December 3, 2017
December 3, 2017


Thanks very much for the informative column on bought deals. Two stocks that I own (TAO.V and SLG.V) recently did bought deals, in both cases at about 10% below prior close. In neither case did the price drop the next day to anywhere near the deal price. In fact, by the end of the day the price hadn’t dropped at all.
What would a situation like this tell you, and how would you play it if you had funds to spare?

I’m not sure if it really tells you anything. Commodities are very popular lately and most funds are underexposed. They’re using financings to get exposure without running the prices up. Bought deals don’t always hurt the share price. Most brokers try to put the shares with clients who intend to hold onto them. This is a relationship business. If you burn your investors or the companies doing deals, you won’t get future deals. Most brokers try to do the right thing. Sometimes, they just get caught holding paper and then there are fireworks to the downside.

Thank you for the article on Energold’s recent financing. I have 2 takeaways from it:
1. Fred Davidson may not be as shareholder friendly as you hoped; he can’t be naaive about his actions.
2. Bottom line: “In the end, saving a dollar on this deal just isn’t that much dilution in the scheme of things.”

Fred is shareholder friendly. He’s the second or third largest owner of the company. I’m pretty confident that he’s looking out for shareholders. In the end, this deal really has little effect on the valuation of the company in the long term. I’m a bit amazed at how many frustrated emails I have received. The business is doing well. The shares have nearly doubled in the past few months. I don’t see what the real crisis is. The shares may be under a bit of pressure for a bit, but I’m a long term holder. I’m not going to worry about what happens in the short term.

Is this the same as a PIPE? Sounds identical–been screwed by them in past myself. Also, who builds the rigs for Energold?

I guess this is a PIPE. Same thing really. Not sure who builds the rigs. It’s a private firm.

Thanks again for such a wonderful blog.I was wondering if you agree with the following trend. If yes, how you think one can profit from this trend aside form buying the CDS on JGBs [that is not available to retail investors].

Japan’s weakening fiscal situation

1. 40 trillion yen in tax receipts is the same level from 1985 in nominal terms.
2. Expenses have increased 200% since 1985 to 97 trillion yen.
3. 1 quadrillion yen in total credit market debt = 190% of GDP (U.S. is at 113% of GDP).
4. By themselves, interest expense, debt service, and social security are greater than revenue.

Japan will be forced to restructure within 1 to 2 years

1. Japan debt largely self-funded by corporate and personal savings generated from trade surplus.
2. Personal savings rate now zero and corporate savings rate has fallen to 4%.
3. Japanese population is now in secular decline, working age population peaked last year.
4. Without more people entering the system (“the Ponzi scheme”), Japan will be forced to look for external funding and pay 100-200 extra basis points.
5. Every 100 basis points costs Japan 25% of revenue for debt service.

I’m not sure why you are so convinced that Japan will have to restructure within 1 to 2 years. I remember seeing similar arguments about Japan a decade ago. Only today, the numbers are more egregious. Trends in motion have an amazing ability to continue in motion, especially when very wealthy politically connected people want them to stay in motion. For the record, I’ve been long JPY on and off for years. It seems like one of the best of the worst in terms of currency. I have no position now, as the easy money has been made, but I’m still tempted to think that the Yen goes higher rather than lower, at least in the medium term, if only because trends in motion stay in motion. If I wanted to bet on Japan having a “problem” I would just buy gold. Eventually Japan will have to print money, just like everyone else. Being short JGB has a carrying cost (I hate those sorts of trades). Gold has no significant carrying cost. Eventually Japan will be an epic collapse, but I think they can keep the house of cards together for a lot longer than most people give them credit for.

I just came across your website and I can’t thank you enough for publicly sharing your thoughts. After spending a few hours reading, I have a few questions which I hope you will find worth answering.

1) When deciding whether to invest in a frontier market, how do you get comfortable that the rule of law will protect your rights as a passive, foreign shareholder? Is there a systematic process or checklist you go through? When you visit and talk to people, what questions do you ask, and before you invest do you typically consult with foreign lawyers? If you could elaborate on how you got comfortable with investing in companies listed in Mongolia that would be greatly appreciated.

2)You recently said that the trend in uranium is “still viable”. Where do you see uranium going over the short and intermediate term, or whatever timeframe you are currently thinking in terms of? Have you avoided Uranium Participation because it doesn’t have the explosive upside you normally look for? Have you looked at UEX or Ure Energy?

Glad you enjoy the site.

1–Bad things can happen in any country. You have to just look at precedent and weigh the risks vs the price you pay for those risks. I rarely talk to lawyers. If I get screwed, I have no recourse. I got comfortable with the companies I intested with in Mongolia mainly because no one else comes there to invest. They never meet western investors. They don’t have presentations. They really do not care if we invest or not. Quite a few of these companies were confused why anyone was even visiting. This means that they have very little incentive to try and lie about the earnings. If anything, the incentive is to understate earnings so that they pay lower taxes. Remember, most of these companies have a few large shareholder who own the majority of the shares. These people have reputations to uphold and my hope is that they will do the right thing for minority shareholders because they already own so much stock. A decade ago, it may have been tougher to feel confident, but many of these companies are now trying to clean up their books and prepare for listings in Hong Kong. The disclosure will only get better from here. Does that mean I am safe? Of course not. But I think I will be ok with a diversified basket. In the end, it’s a gut feel thing,

2–I think uranium use will increase substantially in the next few years. I also think that people underestimate how much supply is still out there in the form of warheads. I just don’t see any near term catalyst to get me excited about uranium. There are easier places to make money for me right now. Uranium participation just doesn’t have the upside I would want. UEX is an Athabasca company and Athabasca companies don’t interest me. I don’t think they will ever try to build another mine in that district again (but I culd be wrong). UR-energy is the only one I would ever think of owning. I met with management and was impressed. It didn’t hurt that one of my smartest friends is also one of the largest shareholders there. I actually bought a slug of that at 80c this summer but then sold it when it started to run because I didn’t get a full position on. Guess I should have held on….

Just finished reading todays spew from fleck.  He is all over the bond mkt thinking it has topped.  If so like he said 2011 going to be huge for gold and miners.   You thinking of trying to play the short side on bonds?   Shorting is so tough but this one could be like shorting techs in 2000.

The problem with shorting is that the most you will make is 100% and bonds won’t go to zero (I hope). There are easier ways to make money. If bonds collapse, it is probably because gold is going parabolic. I’d rather play that and look to make a few times on my money. I mean, I own some ABX and it’s up $6 in the last 2 weeks. My AUY is up 15% in the past 6 days. These miners are (finally) running. If gold really ramps, hopefully these things will be worth a big multiple on current prices. Right now, you can buy companies like AUY for single digit multiples on cash flow. It just seems silly on valuation. Besides, why do I still have this suspicion that inflation will be double digits in a few years, but 30 year bonds will yield 150 bps as Bernanke uses QE7 to try and fight ‘deflation’?