Thoughts on mining (2017 edition)

Some key lessons on mining companies:

  1. They regularly withhold key information from investors.
  2. Technical reports should not be relied upon because many of them are disconnected with reality.

Without key information on a mine’s economics, these companies cannot be accurately valued.  So… mining stocks aren’t a great place to look for longs.  You might spent a lot of effort trying to value a mine and still fall short of being able to find reliable information on that mine.

On the short side, there are some opportunities.

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Pretium update: disappointing grades

(*Disclosure:  Pretium is by far my largest short position so I am biased.  Take what I say with a grain of salt and do your own homework.)

The production figures reported in Pretium’s MD&A filed on August 10, 2017 fall far short of the projections from Pretium’s latest published feasibility study.

According to the feasibility study filed on June 30 2014 (effective date June 19, 2014), year 1 production from Pretium’s flagship project would have a head grade of 15.4 g/t gold with a recovery of 96.8%.  The effective grade after recovery losses would be 14.9072 g/t gold.

Figures are from Table 17.2 of the technical report.

Compare this with the data from page 2 of the MD&A:

  • For June, 8510 ounces of gold were produced and 70805 tonnes of ore were processed.  8510 / 70805 X 28.3495 gram/ounce = 3.407 g/t for June
  • For July, 16882 ounces of gold were produced and 83667 tones of ore were processed.  16882 / 83667 X 28.3495 gram/ounce = 5.720 g/t for July
  • An average of 4.660 g/t for June and July

The 3.407 g/t and 5.720 g/t fall far short of hitting the 14.907 g/t mark projected from Pretium’s feasibility study three years ago.

While grades so far have been low relative to the estimates from the feasibility study, Pretium does expect grades to ramp up [page 4; emphasis mine]:

Working Capital

As the Brucejack Mine continues to ramp-up grade, we expect the increased production and concomitant proceeds from the sale of doré and flotation concentrate will enable us to overcome our short-term working capital deficit. We expect as gold production ramps up this deficit will reverse (refer to the “Liquidity and Capital Resources” section below). In addition, we are evaluating other opportunities to bolster our short-term working capital.

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How to track changes in a webpage

There is a free website called Change Detection that can send you email alerts whenever a webpage changes.  I use it to keep track of:

  1. Hedge fund letters, e.g. Bronte Capital’s.
  2. Scumbag client lists.  There are certain firms that specialize in helping scumbags.  Some of those scumbags are investment banks that publicly post their coverage list.

So instead of constantly re-checking a website, you can simply use ChangeDetection.com to receive email alerts.

Trex: marketing hype and unproven technology

This blog post is in reference to John Hempton’s post on Trex; the post points out that Trex’s operating margins are suspiciously high.  I haven’t uncovered enough about Trex that would suggest to me that there is some form of egregious accounting fraud occurring.  However, I can see how Trex’s margins can appear to be so high. This industry does not sell a commodity.  Rather, the industry sells marketing hype and unproven technology.

Trex was one of the companies that pioneered the use of wood-plastic composites as decking material over 2 decades ago.  Unfortunately, the composite materials did not live up to their fanfare and marketing hype (e.g. zero maintenance, lasts longer than wood, etc.).  There have been issues with composite deck materials from virtually all manufacturers that have led to recalls, expensive warranty claims, and class action lawsuits.  Some manufacturers have gone bankrupt and were not able to pay out all warranty claims, leaving homeowners holding the bag.

The current practice is for manufacturers to exclude known problems from their written warranties.  These written warranties do not obligate them to stand behind their marketing hype.

(*Disclosure:  No position.)

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A China XD Plastics follow-up

In my previous post, I explained how CXDC’s website was worse than Bill Ackman’s due diligence on Valeant.  It turns out that CXDC really does use that website for their operating business; I thought that they simply setup chinaxd.net for Western investors and had another website somewhere else for the operating business.

According to CXDC’s latest 10-K, they had $237M USD in revenue for 2016.  They have almost two thousand employees:

As of December 31, 2016, there were 1,960 employees, including 710 in manufacturing, 485 in R&D, 584 in management, 59 in finance, 101 in sales, purchasing and marketing and 21 in other departments.

But apparently they cannot make a fully functional website.  Perhaps it is due to a stifling bureaucratic environment of middle management: more than a quarter of their employees (584) are in management.

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Chinese companies with poorly executed websites – 3 years later

3 years ago, I wrote about Chinese companies with poorly executed websites.  Specifically, I pointed out that YONG and CXDC didn’t have great websites.  (For your information: CXDC has a market cap of $235M and the borrow is about 7%.)  Let’s revisit these companies.

  1. YONG:  Back then, I took a large position in YONG put options, betting on the Yongye takeover bid failing.  Unfortunately, the takeover bid did go through and I lost money.  Fast forward 3 years, their websites have disappeared.  Yongyeintl.com was the website aimed at investors.  It went dark on or before September 14, 2014 according to archive.org, shortly after the going-private transaction.  China-yongye.com was the Chinese language website.  It went dark on or before February 28, 2017 – the website is currently an error page (in Chinese).  So now you understand my irritation with losing money betting against YONG.  While I don’t know what happened to this company, I think it’s safe to say that their website execution got worse.
  2. CXDC:  Back then, they did not seem to have paid for their stock photography.  Now, they have rectified that.  However, the copy on this website is pretty awful.  The copy on the top of the website (archive.org) reads: “Welcome to China XD Chinese website”.  Those are the exact words… in English.  The copy on the bottom reads: “In case of information discrepancy between the Chinese website and English website of the company, the English website shall prevail”.  That’s quite the paradox- we’re welcomed to the Chinese website but apparently it is the website that will prevail in case of [sic] “information discrepancy”.  On top of that, a lot of the links on the website do not work (e.g. I could not figure out how to watch their corporate video).  But hey, at least they paid for their stock photography.

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