shares. One could make the argument that the B shares have 6 times the economic interest of the A shares. On top of that, the B shares have higher voting power so they should trade at a slightly premium (though in practice it could trade at a discount due to illiquidity).
- Go long the B shares. National Research is a well-managed company run by a CEO with unusual integrity.
*Disclosure: Long NRCIB, no position in NRCIA.
Selwyn Resources is being taken over by activist investors who will likely liquidate the company. Originally the proxy argued that Selwyn would be able to distribute a 10 cent/share dividend. Because Selwyn trades at 0.8/0.85 cents, the return may be attractive. However, the company burns through a lot of cash and there may be complications to actually liquidating the company. As well, there is a healthy dose of drama.
*Disclosure: I am long Selwyn.
I used to assume that large mining companies would not chase projects with negative returns. This is a dangerous assumption that I need to rethink. I’m starting to realize that most large miners regularly chase projects with poor return. Or, they engage in business decisions that don’t make a lot of sense. I shouldn’t rely on the due diligence of senior mining companies when trying to value the assets of a junior.
Here’s my analysis of various large mining companies and why they are crazy.