Category: Equity

Gold Wheaton gets bought

Gold Wheaton (TSX: GLW) sold itself today for 40% cash and 60% stock for about CAD$830 million. The acquiring company is Franco-Nevada Corporation (TSX: FNV). The buyout price caused a jump of about 14% in GLW shares today.

Both corporations are very similar in that their economic interests lie with royalty streams derived mainly from gold mining. FNV has other metals and oil and gas royalties as well.

I have done a lot of research on the valuation of Gold Wheaton, primarily because of its relationship to First Uranium (TSX: FIU), and can safely say that FNV paid what would be the high end of a fair value range for Gold Wheaton’s assets. The primary variable would be the assumption of the future price of gold.

Gold Wheaton does own an equity interest in First Uranium (14 million shares or a 7.7% interest) plus $20 million in First Uranium senior secured notes, which if converted into shares, would result in an increase in equity ownership to about 10% of the company.

I generally do not believe in the royalty trust model of company, in that the administrative costs and management salaries generally are overburdened by economic benefits of purchasing cash streams from mineral proceeds. Royalty companies then become a matter of getting capital cheaply and investing into projects with a higher return, which means that you are investing in a bank that is choosing to align itself with the price of a commodity. There is usually more value created with mining operations than purchasing royalty streams, but it depends on the whims of the marketplace at that time.

Such companies become a bet on the underlying commodity price and the ultimate control goes to the company that you are purchasing the royalty from – if they suddenly decide it is unprofitable to mine from a particular venture, they will have a higher incentive to doing so if they have a lesser share of the revenue. The company purchasing the royalty will be out of luck at that point. In Gold Wheaton’s case, the Quadra FNX (TSX: QUX) venture was quite profitable for Quadra, who wisely chose to sell their nearly 1/3rd stake in Gold Wheaton at an opportune time.

One person to pay attention to in the future is soon-to-be former CEO of Gold Wheaton, David Cohen, who seems to be fairly good at being involved with companies that generate value. He is the chairman of Eastern Platinum (TSX: ELR)

I will disclose I flipped some GLW shares like pancakes in 2010, which created some capital gains that would purchase quite a few pizzas. I currently have no position and have no further intentions of acquiring anything related to FNV.

Sleeping through 1999 and not learning the lessons of the past

It appears that China-related IPOs that list on the US exchanges are the latest fad, with Youku.com being the latest example. Shares (Nasdaq: YOKU) went up 161% upon their offering, and reached as high as $50/share from an initial price of $12.80.

Doesn’t anybody remember what happened in 1998 and 1999? Amazing how history is repeating itself. The only difference is that these companies are foreign, and even less accountable to shareholders than if they were domestically held!

Already you have a chorus of people that say the company is overvalued and ripe for shorting, but most prudent investors know that timing when “the top” will be is exceedingly difficult – a phrase to always remember is that the market’s ability to remain irrational can be longer than your ability to remain solvent. It will just be a matter of time, but predicting when this Chinese asset bubble will finally deflate will be a matter of debate – until after it occurs.

Although I am sure there will be some Chinese equities out there that will be stable and provide a decent return on investment, it should be noted that management is even more entrenched in these companies than in the US/Canada, where at least you can pick out some corporations that have shareholders’ interests at heart. It is impossible to pick out the very suspicious cases (e.g. earlier coverage of Universal Travel Group, NYSE: UTA) versus the legitimate companies. Investing in Chinese equities feels more like pure gambling, hoping for the herd to ram the share prices higher, rather than investing or even “speculation”.

Anybody from North America playing these types of equities has to realize that they are playing against players that are loaded with insider information, and Chinese language/culture knowledge. As a result, people would have to be insane to invest in these types of companies. It’s like going to war with a pellet gun when your opponents are armed with sniper rifles – and you don’t even know what your opponents were armed with when you entered into battle.

I am sure there will be a few people here and there that will be bragging about the small fortunes they made by investing in Chinese equity, but this is the financial equivalent of reading the list winners from the last lottery.

Lululemon goes ga-ga

Lululemon (Nasdaq: LULU) is up another 18% today, as of the time of this writing, after reporting a much better than expected quarter (36 cents EPS on 25 cents analyst consensus).

This tells you what I know about fashion – I wrote about their previous blow-out quarter, warning that:

They will need to continue achieving rapid growth in order to grow into the existing valuation. If not, you will see a significant haircut in the stock price

… and …

Lululemon is a classic case of a well-run company that you do not want to own stock in.

This was back at $40/share (or a 2.8 billion market capitalization). Today, I see $66/share or a $4.6 billion dollar company!

Where did I go wrong? Don’t underestimate social trends when it comes to fashion – most importantly, I should have taken the subtle hints when I see family relatives wearing Lulu material. From my neanderthal male perspective, I remember walking into a Lulu store outlet with my wife, and while she went looking for some overpriced pants, I was looking around the store, asking myself how the heck they deserve a $2.8 billion dollar valuation when it is so clear that they will be prone to predatory competition.

Financial lesson of the day: Never underestimate the value of brand.

I have never had a position in LULU stock, and plan to keep it that way. I will disclose I did consider buying shares at $5 in the middle of the 2009 economic crisis, but decided on going with long term corporate debt of another fashion star, Victoria’s Secret (Limited Brands) instead, so I’m not kicking myself too hard about the matter.

Even though I don’t understand the fashion world, from an investment perspective I have always found it to be utterly fascinating because of the intense amount of “social research” required in order to properly value these companies.

A minor follow-up on BP

I note that BP (NYSE: BP) traded as high as 44.37/share – I had projected during the brunt of the Gulf of Mexico oil spill that BP would likely rise to about $42-$47/share by the end of the year. It’s pretty close to the end of the year, so I would consider this to be a successful prediction.

There are so many other factors affecting BP’s valuation that there is no longer any “political edge” to the stock valuation, beyond the usual political considerations that go around with oil companies. All of the transient effects of the oil spill have been well priced into the stock – notably the implied $50 billion cost of clean-up, which has been cleanly lopped off BP’s market capitalization.

The company took a massive charge-out, so it will be showing negative net income for the next 9 months, but after this they will be showing their usual large profits – around $18 billion or so. This gives them a valuation of about 6-7 times projected earnings, or about a 15% earnings yield. Assuming the market mania for yield continues to maintain itself, whenever BP gets around to re-instating its dividend (which was historically 84 cents per share per quarter), this will give it an 8.1% dividend yield, and then the lemmings will buy into the company, raising its valuation.

General Motors IPO trading on the market

It was a virtual guarantee that General Motors would start trading above its IPO price ($33/share); given that this company is purely a political entity at this point, it would have been disastrous for the IPO to crash on the initial day in the marketplace.

Given the fact that GM has not really solved any of its fundamental business problems (high costs, inferior products) it will be able to successfully use its government-held ownership to bend rules toward its favour.

Suffice to say, I would avoid this company by a long mile.