Let’s Talk Risks…
March 14, 2010
Comparing 16th Century Spain To Current Conditions
March 15, 2010


We owned shares in Oceana Gold, (OGC: Canada). They had stable yet depleted mining assets in New Zealand that were clearly worth more than the whole company. They also had acquired a gold property in the Philippines named Didipio. Didipio, once built, was going to take the company to the next level. We were enamored with it, but it was going to cost AUD$154 million to build it—money that the company didn’t have. Who cares, a good asset will eventually get funded—that was my reasoning at least. Everyone assumed it was indeed a good asset. Even if they couldn’t get it funded, the New Zealand assets were worth more than the share price anyway.

As they fine tuned the engineering report, rumors began circulating that the project was looking to be over budget. When was a mining project not over budget? However, what’s a 20% overrun when the mine economics looked so good. I bought some shares and sat down with the CEO for breakfast. I should have let him pay—it was one of the most expensive breakfasts in history. He admitted that things were over budget, but it was nothing dramatic. The engineering firm was a bit worried about some excess water. A few pumps would be sufficient—there wasn’t much ground-water anyway. Besides, the price of gold was up since the original budget was produced. Who cares if the mine was going to be over budget? The increased gold price more than made up for it. Why did he keep talking about water so much? I don’t know what got into me, but I doubled my position as the shares declined. If I liked it at $2.75, I must love it at $2.25

For good measure, I sent Mark Zabel, a fund analyst and mining expert, to the Philippines to see what he thought. When he called me, his first comment was, “This mine is at the bottom of a valley in a rain forest. The first time it rains, it will become a lake. This isn’t a little water problem. This is a MAJOR problem. This isn’t going to be a mine. Sell it.” Groundwater wasn’t an issue—simple rain was. Did I mention that the region gets hit with a typhoon once a year? This mine wasn’t going to be over budget by just $50 million. Mark thought they’d be over budget by a hundred million or more. That changed the economics significantly.

I sold half—thankfully. A month later, they announced that even Mark was conservative. They planned to build a tunnel running under the mine for miles to the ocean. It would be needed every time it rained. They needed AT LEAST $320 million more to build the mine. The economics were shot—yet they still intended to build the thing. Simple hubris.

I sold the rest of what we owned at $2.15. Six months later, it traded for 15 cents. The whole way down, management assured investors that the mine could be built. Maybe it can be. At least we won’t own it to find out. A plane ticket to the Philippines is expensive—but cheaper than losing on an investment. ALWAYS trust but verify. Always do the work—even if it’s time consuming. I lost a few hundred thousand dollars. Had I not sent Mark, I would have lost a few million.

Categories: Past Investments
Positions Mentioned: none

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