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.

Aren’t cars supposed to be flying by now?

Flying cars as depicted in this cartoon series from the 60s.

Predicting the future is hard.  Yet many people talk about self-driving cars as if they will become reality in a few years.  Unfortunately, the current reality is that we are far away from commercialization of fully self-driving cars.  Google is the closest, yet its self-driving car technology has some serious limitations:

• It requires an attentive human driver to drive safely.  This largely defeats the point of a self-driving car.
• It doesn’t work if there is heavy snow or rain.
• The car only works in areas with special 3-D maps, which are currently expensive to create.
• The system can’t handle construction zones.
• Because they drive in a non-human manner, the cars get rear-ended more often than human drivers.
• There are other situations where the cars may have problems – left turns without a light and heavy traffic, potholes, pulling aside for emergency vehicles, obeying directions from a police officer, ice on the road surface, cyclists doing a track stand, etc. etc.

I find it interesting that so many people have been sucked into the idea that self-driving cars will be an imminent revolution that will disrupt our lives.  Mostly, there are many people who want to believe that technology will disrupt our lives in a positive way.  There is no differentiation between technologies with major technical obstacles (e.g. artificial intelligence, machine learning) and technologies with few obstacles (e.g. cloud computing, social media, smartphone apps, over-the-top video, etc.).

Exxon Mobil put options

(Unfortunately I did not have the time to fully research this.)

Improvements in shale extraction technology and a glut of capital have basically destroyed oil and natural gas prices.  While Exxon’s management is ok, the company cannot defy commodity prices.  Its upstream assets aren’t worth that much anymore because they’re inherently leveraged to oil prices.  But despite the dramatic decline in oil prices, Exxon’s share price remains high.

The put options are interesting to me since implied volatility is low (20-30%+) and the company is overvalued.  The options are barely more expensive than SPY puts (in terms of implied volatility), except that oil prices fell by half and America’s GDP did not.

A back of the envelope calculation puts Exxon’s private market value at <$129B versus a market cap of $359B.

NRCIB: the business has grown but the share price has stayed the same

(*Disclosure:  Long NRCIB.)

Idea type:  GARP and/or share class arbitrage

Three years ago, I wrote about National Research Corporation, an obscure and illiquid company with a market cap of half a billion.  Since then, the company has continued to grow (around 11-14%/year) while the share price has stayed the same.  According to the 2015 10-K, EPS for class B shares was $2.52 so the GAAP P/E is around 14.  However, due to this company’s unusual structure, GAAP earnings overstate the true P/E.

The arbitrage trade might also be interesting since the spread between the B and A shares should be somewhere around 1:1 to 6:1 or higher (arguably close to 6:1), but is currently 2.16:1.

Amazon: the high-margin online retailer

(This is not an actionable idea.)

From researching dollar stores, one of the things that struck me was that you can purchase a pregnancy test for a dollar.  Amazon’s #1 best seller pregnancy test costs $12.33– a magnitude more expensive than dollar stores.  Amazon is clearly not competing on price!!

By comparison, a more discounting-oriented online retailer like Newegg has razor-thin gross margins of between 8 to 11% (before overhead).  Newegg sells computer parts online.  Its financials are available via the  S-1 filing on EDGAR due to Newegg’s aborted IPO.

Coach’s brand transformation fake-out

Victor Luis, Coach’s CEO, has told investors about his brand transformation plans.  In practice however, many aspects of his brand transformation plan have not panned out.  Coach has succeeded in discouraging its fans from shopping at retail/mainline stores without actually reducing the discounting of the brand.

The Chipotle Mexican Grill way

(This is not an actionable idea or writeup.)

What makes Chipotle different is how small its menu is.  With a barebones menu, the restaurant can turn over its food quickly.  This allows Chipotle to make food before a customer orders, allowing customers get freshly-cooked food without having to wait for that food to cook.  This means high-quality food with a very short wait, making Chipotle an attractive choice for workers on their lunch break (or anybody who wants a quick meal).

Dollarama: The low-tech retailer that could

(This post is long and may not be very interesting to you.  This is not an actionable idea.)

Lately I’ve been trying to learn more about the retail industry.  Two things about Dollarama struck me:

1. Its returns on capital are very high.  My 2013 post on dollar stores put Dollarama’s return on capital at around 57.8%, dramatically better than all of its dollar store peers.
2. Dollarama is a technology backwater.  Dollarama did not fully implement a point-of-sale system until 2011.

Dollarama has higher returns on capital than most other retailers out there, yet it’s not obvious why that is.  My take is that Dollarama is really good at doing three things:

1. Choosing what products to buy.
2. Choosing what prices to sell that product at.  Dollarama buys high-margin items and undercuts its competition on pricing.
3. Cutting out the middlemen.  Dollarama sources a lot of its product directly from manufacturers rather than going through distributors.

Scumbaggery matters, but only up to a point

When researching a stock, sometimes I stop caring about how shady the insiders might be.  The quality of a business usually overpowers insiders’ shadiness.  For example, Steve Madden (SHOO) is an example of terrible corporate governance.  It originally began as a ‘chop stock’ (similar in concept to a pump and dump).  Many of the people behind the scam went to jail or were barred from the securities industry.  Steven Madden, the founder of the company, went to jail.  But even after many people went to jail, the shenanigans continued.  While in jail, Steve Madden was paid a high six-figure salary even though he admits that he didn’t work while in jail.  Despite all of this… the stock did incredibly well since its IPO.  In many cases, the underlying business can make far more money than insiders end up stealing/siphoning/wasting.

Quickly estimating the DCF of oil and gas reserves

From what I can tell, practically all stocks’ oil and gas reserves will have a Net Present Value of roughly 2-7 times the trailing twelve months’ cash flow.  One relevant article is titled: “The Valuation of Oil and Gas Properties: Are They Really Worth 3x Cash Flow?“.  For conventional wells, the 3X rule of thumb should come fairly close to the NPV in most cases.

I use this shortcut to get a quick sense of whether or not an E&P is massively overvalued.  Currently I only short E&Ps and am not seeing any undervalued E&Ps even though these stocks have fallen a lot.