Why would anybody want to invest in independent oil and gas?

The current situation doesn’t make a lot of sense to me.  The management teams at these companies don’t give investors enough information to value the assets.  I think that investors would demand such information.  They should know the historical and projected decline curves of their company’s assets (for each basin the wells are in).  This is very basic information that investors need to perform their due diligence.

Another way of looking at it is to examine how a private market buyer would perform due diligence.  When an oil and gas company wants to sell its assets to private market buyers, it typically opens a data room.  I’m sure they provide a large volume of technical data far beyond decline curve data (e.g. reservoir models, data on porosity, pressure, 3-D seismic, etc. etc.).  Institutional investors and analysts simply don’t perform that level of due diligence.

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Order execution traps

This is a follow-up post to “Are stock prices random?  A look at market structure“.  Here is a list of some order execution traps.

How to bury material information if you’re a junior miner

1. Bury it in the middle of a press release about something else.
2. Reveal material information in a quarterly (not annual) MD&A, because most people don’t read ’em.
3. Simply choose not to release it.  This is probably illegal and may be considered illegal if lawyers sue company insiders.  However, some juniors have directors’ & officers’ insurance that may protect insiders against some of these claims.  NI 43-101 has reduced some of these abuses as companies now have to reveal more technical data about its properties.  The technical reports often contain information about metallurgical problems with a deposit; few companies will mention these metallurgical problems elsewhere so it can be worth reading the technical reports for yourself.  Title issues are often not revealed at all; there is no legal equivalent of a NI 43-101 report.
4. Announce delays to releasing the information (e.g. lame excuses for why a feasibility study isn’t ready or why the scope has changed) until everybody hopefully forgets about it.  Also, make sure that negative information is released after a private placement.  Private placement investors are supposed to be sophisticated so in a courtroom you can argue that it’s their fault that they didn’t do their due diligence.
5. Instead of announcing that your deposit is worthless in a material change report or press release, just quietly write the property down to 0 in your quarterly or annual filing.

If you blow up enough shareholder capital, eventually they won’t have anymore capital to give you.  So learn from all those part-time CEOs on the TSX Venture Exchange.  If one of their promotions blow up, they still have a few others that will pay them six-figure salaries.  It’s not like shareholders degenerate gamblers are smart enough to figure out that every unnecessary company comes with six figures worth of unnecessary listing fees, transfer agent fees, legal fees, audit fees, and directors’ salaries.  The part-time CEOs understand that they are in the business of mining… the stock markets.

Pretium Resources (PVG) – Massive red flags

Strathcona has was hired to oversee Pretium’s bulk sample program.  The purpose of these programs is to get a better idea of the amount of gold contained in a deposit since the gold distribution may be erratic and drilling samples very little of a deposit.

Strathcona has inexplicably resigned from the project.  This is a massive red flag for me.  In my opinion, Strathcona has a very good reputation as Graham Farquharson’s work is famous for uncovering the Bre-X fraud.  He has also continued to attack John Felderhof over his involvement in the fraud.  (Felderhof remains a free man, his children are reported to be millionaires, and has never been convicted.  I agree with Farquharson’s assessment.)  His company strikes me as having high integrity.  I was surprised that Strathcona would work with Pretium in the first place since Pretium’s quality control checks were consistent with fraud (see my previous post).  It wouldn’t make sense for Pretium to hire Strathcona if fraud was occurring because Strathcona’s engineers are smart and have integrity.  Now I’m less confused and strongly believe that the red flags are too big to ignore.

Here is Pretium’s press release:

Strathcona Mineral Services Ltd. (“Strathcona”), which had been engaged as the independent Qualified Person to oversee and report on the 10,000-tonne bulk sample for the Program, has resigned from the Project.

Barkerville Gold: Sprott lent them money?!?!

Barkerville Gold “Mines” (BGM) is the poster child for everything that is wrong with the junior mining sector.  Insiders are overpaid, G&A costs are excessive, and they issue inflated technical reports.  The stock is currently halted as their latest technical report was massively inflated.  The halt was a little late but at least regulators did something for once.  The technical report claimed that Barkerville had a Bre-X sized deposit in the tens of millions of ounces and that it had the geological potential for 65-90 million ounces.  That would correspond to the largest gold deposit ever found by man.  Apparently Barkerville still has credibility.

Sprott Resource (SCP.TO) – Trading below NAV but I’m not buying it

Sprott Resource Corp is somewhat similar to a publicly-traded closed-end fund.  It is a vehicle for generating asset management fees for Sprott Inc. (SII.TO).  SCP is currently buying back its shares as they are trading at a ~21% discount to NAV.  Normally I like situations where undervalued companies are buying back their shares.  However, I’ve been learning (the hard way) that management matters.  While SCP’s management is not the worst in the business, I am not enthusiastic about it.

KWG Resources update – they own the best route to the Ring of Fire

KWG and Cliffs have been embroiled in a legal battle over the surface rights for a transportation route to mineral deposits in the Ring of Fire.  On Sept. 10, the Ontario Mining and Lands Commissioner released its decision (you can download it from KWG’s website) and KWG won.  It wasn’t a close decision judging by the wording:

[…] the law is clear; the application must fail.

Cliffs could find an alternate route, though it could cost hundreds of millions more.  It makes more sense for them to buy the rights from KWG.  KWG is sitting on an asset that is worth tens of millions of dollars to Cliffs, if not more.