Invest in a gold miner, get a solar project

Alternative title: Gran Colombia Gold’s confusing capital allocation strategy, part 4; (See also: Gran Colombia Gold’s confusing capital allocation strategy, part 1, part 2, and part 3)

(This was supposed to be published the evening of May 5th, but for some reason, I forgot to hit the button until May 11th)

One of the reasons why one of my policies are to be very, very careful before investing in any gold mining equities is that management in these industries is usually less than efficient with shareholder capital, especially when they have lots of it. Right now things are flying high in the gold mining industry because of the US$1,700/Oz commodity price and the general public fear and panic out there due to the aftermath of COVID-19, and looming large government deficits, and just general doom and gloom.

My personal take on the matter is if you believe gold is going to do well, just invest in long-dated commodity futures at a reasonable amount of leverage instead of playing around with companies that are most likely blow your capital away.

Or you can take a debt investment in such companies, where in that case you don’t really care how much management blows shareholder capital short of stunting their ability to pay you back, but a debt investment (in non-distressed situations) defeats the purpose of investing in such companies (i.e. you want double digit returns).

Imagine my thoughts when Gran Colombia Gold (TSX: GCM) announced the following:

Gran Colombia Gold Corp. (TSX: GCM; OTCQX: TPRFF) announced today that it has signed a Letter of Intent (“LOI”) with Renergetica Colombia S.A.S. (“Renergetica”), a subsidiary of Renergetica S.p.A., a developer in the field of renewable energy and of the smart grid worldwide and an independent power producer and asset manager for third party investors. The LOI encompasses Gran Colombia’s acquisition, through its Segovia Operations, of a solar project with a total installed capacity of 11.2 MW of power called “Suarez”, located in the Tolima Region, Colombia (the “Suarez Project”).

Lombardo Paredes, Chief Executive Officer of Gran Colombia, said, “As the leading gold and silver producer in Colombia, we focus our ESG programs on health, education, community and the environment in the areas in which we live and operate. We see the opportunity to invest in renewable energy initiatives, such as the Suarez Project, as the next step in doing our part to combat global warming. With the new Suarez plant, approximately 10,300 tons of CO2 per year will not be released into the environment. We look forward to partnering with Renergetica to make this solar project a reality.”

The Suarez Project is the first project of a pipeline under development by Renergetica in Colombia. Expected to have a 30-year life, the Suarez Project will connect to the Colombian National Electric System and will become operational later in 2020. The capital cost of the Suarez Project, expected to total approximately $8 million, may be financed by up to 70% through local banks involved in “green financing” and will benefit from special tax incentives in Colombia on investments in renewable energy.

Recall on March 1, 2019 the company attempted to raise financing, citing that they wanted to accelerate drilling in their Segovia mine, even though they had sufficient cash on hand and cash flows to do it internally. They have done a couple financings since, in addition to more financings on their separately publicly traded entities (other gold mining projects). You can at least make a justification for raising capital and spending it in majority-owned public entities in the name of gold mining.

But this press release to invest capital in a solar project in the name of ESG? If I owned shares in GCM (I do not), I’d be really wondering.

Hence the title of this post – I invested in a gold mine, but I got a solar project instead!

More Misc market notes

Too much going on today, so will consolidate it into one post.

Everything that is going on is liquidity-fuelled. Central banks buy bonds. Bond yields go down. The equity to bond spread goes in conjunction with this, and hence prices rise. Doesn’t matter what the heck happens to the economy and it will drive most people crazy that do not see this relationship. Eventually they will capitulate and buy at the top, but right now there is a huge wall of worry which favours further equity upside.

* A week ago, I told you about Birchcliff preferred shares – they’re up today and as natural gas strengthens these present a good risk-reward, coupled with some income to boot. I’m sure there are better ways to play the natural gas space with equity (TOU, ARX?). The floor is pretty much in. Dollar-cost average on anything fossil-fuel related over the next couple months and a year later I’m sure it’ll work out.

* Atlantic Power’s performance (and utilities in general) has been disappointing in the COVID-19 recovery, mainly because power demand has dropped as a result of the economic slump. It doesn’t really matter for them as the price of their power generation is secured through power purchase agreements, but it doesn’t bode well for the residual value of their power plants after the agreements expire. After repurchasing 12.5 million shares of their own stock on May 1st, they will not be able to repurchase further equity until 20 business days after the offering concluded (i.e. not until June). I would expect them to resume share repurchases in June, so I suspect that the common shares will be a reasonably good bargain in May. I won’t be adding since this company is a low-medium reward and low risk entity, so it will be like watching paint dry compared to many other offerings in the stock market. But I’m pretty sure that June will see higher prices for ATP than in May.

* I watched Planet of the Humans, available on Youtube until mid-May, which puts a huge hole through the motivations of various environmental activists. Surprise surprise, it’s all about money and not the Earth! Blair King (a professional chemist which I have a very high degree of respect for) has an excellent review on the movie.

The only reason why I mention this movie is because they tear a good strip out of biomass plants as being “renewable energy”, and for a very brief moment, Atlantic Power’s Cadillac plant (the one which had a major explosion and plant fire earlier this year) was mentioned.

* Firms are going to be throwing everything under the bus for the first and second quarter, citing COVID-19. There will be write-downs of all sorts of junk on the books that have been accumulating. Firms that do not blame COVID-19 during the two quarters for various one-time write downs of financial performance are likely to be more honest than not.

* An example of this is BWX Technologies (NYSE: BWXT), which reported earnings yesterday. They have a competitive advantage in nuclear engineering services. They did not blame COVID-19 for anything, probably because nuclear engineering services are booming and they should become at least a US$65/share stock by year’s end. Yes, I own shares. The most profit to be had in the nuclear value chain is not in uranium, people!

* There is an interesting tug-of-war happening in the Yellow Pages right now, which traded more shares today than it has in a long time. Somebody at RBC is very interested in shares, while Canaccord has been on the selling side of the large blocks, mostly around the $10 range. Just announce the takeover bid already, folks!

* I find it probable that the central banks will target a stabilization of equity levels, so they will adjust the rate of their liquidity injections that go into the market. Still, the trend is for further liquidity until unemployment metrics begin to moderate. I will have a comment on unemployment/employment rates in a future post, as this is an interesting topic in itself which has market implications.

* REITs, financials, and insurance companies, in general, I think will disappoint. You can almost take anything that somebody is bullish on whatever that is posted on Reddit CanadianInvestor and just take it off your list of consideration. It is quite remarkable how useful it is, entirely for the oppositely intended reason.

COVID-19 false positives

Apparently Nunavut’s first COVID-19 case was a false positive.

From what I remember reading, it is possible that tests have false positive rates of up to 30%, depending on what’s being tested. Conversely the false negative rates I’ve seen quoted are around 15%, again, depending on tests. I haven’t taken the time to seriously dig into what precisely the numbers are, but you can be sure that in most instances, false positives are rarely corrected to negative and subsequently not reflected in the statistics, while false negatives will eventually become positives later (at least in symptomatic cases).

One of the whole issues of this social isolation is that it’s basically impossible, short of precision testing, to contain it, so efforts are basically about buying time. If these studies of anti-body testing in the San Jose, and NYC area of people having 20-30% antibody rates for COVID-19 are true (hence being already sensitized to it and not being prone to further viral infection), once further confirmation of this broad “already infected” cohort becomes more confirmed, you will see a very suddenly policy change of just freeing up everybody.

The residual hysteria will be with us for at least a year as long as these “second wave” scare-and-fear media reports continue.

Late Night Finance with Sacha, Episode 2

Late Night Finance with Sacha, Episode 2

Date: Thursday, May 7
Time: 9:00pm, Pacific Time
Duration: Projected 1 hour.
Where: Zoom

Frequently Asked Questions:

Q: What are you doing?
A: Thursday’s conference will be about analyzing BMTC Group (TSX: GBT). The company was suggested for review by somebody on the first Late Night Finance episode. Prior, I had never heard of this company before. Short of doing some very superficial research on it, I will keep myself mostly ignorant until I analyze it on Thursday, so it will be like going through a company from scratch. I’ll share screens and go through financial statements and annotate (verbally or otherwise) and go through my thoughts. I might even come to a valuation opinion, or at the very least give you my hunch. This can most certainly be used as a sleeping aid for you.

Questions during this presentation, both on and off topic, are accepted. If they become too distracting, I’ll be sure to get back to the original topic.

Q: Do you own this company, is this a pump and dump?
A: No, and no. Entirely up to you whether you want to buy, short, hold, or whatever.

Q: Why are you doing this?
A: Continuing my experimentation in video broadcasting. Who knows, I might learn something from you as well.

Q: Why so freaking late? I live in the eastern time zone.
A: It is late night finance, is it not? I might do ‘afternoon finance’ another time, but not this time.

Q: How do I register?
A: Send sacha@divestor.com an email. Subject line “Late Night Finance May 7”, and in the message body tell me what city and province/state you’re from (or if you’re international, city and country). I’ll reply later (Thursday afternoon) with the zoom channel and passcode to get in.

Q: Are you trying to spam me, try to sell me garbage, etc. if I register?
A: I can hardly manage a mailing list without breaking my own website, what makes you think I will spam you? No, if you register for this, I will not harvest your email or send you any solicitations. Also I am not using this to pump and dump any securities to you, although I will certainly offer opinions on what I see.

Q: Why do I have to register? I just want to be anonymous.
A: I’m curious who you are as well.

Q: If I register and don’t show up, will you be mad at me?
A: No.

Q: Will you (Sacha) be on video (i.e. this isn’t just an audio-only stream)?
A: Yes. You’ll get to see me.

Q: Will I need to be on video?
A: I’d prefer it, and you are more than welcome to be in your pajamas. No judgements!

Q: Can I be a silent participant?
A: Yes.

Q: Is there an archive of the video I can watch later if I can’t make it?
A: No. Eventually when I figure out a good procedure I will enable this.

Q: Is there a limit to the people that can participate?
A: Zoom limits me to 100. I really hope the number isn’t higher than 10.

Q: Will there be some other video presentation in the future?
A: Yes.

Oil tankers

Oil tankers are a very crowded trade at the moment (Kupperman, et al) because of the very obvious contango in the oil futures. You can see how they are a crowded trade because many of these companies trading have trading volume that is a ridiculous volume of shares outstanding. The day traders are flipping shares like pancakes. The various stocks have been very volatile, and options trade at implied volatilities of over 100%.

Today is the first day I can recall in awhile that the tanker stocks have gone up despite the contango converging a little bit – spot oil today is up $1 while futures 2.5 years out are up about 20 cents.

Usually when you see that situation in trading (stocks going up despite the fundamental being in rough shape) it aligns well for a reasonable probability short-term trade.

Just be warned the sector is full of foreign players that do not in any way have a long-term sense of shareholder value. All of these shipping companies are going to report gigantic profits in at least the next quarterly reports, however.

I’ve attached a few names of companies in the shipping field. Again, it’s a miserable industry that gets their day in the sun once a decade, and that time is definitely now. Their time in the sun usually lasts for half a year before they get a massive case of sunburn and become cancer for shareholders again.