The not so pretty side of Altius Minerals

I have a large position in Altius.  But sometimes it is good to invert and to look at why your positions aren’t great ideas.  Here are some things about Altius that deserve examination:

1. Altius owns shares in Alderon (and has a valuable royalty on Alderon’s flagship Kami project).  Alderon pays for stock promotion.  The way this paid promotion is disclosed may be improper.
2. It is hard to time if the Kami mine  is economic.
3. Alderon engages in your typical junior mining bullshit.
4. Altius voluntarily bought shares of Virginia Mines, a company which pays for stock promotion.
5. Some of Altius’ corporate presentations are on the promotional side.

Unbuilt mines with planned expansions

It is a red flag when a development-stage mining company makes plans for a mine with expansion stages.  Why?  There is one mine size that maximizes the net present value (NPV) of the deposit.  Usually this size results in a mine life of 6-15 years.  A bigger mine exploits the resource faster, making the future revenues happen earlier.  Because there is a time value to money, mining faster increases the present value of the future cash flows.  A larger mine also enjoys economies of scale that lower operating costs.  Of course, all of this has to be balanced against the capital costs of a bigger mine.  Underground mines tend to have higher capital costs so they tend to be designed with longer lives.  Open pit mines tend to have low capital costs so they tend to be designed with short lives.

If the estimated mine life is over 20 years, then there is probably something fishy going on.  Usually, it would make more sense to build a bigger mine with a shorter life.

Sturm, Ruger accounting notes

Ruger is a rapidly growing company with incredibly high returns on capital (over 60%).  This is a follow-up to my original post on the company.

Generally speaking, their accounting is conservative.

Yongye (YONG): An asymmetrical trade

Today, Yongye stock shot up over the possibility of the company going private at $7.00/share.  You should read the SC 13D filing on Edgar for details.  The last attempt was for $6.69/share and it failed.

I am speculating that the second takeover will fail like the first.  Suppose that I buy puts with a $5 strike at 10 cents (*I ignore commissions, which can be quite significant).  The potential upside is 50X.  I believe that Yongye may very well turn out to be a fraud and see its share price drop dramatically.  The risk/reward here seems compelling.

The options market for Yongye is somewhat liquid and there are Jan 2016 puts available.

SkyPeople Fruit Juice (SPU)

SPU is the company that led me towards Equisolve and developing a better understanding about how pump and dumps work.  *Disclaimer: I am not saying that Equisolve caters to pump and dumps.  Maybe they do, maybe they don’t.  You should form your own opinion based on your own research.

The domain registration for skypeoplefruitjuice.com shows contact information for Mark Lazatin at CCG Investor Relations.  (Not that this matters, but LinkedIn and his new employer’s website suggests that he has moved to a new job.)  The domain registration suggests to me that CCG built SkyPeople’s website and controls the domain registration.  It so happens that many Chinese reverse merger frauds retained CCG for investor relations services before they blew up.  While I don’t believe that ‘guilt by association’ is evidence of fraud, it is a red flag in my opinion.

I find it interesting that other people are on the fence about whether or not the company might be a fraud.  Investingsidekick.com has an interesting blog post on the company.

*Disclosure:  No position.  I am not saying that the company is a fraud and I don’t know for sure if it’s a fraud or not.  I have not done much research into this company.

EDIT (3/26/2014):  Roddy Boyd has an interesting piece of journalism on SPU.  It covers Absaroka Capital’s attack on the company and the legal battle between the two parties.

Turquoise Hill Resources (TRQ): It’s about what they are NOT saying

(This is not an actionable idea.)

Virtually all of Turquoise Hill’s value lies in its flagship project, Oyu Tolgoi.  The company has poured several billion dollars in it and the mine is currently ramping up to commercial production.  I have serious doubts about the project’s economics.

Normally, before you spend billions of dollars building out a mine, you would perform a feasibility study and release it to your investors who are putting up the billions of dollars needed to finance the mine.  I could not easily find a feasibility study on the company’s website.  (I believe there is a 2009 feasibility study filed on SEDAR somewhere.)  This is a massive red flag.  It suggests to me that the mine’s economics are so awful that the company doesn’t want its shareholders to know the truth.

Why Selwyn is two-faced

On March 3, 2014 Selwyn issued a press release stating that it is “currently exploring options for financing the Company, with a view to restarting the ScoZinc operation in Nova Scotia, Canada”.  (You’ll have to find this press release on SEDAR because it’s not the company website.)  A few months before that in December, Selwyn returned millions of dollars of cash to shareholders that could have been used to finance such a mine.  On the surface, it looks like Selwyn management is inept.  IKN has colorful commentary as always, even though I disagree.

Global Sources (GSOL) – Interesting tender offer but I will watch from the sidelines

(This is not an actionable idea.)

Global Sources has announced its intention to tender for its shares at $10.00/share (press release).  The shares currently trade at $7.93, well below the tender price.  Global Sources has had two tender offers in the past.  If history repeats itself, then the tender offer will be massively oversubscribed.  Effectively, the tender offer will like a special dividend.

So why am I sitting this one out?

My approach to shorting oil and gas

When oil and gas companies sell assets to each other in private transactions, they will often open a data room where the acquirer’s team of engineers can look at the data and perform their due diligence.  I find it strange that supposedly sophisticated institutional investors are comfortable with oil and gas stocks without being able to perform this level of due diligence.

Maybe I’m crazy but I think that institutional investors are making huge mistakes in the oil and gas sector.
Either they’re wrong or I’m wrong.  Time will tell.

I believe that there are currently very high levels of deceptive stock promotion and many opportunities for short selling.  The nice thing about the current situation is that institutional investors are involved and are lending out their shares.

Oil trap or value trap?

The website “Oil On My Shoes” contains a short and excellent introduction to petroleum geology.  In particular, it explains how economic oil and gas reservoirs are often found in either structural or stratigraphic traps.  What I took away from the website is that petroleum geology is quite complex.  There are many factors that affect the exploration potential for a piece of land and therefore how much that land is worth.  Just because two parcels of land are close to each other (what I would call “closeology”) doesn’t necessarily mean that wells drilled on both parcels will have similar economics.

Many publicly traded companies avoid disclosing information about geology and would like investors to focus on closeology.  They want to trick investors into valuing acreage on the sale price of nearby land rather than the geologic potential of the land (or lack thereof).  Without knowing the geological details, it’s hard to say if closeology is a reasonable shortcut in valuing acreage. At the end of the day, I think that it is a red flag whenever an oil/gas company tries to steer investors towards closeology.  Usually it is an attempt to mislead.