Bad management tends to continue

Some CEOs are bad because they spend way too much time and effort figuring out how to enrich themselves.  Inevitably, they will siphon money from the company from taking an excessive salary, expensing “travel and entertainment” costs to the company, etc. etc.  These CEOs tend to fill the board of directors with their cronies.  What sometimes happens is that the board of directors has interlocking relationships with other boards, CEOs, etc.  All the shady people know each other.  It becomes a network of people giving each other favours and returning them.  What ultimately happens is that the directors and CEOs want to maintain a status quo of insiders profiting from the company.

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Smart fraud

Smart fraudsters do not commit fraud.  There are many ways in which scumbags can legally deceive (or lie to) investors.  Given all the legal methods available, I’m surprised that some people choose to do illegal things.

Microcap stocks and G&A

Thankfully, it seems like many people (including even some institutional investors) don’t get it.  With microcap stocks, it’s very important to examine the company’s general and administrative spending.  The companies with excessive G&A spending are typically doing one or all of the following:

1. Lining insiders’ pockets or supporting their lavish lifestyles (e.g. private jets, unusually expensive meals, etc.).
2. Paying for stock promotion.
3. Operating inefficiently.

All of these behaviours are bad for shareholders.  Excessive G&A is a sign that at least one of these value-destroying activities is happening.  Examining G&A will help you avoid stock promotions and really awful management teams.

Altius Minerals Post Mortem Part 2

Sometimes I will search a company’s website to see what PDF files and other files they have uploaded onto the website (e.g. use Google to search “filetype:pdf site:JuniorMiningCompany.com”).  Junior mining companies often repost analyst reports, presumably for stock promotion purposes.  It so happens that I did not bother to do this until after I closed my Altius Minerals position at a large profit.  Had I figured this out earlier, I’m not so sure I would have invested in Altius.

Altius Minerals announces secondary offering / Altius post mortem

Here’s the press release. I am very surprised that Altius chose to do a secondary offering of shares.  Management initially said that they would sell convertible debt.

In general, secondary offerings scare me.  Selling shares is an extremely expensive way of raising capital:

• Share dilution from issuing shares at a discount.
• Altius’ underwriters will collect a 5% fee and a call option.
• Various professional fees in handling the paperwork.  I believe this usually costs hundreds of thousands of dollars.

Secondary offerings are generally a sign that management (A) is stupid or (B) believes that the stock is overvalued.  Brian Dalton has a track record of selling high and buying low so it is almost certainly the latter.  Perhaps I should have noticed the overvaluation earlier; my process may have been flawed.

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.