Dollar stores and Dollar Tree (DLTR)

Dollar Tree is a quickly growing retailer with a P/E around 18 and revenue growth in the ballpark of 17%/year.  I don’t think it’s that cheap right now but it’s on my radar since it is a quality business with very high returns on capital.

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Senvest Capital (SEC.TO) – good business trading below liquidation value (illiquid)

I found out about this company from Oddball Stocks, which is a great blog with a great writeup on Senvest.  It trades at a ~31% discount to book value.

Valuing mining assets

The big picture is this:

1. Mining projects in the earliest stages of development are the most difficult to value.  As more and more drillholes are sunk into a property, we know more and more about the size and the nature of the deposit.
2. When senior miners invest in a project, they will have (A) access to engineering data and (B) a team of specialized engineers.  Institutional and retail investors virtually never do this level of due diligence.
3. In general, mining assets are very difficult to value precisely or accurately.  Mining professionals will often come to different conclusions about the same property.

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

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.