Kobex Minerals (CVE:KXM)

GlennC

4 years ago

Management

Paul van Eeden manages money for Cranberry Capital, which is a joint venture between himself and Altius Minerals (this blog has multiple posts on Altius). I believe that Paul van Eeden’s best ideas will go into Cranberry Capital and not Kobex. Kobex’s latest management information circular suggests that van Eeden will oversee investment decisions at Kobex.

I presume that Philip Du Toit (who may be van Eeden’s protégé) will be generating the ideas and doing the research. Du Toit is a relatively young CEO. His LinkedIn profile states he graduated in 2010 with a Master’s in Mining Engineering. Since graduation, he worked for his father at ArcelorMittal and as a consultant for Paul van Eeden. CEO.ca has a good blog post that profiles him and the company.

This is Philip Du Toit.

It’s unclear to me what Du Toit’s track record is, what his portfolio looked like in the past, and how skilled he is as an investor. But I think that Paul van Eeden is clearly an above-average investor so hopefully some of that is reflected in Du Toit.

Van Eeden’s track record

In 2007, van Eeden apparently sold all of his junior mining stocks other than Altius Minerals. He also shorted Noront Resources close to its peak as he thought that the deposit was much smaller than management was suggesting. (At the time, the former CEO was suggesting that it could be the world’s next Voisey’s Bay. Here is a video of Richard Nemis on Youtube.) Brian Dalton of Altius Minerals, who I think is the smartest CEO in mining, liked van Eeden enough to pay him to manage money for Altius.

On the other hand, I am very skeptical about junior mining in general. The dramatic rise in commodity prices has made people look much smarter than they actually are. Read my posts on Yukon-Nevada Gold and you’ll see why I think Eric Sprott does not deserve his reputation. A lot of money has been wasted on G&A while few companies have found deposits that have turned into profitable mines. An unusual amount of money has been poured into unprofitable mines (e.g. Yukon-Nevada). Junior mining is not a good place to try to make money as a shareholder. The industry is highly inefficient due to the paid stock promotion, excessive salaries of the part-time CEOs and other insiders, the overhead of thousands of public listings, etc. etc.

A part of me feels that Liberty Media, a $15.28B media juggernaut (they don’t touch mining stocks), will likely outperform Kobex despite the size difference.

G&A

The latest management information circular states that the company expects to spend $1,050M of its working capital over the next 18 months. This equates to a cash burn of $700k/year. This is around 2% of Kobex’s $34M in working capital. I believe that the overhead will be a little higher due to other expenses and non-cash compensation. While current management has decreased G&A, a more cost-conscious management could get G&A much lower. Obvious places to trim spending would be office expenses and the board of directors. Another way to trim expenses would be to de-list the stock (*a delisting may be problematic for Sprott, one of Kobex’s largest shareholders).

Mountain Province Diamonds

This is Kobex’s first and only disclosed stock pick to date. Here’s my take on the company.

The good

The company is in a joint venture with De Beers Canada, a privately-held company. De Beers seems to be behaving rationally. I do not believe it has participated in mining mania by making stupid investments to try to grow production (e.g. old CLF, Chinese companies, senior gold miners who use overvalued stock to buy juniors, Barrick, etc.). If De Beers is putting its own money on the line, it is likely that they have performed their due diligence and figured out that this mine will (likely) be economic.
De Beers owns other diamond mines in Canada and brings some serious technical expertise to the table.
The mine may have high margins.
Of all the junior stocks out there, this is probably one of the better ones to own. It is generally a good idea to own the ones that will turn into profitable high-margin mines.

The bad

MPD behaves like your typical junior mining stock. (If you haven’t figured it out already, I do not think that junior mining stocks are good for the shareholder-gamblers who own them.)
Insiders have high salaries.
MPD is far more promotional than their joint venture partner (De Beers). The company has not been very forthcoming about project delays and the red tape that De Beers (the operator) has to cut through.
Diamonds are extremely difficult to value. The feasibility study prepared for MPD may be using an unrealistically high price for diamonds. I suspect that De Beers has some good information on diamond pricing (e.g. it mines diamonds, markets them, and developed some know-how about using micro-diamonds to estimate reserves). However, the feasibility study did not use De Beers numbers and instead used numbers from WWW International.
The diamond price escalation used in the study seems… questionable. The feasibility study may be modelling inflation for the mine’s revenues but not its expenses. In my opinion, the proper way of doing a feasibility is to avoid assumptions about inflation and price escalation. This makes feasibility studies more comparable to one another.
It is inherently very difficult to estimate the value of a diamond deposit due to sampling issues. This creates room for mischief unfortunately.
The feasibility study filed on SEDAR talks about a feasibility study prepared for De Beers. I really, really want to see the study prepared for De Beers. It is highly likely that the study prepared for MPD is far more “optimistic” than the one prepared for De Beers.
MPD has not been filing a constant stream of technical reports on SEDAR. Given that the mine is going into production soon and that MPD is trying to raise its share of financing, I think that it would be appropriate to have more technical reports filed. There are feasibility studies for 2010 and 2014, but none for 2011-2013. I haven’t done a lot of work on this company but I believe that De Beers has been performing millions of dollars of engineering work every year on data that would go into a feasibility study.
Their website is beautiful. The company puts out monthly investor presentations. This is a very minor red flag as it suggests that the company is promotional.
The financing strategy is silly. De Beers could probably finance this mine entirely by itself through cash flow, bank debt, and/or issuing royalties. MPD cannot finance this mine as efficiently. It has to pay inflated insider salaries, overhead associated with a public listing, private placement fees (e.g. 5%), shareholder dilution on private placement deals, etc. MPD has not chosen to finance this mine via rights offerings, instead choosing more expensive methods of raising capital.

Things I did not look at:

The exploration potential of these deposits extending deeper.
The exploration potential of the company’s land.
Whether or not the joint venture is a sucker’s deal for MPD.
I only skimmed through the latest feasibility study and did not read the other technical reports.

In general, I think that 99% of the junior mining industry is silly. MPD is no exception. However, this is one of the least silly stocks that you can own as far as junior miners go. I like Du Toit’s stock picking better than Northfield Capital’s. (And I like John Malone’s stock picking better than Du Toit’s.)

What I would do

If I had to re-create my portfolio, I would own lots of Liberty Media and have much smaller stakes in Kobex and Northfield Capital. All three can be considered to be piles of assets selling at less than what they’re worth. Of the CEOs, John Malone has the best track record and is a self-made billionaire. I would say that he is the most skilled.

Going forward, I expect Malone to compound money the fastest because (A) he’s brilliant and (B) it’s easier to make money in media than in mining. All three stocks are attractive in my opinion because they are cheap stocks with above-average management with histories of share repurchases. I own all three and personally have a much bigger stake in Liberty than the other two. On the other hand, I may be too optimistic about Kobex and Northfield Capital. While the CEOs at the respective companies are in the top percentiles of their field in terms of skill and integrity, this is junior mining. The industry is not designed to generate shareholder value so it will be very difficult to make money in the field.

*Disclosure: Long Liberty Media, Kobex, and Northfield Capital. I sold out of my positions in Altius, Pinetree, and Aberdeen. I don’t own any of the Sprott-related companies.