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Vijay Rao  

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  • Tara Minerals: Nearly Worthless Stock Being Promoted [View article]
    1. CME could find iron ore, but it could also spend $1M on the project and decide it’s not worth the money and quit. CME negotiated an option and not a definitive agreement to buy a part of Don Roman. They clearly are not sure the property is worth my calculation above because they could’ve gotten a better deal if they negotiated a guaranteed contract instead of an option. The capital markets are working fine, especially for companies looking for gold, so if TARM is willing to give up 50% of its prized project we can be sure that they couldn’t get either a guaranteed contract or a better deal elsewhere. So bottom line, the expected value is still less than the $14M (includes the 3rd iron ore option) I calculated above, but there is definitely some variance and it can end up being higher or lower.

    2. The company is broke so you are right that it needs to either raise capital or find a partner to develop its properties. Currently, TARM will give up 50% of its assets by having $19M (this is adjusted for TARM’s 87% ownership of Adit and includes the $1M payment made to Adit) spent on its project by partners. Its current market capitalization is over $100M. By issuing shares at current prices, TARM would have to give up less than 20% of its company for the same amount of funding. Why is it giving up 50% of its assets instead? The reason is that the shares are not worth anywhere near where they currently are and someone putting $19M on the line would do enough due diligence to figure that out. To drive this point home, TARM would still be better off issuing shares at a 50% discount to current prices. They would have to dilute themselves by 40% (which is still better than giving up 50%). So I disagree that TARM would be better off finding partners. The math clearly shows capital raising is the better option, even by issuing shares at a 50% discount to the current share price. I think they picked the poorer route because they couldn’t raise the cash by issuing shares because no investor would put down $19M without doing full due diligence.

    3. I do include the $1M that Yamana pays Adit; it is just simplified in the initial equation. Here is the equation rewritten to show the $1M: (Picacho’s current value + $2M in required spending by Adit + $5M of spending by Yamana)*51% = $5M in required spending +$1M payment to Adit. Yamana is a large company, so their involvement is a positive for TARM and in my calculations above, I assume they are correct in investing in Picacho because I use the deal they negotiated as the comp to value Picacho. The risk that Yamana made a good investment should be covered by the fact that I am not valuing the option value of the deal (which should be pretty high given the large standard deviation in outcomes for early stage miners). But even if we ignore the option value and assume Yamana made an amazing deal (something I highly doubt because I am sure Adit shopped this deal around to other potential partners besides Yamana), a 100% increase in the implied Picacho valuation would only add less than $4.1M or $.06 to TARM’s valuation. I see that Yamana owns 0.5M shares out of around 23M outstanding Adit shares—under 2%. Given Adit’s valuation, Yamana’s current ownership is worth less than $0.1M.

    UTOG was definitely a better short. It was easier to understand and the promotions were very aggressive. That is why the SEC halted it and is still looking into the matter. TARM is still an excellent short in my opinion, but the overvaluation and promotions are not as extreme as they were with UTOG.
    Jul 28, 2011. 04:24 PM | Likes Like |Link to Comment
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