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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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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Pretium 2017 recap – “they will not have a mine producing 425,000 oz. a year for the next 20 years”

(Pretium has a US$1.8B market cap and the borrow is in the low single digits.  I have written about this stock previously.)

Back in 2013, Strathcona resigned from the Brucejack gold project due to disagreements over what Pretium was telling investors.  Graham Farquharson (Strathcona’s head honcho) was being a gentleman and allowed Pretium to disclose on their own terms (with their own PR spin).  Unfortunately, Pretium instead tried to discredit Strathcona.

So, Farquharson did an interview with The Northern Miner, a trade publication.  You can read the interview on the website (no paywall):

Yes, and we told them that it has an excellent chance of being a small-tonnage, high-grade mine in the Cleopatra vein, and a couple of other similar occurrences that they found in the last drilling program.  If they lined all those up, there’s an excellent chance that they could have a small-tonnage, high-grade gold mine. But they will not have a mine producing 425,000 oz. a year for the next 20 years, as they have been advertising so far.

Here’s the crazy part.  This is 2017 and Pretium is almost finished building that mine.

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Wall Street is stupid: BATS IPO edition

In general, stock exchanges have a perverse business model: they sell out their clients (investors) to market makers.  They give special trading advantages to market makers, who then use those advantages to fleece investors.  Now one of these stock exchanges (BATS) wants investors to buy their stock.  I doubt that it is wise to buy stock from people whose business model is built on cheating you.

I’d be interested to see which institutional holders participate in the IPO.  It will be a who’s who list of clueless portfolio managers and those who enjoy the graft that investment banks send their way.  (If investor interest is strong, there may be some Jim Cramer types who immediately flip their IPO shares for an easy profit.  While this practice is not entirely kosher, any portfolio manager who does this is at least trying to make money; I would not classify them in the stupid category.  If these money managers care about their clients, they would flip these IPO shares in client accounts rather than their own personal accounts.)

As commodity prices plunge, miners are stretching their numbers

My July 8 post “Mine economics explained” explains why I think capitalization of stripping expenses is bullshit.  The current trend is for miners to make more aggressive assumptions in that department to boost their earnings.  This is contrary to reality.  Lower commodity prices means that mines will close earlier.  It would make sense to take impairments on previously capitalized expenses.  (Or better yet, accounting rules should be overhauled to reduce accounting shenanigans, investor transparency should be improved, and the accounting burden on public companies should be reduced.  Simpler rules would benefit investors.  The problem is that the system has been co-opted by public companies that want to play games with their accounting and rulemakers who enjoy lucrative consulting gigs helping companies game the complex rules that they created.)

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The BCSC / Jon Carnes drama and its implications

A British Columbia Securities Commission (BCSC) panel dismissed fraud allegations against Jon Richard Carnes.

While Carnes theoretically won, the panel’s written decision was very biased against short sellers.  Firstly, the BCSC failed to realize that they went after the wrong people (this is a pattern that repeats through history with many regulators… it’s nothing new).  However, the panel did not see value in creating an environment where people can expose fraud without fear of repercussions and nasty legal bills from regulators.

More importantly, one of Carnes’ researchers (Huang Kun) was wrongfully imprisoned in a Chinese jail and suffered abuse while detained.  Money is one thing.  Having your human rights violated is another.  I believe that Carnes’ lawyer(s) presented newspaper articles that describe Kun’s story.  Exhibit EX00344 (a BCSC webpage lists the hundreds of exhibits filed) seems to be a Globe and Mail article that describes what happened to Huang Kun in China.  The panel’s written decision does not seem to mention Huang Kun at all.  His name does not appear in the decision anywhere.  I am very disturbed at what appears to be the panel white washing the abuses that have occurred.

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I’m staying away from oil and drilling

Lately, independent E&Ps have been beaten down due to lower commodity prices.  Drilling stocks (e.g. NADL) have been beaten down due to US sanctions on Russia and lower oil prices.  Some shipping stocks (e.g. DRYS, PANL) are beaten down.  In these situations, I will not be greedy when others are fearful.

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