Pretium Q4 2018 update: management is crazy but the mine did generate a lot of cash

Firstly, I should admit that I was wrong about Pretium.  I thought that the situation would be like Rubicon Minerals where the resource modelling issues would cause the stock to immediately blow up.  That did not happen.  The company has generated a substantial amount of cash that it has used to pay down debt and interest.  I was surprised that the grades did ramp up to high levels and that the mine did generate substantial cash.

Going forward, management hasn’t provided a serious guidance as the range is unreasonably tight at less than ±4% (see slide 25 of the earnings presentation).  This is fresh off of missing its previous guidance and (rightfully) blaming that miss on the variability of the deposit.  Bizarrely, it seems that management hasn’t learned from its past mistake.

My takeaway is this:

  • Management is guiding for a weak first half of 2019 (presumably below 10.4 g/t), as indicated by their remarks on the conference call.
  • Beyond that, I don’t think that management / Pretium’s geologists have a great idea as to what grades will be.  If there was good news, such as the mine consistently producing grades in the 10g/t range or higher, it would make more sense for management to behave more normally.

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LSXMA is trading at a discount

Liberty SiriusXM Group (LSXMA/B/K) is trading at roughly a 27% discount to its NAV.  The latest investor presentation discusses the discount:

As LSXMA is actively taking advantage of the discount by buying back shares, the discount should resolve in due time.  In the past, LMCA traded at a discount to the DTV (DirectTV) shares that it owned and that trade worked out well.

My Google Sheets calculations are here (it is updated with LSXMA/B/K’s latest share prices).  Use File –> Make a copy to edit it.  I own LSXMA shares.  This is a bet on the NAV discount narrowing as well as a bet on Sirius XM (SIRI) itself.

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AMD and the death of the crypto-mining GPU

(AMD stock and its options are extremely liquid as AMD is one of the top 10 most traded stocks.)

Previously, I’ve written about how AMD’s profitability has been inflated by the cryptocurrency bubble.  This will likely come to an end in the coming quarters as the market for video cards will shrink thanks to the emergence of ASICs for top cryptocurrencies.  We are already seeing the effects of this as prices of video cards continue to normalize at the retail level.  From PC Part Picker:

Most investment bank analysts anticipate that AMD’s earnings will go to the moon.  While that type of behaviour may help their employer earn underwriting profits if AMD chooses their employer for an equity raise, these optimistic projectons are unlikely to materialize.

I/B/E/S estimates for AMD, courtesy of Sentieo.

In my opinion, AMD is a compelling short as its earnings will likely shrink rather than grow in the coming quarters.

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A model portfolio of large cap stocks

I’ve started an experiment where I’m keeping a public portfolio of large cap stocks via the Motley Fool CAPS system- you can view it here.  I would like to see if I can generate value on the long side… something that I find much, much more difficult than shorting.

My criteria are:

  1. Pick only the quality businesses in a particular sector.  For example, Dollarama is the clear leader among discounters.
  2. Not overpriced.  For that reason, Amazon and Netflix don’t make the cut (just look at what happened to Amazon during the Dot-Com Bubble).
  3. I avoid industries where there are no clear industry superstars.  Oil and mining stocks simply don’t make the cut as none of them are quality businesses.
  4. Lastly, I avoid dying or shrinking industries.  Profits ultimately don’t grow in dying industries and therefore those stocks almost never do well.

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Healthcare inflation is driven by bad medicine

According to the Commonwealth Fund (an endowment-supported US foundation), US healthcare spending has increased to 16.6% of GDP in 2014.  Other countries have seen less rapid increases in healthcare spending.  For the most part, inflation is being driven by doctors with a vested interest in pushing medical services, expensive treatments, and pharmaceutical drugs.  To my surprise, what I’ve found is that many aspects of modern medicine aren’t supported by rigorous scientific evidence.  While the FDA drug approval process superficially appears to be scientific, it often isn’t.  One way that pharma companies game the system is to prove that a drug (e.g. statins) affects a dubious biomarker (e.g. cholesterol) rather than prove that the drug causes more good than harm (e.g. lower mortality).

Unfortunately, mainstream views on science and medicine are quite ignorant of what goes on.  We are taught to only trust medical advice from “trained and licensed professionals”.  Much of society worships technology and has blind faith in the claims made by medical authorities.  I would argue that this environment is a fertile ground for the trend in healthcare inflation to continue going forward.  And if that trend continues, it is likely that American health insurance stocks will continue to do quite well.

Pharmaceutical companies researching active placebos may also do quite well.

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Dollarama: why I’m ignoring the nepotism and related party transactions

While I don’t think that Dollarama is extremely compelling at the current P/E of 26.5, I do own the stock because I am trying to diversify.  The company’s earnings growth is impressive and I like the new CEO, even though his father passed on the family business in 2016.  And while the related party transactions continue under Neil Rossy, they haven’t meaningfully impacted shareholder returns in the past two decades.

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