Mining: what companies are actually saying

#1- Our gold production is going to go up over the next few years

Translation:  We are going to waste money on dumb projects and we still won’t be able to increase production.

The conventional wisdom is that miners have to re-invest their capital to maintain or increase production.  This is idiotic.  If you will get poor returns on new mines, then don’t build them.  There is no rule in capitalism that says that you have to throw away money.

What happened in the gold industry is that the seniors chased dumb projects and didn’t make as much money as they should have in a bull market.  And because the economics of the new mines were bad, they didn’t even manage to increase ounces produced per share.  In hindsight, gold miners should have returned capital to shareholders and let production drop instead of chasing dumb projects.

#2- We have initiatives underway that will decrease production costs

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Selwyn Resources: Post Mortem

Previously I wrote that:

1. Resource Capital would be trying to liquidate its position.
2. The Yukon project probably isn’t worth that much.

It looks like I was right on the first count as Resource Capital sold in the ballpark of 2 million shares.  I was kind of wrong on the second count.

Pinetree Capital (PNP) – Cigar butt situation

Pinetree trades on the Toronto Stock Exchange at around $0.51/share.

Pinetree says that its “net asset value” is around $1.28/share or less as it publishes a NAV calcualtion every month.  This is a big, big discount to NAV.

It’s also in a terrible business and has bad management.  It definitely qualifies as a cigar butt.

Noront (CVE:NOT) update

Noront is in the process of getting a loan from its largest shareholder (RCF, a hedge fund with many mining professionals on its staff).  Overall, this looks a lot like a convertible junk bond.  The effective interest rate is really high once you sort out the financial engineering.  This makes sense as Noront has negative cash flow and is not safe to lend to.  The lender needs to be compensated for the risks on its loan.

Setting aside the trickiness of the loan for a second, I think that it is somewhat of a good sign that RCF decided to lend money to Noront.  It shows faith in Noront.  If it turns out that the nickel and chromite projects are not economic (and this could well happen), then RCF could lose a lot of money on its loan and be left with assets that aren’t worth that much.

NovaGold (NG): A quick comment

Here’s my extremely superficial analysis of NovaGold.  NovaGold’s main asset is its Donlin Gold joint venture with Barrick.  Barrick has pretty much come out and said that it doesn’t think that the deposit is worth pursuing. Therefore, this stock is doomed.  I don’t care if Seth Klarman owns it.

Mines leveraged to commodity prices

Some people make the argument that mining stocks are leveraged to commodity prices.  (I would agree with this.)  One might think that low-margin deposits would be more leveraged to commodity prices than high-margin prices.  I’m not so sure that this will work out the way most people will think it will work out.

Tesla (TSLA) earnings update

Regarding Tesla’s earnings press release (SEC filing), here is what I see:

1. “We also expect to be near breakeven on cash flow from operations.”  This is music to my ears.  Because Elon Musk is always overly optimistic, this means that Tesla will have slightly negative cash flow from operations.  Add in capex and this means that Tesla will definitely be unprofitable.  I am guessing that ramping up to 5000 cars a quarter instead of 4500 will still mean that Tesla is unprofitable.
2. Tesla expects to reach full production in the next year.  20,000 cars next year with 4,500 in the next quarter.  I’m not sure that their explanation for the shortfall (4500 versus 5000) makes a lot of sense: “[We] gave the manufacturing team the first week of the year off to celebrate their accomplishments during 2012“.  I don’t know much about car manufacturing but they will idle expensive tooling equipment because the workers wanted to celebrate?  And wouldn’t you want to celebrate before New Year’s before rather than after?
3. “In the first quarter of 2013, we expect to generate slightly positive net income, on a non-GAAP basis.”  Companies typically inflate non-GAAP earnings by adding in stock-based compensation.  Shareholder dilution is still an expense, though Tesla’s management is smart in using stock-based compensation to raise money.  I think that analysts are intelligent enough to smell BS in non-GAAP earnings… I believe that this is stuff that they deal with a lot.  Institutional investors may exit the stock because of this.  They might stick around if there is hope in the future (Model X???)… with mining companies overvaluation tends to last a lot longer because it legitimately takes several years to build most mines so it takes several years for investors to realize that they’ve been duped.
4. The other way non-GAAP earnings can be inflated is by recognizing expenses that are “one-time”.  Of course, I’m sure that analysts have figured out that companies recognize “one-time” expenses year after year after year.  Basically… for Tesla to say that they will be non-GAAP profitable is a joke.  If you polish a turd it’s still a turd.
5. Sometimes non-GAAP earnings are helpful if there are arcane accounting rules that cause earnings to be weird (and these definitely exist).  If this were the case, I’m sure that Tesla’s promotional management would explain the accounting intricacies for everybody.  This does not seem to be the case.

In general, the press release was written to be misleading.

1. “Achieved 20,000 annualized production rate”:  Tesla is saying that they will deliver 4,500 cars in the next quarter versus 5,000.
2. “First profit now expected Q1 2013 versus prior guidance of late 2013”: What profit?  Tesla will be GAAP unprofitable in the next quarter.

*Disclosure: Short Tesla via the common stock and the puts.  The puts are probably a better idea… I’ve been bought-in on the common before and it stinks.