Monday, April 30, 2007

Looking At Uranium - What a hedge.

As an investor uranium has made me very uncomfortable. There is no question that there is a huge gap in supply and demand and that uranium mines take longer to get the approval process to build them than other mines, so there should continue to be a gap for some time, but it has all the appearance of a bubble.

So, I've been looking deeper into uranium because the spot is very, very, very high, and any one in a position to take advantage of that spot price is going to make a lot of money. The question is, have investors fairly valued the potential, under valued or over valued it?

So, I've been reading Cameco's management an analysis. Cameco has 513 million pounds of uranium reserves. At that spot price of $113/lb, well that's $58 billion dollars!!! And their market cap is only $17.8 billion US, fully diluted. And heck, they also have 100 million pounds of resource and another 316 million pounds of inferred resource. They also have 3.6 million ounces of gold reserves. And then they have the electrical part of the business.

Actually, the numbers do not excite me. Certainly if they were able to sell their uranium at those prices they would make so much money because the profit margin would be incredible.

But, these are things that I found. Much uranium is bought and sold through long term contracts. In 2006 the cost per kWh for energy produced from nuclear power was 1.66 cents, from coal was 2.28 cents, 6.60 for gas and 9.64 cents from petroleum.

So nuclear energy costs only 1.66c/kWh (average 2006) when spot prices are $49.60 (average 2006), right?

Wrong, time to choke, Cameco's average price was $20.62/lb, about 41% of the actual spot price. The industry tends to make contracts 2-4 years prior to delivery and have those contracts in place for 4-6 years. Cameco has 60% of its uranium hedged. Looking back to just 2003, well that was the first year the average spot price exceeded $11 US, that's the price range for 60% of it uranium. That's only about 90% short of the current spot price...

At $20.62 that 513 million pound uranium reserve is worth about $10.6 billion.

Currently their production volume is about 21 million pounds per year, and they have a fully integrated business in converting the uranium from what's pull from the ground to what nuclear reactors actually use. They actually ended up selling 32 million pounds, but they purchase other uranium concentrate, process it and then sell it. They do not gain from the bull run on uranium for those 11 million pounds.

It seems Cigar Lake had production commitments for 2007. It seems like these contracts at low prices are being extended for 5-7 years.

I didn't find guidance on the price of the hedged uranium, but it seems only an inflation increase is in order.

It sure changes the dynamics of what a stock might be when they are only getting about 10% of the current spot price for 60% of their production.

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Quote of the Day

It is interesting to note that when financial reports show a remarkable increase that is utterly due to unrepeatable events there is little said about what a poor indicator those reports will be of future performance. However, Cameco's president has said it well about how the problems they've had this quarter are a poor indicator of how their company will ultimately perform.

"Since Cameco's quarterly results vary significantly, comparing today's results to a remarkably strong first quarter last year is a poor indicator of future performance," said Jerry Grandey, Cameco's president and CEO."

EPS was 17c this quarter, about half compared to last year. It appears that Mr Grandey is suggesting earnings for the year should be in the $1.25-$1.50 range, but I haven't looked closely enough to really understand what he said with, "We expect our consolidated annual revenue to grow by nearly 50 per cent in 2007."

Cameco is in a position to really take advantage of the uranium bull when they get their flooded mine operational again. Whether that bull has the potential to meet their premium price of $52.58/share right now would require a careful analysis of their operations. Their price has jumped from about $36/share, 46%, last fall when I first looked at Cameco when their mine flooded. That is creation of about $6 billion of market cap. Revenues for Q1 2006 to Q1 2007 fell from $542 million to $409 million. Over a year it works out to about $2 billion in revenue for an $18.4 billion, without dilution, market cap company.

Uranium has definitely moved into bubble valuations for many companies, and many will plummet taking investors life saving with them. Right now it appears there is a lot of future valuation built into Cameco.

It would really require careful analysis to evaluate Cameco's potential. Because they are a producer, they are morely likely to actually make a lot of money on the uranium bull, however, supporting a market cap of $18.4 billion is a pretty tall order. Uranium is different from many other metals in that the approval process to build a new mine takes a lot more time, so it is likely it will take a long time for supply to balance out with demand, giving producers an incredible opportunity to make a lot of money. However, an unsustainable amount of money has poured into uranium stocks.

Tread carefully with this one and do some serious homework. $18.4 billion is a lot of market cap to support. It is likely 2008 earnings will go up as well, but this one is being valued at a P/E of 70 today. Catching up is a tall order.

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Saturday, April 28, 2007

Jones Soda Co, Breaking Down the Growth

When I look at a stock I always look at the fully diluted market cap and the P/E first. As of March 6, 2007 Jones Soda, JSDA, gives 25,667,491 shares, Stock Option 1,424,025 (2006 annual report), for a total 27,091,516. Additionally, it appears they have another 1,930,975 options they can issue. Current price as of Apr 28, 2007 is $23.02. That gives a fully diluted market cap of $623.6 million and if you include the options that can be issued, you get $628 million. I get two different P/E's, depending on which site I look at, 124 on Yahoo, and 99 on The Motley Fool Caps, neither of which looks good.

What do I calculate as a fully diluted P/E based on the 2006 income of $4.574 million and the fully diluted market cap? $623.6/$4.574 = 136.

If I use the 19c eps with the $23.02 price, I get a P/E of 121. If divide the 19c into the $4.574 million of earnings I get 24 million shares, so clearly the P/E of 121 is a understatement. I get a P/E more than 12% greater.

It is absurd to truncate eps calculations when they are mere pennies as from 18c to 19c is 5.6% difference in earnings. At 5c to 6c, you get 20% difference in earning. They ought to have 3 significant figures.

There is no question there is an awesome growth story here in terms of the business, but at the same time, from December 2000 with a share price of 41c to $23.02 today is 5,500% growth in share price, and because of increased shares, the growth in the market cap would be 7600%, yet revenue in 2000 was $19 million and in 2006 it was $39 million, only double.

What is striking about Jones Soda is that eps went from 6c/share to 19c/share, a stellar 217% improvement considering revenue only increased by 16.5%.

Where did the growth come from?

Breaking down Jones Soda's growth numbers show that actual sales revenue went up 16.5%, yet their cost of goods only went up 8.3%. This change enabled them to increase their gross margin by 30%, from $12.3 million to $16 million.

Thirty percent growth in gross margin is great, but, keep in mind that $16 million is only 2.5% of the market cap. They still have to pay promotion, selling, general and administrative expenses from this.

The promotion and selling expenses increased by 10.6%, and as an expense that accounts for more than half the gross margin, keeping this expense down relative to the gross margin is very good. The one place where they did not do so well is the general and administrative expenses which increased by 42%. Combined these expenses actually went up 20%, which exceeds the increase in sales revenue, but, because the margin was up 30%, it further leverage earnings.

The licensing part of gross margin declined by 6%. Overall the licensing revenue accounted for 2.67c/share of the income.

Earning before interest and taxes increased by a whopping 111%. This kind of number sounds great, but it means that earnings increased from $1.3 million to $2.7 million, or from 2/10ths of one percent of the market cap to 4/10th of one percent of the market cap. This is so far behind the rate of inflation, it is effectively a negative earning rate. It makes up for about 11 of the 19c eps, or 60% of the eps, before taxes.

What made up the other 40% of the EPS?

Taking a closer look at the earning for the year you find that the revenue was way more consistent than the earnings:

2006 Q1 Q2 Q3 Q4TOTAL
Revenue 8,760,380 10,025,978 10,200,843 10,047,92539,035,125
Earnings 2,542 2,313,795 194,774 2,063,3284,574,439
EPS $0.00 $0.10 $0.01 $0.08$0.19
Using 3 s.f. $0.000123 $0.0964 $0.00741 $0.0787 $0.183

What has happened in Q2 is a deferred income tax credit of $1,482,934, or $0.0618 per share, fully 34% of the earnings. This had come from a new equity issue, which leads to another significant portion of the earnings, interest!

The company issued new equity, and much of that was invested and has given interest income. Fully, 20% of the earnings is from interest, or $0.0371 per share.

Together the interest and the deferred taxes make up 52.4% of the earnings.

The are separate adjustment where taxes are paid and the deferred taxes are reduced, leaving $1,144,491 still outstanding, or $0.0465/share.

What would the growth look like without the equity offering?

Without the equity offering there would not be this enormous increase in interest. Based on Q1, there might have $50k of interest income for the year. There would also not be the enormous deferred tax item, and the eps would be less than the 11c eps without taxes calculated above.

I have no idea what taxes would be without the interest income and and with the increased earnings. Taxes paid were $50k in 2005. There is $150k payable liability on the 2006 balance sheet. It would be fair to expect earning to be $100k less due to taxes if the equity offering had not happened, or eps of about $0.10, or a 69% increase, still stellar, but about 1/3rd of the 217% growth.

The earnings per share from actual operations is about 4/10ths of one percent of the market cap. They rest is from a tax thing that can not be repeated, and interest.

The interest component is especially interesting to think about. They have gotten $28,113,000 from an equity offering which has enabled them to earn about $900,000 in interest, or perhaps 5-6%. Investors in the stock then essentially buy these earnings in the form of at a P/E of 136, or 0.7% eps or they are paying a 1200% premium for these earnings.

I repeat, Jones Soda made about $900k of interest, and investors have created $900*136 = $122 million of market cap for it!

Alternatively, say the allocation of market cap to the interest is at 6%, or $15 million of market cap. The deferred tax thing is not worth any market cap, so that leaves about $610 million of market cap for the $2.6 million of business earnings. It gives a P/E of 235. They need to increase the real earnings of the business at least 10-fold to catch up with the market cap.

What is the company doing with all that equity?

It appears that they are preparing to expand directly into business rather than using their licensing option. There agreement with Target ended December 31, 2006, and with it goes some of that licensing revenue. They need to build replacement business for that revenue, and they have raised enough equity to expect to do that.

It took them about 6 years to double their revenue, excluding licensing. This stock is going to crash.

Attention getters for me:

As of December 31, 2006 we had 67 full-time employees.

Ok, so a lot of the business is through distribution, etc., but $623 million of market cap for 67 employees? To me it simply points to the degree to which the business is over valued. That's about $9 million of market cap per employee. It just gets my attention.

Net income for 2005 was $1,285,000 compared to net income of #1,330,000 for 2004. The decrease ... was primarily due to an increase in income tax expense (tax espense increased by 37k) and a smaller contribution from other income (interest income declined by 25k).

These same items are going to murder earnings in the future and if you've understood this post, you'll understand why.

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Monday, April 23, 2007

The CopperCorp Disaster (GoldCorp)

"How come Goldcorp is underperforming," I read over and over.

Tear into the fundamentals and the changing business dynamics and it isn't hard to figure out. My first post on the over valuation of Goldcorp pointed out many of the reasons why Goldcorp would not perform well.

It is time to update.

Prior to the merger with Glamis most of the earnings were from copper.

The cost of production changed from -$73/oz in Q4 2005 to $160/oz in Q4 2006. That's an enormous increase of $233/oz in production costs.

The eps for Q4 2006 compared to Q4 2005 is 11c compared to 30c, a whopping 63% decline. People should be grateful that the price has held at all. In Q2 2006 Goldcorp had 50c eps. Some of that reduced earnings is from a three-fold hit on copper:

  • A 20% royalty kicking in.
  • A 20% reduction in production.
  • A 30% reduction in copper price.
There will be some recovery for the copper hit for Q1 2007 as they work out their copper production problems and copper prices recover. But, there is still a 20% royalty. To appreciate the effect of the negative leverage of copper, coupled with the reduced production and price, for Northern Orion from Q2 to Q4 eps when from 22c to 6c, a 73% decline. Gold corp has gone from 50c in Q2 2006 to 11c in Q4, a 78% decline. Part of this decline is from copper, but a big part is also from the Glamis merger.

The Glamis Effect on Earnings

The gross effect of the Glamis merger on earnings was not discussed in my previous post, only that it had been expensive.

Prior to the merger, and the restated eps, Goldcorp's eps was 89c for the first 9 months, but Glamis was only 44c. This was made much worse in that Goldcorp issues 1.69 shares for each of these dog Glamis shares. 44/1.69 gives a weighted average of only 26c eps. 284 million of these dog shares were added.

To just appreciate the affect of adding these shares consider the scenario that Goldcorp been able to continue at the same rate of performance, without the Glamis merger, you would have expected about $1.19 eps for 2007 (4/3*$.89). Using the same extrapolation for Glamis, you would have expected 35c eps for the diluted Glamis shares. If you do weighted average of the 418 million Goldcorp shares with the estimated $1.19 eps with the 284 Glamis shares that had the estimated 35c eps, the combined earning potential is 67c eps.

Never mind the copper hit, assuming all things remained the same, the Glamis merger reduced the possibility of earnings by 44% due to the vast difference in earnings at the time of the merger and the gross level of share dilution to acquire Glamis.

Goldcorp debases math

When I looked at their reporting of 2006 results, imho, how they reported the earnings should be against the law. It certainly violates every math concept I know, and I teach math. You have no idea how much I use this kind of debasing of math in the class room. I find that it get kids attention that they should appreciate math like nothing else I've ever used.

As far as I can tell what has been done is legal, but I can make an argument that earnings reports should correct for mergers and dilutions to reflect the effect on earnings of the dilution or merger. It is utterly nonsensical to add numbers together with different parameters as is done is earnings reports.

To show the point, here are is what Goldcorp has reported.

eps# of shares diluted
# of shares
Q1 2006$0.27340,961,000$0.24383,180,000
Q2 2006$0.50381,274,000 $0.49386,951,000
Q3 2006$0.14418,180,000$0.14422,345,000
Q4 2006$0.11597,706,000$0.11603,429,000
Dec 31,


Net earnings were $408.3 million for the full year. If you divide the net earnings by the actual number of shares December 31, 2006, you get 408.3/703.5= $0.58 eps. Goldcorp reports 62% higher eps than if you take what the company actually earned and divide it by the real number of shares.

Above I did a weighted average between what Glamis' earnings had been and Goldcorp's to get 67c eps. The $408.3 million is only Goldcorp's earnings. Glamis had earnings prior to the merger and a proper way to do weighted averaging is to add those earnings to Goldcorp's earnings and then divide by the true number of shares. That gives 67c.

If you just look at Q4, the net earnings were $65.9 million, which if you divide by the 703.5 million shares give you 9c eps, not 11c. This result is overstated by 18% because there is over a month that the 284 million dog shares from Glamis are not included in the share count.

In this example the difference between what is truth when sound mathematical principles are applied and what is reported because of simply adding numbers with grossly different parameter is beyond comprehension, grossly misleading to investors and ought to be illegal.

And to make matters worse for Goldcorp investors, as of March 8, 2007 Goldcorp has 707.7 million shares, 15.1 million stock options (average exercise price $19.16) and 8.4 million warrants (exercise price $45.75), for a fully diluted count of 731 million.

Mines are depleting assets, and as such, it isn't wise to purchase mining stocks with a P/E of over 12 unless they have a stellar growth profile. If you buy into the fiscally insane idea that a gold stock should trade at a P/E multiple of 25, at the very least, it should be calculated on true earning potential. Goldcorp's earning potential is in the 67c/share range, and using that it is currently trading at an adjusted P/E of 43.

And, using the weighted average eps of 67c, it gives a share price of $16.75.

A future post will go over more problems with the Glamis merger and tear apart an analyst's valuation report. The analyst's report has set a price of 2x the NAV, which is like me saying my home is worth 2x the assessed value. The target price based on 2x the NAV was $36. But hey, I will sell you my home for 2x the assessed value. I'll even throw in my car.

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Friday, April 20, 2007

Hudbay vs Blue Note, experience vs new

Hudbay Minerals is Canada's third largest producer of copper and zinc and also produces some silver and gold. They are highly integrated in that they own a copper smelter, a zinc plant and they convert some of their zinc to zinc oxide. Their product is marketed by Considar Metal Marketing, of which they own 50%. Being fully integrated gives them autonomy over the entire process.

Fully diluted warrants and stock options they have 129,284,210 shares, and at today's closing price of $20.77, it gives them a fully diluted market cap of $2.69 billion. Hudbay has a history of successful mining production, and their financial reports fully breakdown their costs and production.

By contrast, Blue Note is a small soon to be producing mine acquired from Breakwater when zinc price was down. Breakwater had spent $100 million on infrastructure and shut down in 1998 due to zinc prices and recovery rates. Blue Note has refurbished with mining technology developed since then. Their mine is scheduled for start-up in June/July and their unproven production plan relative to their market cap is stellar, but as a start-up it is still unproven.

Blue Note has 312,930,175 shares and Breakwater has the option to convert a $15 million debenture into 41.7 million shares, or 20% of the Cariboo and Restigouche mines. Additionally a $30 million debt offering adds an additional 4.5 million shares. For comparison purposes, it works out to about 360 million shares fully diluted. At today's close of 46c, the fully diluted market cap is about $166 million.

The market currently values Hudbay at about 16 times that of Blue Note.

Mining Production to Concentrate

Hudbay has 4 producing mines and with one increase production this year. The totals are from the financial reports but the reports do not specifically break down production by mine, so the estimates are mine based on given recovery and production rates given. They give a general picture of production.

Zinc (lbs) Copper (lbs) Silver (oz) Gold (oz)End of Mine
*$ (millions)
Mine 777 120,000,000 84,000,000 725,000 75,0002017
Trout Lake 57,000,000 40,000,000 236,000 24,000 2009
Chisel North 51,000,000

Balmat* 20,000,000

$30+$75 +$82
Total 250,000,000 125,000,000 963,000 96,000
Market Value* (millions)$375 + $75*$425$12$65Total
*Production to about 70 million pounds for 2007 and 125 million pounds for 2008.
*Prices I used are $1.50 zinc, $3.40 copper, $13.50 silver, $680 gold, and $0.85 lead.

Additionally, Hudbay buys other concentrates that they process through their smelter and zinc plants, further producing from concentrate about 70 million pounds of copper, 10 million pounds of zinc, 2,000 oz of gold and 380,000 oz of silver.

What they mine and what they produce from concentrate needs to be evaluated separately.

Blue Note has one mine set to start producing this year. Their first full year production plan is:

Zinc (lbs) Lead (lbs) Copper (lbs) Silver (oz)End of Mine
Cariboo 104,000,000 57,000,000 1,300,000 1,300,0002011
Market Value* (millions)$156$48$4$18Total

Contrasting mining production only, Hudbay has 4.2 times the gross revenue potential from mining production.

In both companies the end of mine life is of concern for future income. Trout Lake has 3 years of operations left which is 20-25% of production. Whether there is opportunity to extend this LOM was unclear reading the reports. Their next mining project will not be a growth project but will be a replacement project.

Hudbay has significant exploration potential around their 777 mine. According to a 2004 technical report, "on average, mining reserves have increased 2.5 times over the initial resource and reserves estimate." Trout Lake has had 10-fold increase in estimates over its mine life, but whether there is more potential to extend the mine life at this point is not clear. Their Flin Flon/Snow Lake area also has exploration potential.

Blue Note's current plan is a 5 year LOM plan. Their mining plan goes to depth of 300 meters and they have some drill results to indicate that they will be able to continue their mine to 900 meters giving their mine a life of up to 14 years. This is a significant exploration potential.

Mining Production from Concentrate

Blue Note does not have facilities to smelt or refine their concentrate.

Hudbay has more refining and smelting capacity from concentrate then they get from their own mines. They purchase additional concentrate to utilize their capacity. This part of the business gives them some income stability from declining mine production in that when a mine stops producing they can continue this income stream by switching to purchasing more concentrate.

Financial reports have to be evaluation to determine how this part of the business adds to revenues.

Looking at Financial Reports

Blue Note does not have an earning history to look at and evaluate. It is a speculative stock based on its new mine production. The pre-tax earning potential according to their reports for 2007 is $25 million and that is with zinc priced at $1.44, lead at $0.52, silver at $12.50 and copper at $2.80, and that is based on 2007 projected production of 68 million pounds of zinc, 35 million pounds of lead, 0.8 million pounds of copper and 0.85 million ounces of silver. Current commodity prices suggest they will exceed this projection if they meet their production goals.

Hudbay had a record year for earnings and revenues. Revenues were $1.13 billion. What is highly confusing, and perhaps misleading, is how they came up with earnings of $5.32/share for 2006.

On page 28 of the Management and Analysis is the following table for 2006 (my totals):

Q4 Q3 Q2 Q1Total
Revenue 313,110 346,203 261,727 207,9631,129,003
Earnings before taxes 134,636 151,582 94,590 61,643 442,451
Net Earnings 165,788 169,381 152,836 75,986563,991
Basic EPS 1.32 1.37 1.71 .895.29
Diluted EPS 1.29 1.33 1.30 0.70 4.62

  1. A minor problem is that their Key Financial results on page 5 of the report say $5.32 and $4.69 whereas when I add the quarters I get $5.29 and $4.62.

  2. A big problem that I see is when you look at the difference between the basic and diluted EPS you see that for Q3 and Q4 the difference between the two values is about 2-3%. However, if you look at Q2 the difference between the two is 51c, and .51/1.30*100% is 39%, and for Q1 the difference is 27%. Without looking further, this tells me there was dilution and the true earning potential is overstated in the financial reports because of the dilution.

    They are doing this calculation using the net earnings divided by the number of shares at the time. If you redo this calculation using the today's diluted share count you get 564/129 for $4.37 eps based on today's fully diluted market cap. This is 93% of their diluted eps of $4.69 that they reported, and 82% of the undiluted $5.32 eps being promoted.

  3. An even larger problem that I see is that is that earnings before taxes is less than earnings after taxes. Once you pay taxes earnings are supposed to go down, but somehow their earnings go up, very significantly. I saw this problem as so significant when reviewing the financial reports, I immediately checked insider activity.

    Upon a closer look at the financial reports I found that they had put $125 million of future tax into earnings and it says that as this is "drawn down, ... it will be reflected as a mining tax expense."

    When I take their earnings before taxes and divide it by the 129 million fully diluted shares I get $3.43 eps, which is 64% of the $5.32 eps, or more than 1/3rd less. It is an earning rate of 16.5% of the current share price, without paying taxes.

    I am not an expert, but I read the "reflected as a mining expense," as not a good thing. I read this as meaning that not only will future years bear their tax burden, but they will have this extra expense of writing off this future tax asset.

    I do not profess to understand how this future tax thing works, but from what I've seen in other financial reports in other industries is that it seems to result in highly overstated earnings in earlier years at the expense of plummeting earnings in later years.

    And my look at insiders going back to July of last year, they appear to have significantly reduced their positions. Anderson has taken a gain of about $185,000 from options, Axworthy about $252,000 from options (he still has about 6,000 shares), Deitrich sold 3,300 of 10,000 shares at $23.37, Gordon took a gain of about $2.2 million from options, Hair took a gain of about $950,000 from options, Jones took about $4-5 million from options, Palmiere sold options for a gain of about $525,000, Rood took a gain of about $300,000 from options, Swinoga took about $970,000 from options. Lawler is the only director that is holding significantly in the company, with 193,000 shares.
The average prices received for product for 2006 for Hudbay was $1.53/lb for zinc, $3.15/lb for copper, $603 for gold and $11.13 for silver. They are most price sensitive to zinc and copper.

I haven't studied how the money flows through smelting and refining companies. As commodity prices go up, what they pay for concentrate goes up, and the same is true for when commodity prices decline. This means that earnings from this part of Hudbay's business should remain relatively constant and is not subjected to the speculative risk of starting new mines, doing exploration for new deposits, etc.

A quick look at this part of the business is that it looks like it made up for about $250-300 million of the overall revenue. Operating expenses increased by about $120 million from 2005 to 2006, or 25%. If you examine the individual cost of operations you see far smaller price increases of 2-10% in the operating expenses. The biggest hit for the operating costs is in the smelting and refining part of the business because of buying the concentrate. A 2004 report breaking down the employment numbers shows that 558 were directly employed at mines and concentrators and 485 at smelter and zinc plant. So the mining part of the business is bringing in 75-80% of the revenue with about 54% of the workers directly employed in those operations.

The financial reports state what they averaged for final product, but they do not actually say what the average cost was for the concentrate they purchased.

The bottom line to me is that the 70 million pounds of copper, 10 million pounds of zinc, 2,000 oz of gold and 380,000 oz of silver produced from concentrate simply does not contribute to earnings the way that production from mining operations do.

My look at the two companies suggests to me that Blue Note has significant potential to outperform Hudbay. The risk with Blue Note is how successful they are in getting their new mine started. I see the handling of taxes and the loss of production from Trout Lake as the risks with Hudbay. I personally do not see how Hudbay can increase earnings this year over last year despite increased production because of Balmat and potentially higher commodity prices because of the $125 million added to earnings last year from future tax benefits. But I don't profess to be an expert, that's just my take on it.

Read More......

Thursday, April 12, 2007

What's Up with Zinc?

I like Blue Note. It is a near term producer starting up in the next month or two.

The production plan for the Cariboo Mine is:

(x'000)200720082009 20102011Total
Zinc68,105 104,467107,748107,03988,816476,175
Lead34,94657,47146,571 44,70839,804223,501
Copper 8051,2631,9051,9451,699 7,616
Silver8471,3171,055 1,0148865,119

Blue Note is ready to cash in on high zinc prices now, and it looks like their timing couldn't be better.

What's up with Zinc?

The charts below are the 24 hour spot price, the 5-year LME zinc price and the 5-year warehouse stores.

What caught my interest was the large Chinese imports of Zinc in 2005 when zinc was very cheap and then when zinc was peaking in price in Dec 06-Jan 07 the Chinese exports take off, and their large increase in exports brought the price of zinc down from its peak.

[Most Recent Quotes from]

[Most Recent Quotes from]

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Meanwhile, there was a Shanghai exchange opened to trade zinc in March.

What's happening with the Shanghai Exchange?
On March 25th the Shanghai price for zinc was 28,510 yuan, which works out to $1.6765 US, but the LME price was just under $1.45, or almost 16% higher.

An April 5th article in the Chinadaily reports that zinc prices are around 28-30,000 yuan and that China's demand will rise about 10%.

An April 9th Bloomberg article states "Shanghai zinc for July delivery rose for a fourth day, advancing 990 yuan, or 3.2 percent, to settle at 31,950 yuan a ton. It rose by the maximum 4 percent from the morning session." That's about $1.88/lb, and about 19% more than today's LME price.

An April 10th story on Etrade said Shanghai zinc ended at 32,745, which at today's exchange of 7.7257 works out to $1.93 US/lb zinc, or about 21% more than the current 1.59/lb.

Zinc is looking good to me.

Read More......

Monday, April 09, 2007

Imperial Metals - The Right Hedge

Imperial Metals is a primarily copper mining company with other metal by-products. Like Quadra, in 2006 they hedged their copper, only Imperial hedged the right way, protecting earning and minimizing losses.

The company did have derivative losses from hedging, about $27 million for 2006, relative to production, that's about 1/5th the loss that Quadra had. In one hedge they protected themselves from copper going below $1.80, but participated in price increases to $2.60. Later they had a hedge that had protection from going below $2.90/lb, but price participation up to $3.68/lb, and another hedge had price protection for $2.50/lb and price participation to $3.06/lb. Sure the hedge cost them money, but this is the right way to hedge, keeping 75-80% of the gain. Quadra hedged at $1.60.

The change in their financial position from 2005 to 2006 is stellar, short term assets up $27 million, all assets up $78 million and none of those fiat intangible assets like "Goodwill" listed on their balance sheet. Additionally, their liabilities are down by $21 million for a total change in financial postion of $99 million. Not bad for a company with a fully diluted market cap of $433 million. Earnings per share for 2006 was $2.69, or 22% of today's earlier share price of $12.12.

Imperial currently has two sources of income, their Mount Polley mine which provided net revenue sales of $210 million for 2006 and their equity income from their share in the Huckleberry mine, which provided them with $34 million. Guidance for 2007 is 98 million lbs copper, 58,800 oz gold, 596,000 oz silver, and 210,000 lbs molybdenum. And again they have hedge for 2007, 3/4rd of their copper is hedged to between $2.97 and $3.47/lb.

The company recently purchased bcMetals for $68 million, from cash and a $40 million loan. According to Management Discussion and Analysis:

The Red Chris project has received Federal and Provincial environomental approvals for mine development. A bcMetals feasibility study on the Red Chris property indicates a 25 year mine life at 30,000 tons per day with reserves of 276 million tonnes grading 0.349% copper and 0.266 g/t gold.

Working through the numbers, 276 million tonnes of 0.349% copper is a contained resource of 2.1 billion pounds of copper, which they bought for a take-over price of about 1/3 of a penny per pound, making the gold free. That price is well under the 1c/lb of copper resource guideline of my previous post.

The production rate indicates 84 million pounds of copper/year and 94,000 oz of gold. With recovery rates taken into consideration it would be more in the range of 75 million pounds of copper and 50,000 oz gold (my rough estimate).

Other exploration holding include their Bear property which has molybdenum and copper. The best drill results were 296 meters of 0.059 molybdenum and 0.27% copper. Some pure moly plays for open pit have just 0.06 molybdenum.

Their Sterling property is gold and so far has defined a resource of 46,000 ounces of gold with 7.41 g/t. There are more exploration opportunities on this property.

Their Nak property has rich chalcopyrite veins which grab samples returned grades as high as 5.11% copper and has drill results with 0.1 to 1.1% copper.

Their Giant Copper property, located 220 km east of Vancouver, had a 1989 feasibility study that calculated a reserve of 3.7 million tonnes of 1.08% copper, 0.47 g/t gold, 19.18 g/t silver and 0.01 molybdenum. These results are before NI43-101, so they are not compliant.

Their Porcher Island property is also a gold property with before NI43-101 estimated mining reserve of 623,000 tonnes of 6.9 g/t gold.

By doing the hedge the right way Imperial Metals is in a very, very strong position for 2007 earnings. They will be able to pay off debt and be in a strong financial position to further develop and explore their properties.

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Earth for Sale

Check out the bullboards and complaints about undervaluation of a stock because of the reserve or resource abounds. I've found the metal values in the ground staggering at times myself.

So, just what is the value of the metals in say the top 1 km of the Earth's crust?
Well, copper makes up about 0.00007% of the Earth's crust, which is 40 km thick and that is about 2.6% of the mass of the Earth, and the mass of the Earth is 6 x 10^24 kilograms. Convert that to copper and you get 6 quadrillion pounds, which at today's prices is $18 quadrillion dollars. In case you'd never hear of a quadrillion, its 1000 time bigger than a trillion, so $18 quadrillion is 18,000 times bigger than a trillion. It's 2000 times bigger than the US federal debt. It's $300,000 for every man, woman and child on Earth.
So, then I looked at Uranium. It makes up about 4 parts per million of the Earth's crust, so there is about 32 quadrillion pounds. At $100 per pound it comes to $3.2 quintillion, that's 32 with 17 more zeros or about 350,000 times more than the US debt, or about $50 million for every man, woman and child.

Then there's gold, silver, zinc, lead, platinum, rhodium, palladium, cobalt, nickel, etc., all worth outrageous amounts of money at today's prices.
Truly, the only metal worth those prices is the metal being sold today that those prices.
So, how do you value that which is in the ground?
There was a small item in a paper I was reading that said the industry standard for buying a copper resource property is about a 1c per pound for the resource, and copper resource cut-off is 0.2% or roughly 4.4 lbs per ton. This means anything under 0.2% you can essentially assign zero value unless it is producing or a by-product.
In that light the valuation of a property becomes a lot different. For copper, that's about 1/300th of the value you hear on the bullboards.
Consider that mining a property requires acquisition costs; exploration costs; capital costs; production costs; operating costs; taxes, etc. The acquisition costs have the longest carrying time and can take a long time to recover the investment.
So, that's where you start and then you add or subtract depending on the answer to the following questions:
  • How good is the quality of the grade?
  • What's the likelihood that the management team will actually turn the resource in a mine?
  • What is the access to infrastructure?
  • What's the length of time to actually build a mine?
  • What will the labour costs be like?
Certainly those who are mostly likely to make real money are current producers and near term producers, and then it just makes so much more sense to value the company based on production.

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Saturday, April 07, 2007

A New Breed of Dividend Paying Companies?

Historical analysis is clear, very clear, and very strong. Dividend paying companies recovered faster and overall suffered far less losses through stock market "corrections."

Some of the reasons for this are pretty clear to me. In general, an investor searching for a dividend paying company is looking for the best rate of return in the form of a dividend. It precludes many investors from ever buying into a company with bubble P/E valuations.

In general, to pay say a 3% dividend the company is likely to be retaining about half the earnings, so the company is likely to have eps in the range of 6%, which would give a P/E of about 17. I suspect if the P/E ratios of dividend paying companies was compared to the P/E of the stock market as a whole, they would be much lower. At the end of a crash, they continue to prove they have strong earnings.

But, that's just my theory as to why dividend stocks have typically come through a crash and recovered fairly well.

And so, in accordance with my theory, I was shocked with what I found looking at Chemtura, (CEM). They pay a dividend and have a dividend yield of 1.7%.

But, when you start tearing into their financial reports you find they had a loss of 91c per share on operations for 2006. They had a one time only gain of 20c/share from the sale of a business, but that's the kind of thing sharp investors look for to evaluate the true status of operations. One time gains can not be repeated.

Sales from 2005 to 2006 declined by $200 million, from $3.9 billion to $3.7 billion, and with another 12% price increase over last year's 20% price increase on Organotin intermediates, well, there could be more contraction of sales.

They lost over $200 million for 2006, yet they pay a dividend? They have done some debt restructuring, which will be good, but how is paying out $48 million in dividends a good thing when a company owes over a billion, with long term notes due in 2016 at 6.95%. That $48 million they paid out in dividends will cost $119 million to pay back on the notes in 2016. The yield of 1.7% is far less than the interest the company is paying on seniors' notes.

The message about the relative safety of dividend stocks compared to others has gone out to the market in general. The Motley Fool regulary promotes this idea in their news letters and in many articles it publishes. "Invest in dividend stocks, your money is far safer."

Chemtura is a company with 3 year in a row losses and as such, it doesn't even have a P/E, but it pays a dividend. There is nothing about this company that fits with my theory about why dividend paying companies are safer investments than those that do not.

Read their books closely and you find they have negative share holder equity when you look at the tangible assets, the land, buildings, inventory, accounts receivable, etc. The entirety of the shareholder's equity is intangible assets, like goodwill, and a category called "other."

Indeed, imho, this company has the appearance of taking the focus away from serious problems and creating the appearance that all is well by paying a dividend and leading investors astray due to belief systems that have developed around dividend stocks.

Bottom line, this stock does not fit my theory of why dividend stocks have done well, and it has enormous challenges to overcome.

Chemtura, an investment or craps shoot? I say a smoke and mirrors craps shoot.

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Tuesday, April 03, 2007

Quadra, An Update

As stated in previous posts, Quadra is going to have big earnings for 2007. Quadra made a hedge on the wrong side and it cost them $144 million in derivative losses.
But Quadra is moving forward. They recently entered purchase agreement for a large molydenum property with good grades of molybdenum. The graph shows the size of the Malmbjerg deposit relative to other deposits.

The tables below show the actual break down of the Malmbjerg deposit. The deposit as a whole has an average of 2.6 lbs of molydenum per ton. Using a 0.2% MoS2 cut off it averages 3.2 lbs/ton for over 300 million pounds of molybdenum.

Malmbjerg Deposit - Measured Mineral Resources
(% MoS2)
(% MoS2)
Million lbs
Avg # lbs
cut-off # lbs
0.28 6,900,000 0.311 28.3 4.113.70
0.26 11,700,000 0.29345.33.873.43
0.24 21,700,000 0.27378.23.603.17
0.22 30,500,000 0.261105.13.452.90
0.20 37,300,000 0.252124.13.332.64
0.15 48,800,000 0.234
0.12 52,900,000 0.226 157.82.981.58

Malmbjerg Deposit - Indicated Mineral Resources
(% MoS2)
(% MoS2)
Million lbs
Avg # lbs
cut-off # lbs
0.28 6,400,000 0.301 25.4 3.973.70
0.26 13,100,000 0.28549.33.763.43
0.24 23,600,000 0.26983.83.553.17
0.22 39,100,000 0.253130.63.342.90
0.20 60,600,000 0.238190.43.142.64
0.15 124,300,000 0.206 338.02.721.98
0.12 163,900,000 0.188 406.72.481.58

Malmbjerg Deposit - Measured and Indicated Mineral Resources>
(% MoS2)
(% MoS2)
Million lbs
Avg # lbs
cut-off # lbs
0.28 13,300,000 0.306 53.7 4.043.70
0.26 24,800,000 0.28994.63.813.43
0.24 45,300,000 0.271162.03.583.17
0.22 69,500,000 0.257235.83.392.90
0.20 97,900,000 0.243314.03.212.64
0.15 173,100,000 0.214 489.02.821.98
0.12 216,800,000 0.198 566.62.611.58

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