I don't think I've ever come across a stock like Nautilus Minerals (NUS). This company is proposing to build the world's first underwater mine. The implications of this is beyond enormous to say the least. Most people are probably unaware that the ocean's floors hold an abundance of untapped minerals/metals in what's called SMS deposits These deposits contain primarily copper, zinc and gold with grades far superior to that of the average land based mine. Since the discovery of SMS deposits over 50 years ago, nobody has ever attempted to exploit them until now. NUS believes that thanks to the developments in offshore oil drilling in recent years, we now have the technological capabilities to mine the ocean's floors and they believe they can do it profitably and safely (which is debated of course).
NUS first began exploring for underwater SMS deposits as far back as 1997. They became a public company in 2006 and had identified targets for underwater mining in the Bizmark Sea just off the coast of Papua New Guinea and since then they have been working towards getting all the necessary permits, studies, equipment and partnerships to achieve their vision of mining the seabed for the first time in history. The road to this vision has not been an easy one to travel. There have been serious stumbles along the way which included the financial crisis in 2008 along with a 3 year dispute with their joint venture partner, the PNG government.
In April of 2014, it appears as though NUS hit a major turning point after many years of suffering. They came to an agreement with the PNG government whereby PNG took a 15% stake in their joint venture to mine the Solwara 1 deposit with the option to increase to 30%. As a result of PNG's 15% commitment there is $113M in escrow which will be released to NUS on the condition that they secure the vessel that is required to carry out the project by November. NUS is confident they can do it and in the meantime are in the process of building the equipment and machinery needed to mine the deposit. Once the vessel is secured, mining is expected to begin 2-3 years afterwards. That's still quite some time from today but never has NUS been this close to carrying out what they set on doing 17 years ago. If NUS is successful with their first mine, the sky is the limit. They have explorations licenses for about 500,000 square KM of prime seabed real estate.
This is not just some pump and dump pipe dream stock. These guys are actually in position to make a serious go at this and they have a government partner along with some big name investors behind it. There's no doubt many serious risks and uncertainties with this play including the potential for more stumbles, but for the first time in several years NUS has the wind at their back and have never been in a better position to make their dream a reality. The hype alone could make this stock soar once they are on the verge of production and it could easily turn into a bubble stock as is the case with most "new paradigm" companies. The question I've been asking myself is how much should I commit now given that we are still 2-3 years away before mining begins (assuming things go as planned). I think some sort of a commitment now is warranted. I'm sure a lot of people including big money players are going to take a wait and see approach and only be convinced once they see results but by the time they see what they're looking for the stock will be much, much higher than 0.54. One near term catalyst is when NUS secures the vessel which would unlock the $113M from PNG. That could cause the stock could pop another 20-30 cents easy. At this valuation I think the risk is well worth the potential reward to commit 40-50% of what I have in mind and then take a wait and see approach with the balance over the next year or 2. Of course with this type of play I can't bet big but I think you gotta have a piece of this, even if it's just 500 shares.
Sunday, August 24, 2014
Tuesday, August 19, 2014
Foran Mining
I normally don't look at long shots because I try to avoid gambling when it comes to putting my money on the line. While every investment is a gamble to some degree, when you buy companies that don't have a proven product and are burning through cash, the risk of major or total loss is high. Having said that though, if you buy at the right price and with the right circumstances, it can be worth making a play given the potential reward although you still have to keep such bets small. One such play I believe is Foran Mining (FOM).
FOM is an exploration company located in East Saskatwean that owns a few VMS deposits which contain primarily copper and zinc. VMS stands for Volcanic Massive Sulfide. Pretty interesting stuff. Its flagship project is McIlvenna Bay which has the potential to be a significant copper and zinc mine. Here's the thing about exploration companies on the TSXV - they are a dime a dozen and all of them would seem to have "potential" but the vast majority end up either going bust or diluting their shareholders into infinity which is why I generally avoided these plays, but because of the carnage that has taken place in this space in recent years I have become more open minded as there's gotta be some worthwhile prospects trading on the cheap that were unduly trashed. One of them appears to be FOM which has a rare confluence of positive factors going for them. They have management and significant investors with great reputations and deep pocks. The Chairman is Darren Marcombe who once worked for Newmont Mining. He restructured this company in 2010 and brought in his former colleagues Pierre Lassond and David Harquail as significant investors. He then hired the CEO Patrick Sores who had just come off a success leading a company that got acquired. FOM's flagship property is sizable and appears to have attractive fundamentals, it operates in a safe, mining friendly jurisdiction, has infrastructure already in place (roads, power) and is located 60 km from the mining town of Flin Flon which means there's readily available personnel. There's a mid sized mining company called Hudbay Minerals nearby (which is the founder and vital employer of Flin Flon) which operates 2 mines similar to the one that FOM hopes to be to build. They only have about 7 years worth of ore remaining in their mines surrounding Flin Flon without any worthy prospects (apparently) which means FOM is in a perfect position to be acquired by Hudbay sometime in the future and it wouldn't happen 6-7 years from now either as it would probably take at 2-3 years to permit and build the mine before it's ready for production and Hudbay would almost certainly not wait until the last minute to replenish their inventory which means FOM could be acquired in the not too distant future. The more they can prove their resource is in fact economical the greater the chance they will get acquired by Hudbay or someone else.
They are conducting a Preliminary Economic Assessment a.k.a. Scoping Study which should be complete by year end or early next year. If that checks out, the next step would be a Feasibility Study which I've learned is what you need to have done in order to provide the highest level of confidence/proof to financiers that the resource in question would make for a profitable mine. I spoke to Darren Marcombe at length and based upon his calculations (not the company's) he thinks McIlvenna Bay could have a NPV(8%) of $250M with a capital cost of about $250M. This NPV number is based upon a 24M ton resource which assumes that the current indicated and inferred resources in their most recent 43-101 technical report end up becoming actual reserves. That's a rather aggressive assumption and I'm not sure what other numbers he's plugging in but he knows more than I do and even if he's just half right it would be quite significant given FOM's current $16 M market cap.
Looking into mining companies such as FOM and NSU has forced me to learn new things. Prior to this I had no idea what a Scoping Study was or that you need to be aware of the major difference between a resource and a reserve. Mining is no doubt a tricky and complex business and there's no way I will be able to understand all the details of a report but I can tell you that I know a lot more now than I did just a few weeks ago. I'm getting to know what the important terminology is and the basic rules of thumb. For instance, it usually takes several years i.e.7-10, to go from discovery of a deposit to building a mine. After reading the historical news releases of these companies and others, I can see that there's a lot of ups and downs with the mine development and operation of it even with the successful, profitable companies like NSU. There always seems to be unexpected developments that even geologoist experts couldn't have predicted and things often take longer to develop that you would hope for which is why timing and the price you pay is important. With FOM I may very well be a little early unless base metal prices heat up in the next few months and the "animal spirits" create a rising tide that lifts all boats situation. Either way, I think FOM is worthy of a small bet at 19 cents given the potential catalysts and large payoff.
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FOM is an exploration company located in East Saskatwean that owns a few VMS deposits which contain primarily copper and zinc. VMS stands for Volcanic Massive Sulfide. Pretty interesting stuff. Its flagship project is McIlvenna Bay which has the potential to be a significant copper and zinc mine. Here's the thing about exploration companies on the TSXV - they are a dime a dozen and all of them would seem to have "potential" but the vast majority end up either going bust or diluting their shareholders into infinity which is why I generally avoided these plays, but because of the carnage that has taken place in this space in recent years I have become more open minded as there's gotta be some worthwhile prospects trading on the cheap that were unduly trashed. One of them appears to be FOM which has a rare confluence of positive factors going for them. They have management and significant investors with great reputations and deep pocks. The Chairman is Darren Marcombe who once worked for Newmont Mining. He restructured this company in 2010 and brought in his former colleagues Pierre Lassond and David Harquail as significant investors. He then hired the CEO Patrick Sores who had just come off a success leading a company that got acquired. FOM's flagship property is sizable and appears to have attractive fundamentals, it operates in a safe, mining friendly jurisdiction, has infrastructure already in place (roads, power) and is located 60 km from the mining town of Flin Flon which means there's readily available personnel. There's a mid sized mining company called Hudbay Minerals nearby (which is the founder and vital employer of Flin Flon) which operates 2 mines similar to the one that FOM hopes to be to build. They only have about 7 years worth of ore remaining in their mines surrounding Flin Flon without any worthy prospects (apparently) which means FOM is in a perfect position to be acquired by Hudbay sometime in the future and it wouldn't happen 6-7 years from now either as it would probably take at 2-3 years to permit and build the mine before it's ready for production and Hudbay would almost certainly not wait until the last minute to replenish their inventory which means FOM could be acquired in the not too distant future. The more they can prove their resource is in fact economical the greater the chance they will get acquired by Hudbay or someone else.
They are conducting a Preliminary Economic Assessment a.k.a. Scoping Study which should be complete by year end or early next year. If that checks out, the next step would be a Feasibility Study which I've learned is what you need to have done in order to provide the highest level of confidence/proof to financiers that the resource in question would make for a profitable mine. I spoke to Darren Marcombe at length and based upon his calculations (not the company's) he thinks McIlvenna Bay could have a NPV(8%) of $250M with a capital cost of about $250M. This NPV number is based upon a 24M ton resource which assumes that the current indicated and inferred resources in their most recent 43-101 technical report end up becoming actual reserves. That's a rather aggressive assumption and I'm not sure what other numbers he's plugging in but he knows more than I do and even if he's just half right it would be quite significant given FOM's current $16 M market cap.
Looking into mining companies such as FOM and NSU has forced me to learn new things. Prior to this I had no idea what a Scoping Study was or that you need to be aware of the major difference between a resource and a reserve. Mining is no doubt a tricky and complex business and there's no way I will be able to understand all the details of a report but I can tell you that I know a lot more now than I did just a few weeks ago. I'm getting to know what the important terminology is and the basic rules of thumb. For instance, it usually takes several years i.e.7-10, to go from discovery of a deposit to building a mine. After reading the historical news releases of these companies and others, I can see that there's a lot of ups and downs with the mine development and operation of it even with the successful, profitable companies like NSU. There always seems to be unexpected developments that even geologoist experts couldn't have predicted and things often take longer to develop that you would hope for which is why timing and the price you pay is important. With FOM I may very well be a little early unless base metal prices heat up in the next few months and the "animal spirits" create a rising tide that lifts all boats situation. Either way, I think FOM is worthy of a small bet at 19 cents given the potential catalysts and large payoff.
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Friday, August 15, 2014
Show must go on
Still no word from Greenstar and my disposition towards the situation remains the same. The prolonged silence tells me it's pretty much game over. I've moved on though. I've gone through some of the darkest days in my life and I feel like I'm walking around with a hole in my chest but I'm not going to give up. I will do my best to come back from this and if I fail, I fail. At least I won't fail without a fight.
For the first time in a while I've come across a handful of interesting companies and that has helped me to get my mind off of Greenstar. These names are all in the resource sector and each of them have interesting stories. I think that junior base metal plays in particular are looking interesting here. The sector has been badly trashed from 2011 to 2013 but it looks as though may have found a bottom about a year ago and if that's the case we're still early in the recovery phase making this what I like to call the "sweet spot" whereby you have the wind at your back early in a turnaround situation. Here are a couple of solid cash flow generator stocks with clean balance sheets, attractive valuations and promising growth potential I have started positions on.
Dynacor Gold Mines (DNG)
This little company owns a gold mill and a few exploration properties in Peru. They purchase the ore for their mill from small local miners which account for a lot of the mining activity in the country. The beauty of the business is that they always purchase the ore at a discount to the gold spot price, therefore, it doesn't matter what gold trades at, these guys always make money. Well, that's not entirely true. I've been told by IR that the company would feel the pinch if gold were to drop to $700/oz or so as it would no longer be economical for a lot of the local miners to extract and sell the ore. Also, the discount from spot they get from buying the ore will widen or contract slightly as gold price rise or fall respectively but the bottom line here is that so long as the gold price doesn't tank really big from current levels, the mill is a steady cash flow generating machine. They are planning to double their capacity by constructing a new mill for which they are still awaiting a permit from the government. This expansion will be organically financed given the company's cash position which means no dilution to shareholders and a potential doubling of EPS to about 0.60. The new mill will be scalable giving DNG the ability to increase capacity as much as 6 fold from current levels in the future. I was told it would take about 8-9 months after the permit is issued before the new mill would be constructed and operational. Once they have the new mill operating they will likely start a dividend.
Early this year the government cracked down on illegal mining activity which had a temporary disruptive effect on all mining in the country including the legal operators like DNG and their customers which caused DNG to report a weak Q1 and a delay in receiving their permit. Things appear to be back on track though given Q2 results and the oulook for Q3 and the company hopes to get the permit in 2-3 months. The government crackdown was actually a LT blessing for the company because it resulted in the permanent shutdown of 50% of DNG's competitors!
The company also has what appears to be a promising flagship property in an area called Tumipampa which is the cherry on top. I admit that I am quite clueless when it comes to assessing mining properties but from what I've read, this property could be worth $100 M based on drill results so far but I stress the word could as there's been no preliminary economic assessment conducted (getting a formal, albeit early, rough estimate as to what the property could be worth).
When you take into account the existing fundamentals (which includes the pristine balance sheet), how the company is poised for significant organic growth and the blue sky potential with Tumipampa, you don't need to be a gold bug to like DNG at its current valuation. The main risks to the play is a crash in the gold price and political risks of operating in Peru although it should be noted that the company has been operating in Peru successfully for several years.
Nevsun Resources (NSU)
Here's an interesting mining company that operates in Northern Africa in a small country called Eritrea. These guys are making tons of cash from the one and only mine they operate which is 40% owned by the government. The mine is primarily copper with a cash cost of about $1.05/lb. When you consider that copper current trades at about $3.10/lb you can see that their margins are huge. The stock trades around $4.20 (Canadian) and pays a .04/sh quarterly dividend They have a pristine balance sheet with $360 M or $1.80/sh in cash with no debt. They trade at an EV/EBITDA multiple of about 2.5 which is incredibly cheap. There are some reputable institutional investors like Blackrock who are significant shareholders. So the question one should ask is what's the catch? One factor is the location of where the company operates. Eritrea is not what you would consider a politically safe place to do business, however the company has been operating there for many years without incident. Last year the company was accused of using forced labor to work in their mines but apparently it was one of the company's sub contractors was that guilty of doing this which they were not aware of. That issue seems to have dissipated but it just goes to show you the type of risk that exists when you are in a country like Eritrea. Although Eritrea claims to be democratic, it's a one party state whereby the residing president has been in power since 1993. Here's the thing though. With NSU's massive cash position (held in US banks) and no debt, they are in a position to make a significant acquisition in a more politically stable country which would significantly reduce their operational risk while providing major organic growth. They've been on the hunt for an acquisition for some time to do just that and I think it's a question of when, not if they will make one. From what I can see, next year's copper production is slated to decline about 15% and then drop about 50% from current levels in 2016 which will then be supplemented by zinc production. I've read that the zinc is very high grade but I'm not sure yet what the cash flows will look like and perhaps neither does the market. This uncertainty could also possibly account for the low valuation as well, but that would be short sighted thinking since the company is in such a great position to expand organically and is motivated to do so. The company also has prospects surrounding their existing mine that they are exploring.
When you size up up the risks vs rewards NSU looks very appealing to me. It should be also noted that the day to day movements in the price of copper will impact the stock but with NSU's cash cost only about $1.05/lb they will be cash flow positive no matter what copper does (unless of course it totally collapses).
I'll talk about a few "long shots" in my next post
For the first time in a while I've come across a handful of interesting companies and that has helped me to get my mind off of Greenstar. These names are all in the resource sector and each of them have interesting stories. I think that junior base metal plays in particular are looking interesting here. The sector has been badly trashed from 2011 to 2013 but it looks as though may have found a bottom about a year ago and if that's the case we're still early in the recovery phase making this what I like to call the "sweet spot" whereby you have the wind at your back early in a turnaround situation. Here are a couple of solid cash flow generator stocks with clean balance sheets, attractive valuations and promising growth potential I have started positions on.
Dynacor Gold Mines (DNG)
This little company owns a gold mill and a few exploration properties in Peru. They purchase the ore for their mill from small local miners which account for a lot of the mining activity in the country. The beauty of the business is that they always purchase the ore at a discount to the gold spot price, therefore, it doesn't matter what gold trades at, these guys always make money. Well, that's not entirely true. I've been told by IR that the company would feel the pinch if gold were to drop to $700/oz or so as it would no longer be economical for a lot of the local miners to extract and sell the ore. Also, the discount from spot they get from buying the ore will widen or contract slightly as gold price rise or fall respectively but the bottom line here is that so long as the gold price doesn't tank really big from current levels, the mill is a steady cash flow generating machine. They are planning to double their capacity by constructing a new mill for which they are still awaiting a permit from the government. This expansion will be organically financed given the company's cash position which means no dilution to shareholders and a potential doubling of EPS to about 0.60. The new mill will be scalable giving DNG the ability to increase capacity as much as 6 fold from current levels in the future. I was told it would take about 8-9 months after the permit is issued before the new mill would be constructed and operational. Once they have the new mill operating they will likely start a dividend.
Early this year the government cracked down on illegal mining activity which had a temporary disruptive effect on all mining in the country including the legal operators like DNG and their customers which caused DNG to report a weak Q1 and a delay in receiving their permit. Things appear to be back on track though given Q2 results and the oulook for Q3 and the company hopes to get the permit in 2-3 months. The government crackdown was actually a LT blessing for the company because it resulted in the permanent shutdown of 50% of DNG's competitors!
The company also has what appears to be a promising flagship property in an area called Tumipampa which is the cherry on top. I admit that I am quite clueless when it comes to assessing mining properties but from what I've read, this property could be worth $100 M based on drill results so far but I stress the word could as there's been no preliminary economic assessment conducted (getting a formal, albeit early, rough estimate as to what the property could be worth).
When you take into account the existing fundamentals (which includes the pristine balance sheet), how the company is poised for significant organic growth and the blue sky potential with Tumipampa, you don't need to be a gold bug to like DNG at its current valuation. The main risks to the play is a crash in the gold price and political risks of operating in Peru although it should be noted that the company has been operating in Peru successfully for several years.
Nevsun Resources (NSU)
Here's an interesting mining company that operates in Northern Africa in a small country called Eritrea. These guys are making tons of cash from the one and only mine they operate which is 40% owned by the government. The mine is primarily copper with a cash cost of about $1.05/lb. When you consider that copper current trades at about $3.10/lb you can see that their margins are huge. The stock trades around $4.20 (Canadian) and pays a .04/sh quarterly dividend They have a pristine balance sheet with $360 M or $1.80/sh in cash with no debt. They trade at an EV/EBITDA multiple of about 2.5 which is incredibly cheap. There are some reputable institutional investors like Blackrock who are significant shareholders. So the question one should ask is what's the catch? One factor is the location of where the company operates. Eritrea is not what you would consider a politically safe place to do business, however the company has been operating there for many years without incident. Last year the company was accused of using forced labor to work in their mines but apparently it was one of the company's sub contractors was that guilty of doing this which they were not aware of. That issue seems to have dissipated but it just goes to show you the type of risk that exists when you are in a country like Eritrea. Although Eritrea claims to be democratic, it's a one party state whereby the residing president has been in power since 1993. Here's the thing though. With NSU's massive cash position (held in US banks) and no debt, they are in a position to make a significant acquisition in a more politically stable country which would significantly reduce their operational risk while providing major organic growth. They've been on the hunt for an acquisition for some time to do just that and I think it's a question of when, not if they will make one. From what I can see, next year's copper production is slated to decline about 15% and then drop about 50% from current levels in 2016 which will then be supplemented by zinc production. I've read that the zinc is very high grade but I'm not sure yet what the cash flows will look like and perhaps neither does the market. This uncertainty could also possibly account for the low valuation as well, but that would be short sighted thinking since the company is in such a great position to expand organically and is motivated to do so. The company also has prospects surrounding their existing mine that they are exploring.
When you size up up the risks vs rewards NSU looks very appealing to me. It should be also noted that the day to day movements in the price of copper will impact the stock but with NSU's cash cost only about $1.05/lb they will be cash flow positive no matter what copper does (unless of course it totally collapses).
I'll talk about a few "long shots" in my next post
Sunday, July 27, 2014
I'm ready
There has been no news released by Greenstar for over a month. It has been far too long without an update and at this point I've thrown in the towel in terms of hoping for a positive resolution to this. For what seems to be a straight forward issue to resolve it's taking way too long and with the company being so quiet like this it can only mean there's a major problem of some sort. I've assumed the worse and I'm ready to take a total loss on this. It will be devastating and I don't know if I can ever fully recover but I've done my grieving and accepted it and so there's been no more sleepless nights for me. I'm ready for the worst. I always knew there was the risk of this happening but I just never thought it would happen like this. I suppose a lot of people in my situation will say that. I suspect news will be coming soon as the company can only stay quiet for so long. Whatever they say won't hurt me as I'm already dead.
Tuesday, June 24, 2014
So far so good....
Things seem to be moving forward with Greenstar. They are still not out of the woods but it was a big relief to know that the CFO, who flew over to China, confirmed the story of the CEO and that there's nothing else going on. It was my biggest fear that there was more than meets the eye with this crisis....and there still may be, but such fears have been quelled given recent news. Major hurdles have been cleared. Now that the finance chop has been replaced the audit can be completed and it should be a matter of short time before it gets done and the financials can be filed. Management is targeting the end of the month but don't be alarmed if it ends up taking a little longer. There's a few moving parts for this thing to get done and so the company probably needs a little good fortune for all to go smoothly. One possible remaining concern is the cash in the bank. Was there any funny business going on with the cash while the controller had possession of the finance chop? It's highly unlikely as it requires both the finance and legal rep chop to make transactions. So, the only way the cash was tampered with is if the controller and CEO were conspiring and that too seems quite unlikely. If that was the case, I don't think the CEO would have been cooperating with the board the way he has as well as supporting the company with his own money (the bank accounts are frozen without the finance chop). If he was guilty of wrongdoing I think he would have behaved a lot differently and pulled the plug much like what the CEO at APX did.
If and when the financials are filed, I suspect the company will also have to provide an explanation to the regulators as to how they intend to ensure that a similar crisis will not happen again before trading gets reinstated. As mentioned in a prior news release, the company has plans, but will they be enough to satisfy the regulators? That is another remaining risk but I don't think it's one to be overly concerned about.
As I stated last post, if Greenstar can survive this crisis they could end up being stronger as a result. In completing the audit, they will have satisfied higher standards as per the mandates being enforced by CPAB which I also touched upon in my previous post. They will have identified and corrected a major weakness to their corporate structure and I'm quite sure they will also be examining other potential weaknesses and take a proactive approach to address them as well. They will do everything they can to win back investor trust. However I'm sure some people are not going to look at this way. There will be those who will take a pessimistic view and claim Chinese companies can't be trusted no matter what. There are bitter shareholders out there I'm sure, who will be eager to sell at some point if and when trading resumes. I will not be one of them.
This crisis as serious as it is, did not involve fraud nor has it harmed the company's operations or prospects in a material way. From what I can tell, there have been no major disruptions and the Canadian acquisition is still on the table. People make mistakes. Some mistakes are forgivable others are not; in my opinion this is the former. The CEO Guan appears to be mainly at fault here for letting the situation with the controller get too far out of hand and didn't inform the board until it was too late. I think he learned his lesson here and deserves a second chance. Let's hope he gets one.
If and when the financials are filed, I suspect the company will also have to provide an explanation to the regulators as to how they intend to ensure that a similar crisis will not happen again before trading gets reinstated. As mentioned in a prior news release, the company has plans, but will they be enough to satisfy the regulators? That is another remaining risk but I don't think it's one to be overly concerned about.
As I stated last post, if Greenstar can survive this crisis they could end up being stronger as a result. In completing the audit, they will have satisfied higher standards as per the mandates being enforced by CPAB which I also touched upon in my previous post. They will have identified and corrected a major weakness to their corporate structure and I'm quite sure they will also be examining other potential weaknesses and take a proactive approach to address them as well. They will do everything they can to win back investor trust. However I'm sure some people are not going to look at this way. There will be those who will take a pessimistic view and claim Chinese companies can't be trusted no matter what. There are bitter shareholders out there I'm sure, who will be eager to sell at some point if and when trading resumes. I will not be one of them.
This crisis as serious as it is, did not involve fraud nor has it harmed the company's operations or prospects in a material way. From what I can tell, there have been no major disruptions and the Canadian acquisition is still on the table. People make mistakes. Some mistakes are forgivable others are not; in my opinion this is the former. The CEO Guan appears to be mainly at fault here for letting the situation with the controller get too far out of hand and didn't inform the board until it was too late. I think he learned his lesson here and deserves a second chance. Let's hope he gets one.
Friday, June 6, 2014
Crisis
It's been an absolute nightmare for me since my last post given the events of Greenstar. I didn't want to talk about it until there was sufficient facts. On April 28th Greenstar announced they would not be releasing their year end financials on time because the auditors were not able to complete their audit procedures. It was later revealed that the reason for the delay was corporate governance and admin deficiencies due to an internal dispute between certain members of the company's finance department led by the controller and the CEO. They basically want more money and the controller has took possession of the finance chop a.k.a seal to gain leverage. Without the finance chop the company is unable to access any banking and tax information which is necessary to complete the audit. The CEO is in possession of the more important legal representative chop. He has the ability to replace the finance chop and the company is in the process of doing so. Once that's done, the company could move forward with completing the audit.
Here's my take on this fiasco. First and most important of all, the delay in the audit was never an issue of fraud. I'm quite sure this is what everyone initially feared when this mess first started. This situation clearly exposes the vulnerability of a Chinese company being hijacked by its employees and that is a negative that can have a permanent impact even if the company survives this, however, the company did say that they are taking steps to ensure such a thing is avoided in the future. Well, they better because this situation just gave people another good reason to be skeptical of Chinese companies. This hijacking however is not nearly as serious as what happened with a couple of other Chinese companies like APX whereby it was the founder/CEO who had a falling out with their board of directors in Canada. That would be a disaster as the founder/CEO has the vital chops in his possession and owns a large percentage of shares and it's very difficult for a board to have the CEO and chops replaced. The situation with Greenstar seems fixable given that the CEO is being cooperative with the board and has the ability to replace the finance chop. The rouge controller doesn't have absolute power over the CEO nor does he own shares. The fact that the company expects to have the audit completed by the end of June is also reassuring and suggests the wheels are in motion. As serious as a trade halt by the OSC is, it was standard procedure given that the company was late in both the filing of the year end and q1 financials which were due end of May. They didn't halt because they suspected any wrong doing aside from the absence of the financials.
A key question I'm looking to get answered is why did the finance department want to get paid more? If I had to speculate what the answer is it would be this. I believe Greenstar may have been subject to higher auditing standards this year as per CPAB (the auditor's regulator). CPAB has demanded that auditors use higher verification standards for emerging market companies given Sino Forrest and some other scams in recent years. So if Greenstar was subject to higher auditing standards this year and were caught flat footed, there would suddenly be a lot more work required by the finance/accounting department and more importance attributed to them as well. This would give them the justification or leverage they needed to demand more pay at such a critical time. Again, all of the above is speculation on my part and it's best to keep such at a minimum.
The bottom line for me is that this is a serious situation but it's not as dire as many people on the message boards make is seem. There is the possibility of more negative surprises to come which would lead to a permanent downward spiral but as things stand right now, the issues seem fixable. If the company does survive this ordeal, they will have to deal with the fact that mgmt's competency has suffered huge damage which would take time...a lot of time, to recover from. To restore confidence, mgmt will have to take very strong remedial actions with respect to corporate governance to ensure such a crisis doesn't happen again and do shareholder friendly things like a buyback and/or dividend hike. Such actions would make Greenstar emerge stronger from this crisis which is the potential silver lining to this, but no sense in looking too far ahead at this point. It's do or die for Greenstar and for me these next few weeks.
Here's my take on this fiasco. First and most important of all, the delay in the audit was never an issue of fraud. I'm quite sure this is what everyone initially feared when this mess first started. This situation clearly exposes the vulnerability of a Chinese company being hijacked by its employees and that is a negative that can have a permanent impact even if the company survives this, however, the company did say that they are taking steps to ensure such a thing is avoided in the future. Well, they better because this situation just gave people another good reason to be skeptical of Chinese companies. This hijacking however is not nearly as serious as what happened with a couple of other Chinese companies like APX whereby it was the founder/CEO who had a falling out with their board of directors in Canada. That would be a disaster as the founder/CEO has the vital chops in his possession and owns a large percentage of shares and it's very difficult for a board to have the CEO and chops replaced. The situation with Greenstar seems fixable given that the CEO is being cooperative with the board and has the ability to replace the finance chop. The rouge controller doesn't have absolute power over the CEO nor does he own shares. The fact that the company expects to have the audit completed by the end of June is also reassuring and suggests the wheels are in motion. As serious as a trade halt by the OSC is, it was standard procedure given that the company was late in both the filing of the year end and q1 financials which were due end of May. They didn't halt because they suspected any wrong doing aside from the absence of the financials.
A key question I'm looking to get answered is why did the finance department want to get paid more? If I had to speculate what the answer is it would be this. I believe Greenstar may have been subject to higher auditing standards this year as per CPAB (the auditor's regulator). CPAB has demanded that auditors use higher verification standards for emerging market companies given Sino Forrest and some other scams in recent years. So if Greenstar was subject to higher auditing standards this year and were caught flat footed, there would suddenly be a lot more work required by the finance/accounting department and more importance attributed to them as well. This would give them the justification or leverage they needed to demand more pay at such a critical time. Again, all of the above is speculation on my part and it's best to keep such at a minimum.
The bottom line for me is that this is a serious situation but it's not as dire as many people on the message boards make is seem. There is the possibility of more negative surprises to come which would lead to a permanent downward spiral but as things stand right now, the issues seem fixable. If the company does survive this ordeal, they will have to deal with the fact that mgmt's competency has suffered huge damage which would take time...a lot of time, to recover from. To restore confidence, mgmt will have to take very strong remedial actions with respect to corporate governance to ensure such a crisis doesn't happen again and do shareholder friendly things like a buyback and/or dividend hike. Such actions would make Greenstar emerge stronger from this crisis which is the potential silver lining to this, but no sense in looking too far ahead at this point. It's do or die for Greenstar and for me these next few weeks.
Sunday, April 27, 2014
Out of sight out of mind
First a few market comments. Since my last post we've seen a notable pullback in the NASDAQ and a more modest one for the markets in general. The frothiest sector of the market has been unwinding somewhat as there seems to be a rotation away from the tech high flyers. Anytime the markets pullback 2-3% I continue to see quite a bit of angst out there....people talk as if the market has crated 15-20%. It once again shows the wall of worry psychology that's still out there. This makes the prospect of shorting the market in the hopes of captializing on a correction quite unappealing to me because it's difficult to get downside traction when you see worry rather than complacency on just a minor dip.
If you pull up a 1 year chart, there's 2 ways you can look at the market - you either see a top forming or a consolidation. From the ways things are unfolding, I believe we are seeing the latter although there could very well be a downside "headfake" sometime in the summer to make it look like the former. I think we could see something similar to 1994 or 2004 whereby the market traded sideways for the majority of the year as the market takes a wait and see approach to the withdrawal of fed stimulus. In 1994 and 2004 the fed was hiking rates from low levels. This time around, we got the withdrawal of stimulus via QE. It's dangerous and rather foolish to believe the market will unfold the exact same way it did in some previous time frame but there are a few times where the action does "rhyme" to some degree when circumstances are similar, but the market never plays out the exact same way. I can't tell you how many times I've seen people overlay a current chart with that of some previous time frame claiming how there's a repeat in history taking place and it never turned out.
Switching gears now. In my year end review, I pointed out how one of the things that I needed to stop doing was checking my stocks every day. It's often the case that I would check them multiple times a day as I'm sure most people do. I've learned the hard way how damaging this behavior can be both to your bottom line and mentally. It causes you to become fixated with the ST and may lead you to take inappropriate actions namely, selling in disgust/fear when the price has been sliding for some time or selling too soon after the stock had a good move to the upside when the fundamentals and valuation warrant doing neither (the mistake I tend to make). Given that I make "conviction bets" with a value focus and LT horizon it's pointless to focus on the day to day or even month to month fluctuations in the stock price (unless your target price is hit which you can be informed via a price alert). The only focus should be on fundamental developments. Even if you are able to resist making an inappropriate ST trade; watching the day to day action will put you on an emotional roller coaster with highs and lows that can take quite a toll on you and impact the other parts of your life. Some people handle it better than others but the more you have on the line the more likely you are going to be impacted by the day to day ups and downs.
There have been a few times in recent years where I have suffered mentally because of adverse ST moves that were not fundamentally driven - they were liquidity driven due to a large seller who wanted to liquidate for non-fundamental reasons or perhaps trivial ones. Despite being pretty sure I got the fundamental story right and being fully aware that the microcap space is prone to nonsensical volatility due to liquidity events as I described above; when a significant adverse move happens I still can't help but worry at least a little if someone knows something I don't or I overlooked some important factor. Those nagging worries can easily turn to doubt and paranoia if the stock has a prolonged slide. It will also make me prone to selling too early once the stock does turn around as I don't want to have to go through another agonizing experience again on the next correction. If I had not gone through the emotional roller coasters I'm pretty sure I would not have made many of the premature sales I made over the years.
It's been about 2 weeks since I've gone "cold turkey" by not checking the price of my stocks. I have real time alerts that will notify me when news is released and I will receive a price alert if the stock hits an upside target price so it's not like I'm just sticking my head in the sand here. If there is a fundamental justification to take action I will. It was hard to do this at first and I felt very anxious but now I've been able to just let it go and there's no urge to check. I feel so much more relaxed and clear headed. I'm more productive with my day as well. If you have a similar LT approach to the market I strongly recommend you try this. You must however, not confuse this strategy with being in denial about a bad situation whereby the company you own is in bad shape fundamentally and you don't want to look at the price anymore refusing to sell a loser. A perfect example of this would be Nortel 10 years ago.
This "no look" strategy really makes a lot of sense if you're a LT value investor. As such, you are not interested in what the stock price is unless it hits at least fair value. You view the purchase of a stock the same way you would the purchase of a private business and so if that's the case, would you then check the value of your business the day, week or month after you bought it? Of course not. The only thing you care about is the business itself and how it's running and if it's doing well, you won't be interested in selling it unless you get at least a fair price for it.
As a result of my new-found strategy I will disable comments and will not answer emails (because I will not check for them) at least temporarily.
If you pull up a 1 year chart, there's 2 ways you can look at the market - you either see a top forming or a consolidation. From the ways things are unfolding, I believe we are seeing the latter although there could very well be a downside "headfake" sometime in the summer to make it look like the former. I think we could see something similar to 1994 or 2004 whereby the market traded sideways for the majority of the year as the market takes a wait and see approach to the withdrawal of fed stimulus. In 1994 and 2004 the fed was hiking rates from low levels. This time around, we got the withdrawal of stimulus via QE. It's dangerous and rather foolish to believe the market will unfold the exact same way it did in some previous time frame but there are a few times where the action does "rhyme" to some degree when circumstances are similar, but the market never plays out the exact same way. I can't tell you how many times I've seen people overlay a current chart with that of some previous time frame claiming how there's a repeat in history taking place and it never turned out.
Switching gears now. In my year end review, I pointed out how one of the things that I needed to stop doing was checking my stocks every day. It's often the case that I would check them multiple times a day as I'm sure most people do. I've learned the hard way how damaging this behavior can be both to your bottom line and mentally. It causes you to become fixated with the ST and may lead you to take inappropriate actions namely, selling in disgust/fear when the price has been sliding for some time or selling too soon after the stock had a good move to the upside when the fundamentals and valuation warrant doing neither (the mistake I tend to make). Given that I make "conviction bets" with a value focus and LT horizon it's pointless to focus on the day to day or even month to month fluctuations in the stock price (unless your target price is hit which you can be informed via a price alert). The only focus should be on fundamental developments. Even if you are able to resist making an inappropriate ST trade; watching the day to day action will put you on an emotional roller coaster with highs and lows that can take quite a toll on you and impact the other parts of your life. Some people handle it better than others but the more you have on the line the more likely you are going to be impacted by the day to day ups and downs.
There have been a few times in recent years where I have suffered mentally because of adverse ST moves that were not fundamentally driven - they were liquidity driven due to a large seller who wanted to liquidate for non-fundamental reasons or perhaps trivial ones. Despite being pretty sure I got the fundamental story right and being fully aware that the microcap space is prone to nonsensical volatility due to liquidity events as I described above; when a significant adverse move happens I still can't help but worry at least a little if someone knows something I don't or I overlooked some important factor. Those nagging worries can easily turn to doubt and paranoia if the stock has a prolonged slide. It will also make me prone to selling too early once the stock does turn around as I don't want to have to go through another agonizing experience again on the next correction. If I had not gone through the emotional roller coasters I'm pretty sure I would not have made many of the premature sales I made over the years.
It's been about 2 weeks since I've gone "cold turkey" by not checking the price of my stocks. I have real time alerts that will notify me when news is released and I will receive a price alert if the stock hits an upside target price so it's not like I'm just sticking my head in the sand here. If there is a fundamental justification to take action I will. It was hard to do this at first and I felt very anxious but now I've been able to just let it go and there's no urge to check. I feel so much more relaxed and clear headed. I'm more productive with my day as well. If you have a similar LT approach to the market I strongly recommend you try this. You must however, not confuse this strategy with being in denial about a bad situation whereby the company you own is in bad shape fundamentally and you don't want to look at the price anymore refusing to sell a loser. A perfect example of this would be Nortel 10 years ago.
This "no look" strategy really makes a lot of sense if you're a LT value investor. As such, you are not interested in what the stock price is unless it hits at least fair value. You view the purchase of a stock the same way you would the purchase of a private business and so if that's the case, would you then check the value of your business the day, week or month after you bought it? Of course not. The only thing you care about is the business itself and how it's running and if it's doing well, you won't be interested in selling it unless you get at least a fair price for it.
As a result of my new-found strategy I will disable comments and will not answer emails (because I will not check for them) at least temporarily.
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