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David Zurbuchen
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Metal Augmentor is an investment research and consulting service focused primarily on the commodities markets.
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  • End Of Year Sales Event In Mining Stocks Via Libra Advisors?

    On November 16, 2012 WSJ ran a story about Libra Advisors returning outside investor money by the end of the year as it scales down from hedge fund to "family office": a private entity that manages a wealthy family's investments and personal affairs. By our count Libra's fund recently held $500+ million in resource stocks (mostly mining) including several concentrated positions in the juniors. Liquidation of these positions could create abnormal price action in the shares of the companies involved and potentially provide a trading or investment opportunity for those aware of the situation.

    Unfortunately, we didn't fully become aware of the scenario until last week when a subscriber spoke to us about it, but since 2012 isn't quite over yet we decided it was worthy of further investigation. In the end we haven't come up with any compelling trading ideas other than the possibility of taking advantage of unusual price weakness on the back of any big sell volume involving the higher quality juniors held by Libra. The assumption is that the selling pressure would in fact come from Libra (although it could arise from other sellers including seasonal tax loss selling) and therefore would be short-lived.

    So far, we haven't seen many opportunities emerge from Libra's downsizing but that doesn't mean we shouldn't continue to monitor the situation. Consider the following:

    1. We don't know what % of the fund is being liquidated versus retained in the new private entity.
    2. We'd expect the larger, more liquid holdings such as Microsoft, China Mobile, Newmont, etc. to be closed out before any wholesale liquidation of the juniors.
    3. There are only a few more trading days left in 2012 and presumably Libra isn't waiting until the 11th hour to take care of business.

    That being said, an interesting name or two in Libra's portfolio did grab our attention … we'll look at these in more detail and report our findings to subscribers if there is something compelling that turns up. You're free to put your guess in the comments section as to which companies this might be.

    Despite the absence of any major trading opportunities to date, it is still interesting to look into the details of Libra's holdings. Perhaps there might still be a trading opportunity that will develop or we might discover some new portfolio strategy or other investing insight. Drawing from several sources we created the following interactive data visual that displays all of Libra's mining exposure (in addition to a few oil & gas plays). It should be noted that the fund holds a handful of non-resource names as well, notably Microsoft ($55 million holdings value) and China Mobile ($38 million), which are not shown in the visual below. We also didn't include most of the oil & gas names but other than Gran Tierra Energy ($15 million) and Advantage Oil & Gas ($8 million) none of those left out were significant holdings.

    click to interact

    Although Libra owns mostly juniors, most of the chunkier positions by dollar value are in bigger names like Newmont (NYSE:NEM) and Barrick (NYSE:ABX). That said, if you sort the second column "% Issuer Owned" you'll notice that the ownership stake in many of the juniors is actually significant in many cases. Here's perhaps the most interesting bit: sort the third column "Times Avg Daily Volume" and you'll notice that Libra would have a very hard time liquidating some of these juniors in the open market. This leads to an expectation of share price volatility and may indicate an opportunity to acquire shares in these companies contingent on a Libra "sales event".

    To that end, we've looked at the volume activity in all of the junior names where Libra's selling would have been obvious but surprisingly there isn't much evidence of liquidation much less fire sale. Volume was a bit spiky in October for several of the companies but that could have been unrelated to Libra. More recently we've seen some big volume days in Revett Minerals (NYSEMKT:RVM), Strategic Oil & Gas (TSX-V: SOG), Storm Resources (TSX-V: SRX), and notably Avala Resources (TSX-V: AVZ) where a very dilutive financing at $0.20 w/full warrant at $0.30 was just announced … but otherwise nothing worth mentioning. Perhaps Libra has been trading positions off market or waiting for a better market to liquidate? More likely Libra is trying to sell the most liquid positions first as it tries to achieve its goal of returning outside money by year-end (the fund will continue to manage "family" money).

    It should be noted as well that Libra owns warrants in many of the companies in its portfolio (you can sort based on # warrants held in the above visual and view the exact amount by hovering over individual data bars). This is potentially interesting since on balance we'd expect Libra to be more likely to sell the free trading shares of names where it retains exposure through warrants. Without giving any consideration to warrant terms (e.g. how far in- or out- of the money and time to expiration), warrant positions are significant in the following names:

    • Sandstorm Metals & Energy (TSX-V: SND)
    • Manas Petroleum (OTCQB:MNAP)
    • Southern Silver (TSX-V: SSV)
    • Kilo Goldmines (TSX-V: KGL)
    • Carlisle Goldfields (TSX: CGJ)
    • Suroco Energy (TSX-V: SRN)
    • Golden Share Mining (TSX-V: GSH)
    • GMV Minerals (TSX-V: GMV)
    • RT Minerals (TSX-V: RTM)
    • Shear Diamonds (TSX-V: SRM)
    • Montana Exploration (TSX-V: MTZ)
    • Solvista Gold (TSX-V: SVV)

    In conclusion, Libra's downsizing may not have provided many trading opportunities so far but there is still the chance for last-minute action before 2012 is history. Based on the above analysis, you and we both know where to look now.

    It should be noted that Libra holds one company that we are currently buying for our own portfolios and so we'd obviously be looking to take advantage of any price weakness in that company during the rest of December (whether the result of Libra selling or otherwise). We'd also be willing to entertain a trading opportunity if the price were right in names like Avala Resources (bearing in mind the $0.20 financing), Solvista Gold, Dunav Resources (TSX-V: DNV), Carlisle Goldfields, and Quaterra Resources (QMM) … if for no other reason than they are decent companies with what we consider to be decent projects. And then there's Manas Petroleum, which is already trading for less than the value of its 100 million share position in Petromanas Energy (TSX-V: PMI) … that one could also appeal to deep value investors as well. Last but not least, we're looking into a couple names we haven't examined closely in the past and will let our subscribers know if we find anything interesting.

    Disclaimer: We don't currently own shares in any of the above companies with one exception. We did not receive compensation from any of the companies mentioned. This is not investment advice, which you should seek from a licensed investment professional.

    Dec 19 5:33 PM | Link | Comment!
  • Mining News Review: Week of December 27th

    We update all Mining News Review posts on a daily basis at Click here to join our mailing list or subscribe to our service.

    Silver Wheaton (NYSE/TSX: SLW)

    Silver Mining is for Suckers – December 31, 2010

    Overall this short little article is fine, but Matt Badiali’s simplistic valuation technique as applied to Silver Wheaton is probably best ignored. Indeed, we find it quite ironic that Matt is trying to convince investors to be smart and own Silver Wheaton rather than a sucker and own the typical exploration and development miner, all the while relying on his audience to be suckers or else they would take such amateurish analysis with a large grain of salt. In our opinion, a much more appropriate and robust method of valuing Silver Wheaton would be through through a discounted cash flow analysis of its silver streams as we have done in our recent Royalty Company report.

    Mr. Badiali closes with the following:

    Today, silver sells for nearly $30 per ounce, and Silver Wheaton shares are $39. Our fair-value calculation says at the current silver price, Silver Wheaton should be closer to $57. That means we can buy shares well below fair value right now.

    Good luck to anyone who’s relying on that advice. In our opinion Silver Wheaton is fully valued. We’d be buying if the price were right, but at present the risk/reward equation does not look favorable through our spectacles. [Zurbo]

    International Minerals (TSX: IMZ)
    IMZ Signs Definitive Agreement with Hochschild to Fast Track Production at Inmaculada Property, Peru – December 28, 2010

    This doesn’t change the fact that IMZ’s valuation is still heavily reliant upon its earlier stage development projects in Ecuador, but we found this part of the joint venture agreement with Hochschild particularly interesting:

    If Hochschild fails to achieve the process capacity at Inmaculada by December 2013 (subject to any force majeure delays), then Hochschild must make quarterly prepayments to IMZ during the period of any delay based on the parties’ joint estimate of IMZ’s 40% share of cash flows that would have been generated if production had started on schedule.

    International Minerals did have had to give up 30% of the project for clauses like the above, and at current metal prices we estimate that the cost of this joint venture to IMZ was about $150 million. Not cheap, but it significantly lowers the development risk of the project and generally we think it’s a fair deal. [Zurbo]

    Disclaimer:  We may own shares in several of the companies mentioned in this analysis (Metal Augmentor subscribers know which ones), but no compensation has been received from any of the companies mentioned. This is not investment advice; should you seek investment advice we recommend you discuss the company with a licensed investment advisor or broker.

    Jan 04 1:17 PM | Link | Comment!
  • Mining News Review: Week of December 20th
    We update all Mining News Review posts on a daily basis at Click here to join our mailing list or subscribe to our service.

    Cream Minerals (TSX-V: CMA; Pink Sheets: CRMXF)
    Endeavour Silver (AMEX: EXK; TSX: EDR)

    With all this cash it now seems unlikely that Cream is going to accept Endeavour’s latest attempt to get a piece of Nuevo Milenio through a joint venture agreement. Indeed, we find Endeavour’s latest proposal to be much less attractive for Cream Shareholders compared with the all-share offer which itself has already been rejected. Looking back Endeavour probably shouldn’t have been so greedy early on, but then again it wasn’t as if Endeavour could have known that silver was about to rise 50% between October 2010 and the end of the year when making their initial offer. [Zurbo]

    Amazon Mining (TSX-V: AMZ; Pink Sheets: AMHPF)
    Secretary of Finance Assents Special Tax Treatment for Cerrado Verde Potash Project – December 22, 2010

    More great news for Amazon. The only things we have to be upset about is not buying even more shares when it was flirting with C$1.00 in the summer of 2010.

    What a beautiful chart! [Zurbo]

    Franco-Nevada (TSX: FNV; Pink Sheets: FNNVF)
    Gold Wheaton (TSX: GLW; Pink Sheets: GLWGF)
    Merged Gold Miners to Address Warrant Issue – December 22, 2010

    The possibility that Franco-Nevada might sweeten the pot for Gold Wheaton warrant holders is interesting, and we will factor in for this potentiality in our upcoming Top 10 Warrants report for subscribers of Metal Augmentor. For now here’s an explanation of how to convert the $10 strike Gold Wheaton warrant (something which has led to plenty of confusion among warrant holders):

    One way to look at this situation is to determine the number of warrants that will need to be exercised to receive 1 share of Franco-Nevada. To find this first divide the current 1:1 warrant conversion ratio (i.e. you need 1 Gold Wheaton warrant to receive 1 Gold Wheaton share upon exercise) by the 0.0934 takeover ratio (i.e. number of Franco-Nevada shares received per share of Gold Wheaton held) to arrive at a new warrant conversion ratio of about 10.7 to 1 (i.e you’ll need to exercise 10.7 Gold Wheaton warrants to receive one share of Franco-Nevada). Using this 10.7 warrant conversion ratio we can determine that the Franco-equivalent strike price is $84.80 (i.e. difference between the original $10 strike minus $2.08 cash portion of takeover offer multiplied by the 10.7 warrant conversion ratio).

    To sum things up, here are the new Franco-Equivalent warrant parameters:

    • Strike: $84.80 (adjusted downwards for cash portion of takeover offer that would be received upon exercising the warrant)
    • Warrant Price: $0.28
    • Warrant Conversion Ratio: 10.7 to 1

    And here’s a chart of how the Gold Wheaton warrants have performed over the past few months:

    Interestingly Franco-Nevada currently has 2 warrants of its own, one of which does not expire until June 16, 2017 with an exercise price of $75 (not far from the converted Gold Wheaton warrant). We’ll have more to say in our upcoming Top 10 Warrants report.

    Tanzanian Royalty(AMEX: TRE; TSX: TNX)
    Tanzanian Royalty and Stamico Join Forces to Develop Advanced Stage Buckreef Mine Project
    – December 21, 2010

    This is all fine and well, but we’re talking about a relatively small project with a 30 month development timeline for a company valued at nearly $700 million. It’s not enough to get us interested. [Zurbo]

    Mines Management (AMEX: MGN; TSX: MGT)
    Positive Preliminary Economic Assessment Completed for the Montanore Silver-Copper Project
    – December 22, 2010

    Plugging the results of the PEA into our valuation model gives us a base case value using current metal prices of about $20 per share. So clearly there is plenty of upside in store for shareholders if Montanore can be brought into production. [Zurbo]

    Baja Mining (TSX: BAJ; Pink Sheets: BAJFF)
    Baja Closes Copper Hedging for Boleo Project
    – December 20, 2010

    Generally we’re impressed that Baja is now full funded and moving forward with Boleo. Using current metal prices and accounting for the hedge our model generates a base case valuation target of about $3.40 per share. With that said, Boleo is going to be a relatively complex mining operation so there’s no reason to expect the company to trade at its valuation target with so much left to prove. [Zurbo]

    Disclaimer:  We may own shares in several of the companies mentioned in this analysis (Metal Augmentor subscribers know which ones), but no compensation has been received from any of the companies mentioned. This is not investment advice; should you seek investment advice we recommend you discuss the company with a licensed investment advisor or broker.

    Jan 04 1:15 PM | Link | Comment!
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