Equity – Page 33

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!

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.

Yellow Pages aftermath

I couldn’t think of a worse stock to be holding (other than cruise ships, airlines and tourism stocks) than the Yellow Pages (TSX: Y) during the CoronaCrisis. It ticks the Corona-Avoidance investment list of “non-essential”, “small business” parameters. On the flip side, the type of work they can do can be done remotely by employees, if they have the right mechanisms for remote work. Not helping is that their headquarters is in Montreal, Quebec, and the province of Quebec is nearly competing with Italy for the COVID-19 management award (for those sensitive readers out there with relatives in elder care homes in Quebec: this is not to make fun of what is going on – it is indeed very tragic, both in Quebec and around the world).

A very smart investor I respect (John Cole) dumped out in early March, noting the stock’s bad liquidity and getting an opportunity to bail out just as the Coronacrisis was coming into full steam, but also citing customer comments over the internet as being incredibly adverse. Indeed, it doesn’t take too much searching to find people incredibly angry at the perceived value they received, coupled with being locked into one year contracts that they can’t get out of mid-term. These concerns came up to me in my initial due diligence screens (indeed, it was pretty difficult to avoid it) but I will just retort with two words – Rogers Wireless. You (mostly) only hear about the complainers that have experienced some sort of injustice (name it – roaming fees, data overages, billing issues, long distance, SMS scams, whatever). This is exactly why every telecommunications company has developed ‘flanker’ brands, so their primary names don’t get sullied (Rogers – Fido/Chatr, Telus – Koodoo/Public, Bell – Virgin, Shaw – Freedom). When you have 153,000 customers with an average annual billing of about $214/mo, you’re going to get some pissed off people over anything, especially if they are sold some $25/mo web package and they don’t discover their sales quadruple overnight.

Some companies have gotten smart about this (“reputation management”) and have started to overtly hire third parties to manage the image of certain brands, by basically spamming the internet with false reviews, and so forth. Explicitly note this is not an accusation of Rogers/Bell/etc. doing this, but in a world where it is perceived that having a positive reputation on Google Reviews, Amazon, Yelp, etc., make a difference, you can be very sure that there will be entities out there that will explicitly game the system.

I even look at people that complain about Interactive Brokers, and having used the platform now for more than 15 years (and still finding it superior to anything I have seen out there, which in itself is an amazing accomplishment), hearing people talk about it negatively makes me chuckle. Questrade has a small staff that is dedicated to their online reputation management. (Indeed, if you want some amusement, go read this Reddit thread claiming the poster lost a bunch of money trading options due to Questrade being down, and apparently at some point the police got involved because he threatened to burn down their offices).

Angry customers love to make noise. They’ve been burnt, it is personal, and emotional, and emotions cause people to do very strange things, some of which gets online. They will do so 10 times, if not 100 times more in magnitude than happy customers will openly praise.

It leads to the conclusion that Yellow Pages’ big mistake on this front was not engaging in more proactive “reputation management”, which is a mild slight against them given that they’re now in that business sector! (Hint hint, if anybody from Yellow Pages executive management is listening, this is a pretty good business segment to get into…)

But anyhow, I go back to the original topic. Prior to Covid-19, and especially after their February quarterly report, all of the stars were lining up on the astrology charts for their stock to break out into the upper teens. It was really obvious. Then Covid-19 hit, and everything went to crap. I managed to get some liquidity on the way down and it is no longer my largest holding, but I do own a moderate amount of stock, although I would have preferred to diversify it into some other holdings, especially in late March and early April. At the price they were trading at those times, there was really no point in liquidating (my estimate had them still worth more).

Also, it was very peculiar that Goldentree Asset Management was purchasing shares of Yellow in the upper 6’s (the last purchase being on April 15) and prior to this they were a 30.3% owner in the company. Were they doing this for value, or were they doing this to keep the asset value on their balance sheet at an acceptable level? One will never know. Although they filed twice to sell shares (February 3, 2020 and March 5, 2020) they never sold any.

What are we going to see in the upcoming May 13, 2020 quarterly report? Oddly, I’m expecting a reasonably decent quarter, but with cautionary notes of collections and uncertainty regarding Covid-19. The biggest problem going forward deals with the following line on their AIF:

Furthermore, the Corporation has entered into Billing and Collection agreements with Bell (up to 2020) and Telus (up to 2031), whereby each performs billing and collection services on behalf of the Corporation, including billing and collecting directory advertising fees from certain Yellow Pages customers who are also customers of the Telco Partners.

Bundling of YPG billings in Bell Canada’s billings ends on December 31, 2020 (page 37 of the MD&A) and most business owners will pay consolidated phone bills, but it is less likely they will pay for separate billings.

A few other notes of mention:

The company on April 15 announced they opened an NCIB to repurchase YPG.DB, which makes sense as they were going to do so at par in May 2021. Might as well do so now (and even at a mild discount) and save the coupon, although the total amount they can obtain is limited to liquidity and a block purchase every week.

Finally, the CEO has a significant carrot that is dangled in front of his nose as per the following in the management information circular:

Pursuant to Mr. Eckert’s Long-Term Incentive Plan Grant Agreement, a one-time grant covering the three-year term of his agreement of 701,875 Options at a stock price of $7.97 per share was awarded to Mr. Eckert on September 15, 2017. The Options are to vest and be exercised on September 15, 2020 at 9:30 EST. The Corporation is to cause a cashless exercise of the Options, whereby the cash proceeds are to be paid to Mr. Eckert as soon as practicable after the settlement of the sale of the underlying Shares. Further, pursuant to Mr. Eckert’s Long-Term Incentive Plan Grant Agreement, a grant of 701,875 Share Appreciation Rights (‘‘SARs’’) was awarded to Mr. Eckert on September 15, 2017. The fair market value per share on the September 15, 2017 grant date was $7.97 per share. The SARs are to vest on September 15, 2020 at 9:30 EST. Upon vesting of the SARs, Mr. Eckert will receive a payment in cash representing the excess of the fair market value of Yellow Pages Limited’s shares on the vesting date less the fair market value of Yellow Pages Limited’s Shares on the grant date. Mr. Eckert’s Long-Term Incentive Plan Agreement also included a grant of 156,839 RSUs. The fair market value per share on the September 15, 2017 grant date was $7.97 per share. The RSUs are to vest on September 15, 2020 at 9:30 EST.

Can anybody say “incentive to get the stock as high as possible on September 15, 2020?”.

I still believe the end game for the company is to be taken over in a strategic acquisition by some other marketing company. Possession of a 150,000 customer base paying an average of $2,500/year is not a trivial asset, and it would merge quite well into a digital marketing firm looking to increase its customer count and penetration into a wide market across Canada.

Overall, however, COVID-19 has put a huge dent into the thesis. Part of the ultra-bull case was reliant on momentum trading combined with ETFs blindly getting in because the company is going to be a dividend stock. I still believe they will issue a dividend, but a smaller one than the 11 cents per quarter they originally intended on from their February announcement. Fundamentally, businesses still need to reach out to the universe, and they will do so digitally. But if the underlying businesses are hurting (which they are), it will most certainly lead to continued revenue pressures, which does very little to “bend the curve” since everybody else is so focused on trying to flatten it!

Buffett on his AGM

He sold out his airlines. Not a surprise since the Form 4 of him dumping Delta and Southwest Airlines. He’ll be able to apply the capital losses to previous capital gains and do okay. He’s correct in saying that aviation will not be the same as it is today for a long time. Just looking at YVR inbound traffic, it is a dim shadow of its former self – apparently passenger flow is down about 90%. This is going to take a very long time to recover (indeed, if at all). You want to go to another country? Most of them will require you to spend 14 days in a virtual prison – in Canada, you get less of a jail sentence for most petty crimes!

We learn that Berkshire’s still sitting on over $130 billion in cash and equivalents, and there are a few ways to spin this:

1) “He’s holding onto so much cash, so the markets are still expensive!”
2) “He’s holding onto so much cash that will have to find its way into the market!”
3) “Buffett’s totally lost it, he missed out on the investing opportunity of the decade!”

Personally I think he’s at the point where if he isn’t going to be investing $50 to $100 billion into something, why bother? I would think that taking over Boeing would be in his ballpark, especially after his comments on the airlines… I will point out that Boeing’s market cap is $75 billion and needless to say, would be Buffet going out with a huge bang (one would have thought Burlington Northern was the crowning achievement, but I always remember the phrase “Planes, Trains and Automobiles”, and how would you get closer than by buying out Boeing?).

Either that, or he could pay a few bucks and put Bombardier out of its misery!

Birchcliff Energy preferred shares

The market is starting to normalize again. We’re about half-way done on the up-side, and I estimate while there will be some minor panics here and there that will bring things down 3-5%, in balance you’re going to see things get back to at least where they were before the end of the year.

I’ve taken my fair share of these shares (earlier in the month), so I’ll post it to the public since there is plenty of upside. I’ve written about them before, so this is going to be somewhat redundant.

Birchcliff Energy (TSX: BIR) is a natural gas heavy producer. They are a low cost producer, refine their own gas, and they will survive. They are primarily financed by a low cost line of credit which is not in any danger of having the plug pulled. While their equity remains undervalued (and insiders also believe the same, especially those that were buying when the stock was under a dollar), the even better risk/reward are the preferred shares.

There are two series. BIR.PR.A is a standard fixed-reset perpetual preferred share, currently 8.374% coupon with a +6.83% reset rate, resetting September 2022. Even at the present Government of Canada’s 5 year bond yield of 0.41%, at current market rates it will reset at a 10.5% yield. It is conceivable that they will trade up to par again, just as they were for most of 2017 to 2019. A ‘quick’ capital gain of roughly 50%, plus you’re given a very healthy 12% eligible dividend. Even with the Bank of Canada turning our currency into toilet paper, your real return will be positive.

BIR.PR.C is a straight perpetual share with a coupon of 7%. After June 30, holders can put their preferred shares back to Birchcliff at par, which BIR has the option of paying cash, or giving stock at the 20 day VWAP or $2 minimum per share. Considering BIR is trading at $1.57/share, this works out to a discount to the current preferred share value ($17 for the preferred shares vs. $19.60 in BIR stock). I don’t know what the term is in finance, but it creates a “Mexican standoff” situation where if this continues past June 30th, I don’t think holders will be too eager to redeem, nor will Birchcliff be too eager to redeem either. In the meantime, you can collect a 10.3% yield (assuming a $17 purchase price) for waiting. The obvious price target is par, although if you get fancy you might be able to get a mild premium.

I generally believe the worst is over for oil and gas, and as a result, all of this is going to be a moot point when BIR goes higher later this year. Why not buy the equity? There are worse things you can do, but the preferred shares are pretty much a lock for appreciation on a risk/reward spectrum. For every 1% the equity goes up, the preferreds will probably get around 75% of it until they get closer to par.

Of course there aren’t any guarantees of 50% gains in a few months’ time, but this one seems feasible. The risk scenario is that the common stock meanders about and you collect an ultra-high coupon while waiting for natural gas demand to rise. In the case of BIR.PR.C you end up with 12.5 shares of BIR.