Why redo a technical report?

Suppose that a junior and senior mining company have entered into a joint venture for a project.  Suppose that the junior has access to feasibility studies prepared for the senior miner.  NI 43-101 obligates the junior miner to file technical reports.  Management at the junior should be disclosing material information to shareholders anyways so they should be issuing technical reports even without 43-101.

The easiest and cheapest way for the junior to meet its obligations under 43-101 is to re-purpose the technical reports prepared for the senior miner.  However, many technical report authors hired by juniors choose to heavily modify the work given to them.  The technical report prepared for the junior will change the underlying assumptions.  In my opinion, the simplest and best explanation for this behaviour is that the junior is trying to inflate the technical report.  They are likely pressuring the technical report author into manufacturing higher numbers.

This is one of the reasons why I dislike the junior mining world.  Juniors are generally dishonest and extremely difficult to perform due diligence on.

Kobex Minerals (CVE:KXM)

Kobex Minerals is an illiquid $23.75M company that trades for less than cash.  The shares currently trade at around $0.52/$0.54 while the company has around $0.74/share in cash.  The company is currently buying back shares.

New management has taken control of the company.  They are turning the company into an investment company.  The CEO is Philip Du Toit (29 years old) and the Chairman is Paul van Eeden.  I think highly of Paul van Eeden and think that this company is in reasonably good hands.

What I don’t say about short selling

This blog post is an attempt to clarify some things about this blog that may not be obvious.

I’m not a fan of writing about individual short positions.  You may see less of it in the future.  In general, I am trying not to get into conflicts with the wrong people:

• CEOs who sue short sellers.
• Eccentric CEOs who rant about Sith Lords, stalk short sellers, threaten their children, etc.
• Regulators
• The scumbags behind egregious frauds.
• Etc. etc.

I really don’t want to get sued (or worse).  Often when writing about a bad company, I will tone down the rhetoric.  I won’t say that a particular company is clearly a fraud even if it ticks off almost every red flag that a fraud can have (see my post on spotting frauds).

Unusual payments to suppliers

Most stock promoters will have a disclaimer stating how much they were paid and how they were paid.  Typically, they are paid with one or a combination of the following:

• Cash
• Stock
• Stock options, warrants

Normally, the 10-K of the promoted company will mention the phrase “investor relations” or “investor awareness”.  In some cases however, neither of the two phrases will appear.  Instead, the 10-K will mention “consultants” that were paid in stock or stock options.  This is a red flag.  While it is possible that legitimate consultants to a company are willing to take payment in stock or stock options, such a practice is fairly unusual in the business world.

The worst of the worst

Lately, I’ve been generating too many short ideas.  On the short side, I have somewhere around 100-400+ ideas.  Because of this, I need to prioritize and focus on only the best short ideas.

RH: This one might take a while…

Restoration Hardware recently announced the pricing of the convertible debentures that they are selling (here is the press release filed on EDGAR).  Unfortunately, this is a blow to my short thesis.

Chinese companies with poorly executed websites

For whatever reason, some Chinese companies listed on foreign exchanges have bad websites.

For example, Yongye links to a press release put out by ambulance-chasing lawyers targeting Yongye.

Insider ownership is overrated

I’ve seen some people argue that management’s incentives must be aligned with shareholders because insider ownership is high.  I think that this is a dangerous idea.  Insider ownership tends to be fairly high in fraudulent stocks and stocks with bad management teams.  Scams and frauds involving the sale of shares at inflated prices often begin with the perpetrators owning almost all of the stock.

Yongye: Bizarre trading

A week ago, Yongye announced that shareholders approved the going private transaction (8-K filing).  This would suggest that the merger has a higher chance of happening than before the vote.  There is one less possible scenario as to why the going private transaction might fail for a second time.

Strangely enough, the stock is trading down a week later.  I have no idea why this is.  Shareholders may soon be paid $7.10 and the stock was previously trading at $7.08/$7.09.  Perhaps Mr. Market’s mood swings are taking effect or some weaker merger arb players are panicking.  In any case, I am closing a portion of my short position in Yongye.  The $7 Jan 2016 puts previously trading at a bid/ask spread of $0.00/$0.05.  The current spread is $0.30/$0.40.  If you had a time travel machine, you could have made several times your money on these puts (before commissions and rebates).  (*EDIT:  When I talk about time travel, I’m being a little facetious.)

One somewhat similar situation is Fushi Copperweld, covered here on the Bronte Capital blog.  Shortly before the going private transaction closed, somebody panicked and the common shares traded down.  The transaction ultimately closed and the shorts lost money.

*Disclosure:  I own Yongye puts.  No position in the common.

Bad management tends to continue

Some CEOs are bad because they spend way too much time and effort figuring out how to enrich themselves.  Inevitably, they will siphon money from the company from taking an excessive salary, expensing “travel and entertainment” costs to the company, etc. etc.  These CEOs tend to fill the board of directors with their cronies.  What sometimes happens is that the board of directors has interlocking relationships with other boards, CEOs, etc.  All the shady people know each other.  It becomes a network of people giving each other favours and returning them.  What ultimately happens is that the directors and CEOs want to maintain a status quo of insiders profiting from the company.