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November 2007



Rate Reductions Will Do Little

November 30, 2007 – Comments (4)

There is a saying that we borrow the Earth from our children.  The same is also true of debt, debt is borrowing the future economy.  [more]



The Wealth Effect

November 29, 2007 – Comments (11) | RELATED TICKERS: SHLD

I haven't looked closesly at the financial reports for Sears (SHLD) but looking at the 99% decline in earnings this morning I am question if we are seeing the wealth effect in action here.  [more]



Cashing Out Options for Share Buy Backs

November 28, 2007 – Comments (8) | RELATED TICKERS: BHP

I have consistently been disgusted by what I see in financial reports as directors consistently do what's best for their pocket at the gross expense of the shareholders.  The silence and continued support of shareholders of these stocks with executives robbing astounds me.  [more]



The Best Time To Buy a Home

November 27, 2007 – Comments (7)

I was reading an article estimating what the decline in the LA housing market will be and the one economist is estimating 25% down, bottoming in 2009.  [more]



The Cliff - Novagold's Galore Creek

November 27, 2007 – Comments (1) | RELATED TICKERS: NG

Have a look at NovaGold... It fell off a cliff yesterday.  [more]



Lagging Indicators...

November 26, 2007 – Comments (7)

I am reading a piece by John Hussman, Financial Markets Anticipate Recessions Before They are Obvious.  It is worth reading.  [more]



AZC - Augusta Resource

November 25, 2007 – Comments (4)

Someone asked me why I underperformed this one.  

This one is has to raise the money to build the mine.  You NEVER know what the share/captial structure is going to look like after that.  I saw one that in the matter of how much the markets changed this past two weeks had to offer an additional 14 million shares to investors of $1000 bonds to close the funding deal, for a total of 91 million shares in addition to having to pay 11% interest on the bonds.  Augusta needs to raise about $800 million and what will the share/debt structure look like by the time they do that?

The world is showing signs of economic slow down everywhere meaning there is a good chance we are going into over supply of commodities and commodity prices WILL come down.

The metal grade is not that great, 0.47% copper, 0.015% moly, and 0.12 oz (3.7 g/ton) silver.  At today's prices it is about $43/ton.  Bingham by comparison mined 0.63% copper, 0.057 molybdenum, 0.49 g/ton gold and 3.5 g/ton silver in 2006.  In 2006 that grade averaged about $90/ton, but today it would be worth about $83/ton.  Bingham has in the range of double the metal values.

I don't know how you get better economies of scale than Bingham.  I guess close to 2/3rds of the metal values made it to profits for Bingham.  By comparison, as long metal prices stay as strong as they are right now only about 25% of the metal values of this one would make it to profits.  I don't care what their feasibility study says, as an investor comparing to Bingham is a better idea because it is a working mine in the region that is a highly efficient mine.  They are likely doing a lot of fudging if they suggest they can do better.

The risk involved in raising capital for a mine is such that 10-12% interest rates aren't uncommon.  Equity financing and they'll probably have to issue 250 million shares an another 125 million warrants to raise enough capital to bring the project to production, which would bring to into the range of 500 million shares fully diluted.

Alternatively, debt financing for mines generally costs 10-12%.  I think with the concerns in the economy it would probably be more likely 12%.  By the time carrying costs are paid for getting it going you'd be in for an extra $2-300 million in debt servicing, so by the time the mine opened there's be $1 billion of debt and $120 million of the $219 million would go to debt servicing.  Paying back the mine would be many more years than they suggest.



Conservative Greed

November 24, 2007 – Comments (7)

I have conservative greed...    [more]



Is Zinc Deleveraging?

November 22, 2007 – Comments (1)

An article, Shanghai Exchange More Than Doubles Zinc Price Limits, describes how the margins for zinc contract have been increased and how price controls have been relaxed, if my understanding of the article is correct.

To enter a contract you needed 5% down, but that changed on November 19th to 9% down and it is increasing to 14% on November 22.  That is almost three times the margin requirement and three times the amount of money down.

The price control limited the change in any single day to 6% and that has been raised to 13%.

The changes to margin are enormous.

Frank Veneroso has maintained that metal prices increased beyond reasonable levels partly due to hedge funds buying metals without ever planning to take possession of metal.   With a 5% margin requirement, they could tie up 20 times the deposit on any commodity trade.  Increasing the margin dropped the leverage to 11 times and the final increase drops the leverage to 7 times.  Essentially traders now require about 3 times the money to enter a contract.  If hedge funds are indeed responsible for the huge increases in price, that leveraging has got to fall apart pretty quickly with such enormous increases to the margin.

Zinc exports from China increased by 47% during the first 10 months of this year, which really doesn't say much unless you have an idea of how much of the world zinc market they produce and how much they export.  Data from the US Geological survey suggests that China produced about 25% of the world production, about 3 times what the US produces.  This certainly suggests China is a big enough producers of zinc to be dramatically influencing the price down with such huge increases in exports.

The price declines will result in enormous downward pressure on zinc stocks I've previously followed.

When I looked at Zinifex in July the P/E was around 8.6.  The metal values per ton of their Rosebury mine that they were mining was about $610/ton, but the reserves for future mining were a higher grade at about $800/ton.  Having a higher grade coming up, and not an outrageous P/E to start gave Zinifex room for downward pressure from prices.  The downward pressure on zinc prices have been enormous, however, at today's prices that higher grade reserve still has metal values of over $650/ton.  The Century mine also had higher grade in reserves to be mined.   Costs are in Australian dollars.  The higher grades to be mined are protective, however, zinc prices have come down enough to be cautious with this one now.

I didn't care much for Tamberlane, Breakwater or Acadian.  Tamberlane only had one deposit out of the 34 that had very nice revenue potential and that would only last 1-2 years and the other deposits were questionable.  Breakwater's best mine had metal values of about $410/ton and those are now below $300/ton.   The metal values in El Toqui are down to about $230/ton.  El Mochito's values are down to about $275/ton and Myra Falls about $320/ton.  Myra Falls is showing $1.10 per pound cash costs last quarter.  With zinc below that the mine doesn't look very good at all.  Toqui has $0.76 cash costs per payable zinc sold.  The costs appear to have gone up enormously, from $0.39 per pound payable in 2005.  There has been share dilution to bring the fully diluted count from about 395 million to 461 million.    Acadian estimates 8 million pounds of zinc and 3.5 million pounds of lead.  The costs are estimated to be $12 million.  They estimated $13 million of revenue, but the price declines of just the past days  brings that down to $12.3 million.  At best that might give just under a penny per share for full year production.  It might even run at a loss.

Hudbay minerals looked to be valued at about 2-3x the valuation of Blue Note when I looked at them together.  Today Hudbay's earning look to me like they are heading to the 50c/share for a full year range, and that won't show up on the next quarter, but Q1 2008 would have earnings in the 10-13c/share range based on today's metal prices and exchange rates.  Q4 already has some better metal prices rounded into the quarter.  I saw some serious reasons to see earnings declines when I reported on this stock and they have shown up and further declines will likely happen.

Blue Note's metal values are down to about $315/ton.  They have have not met 2007 production goals, and there has been more dilution.  Production costs are supposed to be in the $66 million range.   The gross revenue potential is still in the $190-200 million per year, but that up to 4c/share earning potential in a quarter is mostly likely gone.  The numbers still look like it has the potential for 1-2c eps for their first full quarter of production, but the first full quarter of production is not likely until 2008 due to problems getting the zinc circuit functioning.  [more]



Jumping Off My Chair

November 21, 2007 – Comments (0)

The markets go "boo" and I jump.  It seems like I've done a lot jumping off my chair in the past month or two at the rapid changes in the market.  [more]



Instilled "Truths"

November 20, 2007 – Comments (3)

It is natural for older people to teach younger people about how they got ahead and to look and evaluate how people who have accumulated wealth did so.  [more]



The Markets, The Economy

November 19, 2007 – Comments (6)





Steel spiel - Schnitzner Steel

November 17, 2007 – Comments (4)

Motley Fool provides some excellent tools to look at stocks,  Walking through what I looked at did not give me confidence in Schnitzer Steel Industries, SCHN.  I did not dig deep, but what I did see says "YUCK" to me.

Open the chart in a new window and set it for 5 years.  The stock was trading around $5 five years ago.  That's about a 1200% increase in 5 years and that kind of growth is always a red flag for me.  I generally tend to think the money that was there to be made has already been made.  There might be strong reasons for that growth, but nothing else I see on the surface makes me think this is a stock worth spending the time to dig deep and really understand it.

If you click on the "Growth Rates" tab on the quote page in CAPS you get some beautiful bar graphs.  Looking at these is what I would say really killed any interest what-so-ever in this stock.  I looked at the 5 year graph after I saw the bar graphs, trying to understand why people were rating this one as outperform.

Revenue growth has been fantastic.  The bar graph shows three quarters that end in August, so $212 million, $605 million and $749 million.  If you compare the 2005 revenue to the 2007 revenue, well, unbelievable growth, about 250%.  Go Schnitzer go!

But...  I'm the type that couldn't give a dang about revenue growth...  The way I look at revenue is say I have two "brands" of blue jeans, both for $50.  Say I make $10 on the one brand and $25 on the other brand.  What's important here isn't my revenue, but how many of the 50% margin jeans I can sell.  If my revenue growth comes at the "cost" of selling less of the 50% margin jeans in favour of the 20% margin jeans, my growth is garbage.

Here in is the problem with Schnitzer's growth.  First, the bar graph shows that earning are volatile, but in the big picture, they really aren't going up much.  The 3 year eps growth is 5.63%, and if you multiply that out, you get 17.9% over the past three years, the period where most of the revenue growth has occurred.  The share price was about $35 then, so we are seeing about an 80% growth in share price for an 18% growth in earnings.

Look at that one year EPS growth.  Is is NEGATIVE 8.2%.  Revenue is up roughly 25% in that one year.  In my books this looks like imploding earnings, and earnings ought to be a significant measure of a stock's value.

Then, I also think about how does this business fit into the economy.  The strongest point it has in its favour is the declining US dollar.  It means that relative wages compare to other countries in this business are declining, making them more competitive.  That may help those dismal margins improve.

But what potentially works against this company?  Steel is energy intensive and $90 oil is very expense.  Do you see the dollar signs with wings flying away as I do?

They have their metals recycling segment.  Metal prices went through the roof, and that's going to have caused revenues to explode, but, if I have scrap metal to sell, as the metal prices go up, I'm going to demand my fair share, so that's why margins did little.  In this business you are going to get periods where timing is going to give explosive earnings and explosive cost increases.  Metal commodities have done the dramatic unsustainable increases and now they are coming back down into line with reality.  My thinking ahead tells me this segment is going to show an implosion in revenue due to metal price declines.  If they are holding too much scrap metal through price declines, that's going to hurt, but over a longer period it shouldn't change the earnings that much.  They will pay me less for my scrap metal going forward, earning should not change that much, but it explains why that amazing revenue growth isn't worth much.  If metal prices decline too much, it may be hard to find scrap metal for sale, and that will hurt this segments earning.

Then they have their auto parts group.  I just don't see this kind of business doing well.  The competition for used vehicles is going to go up as people buy less new vehicles, so their costs here have to go up.  I can see demand for this segment increasing as people patch up older vehicles, but it seems all costs associated with it will increase significantly.

If I look at debt over the past three years I see $7.7 million in 2005, $103 million in 2006 and $124 million this year.  It isn't high relative to revenue or even earnings, but it is has increased a lot relative to the almost flat earnings by comparison.

Now, look at the dividend they just declared, $0.017/share.  It hasn't increased since inception in 94.  That's 6.8c/share per year, or one tenth of one percent.  Seriously, even if I go back to that $5/share price 5 years ago the dividend yield was still only around 1.4%.


This was something else interesting to find, I calculated about $2 million in dividends based on all shares yet yahoo is saying there was $6 million paid out, so a closer look, dividends $2 million and minority interests $4 million.  The dividends paid in two years have declined a bit, 1.6%, I guess due to the share buy back, yet the minority interest payment has increased , by 1.7%.  I didn't find out how the payout to the "minority interest" works, but it is working better for the minority interests than dividends are working for share holders.  I was looking for a reason that company is making over $100 million per year yet only paying out $2 million in dividends and no increase.  It looks like capital expansion.  The capital expansion for 2006 was much larger than for 2007 and judging by the decline in earning growth, well, it does make the picture look much worse...

Words I do not like in a volatile period "fully leverage its investments in PNE and MRL."  I don't know what that means, but in an up market fully leveraged is a total cash cow, but look out if the market turns.  Leverage can wipe you out.

And what would a look at a stock be without looking at what the insiders are doing?  In the last six months net sale of 706,631 shares, leaving insiders still holding a total of 500,350 shares.  Insiders have reduced their holdings big time, to about 2% of the shares.  Institutions are net sellers as well, selling 1.6 million shares in one quarter.

Dang, I did go opening the annual report.  California accounted for 42% of the steel manufacturing business.  How much of that went into condo construction?  "The steel manufacturing business customers are principally steel service centers, construction industry subcontractors, steel fabricators, wire drawers and major farm and wood product suppliers."  This doesn't look good to me.  They use natural gas and they will actually see a decrease in costs here.

I decided to take a look at the world market, emerging economies and such.  This is a story I found,  Must I learn geography to write a post?  Banladesh sounds like an emerging economy place, you know, India, but I admit my knowledge here isn't that good, all of India is emerging or just parts of India.  Regardless, this article talks about steel rods being stockpiled in India due to a downturn in construction in INDIA.  That growing world economy thing doesn't sound good from this article.

$110 million share repurchase.  That $110 million means that each share now "paid" $3.75 plus carrying costs to do this.  It looks like about $7-8 million in interest per year, or about $0.25/share per year carrying costs for the first year.  Net tangible assets are about $16/share, fully diluted.

What the heck does "Stock options totaling 200,00 and 600,000 shares as of August 31, 2007 and 2006, respectively, were excluded from the calculation of diluted earnings per she because the options were anti-dilutive" mean?

When I look at the market cap on Motley, it looks like they are not including the 7 million something class B shares in their calculation.  Yahoo is better,

I can't stand goodwill, and goodwill seems to be the fastest increasing "asset" on the balance sheet.  Over two years shareholder's equity has increase by 32%, yet if you only look at the tangible assets, well they are only up by 13%.  Share price was about half of what it is now two years ago, well, about $33 vs $63.

So, my main reasons for not liking this one are:

1) Poor earning growth relative to very high revenue growth
2) Downward corrections in metal commodity prices
3) Useless dividend and no dividend growth in 13 years.
4) Insiders and institutions selling out.
5) High energy costs can squeeze earnings
6) Parts business will see increased costs from increased competition for used vehicles.
7) Increased debt.
8) Reliance on construction industry in some poor looking markets for sales.
9) Debt for share repurchase.
10) Capital expansion from 2006 shows no benefit for earnings in 2007, ie, growth is negative 8%.  [more]



Inflation or deflation?

November 16, 2007 – Comments (13)

Which will win out?  The $42 billion cash injection by the feds is inflationary, you can't print money and not expect prices to go up, and the amount of that cash injection leaves me bewildered, kind of like how I was jumping out of my seat each day I saw the US dollar drop compared to the Canadian dollar until that trend reversed.  Certainly a big cash injection will prompt more devaluation of the US dollar.  [more]



What's a bear to do?

November 15, 2007 – Comments (4)

So, look at the day, what was good about it?  Last post mentioned some of the news that seems constant to indicate that we are heading for a serious down turn in the market.  I couldn't help but notice the news all seemed "bad" still.  [more]



Breaking the Buck...

November 15, 2007 – Comments (7)

There is no question that I am a strong market bear.  The evidence that crosses my Google Reader (reader excellent product, I strongly recommend checking it out, the stock way overvalued) spits out daily evidence that hard times are coming.  [more]



Investors did not read the memo

November 13, 2007 – Comments (0)

Another post I was reading this morning,, posts graphs of Freeport McMorgan.  I love the way some writers express themselves,  [more]



Lies can last for a long time, but they are still lies

November 13, 2007 – Comments (3)

So, I am calling the "truth" that the stock market always goes up and you are always better off investing there a lie.  [more]



104 Basis Points Nightmare on Elm Street...

November 12, 2007 – Comments (1)

I just came across another blog post of interest to read...

Reggie Middleton's scary halloween story... 

My motto, if there is going to be a panic, be the first to panic... 



The Friday Sneak

November 11, 2007 – Comments (1)

One of the blogs I follow is "Economics Briefings."  I do learn from this blog and something that caught my attention is the effort to reduce the impact of news by when it is released, as in this story,  [more]



AMAZON is garbage

November 10, 2007 – Comments (0)

I just read a reply on the bear pitch for this stock.  [more]



Currency contrast of commodity prices

November 04, 2007 – Comments (1)

I am Canadian and as such when I look at commodity prices I convert to Canadian dollars.  Earlier in the year the conversion meant adding as much as 19% onto the US quoted price yet today it means take 7% off.  [more]

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