Finance by a Croat

Bear Stumbles

croatz — Mon, 17 Mar 2008 06:53:38 +0000

Within the last hour there have been monumental developments in the American Financial System: Bear Stearns Co. was acquired by the Federal Reserve via JPMorgan for $2/share. Yes, that’s correct the FED will act as the executor of Bear’s assets in order to ensure an orderly unwinding. At least that’s what they are hoping for. The implications to rest of the banking system are huge – the true value of mortgage assets in the current market is nothing.

Will the contagion spread?

Weekly Reading

croatz — Wed, 09 Jan 2008 03:31:42 +0000

The Economist: Business This Week

PIMCO’s Bill Gross: Pyramids Crumbling

Hussman Funds John Hussman: Minding the Hinges on Pandora’s Box

MSN Money’s Jubak’s Journal: Profit from a Stupid Energy Policy

Euro Pacific Capital’s Peter Schiff: Eyes Wide Shut

Novagold Roars Back

croatz — Wed, 09 Jan 2008 02:54:39 +0000

The gold rush is on, with the gold-tracking ETF (GLD) closing at $86.78 (each share represents 1/10th of an oz of gold) – up $20/oz today – and implying a current price of $867.80 per oz of gold held in the ETF.

Recent Development: Government upholds Environmental Permits awarded for the Nome Project – expected to reach commercial production levels in Q1 ’08

Share Price: Closed at $11.36 up more than 86% from its December 17 low of $6.08

Nova – Where do we go from here?

croatz — Sat, 15 Dec 2007 20:56:11 +0000

Although Novagold’s loss was the result of a company-specific event, it is not alone in the industry in experiencing these risks. Rapidly rising mining costs are an industry-wide risk, especially when coupled with lenders insistence on using drastically lower commodity prices to assess the economic viability of new mines. Another industry-wide risk that has been increasing is the geo-political factor that many mining firms face from operating in volatile regions around the world. As Novagold operates mines in countries with strong legal and political systems they have dramatically lower risks in these areas versus the industry as a whole.

The Good: Lawsuits with Barrick settled – Novagold can move forward on the important Donlin Creek project

Donlin Creek – Considerable Gold Reserves, Exploration Stage

Geo-Political Risk: Minimal, Nationalization is not a concern

The Ugly: Novagold is down another 16% to $7.98 since dropping from $20.24 to $9.48 in a single day

Sources:

Details of Novagold Barrick Settlement

Chart courtesy of BigCharts.com

Novagold’s 5-day performance vs GLD

Round Two: Writedowns

croatz — Mon, 10 Dec 2007 10:21:59 +0000

UBS is taking another $10B writedown on top of the $3.5B it had already written down due to the US mortgage crisis.

Of note is the $13B capital injection the bank received ($11 from the Swiss government and another $2B from a state-run middle-east investment house) illustrating just how expensive and difficult it has become to raise capital in the open markets.

Is this the beginning of Round Two of the credit crunch?

Novagold Responds

croatz — Mon, 03 Dec 2007 06:49:35 +0000

In this Street.com interview Novagold CEO Rick Van Nieuwenhuyse reaffirms the value of his firm’s mining portfolio and prospects for developing the halted Galore Creek project.

Talks about: Price Estimates Used, Prospects for continuing Galore Creek, Novagold’s future

Watch the video here:

Novagold Responds

Novagold Part 2

croatz — Wed, 28 Nov 2007 10:59:03 +0000

After listening to the conference call that Novagold hosted regarding the Galore Creek work-stoppage the news isn’t as bad as it first sounds.

Recap of The Bad: Costs are roughly $3.2B higher than initially estimated ($5B instead of $1.8B), Mine Construction Halted

Updates: Canadian Dollar NOT a factor in decision, Not all of the engineering studies are in and $5B may prove to be in the upper-range of cost estimates

Major Factors: Scope and Duration – changing these factors also increases the Complexity

Right Now: Firms (Novagold and Teck Cominco) Spending $72M to determine feasible alternative mine development methods

Caveat: The long-term commodity prices used in their assumptions

During the CC Management alluded to the fact that the copper price used was in the range of $1.50/lb – Current trading price is $3/lb

While they did not commit to a price range for gold it is safe to assume that they are using gold prices significantly below $800/oz

Assumption of Price Used: $475/oz

The Upside: This remains one of the largest recent copper finds in the world and it is located in a Politically Stable Region

If commodity prices remain high this project may find itself feasible (and very profitable)

Listen for yourself:

Novagold Conference Call

Nova…gone

croatz — Tue, 27 Nov 2007 10:47:15 +0000

Novagold turned upside down and gave a perfect illustration of company-specific risk that investors assume when selecting individual firms versus an entire industry or the commodity itself. Look at this (scary) chart:

Where do we go from here?

Reason for decline: Cancellation of a major mining project by their partner Teck Cominco

Reason for cancellation: Dramatic Cost Overruns

What changed? Labor Costs, Surging Canadian Dollar

Opportunity? For long-term risk-tolerant investors who believe that the firm will make the transition from explorer to producer. Current levels could prove an attractive entry-point, however, barring a dramatic rise in the price of gold, weakness in the rest of the North American Equities markets may continue to weigh on the stock.

Sources:

A Forbes article explains the matter in detail.

Chart courtesy of BigCharts.com

A MisAdventure?

croatz — Sun, 25 Nov 2007 10:17:42 +0000

I’ve begun to rethink the nature of this blog, as I don’t really provide any value by talking about what already happened – apparently other people do this – what a crazy world. I’m contemplating shifting it (yes, I pretend that I have readers that are invested in this blog) towards a focus on out-of-favor stocks, or firms that, for some reason or another, have suffered dramatic losses in their stock value. A good example of this would be what TASR went through with its lawsuit process, what Vonage is currently going through and what the homebuilders/mortgage lenders/banks are beginning to experience. I’m not quite sure why I am drawn to catastrophe, perhaps it reminds me that it takes failure to create success and that the greatest opportunities are the ones that are discarded, impossible and laughed at. I derive a certain amount of pleasure from being able to ride out the storm. It is a brutal process, where you are forced to ignore what everyone else is saying and believe that for some reason, you are right and they are wrong despite all evidence to the contrary.

As the saying goes, It is always darkest before dawn.

The losses pile up

croatz — Wed, 21 Nov 2007 01:33:23 +0000

The credit market deterioration spreads to the “safer” areas of the market while FreddieMae continues to struggle as new Congressional reserve requirements restrain its abilities to purchase additional mortgages. These rules, while sharply curbing the liquidity in the system, have forced the Mae’s to sell into inclement market conditions, leading to a further decline in the value of these securities. There is a bottom somewhere out there but it is clear that the credit markets have yet to find out, leading to the likelihood that homebuilders, mortgage lenders, and any firm with exposure to this market will continue to face challenging market conditions for at least 2008.