Canada Lithium update: the end may be near

I’ve previously thought that Canada Lithium’s mine would be extremely uneconomic.  It looks like the thesis is playing out.  The company is desperately raising capital to shore up its working capital.  It hasn’t been able to generate cash flow from the mine yet, which raises doubt about the company as a going concern.  I’ve quoted the company’s financial statements below and added my own emphasis:

The Company has secured off – take partners in major Asian markets, but has not generated revenue or cash flows from its operations. The Company has limited financial resources and no current source of recurring revenue and continues to rely on the issuance of shares, debt or other sources of financing to generate the funds required to develop the Québec Lithium Project, for corporate expenditures, and to satisfy debt obligations as they fall due.

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Pretium update: Graham Farquharson speaks out

Those interested in Pretium should definitely check out this Financial Post article on the company.  In the article, Graham Farquharson (president of Strathcona) comments on what’s happening and criticizes Pretium’s management.

Pretium: Strathcona says that there is no gold

See Pretium’s press release for yourself.  The stock is currently down around 26%.  Here’s one juicy tidbit from the press release:

Strathcona withdrew from the Program on October 8, 2013 before any results from the processing of the bulk sample were available. In withdrawing from the Program, Strathcona advised Pretivm that “…there are no valid gold mineral resources for the VOK Zone, and without mineral resources there can be no mineral reserves, and without mineral reserves there can be no basis for a Feasibility Study.” They also advised that “…statements included in all recent press releases [by Pretivm] about probable mineral reserves and future gold production [from the Valley of the Kings zone] over a 22-year mine life are erroneous and misleading.”

Strathcona is saying that there is no gold (“no valid gold mineral resources”).

Chesapeake (CHK): Is this really a long?

Chesapeake is an oil & gas stock that has been owned by many notable value investors (Mason Hawkins, Lou Simpson) and has often been written up as a long on VIC more than once.  In my cynical opinion, Chesapeake is an example of a stock where supposedly sophisticated investors have been continually fooled by management.  Since its IPO in 1983, Chesapeake has done a very poor job at value creation and generating GAAP earnings.  However, book value per share has gone up dramatically since Chesapeake has been continually selling shares at higher and higher prices.

Perhaps shareholders will realize that they aren’t going to make money and should stop buying stock through secondary offerings (and convertible debt).  However, I don’t think that Chesapeake is a compelling short as the company is not the worst company in the E&P space.

Shorting VIC (ValueInvestorsClub.com), PRXI, PVG

Occasionally, I find myself shorting long ideas that are written up on VIC (ValueInvestorsClub.com).  VIC is an exclusive website where a mix of professional money managers and non-Wall Streeters post investment ideas.  Non-members like myself can sign up for a guest account and see ideas with a 45-day delay.

Here are situations where I have taken the opposite side of their trades.

China Ming Yang (MY) – Another Chinese stock to short

China Ming Yang is a Chinese company listed on the New York Stock Exchange.  Many similar companies have turned out to be frauds or have been taken over by private equity.  I’m not aware of a single fraudster being jailed, though investigators for short sellers have been thrown in jail.  The incentives seem to be perverse and in favour of committing fraud.  So far, the danger in shorting Chinese stocks has been:

1. Private equity takeovers.  Some companies heavily targeted by short sellers (e.g. Muddy Waters) have been taken over by US private equity, causing large losses for the shorts.  e.g. HRBN, FMCN, etc.
2. Liquidity.  In the past, some of these stocks have gone up several times before going to 0.
3. Borrow costs.  As Chinese reverse mergers have been recognized as an area with extreme levels of fraud, short sellers have piled on.
4. Short squeezes.  e.g. CMEDY
5. (If you own put options.)  The stock may be delisted and you may not be able to exercise the puts unless you buy stock on a secondary market.

While I am not going to spent the time going through China Ming Yang’s entire 20-F filing, I believe that it is a compelling short due to the sheer ridiculousness of its related party transactions.

Shares short:  1.01M  (0.8% of shares outstanding, 1.47% of float)
Borrow cost:  Low single digits

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.