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March 21, 2013

"X" marks the flop

From Midas touch to Icarus moment... More bad news for Eike Batista and his companies. 

Revista Capital Aberto - "X" marks the flop

The more incipient a project, the harder it is to establish its value-creating potential. In the case of the companies created by billionaire Eike Batista, the greatest disseminator of the "pre-operating company" concept on the Brazilian exchange, this rationale curiously does not apply. The closer they get to finally starting production, the less certain investors are about the value of their shares — an inglorious situation for a group that raised a whopping R$ 12 billion (about US$ 6 billion) on the BM&FBovespa with nothing but IPOs. But in recent months, Batista’s Midas touch has somehow transformed into "Eike risk". The mega-mogul is accused of not delivering on his promises to investors, or at least not on time. On the BM&FBovespa, the market’s backlash is plain to see. Today, every single equity of EBX Group on the São Paulo exchange (with the sole exception of MMX) is trading below IPO price. Most of the group’s subsidiaries entered the stock market between 2006 and 2010 (see information graphic).

To make matters worse, the conglomerate is deeply in debt. The holding’s five publicly-traded companies (MMX, OGX, MPX, LLX and OSX) reported a consolidated net debt of R$ 15.8 billion, or roughly US$ 7.9 billion, for the third and fourth quarters of 2012. Their year-end cash position for 2012 was R$ 8.3 billion (roughly US$ 4.15 billion). These figures help to explain why Batista has secured stronger partnerships with BNDESPar, the equity holding division of Brazil’s national development bank, the BNDES. According to the institution’s quarterly report, in June 2011, the bank held an interest in only one EBX company — MPX Energia. In March 2012, the list expanded to three; then five in June.

However, things would probably be looking a lot bleaker if the mastermind behind the empire was not Eike Batista. In early March this year, EBX Group entered into a strategic cooperation partnership with BTG Pactual, the bank owned by André Esteves. The agreement involves not only lines of credit and financial advisory, but also future long-term capital investments for EBX projects. In light of the importance of EBX’s infrastructure initiatives in Brazil, President Dilma Rousseff also wants to lend a helping hand. According to a story published in Brazil’s leading economic newspaper, Valor Econômico, Batista wants to convince Petrobras to install its entire logistics headquarters for subsalt oil at LLX’s Açu port in northern Rio de Janeiro State.

"The transition of Eike Batista’s companies from pre-operating to production phase is turning out to be more complicated than we expected," confesses one asset manager who has held some of the fund industry’s largest positions in "X company" shares. He began disinvesting from the equities two years ago, then finally eliminated all exposure early this year. It is not difficult to see why. One hundred percent of a "prospective" company’s value derives from the expectations it generates. "A simple delay in delivery of a construction project can seriously compromise its fair price valuation," the manager explains. And the delays were plentiful for Eike Batista’s projects. His companies lost value, costing him the status of Brazil’s richest man. What happened? Read on for a brief look at the challenges faced by each of the X’s.

"The market often sees and hears only what it wants to see and hear"
OGX — The oil corporation’s wells fueled the strongest wave of investor mistrust against Eike Batista and, consequently, his companies. OGX is seen as the most important member of the conglomerate. Its debut on the BM&FBovespa took place in 2008, raising R$ 6.7 billion (about US$ 3.35 billion) in the largest IPO that Brazil had ever seen. Batista promised to extract the first drops of oil in 2011 and close the year with production in full swing at 20,000 barrels per day. But start-up was delayed and the company ended 2012 producing slightly above 10,000 barrels per day — no more than a fourth of the year’s projected output. The fact is that the two extraction wells operated by OGX in 2012 are not capable of producing much more than 5,000 oil barrels per day. Even so, just months before that volume was announced to the market, the company insisted that a daily output of up to 20,000 barrels per well was possible. "The output from an oil well tends to decline over time, so it would be impossible for OGX to achieve its initial estimate," explains Marcus Sequeira, an analyst at Deutsche Bank. In February 2012, OGX reported a daily output of 16,800 oil barrels, 2.4% more than in January and a 44.8% improvement over February 2011.

This series of frustrated expectations translated into a fiasco on the exchange. OGX ended 2012 with shares trading for 70% less than in the previous year, according to data from Economática. By March 8 this year, the stocks had lost an additional 29% of their value and dragged OSX down with them. OSX is the conglomerate’s shipbuilding subsidiary, with OGX as its main client, and its shares slid nearly 40% in the same period. Specific events have helped to temporarily lift the prices of OGX shares, such as the news that Batista will be selling his own stake in the company to Malaysia’s state-owned Petronas, as published by Valor Econômico (but not confirmed by the company before this issue’s closing date). When the story came out, OGX shot up 12%. But other than that, there is no expectation of a consistent reversal in the company’s steady decline on the BM&FBovespa — in fact, recent information has been painting an even bleaker picture. With a third oil well in operation since early this year, OGX’s output per well dropped to a daily average of 4,900 barrels.

MMX — The situation at MMX is less extreme, but not by much. MMX, the mining subsidiary of EBX, was the conglomerate’s first company to be listed on the BM&FBovespa, back in 2006. At the time, the company’s projected output for 2011 was approximately 37 million tonnes of iron ore. When 2011 came around, production did not exceed 7.5 million tonnes. The total extracted last year has yet to be released, but no one is expecting any miracles. By September, the company had produced around 5.7 million tonnes.

For MMX, distribution logistics is a major problem. The company intends to export most of its production but, for that, it needs to get Superport Sudeste up and running. At present, MMX iron ore that gets shipped abroad is distributed through the Cargo Terminal of Itaguaí Port in Rio de Janeiro, which belongs to CSN.

The initial plan had been to start up Superport Sudeste, currently under construction on the coast of Rio de Janeiro State, by the end of 2011. Now, the most optimistic forecasts predict the start of operations sometime this year. "Without the finished port, it would be pointless for MMX to invest in output expansion, as the terminal that it uses for exporting restricts its throughput to 1 million tonnes per year," says Victor Penna, analyst at BB Investimentos. "Until then, the company will not make any headway on the exchange." This was already the case for MMX in 2012, when its stock lost one third of its value. This year, after getting slapped with a R$ 4 billion fine (roughly US$ 2 billion) by the Federal Revenue of Brazil for overdue tax payments, MMX share prices dropped an additional 25% by mid-February. The dive was so abrupt that BB Investimentos temporarily suspended its analyses on the company.

LLX — In the logistics segment, with LLX, Eike Batista has not been faring any better. The company’s main project is to install Superport Açu in São João da Barra, northern Rio de Janeiro State. The enterprise is already viewed as the largest industry-port in Latin America, with the potential to become one of the world’s largest port complexes. That is, when it finally opens for business. In 2008, when LLX made its IPO on the BM&FBovespa, the company promised to start operations at Açu in 2011. The new opening date is sometime near the end of 2013.

The company has announced some favorable news, such as a recent agreement with GE for the construction of a production plant in the Açu port area – but it wasn’t enough to keep LLX shares from depreciating by more than 30% in 2012. By mid-February this year, an additional 20% dip had ensued when the market was told that Subsea 7, a Norwegian submarine builder, changed its mind about installing a facility at Açu.

Apart from the delays, LLX has also been facing a common problem at Eike Batista’s companies: frequent changes in management. Last year, then-CEO Otávio Lazcano was relocated to EBX, where he was named CFO. Marcus Berto took his place at LLX. Five of the group’s six listed companies changed their CEOs in 2012, some of them swapping head executives among themselves. The current CEO of OGX, Luiz Eduardo Guimarães Carneiro, for example, was OSX’s CEO until June last year.

In 2012, Eike Batista took the initial steps to delist LLX from the BM&FBovespa, but changed his mind when a Bank of America Merrill Lynch valuation estimated a fair price that was double what he was proposing to offer per share. In theory, when a company owner proposes to buy shares back from the shareholders, it is because he believes that the company is worth more than the value attributed to it by the market. In LLX’s case, Batista preferred not to risk it.

CCX — Created to extract coal from Colombian deposits belonging to MPX, CCX would be doing even worse if it weren’t for one thing: it is about to bid the BM&FBovespa adieu. Batista announced the company’s delisting in January 2013, less than a year before presenting it to the market. With the news, CCX shares shot up 70%. Even so, they are still trading for less than half their IPO price of May 2012. To justify his decision, Batista claimed that CCX will be compelled to change its strategy plan due to "deteriorating conditions in the mineral coal market".

In the first business plan for the Colombian mines, disclosed in 2010 when the assets still belonged to MPX, production was expected to start in 2012. The year came and went and the mines, already transferred to CCX, remained unexploited. In recent corporate presentations, CCX defended that it would be possible to initiate coal extraction in 2014. From the shareholders’ perspective, analysts recommend keeping a close eye on CCX’s delisting, which is still in progress. Investors need to choose whether or not to sell for the price that Eike Batista is offering — R$ 4,31 per share (about US$ 2,2), paid in shares of other EBX companies.CCX made its debut on the exchange at an IPO price of R$ 8.50, or roughly US$ 4.25. "We cannot condone this opportunism, handing over the shares at such a tremendous discount," wrote the Empiricus consultancy in a report in January.

MPX — EBX’s electricity generator has been the group’s best performer. By the end of this year, MPX is planning to launch four thermoelectric power plants in the states of Ceará and Maranhão. An additional two plants, one in Ceará and the other in Amapá, have already been up and running since 2011 and 2008, respectively. "The possibility proposed by the National System Operator (ONS), of having thermoelectric plants generate power continuously throughout the year to make sure that the hydroelectric reservoirs will be full in 2014, is good news for the company, " assesses Adriano Pires, director of the Brazilian Infrastructure Center (CBIE).

But don’t think that MPX simply fired up the generators without a hitch. Some plants were not finished on time and, because the supply contracts were already in effect, the company was forced to buy electricity on the market in order to honor them. To name just one example, delayed start-up of the Pecém I plant in Ceará resulted in additional costs for MPX to the tune of R$ 26 million (about US$ 13 million) in the third quarter of 2012 and another R$ estimated R$ 130 million (roughly US$ 65 million) in the fourth quarter, according to calculations by HSBC analysts. The market was unforgiving. The company’s shares dropped 9% in 2012 and another 2.9% in 2013 by March 8. "The general impression is that the market is punishing MPX too harshly," says a fund manager who, in recent months, reduced his exposure to MPX shares to the lowest level in years. "Everything that happened to the company from mid-2012 to the present was expected. This decline appears to be happening for no other reason than the company having an X in its name." In late February, MPX and Germany-based E.ON announced that they will be entering a joint venture aiming to accelerate growth and develop a bigger and more profitable energy market in Brazil and Chile. For this, MPX will raise about R$ 1 billion (roughly US$ 500 million) through a capital increase in which E.ON will invest approximately R$ 850 million (about US$ 425 million), acquiring a 10% stake in MPX.

NOW WHAT? — Despite all those unfulfilled promises, some investors are hanging on to hope. They believe that 2013 will be better than 2012 for Batista’s companies. The start up of MPX’s thermoelectric plants has been lifting the spirits of the company’s shareholders, and a new scenario is also presenting itself for MMX and LLX as their port complexes come closer to opening for business. The possibility of new oil exploration areas being auctioned out this year is good tidings for OGX, in spite of the "sell" recommendations by UBS, BofA and Credit Suisse.
Once again, however, these are no more than promises. "The market often sees and hears only what it wants to see and hear," says Sequeira from Deutsche Bank. The time has apparently come for investors to see and hear the real bases for Batista’s projections.  

read the article online here: Revista Capital Aberto - "X" marks the flop

-- The MasterFeeds

March 19, 2013

Global downturn takes a toll on Canada’s north 'mining boom': report [feedly]

Canada's territories are feeling the effects of sinking global commodity prices

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Global downturn takes a toll on Canada's north 'mining boom': report

Canada's territories, not long ago believed to be the epicenter of a mining boom, are feeling the effects of sinking global commodity prices, says the Conference Board of Canada, but longer-term prospects for the industry in the country's north remain strong.

Nunavut's mining sector, says the report, is experiencing both accelerating growth and downside risks.

Production at Agnico-Eagle Mines' Meadowbank gold mine in 2012 far exceeded initial predictions, and output is expected to rise over the next three years.

On the other hand, Arcelormittal and Baffinland's Mary River iron ore project was scaled back from a planned $4-billion expenditure to a $740-million project. The revised plan is expected to produce less iron ore and not include a rail line or the Steensby Inlet port, although it will begin operations earlier than it would have under the larger project.

Even with the downgrade, overall economic growth in Nunavut is forecast to be 3.4% in 2013 and 8.8% in 2014.

According to according Territorial Outlook: Winter 2013, the Northwest Territories are in a privileged position as recent discoveries demonstrate it doesn't depend solely on diamonds, a sector that is both maturing and entering a long-term decline.

Last week the N.W.T took a giant step closer to gaining unprecedented control over its own land, water and natural resources, but without support from two of the territory's aboriginal governments.

Now the jurisdiction will be able to keep a large chunk of revenue from resource development that currently flows to the federal government.

(Image by Neftali /

It’s Going To End Very, Very Badly In The End, But In The Meantime A Lot Of People Are Having A Lot Of Fun [feedly]

It's Going To End Very, Very Badly In The End, But In The Meantime A Lot Of People Are Having A Lot Of Fun
"This is the only time in recorded history that all major central banks are printing money at the same time and everybody's trying to debase the value of the money. I suspect it's going to end very, very badly in the end, but in the meantime a lot of people are having a lot of fun." - in Philadelphia CBS Local 
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Bloomberg: #Brazil Billionaire #Batista Said to Face Collateral Calls

The house of cards seems to be collapsing...

Eike Batista, the Brazilian billionaire whose oil-company shares fell to a record low last week, is close to selling a stake in MPX Energia SA (MPXE3) as he faces demands from creditors to boost collateral, people with direct knowledge of the matter said.

To read the entire article, go to

March 18, 2013

Edelweiss- Dylan Grice- "Would the real Peter and Paul Stand up?"

when central banks play the games with money of which they are so fond, we wonder if they realize that they are also playing games with social bonding. Do they realize that by devaluing money they are devaluing society?

An excellent piece. 

You can measure the "knowns" ; you cannot measure the "unknowns"- such as trust, integrity and character. You either have it or you don't. Dylan Grice does a nice job here clarifying the difficulty of knowing exactly when we have to "pay the piper". I love his comment about people having faith in "false precision". Additionally, the term "Robbing Peter to pay Paul" takes on new meaning in a society where the President is encouraging distrust between Peter and Paul. This type of gradual divisiveness cannot end well for the economy or the country.             Meanwhile, The Stock Market party will go on until the music stops. It becomes a tiresome task to rail about the debts and deficits and the need for further deleveraging when the market is roaring ahead- and we all want to believe in this "new beginning". Yet, it also is hard to imagine a new beginning without some old reconciliation and genuine price discovery which clearly we have not seen. What we have seen is financial repression of the highest order pushing everyone into the riskiest asset class ( Equities) due to lack of return elsewhere. Is this genuine price discovery or "artificial" and do we have an accurate timetable on when those debts need to be reconciled…and how they get to be reconciled?? Lots of questions, but still the path of least resistance is upwards… we will worry about "trustworthiness" later-mjor


Would the Real Peter and Paul Please Stand Up?

By Dylan Grice

In a previous life as a London-based 'global strategist' (I was never sure what that was) I was known as someone who was worried by QE and more generally, about the willingness of our central bankers to play games with something which I didn't think they fully understand: money. This may be a strange, even presumptuous thing to say. Surely of all people, one thing central bankers understand is money?

They certainly should understand money. They print it, lend it, borrow it, conjure it. They control the price of it... But so what? What should be true is not necessarily what is true, and in the topsy-turvy world of finance and economics, it rarely is. So file the following under "strange but true": our best and brightest economists have very little understanding of economics. Take the current malaise as prima facie evidence.

Let me illustrate. Of the many elemental flaws in macroeconomic practice is the true observation that the economic variables in which we might be most interested happen to be those which lend themselves least to measurement. Thus, the statistics which we take for granted and band around freely with each other measuring such ostensibly simple concepts as inflation, wealth, capital and debt, in fact involve all sorts of hidden assumptions, short-cuts and qualifications. So many, indeed, as to render reliance on them without respect for their limitations a very dangerous thing to do. As an example, consider the damage caused by banks to themselves and others by mistaking price volatility (measurable) with risk (unmeasurable). Yet faith in false precision seems to us to be one of the many imperfections our species is cursed with.

One such 'unmeasurable' increasingly occupying us here at Edelweiss is that upon which all economic activity is based: trust. Trust between individuals, between strangers, between organizations... trust in what people read, and even people's trust in themselves. Let's spend a few moments elaborating on this.

First, we must understand the profound importance of exchange. To do this, simply look around you. You might see a computer monitor, a coffee mug, a telephone, a radio, an iPad, a magazine, whatever it is. Now ask yourself how much of that stuff you'd be able to make for yourself. The answer is almost certainly none. So where did it all come from? Strangers, basically. You don't know them and they don't know you. In fact virtually none of us know each other. Nevertheless, strangers somehow pooled their skills, their experience and their expertise so as to conceive, design, manufacture and distribute whatever you are looking at right now so that it could be right there right now. And what makes it possible for you to have it? Exchange. To be able to consume the skills of these strangers, you must sell yours. Everyone enters into the same bargain on some level and in fact, the whole economy is nothing more than an anonymous labor exchange. Beholding the rich tapestry this exchange weaves and its bounty of accumulated capital, prosperity and civilization is a marvelous thing.

But we must also understand that exchange is only possible to the extent that people trust each other: when eating in a restaurant we trust the chef not to put things in our food; when hiring a builder we trust him to build a wall which won't fall down; when we book a flight we entrust our lives and the lives of our families to complete strangers. Trust is social bonding and societies without it are stalked by social unrest, upheaval or even war. Distrust is a brake on prosperity, because distrust is a brake on exchange.

But now let's get back to thinking about money, and let's note also that distrust isn't the only possible brake on exchange. Money is required for exchange too. Without money we'd be restricted to barter one way or another. So money and trust are intimately connected. Indeed, the English word credit derives from the Latin word credere, which means to trust. Since money facilitates exchange, it facilitates trust and cooperation. So when central banks play the games with money of which they are so fond, we wonder if they realize that they are also playing games with social bonding. Do they realize that by devaluing money they are devaluing society?

To see the how, first understand how monetary policy works. Think about what happens in the very simple example of a central bank's expanding the monetary base by printing money to buy government bonds.

That by this transaction the government has raised revenue for the government is obvious. The government now has a greater command over the nation's resources. But it is equally obvious that no one can raise revenue without someone else bearing the cost. To deny it would imply revenues could be raised for free, which would imply that wealth could be created by printing more money. True, some economists, it seems, would have the world believe there to be some validity to such thinking. But for those of us more concerned with correct logical practice, it begs a serious question. Who pays? We know that this monetary policy has redistributed money into the government's coffers. But from whom has the redistribution been?

The simple answer is that we don't and can't know, at least not on an amount per person basis. This is unfortunate and unsatisfactory, but it also happens to be true. Had the extra money come from taxation, everyone would at least know where the burden had fallen and who had decreed it to fall there. True, the upper-rate tax payers might not like having a portion of their wealth redirected towards poorer members of society and they might not agree with it. Some might even feel robbed. But at least they know who the robber is.

When the government raises revenue by selling bonds to the central bank, which has financed its purchases with printed money, no one knows who ultimately pays. In the abstract, we know that current holders of money pay since their cash holdings have been diluted. But the effects are more subtle. To see just how subtle, consider Cantillon's 18th century analysis of the effects of a sudden increase in gold production:

If the increase of actual money comes from mines of gold or silver... the owner of these mines, the adventurers, the smelters, refiners, and all the other workers will increase their expenditures in proportion to their gains. ... All this increase of expenditures in meat, wine, wool, etc. diminishes of necessity the share of the other inhabitants of the state who do not participate at first in the wealth of the mines in question. The altercations of the market, or the demand for meat, wine, wool, etc. being more intense than usual, will not fail to raise their prices. ... Those then who will suffer from this dearness... will be first of all the landowners, during the term of their leases, then their domestic servants and all the workmen or fixed wage-earners ... All these must diminish their expenditure in proportion to the new consumption.

In Cantillon's example, the gold mine owners, mine employees, manufacturers of the stuff miners buy and the merchants who trade in it all benefit handsomely. They are closest to the new money and they get to see their real purchasing powers rise.

But as they go out and spend, they bid up the prices of the stuff they purchase to a level which is higher than it would otherwise have been, making that stuff more expensive. For anyone not connected to the mining business (and especially those on fixed incomes: "the landowners, during the term of their leases"), real incomes haven't risen to keep up with the higher prices. So the increase in the gold supply redistributes money towards those closest to the new money, and away from those furthest away.

Another way to think about this might be to think about Milton Friedman's idea of dropping new money from a helicopter. He used this example to demonstrate how easy it would theoretically be for a government to create inflation. What he didn't say was that such a drop would redistribute income in the same way more gold from Cantillon's mines did, towards those standing underneath the helicopter and away from everyone else.

So now we know we have a slightly better understanding of who pays: whoever is furthest away from the newly created money. And we have a better understanding of how they pay: through a reduction in their own spending power. The problem is that while they will be acutely aware of the reduction in their own spending power, they will be less aware of why their spending power has declined. So if they find groceries becoming more expensive they blame the retailers for raising prices; if they find petrol unaffordable, they blame the oil companies; if they find rents too expensive they blame landlords, and so on. So now we see the mechanism by which debasing money debases trust. The unaware victims of this accidental redistribution don't know who the enemy is, so they create an enemy.

Keynes was well aware of this insidious dynamic and articulated it beautifully in a 1919 essay:

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.... Those to whom the system brings windfalls... become "profiteers" who are the object of the hatred.... the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Deliberately impoverishing one group in society is a bad thing to do. But impoverishing a group in such an opaque, clandestine and underhanded way is worse. It is not only unjust but dangerous and potentially destructive. A clear and transparent fiscal policy which openly redistributes from the rich to the poor can at least be argued on some level to be consistent with 'social justice.' Governments can at least claim to be playing Robin Hood. There is no such defense for a monetary driven redistribution towards recipients of the new money and away from everyone else because if the well-off are closest to the money, well, it will have the perverse effect of benefitting them at the expense of the poor.

Take the past few decades. Prior to the 2008 crash, central banks set interest rates according to what their crystal ball told them the future would be like. They were supposed to raise them when they thought the economy was growing too fast and cut them when they thought it was growing too slow. They were supposed to be clever enough to banish the boom-bust cycle, and this was a nice idea. The problem was that it didn't work. One reason was because central bankers weren't as clever as they thought. Another was because they had a bias to lower rates during the bad times but not raise them adequately during the good times. On average therefore, credit tended to be too cheap and so the demand for debt was artificially high. Since that new debt was used to buy assets, the prices of assets rose in a series of asset bubbles around the world. And this unprecedented, secular and largely global credit inflation created an illusion of prosperity which was fun for most people while it lasted.

But beneath the surface, the redistributive mechanism upon which monetary policy relies was at work. Like Cantillon's gold miners, those closest to the new credit (financial institutions and anyone working in finance industry) were the prime beneficiaries. In 2012 the top 50 names on the Forbes list of richest Americans included the fortunes of eleven investors, financiers or hedge fund managers. In 1982 the list had none.

Besides this redistribution of wealth towards the financial sector was a redistribution to those who were already asset-rich. Asset prices were inflated by cheap credit and the assets themselves could be used as collateral for it. The following chart suggests the size of this transfer from poor to rich might have been quite meaningful, with the top 1% of earners taking the biggest a share of the pie since the last great credit inflation, that of the 1920s.

Who paid? Those with no access to credit, those with no assets, or those who bought assets late in the asset inflations and which now nurse the problem balance sheets. They all paid. Worse still, future generations were victims too, since one way or another they're on the hook for it. So with their crackpot monetary ideas, central banks have been robbing Peter to pay Paul without knowing which one was which. And a problem here is this thing behavioral psychologists call self-attribution bias. It describes how when good things happen to people they think it's because of something they did, but when bad things happen to them they think it's because of something someone else did. So although Peter doesn't know why he's suddenly poor, he knows it must be someone else's fault. He also sees that Paul seems to be doing OK. So being human, he makes the obvious connection: it's all Paul and people like Paul's fault.

But Paul has a different way of looking at it. Also being human, he assumes he's doing OK because he's doing something right. He doesn't know what the problem is other than Peter's bad attitude. Needless to say, he resents Peter for his bad attitude. So now Peter and Paul don't trust each other. And this what happens when you play games with society's bonding.

When we look around we can't help feeling something similar is happening. The % blame the 1%; the 1% blame the 47%. In the aftermath of the Eurozone's own credit bubbles, the Germans blame the Greeks. The Greeks round on the foreigners. The Catalans blame the Castilians. And as 25% of the Italian electorate vote for a professional comedian whose party slogan "vaffa" means roughly "f**k off" (to everything it seems, including the common currency), the Germans are repatriating their gold from New York and Paris. Meanwhile in China, that centrally planned mother of all credit inflations, popular anger is being directed at Japan, and this is before its own credit bubble chapter has fully played out. (The rising risk of war is something we are increasingly worried about...) Of course, everyone blames the bankers ("those to whom the system brings windfalls... become 'profiteers' who are the object of the hatred").

But what does it mean for the owner of capital? If our thinking is correct, the solution would be less monetary experimentation. Yet we are likely to see more. Bernanke has monetized about a half of the federally guaranteed debt issued since 2009 (see chart below). The incoming Bank of England governor thinks the UK's problem hasn't been too much monetary experimentation but too little, and likes the idea of actively targeting nominal GDP. The PM in Tokyo thinks his country's every ill is a lack of inflation, and his new guy at the Bank of Japan is revving up its printing presses to buy government bonds, corporate bonds and ETFs. China's shadow banking credit bubble meanwhile continues to inflate…


For all we know there might be another round of illusory prosperity before our worst fears are realized. With any luck, our worst fears never will be. But if the overdose of monetary medicine made us ill, we don't understand how more of the same medicine will make us better.

We do know that the financial market analogue to trust is yield. The less trustful lenders are of borrowers, the higher the yield they demand to compensate. But interest rates, or what's left of them, are at historic lows. In other words, there is a glaring disconnect between the distrust central banks are fostering in the real world and the unprecedented trust lenders are signaling to borrowers in the financial world.

Of course, there is no such thing as "risk-free" in the real world. Holders of UK cash have seen a cumulative real loss of around 10% since the crash of 2008. Holders of US cash haven't done much better. If we were to hope to find safety by lending to what many consider to be an excellent credit, Microsoft, by buying its bonds, we'd have to lend to them until 2021 to earn a gross return roughly the same as the current rate of US inflation. But then we'd have to pay taxes on the coupons. And we'd have to worry about whether or not the rate of inflation was going to rise meaningfully from here, because the 2021 maturity date is eight years away and eight years is a long time. And then we'd have to worry about where our bonds were held, and whether or not they were being lent out by our custodian. And of course, this would all be before we'd worried about whether Microsoft's business was likely to remain safe over an eight year horizon.

We are happy to watch others play that game. There are some outstanding businesses and individuals with whom we are happy to invest. In an ideal world we would have neither Peters nor Pauls. In the imperfect one in which we live, we have to settle for trying hard to avoid the Pauls, who we fear mistake entrepreneurial competence for proximity to the money well. But when we find the real thing, the timeless ingenuity of the honest entrepreneurs, the modest craftsmen and craftswomen who humbly seek to improve the lot of their customers through their own enterprise, we find inspiration too, for as investors we try to model our own practice on theirs. It is no secret that our quest is to find scarcity. But the scarce substance we prize above all else is trustworthiness. Aware that we worry too much in a world growing more wary and distrustful, it is here we place an increasing premium, here that we seek refuge from financial folly and here that we expect the next bull market.


March 13, 2013

Where to be when #gold equities bounce

From Dundee, their thoughts on how to position yourselves for any rally in the gold equities.  Developers/Explorers outperform, followed by the intermediate producers.  No mystery here.  If seeking greater security in a senior gold while still capturing very significant upside, Goldcorp.

 The S&P/TSX Global Gold Index closed yesterday at 250.64, levels last seen in December 2008, and the gold equities have been tracking steadily downward since the end of September 2012 (down 29% from September 21 to the present day, and gold down 11% over the same time horizon). Although it may take time, we expect the gold equities to come back to favour as, 1) the hype associated with the "great rotation" cools, 2) US budget issues persist throughout 2013, 3) the fear of global currency wars continues, and 4) our expectation for inflation over the next few years.  
Purpose: We decided to analyze which tier of gold equities performed best over the two rally periods in 2012 (from May 15 to June 5, and from July 23 to September 21), to help investors position their portfolios in such a way to reap the greatest benefits from a pop in the gold equities.


Conclusion: The developer/explorer group has the strongest performance in the two recent rally periods, followed by the intermediates, seniors, junior producers, and finally, gold. 
It is interesting to note that the performances in both rally periods were similar, in that the developers/explorers led the way, followed by the intermediates, and the bullion was the consistent laggard, adding some weight to the conclusion that developers/explorers could be the place to park some money. We maintain that the developer/explorer group we have under coverage/Under Review are best in class, with high quality management teams and assets, and many have financing in place to continue work despite volatile market conditions.


We divided the gold stocks into four categories: seniors, intermediates, junior producers and developers/explorers. We used the stocks we have under formal coverage and Under Review (table below).


Rally period #1 (May 15 – June 5): Developers/Explorers Outperform


Rally period #2 (July 23 – September 21): Developers/Explorers Outperform


Honing in on the Senior Gold Producers:
If seeking greater security in a senior gold while still capturing very significant upside, Goldcorp (Under Review, last close C$33.23) outperformed Barrick (Under Review, last close C$29.64) and Kinross (Under Review, last close C$7.97) in the two rally periods in 2012. We continue to favour Goldcorp among the senior gold producers, especially after attending their Investor Day last week.


Reasons we like Goldcorp:
-          High quality management team that communicates clearly their upcoming opportunities and challenges
-          The company is on track with its three development projects: Cerro Negro (first prodn late-2013, commercial 2014), Eleonore (first production late-2014, full ramp end-2017) and Cochenour (full ramp up late-2015)
o   Combined, the projects should contribute over 1.3MM oz in their first five years of production
-          Long-term water strategy study to be complete H1 2013 (affecting Penasquito primarily, but also the nearby Camino Rojo development project)
-          Notable exploration upside at Cerro Negro, Camino Rojo and Penasquito
Rally period #1 (May 15 – June 5): Goldcorp outperforms


Rally period #2 (July 23 – September 21): Goldcorp outperforms again


Companies included in the analysis:
Source: Bloomberg, Dundee Securities


Rally periods from the beginning of 2012 until the present day (green-hashed lines illustrate the rallies)

 Source: Dundee Securities

March 6, 2013

Friedland`s bullishness lightens PDAC mood - PDAC International Convention - Mineweb

Friedland's bullishness lightens PDAC mood

PDAC International Convention

Ivanplats CEO, Robert Friedland sees a big opportunity to fill a coming void in the market, with the majors hunkering down and shelving major projects after several ousted their CEOs.
Author: Euan Rocha and Rod Nickel
Posted: Wednesday , 06 Mar 2013 
TORONTO (Reuters) -
Leave it to the irreverent Robert Friedland to brighten the mood of a mining conference in the throes of a deep, collective depression.
The outspoken financier, known for his talent for picking winners in a risky business, made a rare public appearance on Monday to trumpet his latest venture, Ivanplats Ltd.

It was a star turn by a man apparently unburdened by self-doubt or any lack of confidence in the industry's resilience.
Friedland's company, one of a handful of initial public offerings in the mining industry last year, owns South Africa's Platreef, a project rich in platinum, palladium, gold, rhodium, nickel and copper.
Ivanplats owns the "largest mechanizable, ethical precious metal discovery in the world," Friedland said at the Prospectors and Developers Association of Canada convention in Toronto, promising that the geological nature of the deposit would allow for more humane working conditions than those in rival South African mines.
"We've discovered something that is very good," he said, "We're quite confident that the nickel and copper values are double what we would need to recover, gold, platinum, rhodium and palladium at a negative cost."
Friedland's sheer enthusiasm seemed out of step with the predominant mood at this year's PDAC, where talk has often focused on the dearth of financing for mining projects amid cost overruns, multi-billion dollar writedowns and stagnant metal prices.
Friedland sees a big opportunity for Ivanplats to fill a coming void in the market, with the majors hunkering down and shelving major projects after several ousted their CEOs.
"We're in a world where all of the CEOs of major miners have had their heads cut off ... So these major mining companies are now being run by people who are inherently risk averse," said Friedland. "That means there is going to be less metal around in five years."
Friedland, who also gave the keynote address at the Canada-Southern Africa Chamber of Business on Tuesday, vowed that the industry would emerge from its funk, as the rise of mega-cities around the world drives metal demand.
"The whole planet Earth is going urban," he said.
No matter how controversial his remarks, Friedland's reputation alone wins him a ready audience.
Now 62, Friedland, made a name in 1996 by selling a then-undeveloped Canadian nickel-copper project called Voisey's Bay for C$4.3 billion ($4.2 billion).
He solidified his near-legendary status within the mining industry with Ivanhoe Mines, a vehicle he used to promote and build the massive Oyu Tolgoi copper-gold mine in Mongolia. Last year, mining giant Rio Tinto acquired a majority interest in Ivanhoe, now called Turquoise Hill Resources.
That deal allowed Friedland to concentrate on Ivanplats, taking it public in 2012 in one of the most closely followed IPOs of the year. The partial offering, which raised about C$300 million, pegged the value of Ivanplats at over C$2.5 billion.
The Chicago-born billionaire is known almost as much for his showmanship as for his track record in spotting the potential of some of the world's biggest deposits.
In keeping with style, Friedland peppered his convention speech with jocular asides and digs at other mining companies.
"I remember Bre-X quite well," said Friedland, referring to a multibillion-dollar mining scam during the 1990s. "It was a 100 million ounce deposit, but (Platreef) is much bigger than that and it has the distinct added advantage of being real."
Friedland, a Boston-area native who now lives in Singapore, said Platreef contains some 75 million to 100 million ounces of precious metals.
He said Platreef was superior to some of Anglo American Plc's costly, deep underground platinum mines, where critics say that extreme heat and a cramped environment make working conditions difficult.
"Anglo is like a man with one foot in a bucket of ice and another foot in a bucket of hot coals," he said, suggesting the rival South African miner faces a dilemma in trying to sell platinum produced under such conditions. In addition to jewelry, platinum is used to make catalytic converters for cars.
"If you're the Toyota Motor Company, you can't sell a yuppie a Prius in California based on this activity," said Friedland. "You already have the concept of ethical diamonds ... similarly we now have the concept of ethical platinum, so this is going the way of the dodo bird."
Friedland has promised that Ivanplats will shake up the mining sector, as the Platreef operation can be fully mechanized and would not require thousands of workers to work in inhospitable conditions deep underground.
The Platreef project is 90 percent owned by Ivanplats. A consortium of Japanese companies paid about $290 million to acquire the remaining 10 percent.
Friedland also praised Ivanplats' Kamoa opper project in the Democratic Republic of Congo, which he believes could turn out to be the "richest copper discovery in the world."
"This little puppy is only a couple of years old and it is quite a spirited little discovery, and it is definitely a candidate to surpass El Teniente," he said, referring to Chilean miner Codelco's massive underground copper mine.
Despite the attributes of Ivanplats' projects and Friedland's promotion skills, the company's shares have not escaped the downdraft that has weighed on the mining sector this year. Ivanplats shares, which rose as high as C$5.45 early this year, have fallen back to C$4.09 a share.
Friedland said Ivanplats is now "scheming" on ways to push its share price higher, hinting that the company may explore a deal to sell a small stake in Kamoa - potentially boosting its valuation.

Friedland`s bullishness lightens PDAC mood - PDAC International Convention - Mineweb

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