12/06/2010
December 3, 2017
11/29/2010
December 3, 2017

12/03/2010

Two weeks ago, you said you were going to participate in the Impact Silver (IPT.V) financing at 1.25. Do you intend to write more about it?

Probably not. The stock is now 40% above what I paid just last week. Feels kind of silly to say anything about it now. Heck, even my $1.75 warrants were in the money for a few minutes this week….

The quick and dirty is that in 2012, they plan to produce 1.5m oz of silver equivalents at less than $10 cash cost. Toss in smelter fees and SGA and maybe their all in cost is around $13/oz. Silver is $28 now. That would be $15 of margin or $22.5m of pre-tax cash flow. 10x that gets you a bit over $3 a share. However, that gives you no value for a huge and very prospective land package where they continue to make discoveries. It also gives you no credit for the expected expansions on the Capire silver project using debt to fund growth. It also gives no credit for some huge gold intercepts recently at the Carlos Pacheco veins.

Basically, this is a company that is growing production 20% a year through organic growth. They’re reinvesting cash flow at very high returns on capital and adding more production capacity and more veins every quarter. It’s a small but really brilliant operation. I would expect nothing less from Fred Davidson. I am always disappointed to see dilution, but when I saw how the $15m they were raising was going to be used, I realized that it made a whole lot of sense to materially increase production at a rate beyond what could be done from simple cash flow. For me, this is more a bet on Fred than anything else. The knock on the current assets is that they’re somewhat narrow vein and somewhat lower grade as many of them have been high graded in the past. However, Fred still manages to produce the asset at an amazingly low cost level. It is also pretty small so it will take a while before the market really notices it.

Of course, this year they will likely only produce 1m oz of silver equivalents and there’s no way to know where silver will be in a year or two. Hope that helps.


It’s not the first time Mark Hart has come up with its short thesis on China, a bit similar to Jim Chanos’ thesis. Please see the link here at The Telegraph: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8166440/Hedge-fund-manager-Mark-Hart-bets-on-China-as-the-next-enormous-credit-bubble-to-burst.html

What do you think?

Everyone wants to see China as a massive bubble. I think it will have setbacks and there are clearly massive misallocations of capital. I think that more of China’s economy is real as opposed to ponzi scheme. I just am not very bearish on China right now. It will be a bubble eventually–a bubble is usually a good idea taken way too far. This will happen, but we’re in the early stages still. The country doesn’t have much debt and they are very cash rich with a government that intends to prop things up if there’s a wobble. I very clearly saw the US housing bubble for what it was. This feels like 2004 to me in China. We’re not there yet. The wild and crazy phase is just starting. Anyone who’s shorting now is asking for some pain before they’re paid.


Hey Kuppy, great blog man thanks for all the hard work. I remember you mentioned that you deconstructed the fastest growing stocks since the 1950s and came up with your framework. I’m planning on doing the same thing but, i dont know where to look for all this data. Any suggestions?

Every year, businessweek and fortune (and those sort of magazines) come out with lists of the fastest growing small companies. That’s where I started. I went to the library and printed out the lists that were published 50 years ago. Usually one of those sorts of magazines also has a list of best performing stocks that they’re gushing over. Hope that helps


Thanks for the blog. Your commentary is very insightful. Just wanted to ask a couple questions about the general trend in mining exploration and relation to commodity prices. You mention that exploration budgets, which are very much a function of current commodity prices, are set to return to 2008 levels, if not surpass them. I’m wondering if you have any idea of how much these prices are supported by a weaker dollar and/or demand from china?

I’ve heard staggering statistics about inefficiencies in China leading to some overwhelming over-consumption of commodities, which, coupled with the dramatic misallocation and ridiculous FAI% of GDP could lead to a huge drop-off in real demand if this corrects itself, which would likely occur with a strengthening of the USD or GLD (flight to safety). This scenario poses a potential disaster for most non-GLD commodity prices.

Ultimately, my question is A) do you see this as being likely and B) how do you think world exploration budgets might fare in such a scenario? It does seem that, regardless of these short term movements in commodity prices, at the end of the day these majors have to replace reserves or else they have nothing. Thanks!

You might be overthinking this. I think metal prices go up many times from current prices in the next decade because of lower grades, higher strip ratios, higher costs, reduced reserves and government induced inflation.

A) It’s a risk, but more than half of all exploration dollars go into gold and silver. So it’s something of a counterweight. Baically, every year, there are winners and losers in the commodity complex. Mining companies tend to spend on where prices are high and juniors mostly raise money on what’s doing well. In this way, it sort of balances itself out each year. The best part is that with mining service companies, you don’t have to chose the right commodity–just the right company/management team to service them.

B) There’s no way to know. If they don’t significantly ramp up spending, in a few years, there won’t be anything left to mine. In that case, prices will go parabolic. So, in a worst case scenario, I might just have to wait a few more years for demand to return.


Kuppy, What are you doing to protect yourself from a deflation scenario?

I’ll let Paul Krugman worry about that for me….

In all seriousness, there’s absolutely zero chance of deflation. Zero. As in none. Not until they take the printing press away and the government gets serious about tackling deficits. I see nothing at all to make me think that this will happen any time soon.

In fact, I’m so worried about inflation that I did the unthinkable… I’ve been about a quarter in cash for almost a year now. I got so scared of owning the cash (even if it is in currencies that I can trust) that I went ahead and bought a basket of large cap gold mining companies a few months ago. I know these companies are terrible businesses, but I figure they’ll do better for me than cash. For the first time in years, they’re cheap on cash flow metrics and the ones I bought are finally expecting some growth in production over the next few years. I’m not sure if this is something I will hold for the long term, and I’m not sure what my upside is, but I’d rather own these things than cash or bonds. There will be no deflation. Repeat after me… None.