How It Got Here
Financial information contained in this report is based on the company's Form 10-K filing for fiscal year ending December 31, 2008, as filed with the Securities and Exchange Commission on February 20, 2009.
The Company
Arkansas Best Corporation (Nasdaq: ABFS), a Delaware corporation, is a holding company engaged through its subsidiaries primarily in motor carrier freight transportation. The company’s principal operations are conducted through ABF Freight System, Inc. and other affiliated subsidiaries of the company.
Headquartered in Fort Smith, Arkansas, ABF is the largest subsidiary of the company, accounting for 96% of the company’s consolidated revenues for 2008. The company is one of North America’s largest LTL motor carriers, providing direct service to more than 98% of U.S. cities having a population of 30,000 or more, as well as interstate and intrastate direct service to more than 41,000 communities through 286 service centers in all 50 states, Canada, Guam, Puerto Rico and the U.S. Virgin Islands.
Through arrangements with trucking companies in Mexico, the company provides motor carrier services to customers in that country as well.
Background
The company was publicly owned from 1966 until 1988, when it was acquired in a leveraged buyout by a corporation organized by Kelso & Company, L.P. In 1992 the company completed a public offering of its common stock, par value $.01. The company also repurchased substantially all of the remaining shares of common stock beneficially owned by Kelso, thus ending Kelso’s investment in the company.
In 1993 the company completed a public offering of 1,495,000 shares of $2.875 Series A Cumulative Convertible Exchangeable Preferred Stock. The company’s Preferred Stock was traded on The Nasdaq National Market under the symbol “ABFSP.” On July 10, 2000, the company purchased 105,000 shares of its Preferred Stock at $37.375 per share, for a total cost of $3.9 million. All of the shares purchased were retired.
On August 13, 2001, the company announced the call for redemption of the 1,390,000 shares of Preferred Stock that remained outstanding. At the end of the extended redemption period on September 14, 2001, 1,382,650 shares of the Preferred Stock were converted to 3,511,439 shares of Common Stock.
The remaining 7,350 shares of Preferred Stock were redeemed at the redemption price of $50.58 per share for a total cost of $0.4 million. The company delisted its Preferred Stock from trading on The Nasdaq National Market on September 12, 2001.
In 1995, pursuant to a tender offer, a wholly owned subsidiary of the company purchased the outstanding shares of common stock of WorldWay Corporation, for a total purchase price of approximately $76.0 million. WorldWay was a publicly held company engaged through its subsidiaries in motor carrier freight transportation.
In 1999, the company acquired 2,457,000 shares of Treadco, Inc. common stock for $23.7 million via a cash tender offer pursuant to a definitive merger agreement. As a result of the transaction, Treadco became a wholly owned subsidiary of the company. On September 13, 2000, Treadco entered into a joint venture agreement with The Goodyear Tire and Rubber Company, Inc. (NYSE: GT) to contribute its business to a new limited liability company called Wingfoot Commercial Tire Systems, LLC. On April 28, 2003, the company sold its 19.0% ownership interest in Wingfoot to Goodyear for $71.3 million.
In 2001, the company sold the stock of G.I. Trucking Company, a wholly owned subsidiary of the company acquired as part of the WorldWay transaction, for $40.5 million to a company formed by the senior executives of G.I. Trucking Company and Estes Express Lines.
In 2003, Clipper Exxpress Company, a wholly owned subsidiary of the company acquired in 1994, sold all customer and vendor lists related to Clipper’s less-than-truckload (LTL) freight business to Hercules Forwarding, Inc. of Vernon, California, for $2.7 million. With this sale, Clipper exited the LTL business.
On June 15, 2006, the company sold Clipper to a division of Wheels Group for $21.5 million. With this sale, the company exited the intermodal transportation business.
The company offers national, inter-regional and regional transportation of general commodities through standard, expedited and guaranteed LTL services. General commodities include all freight except hazardous waste, dangerous explosives, commodities of exceptionally high value and commodities in bulk. The company’s shipments of general commodities differ from shipments of bulk raw materials, which are commonly transported by railroad, truckload tank car, pipeline and water carrier.
General commodities transported by the company include, among other things, food, textiles, apparel, furniture, appliances, chemicals, non-bulk petroleum products, rubber, plastics, metal and metal products, wood, glass, automotive parts, machinery and miscellaneous manufactured products.
During the year ended December 31, 2008, no single customer accounted for more than 3.0% of company revenues, while the ten largest customers accounted for 7.2% of company revenues.
LTL Motor Carrier Operations
The company’s LTL (Less-Than-Truckload) motor carrier operations are conducted through ABF; ABF Freight System (B.C.), Ltd.; ABF Freight System Canada, Ltd.; ABF Cartage, Inc.; and Land-Marine Cargo, Inc.
LTL carriers service shipping customers by transporting a wide variety of large and small shipments to geographically dispersed destinations. Typically, shipments are picked up at customers’ places of business and consolidated at a local terminal. Shipments are consolidated by destination for transportation by intercity units to their destination cities or to distribution centers. At distribution centers, shipments from various terminals can be reconsolidated for other distribution centers or, more typically, local terminals.
Once delivered to a local terminal, a shipment is delivered to the customer by local trucks operating from the terminal. In some cases, when one large shipment or a sufficient number of different shipments at one origin terminal are going to a common destination, they can be combined to make a full trailer load. A trailer is then dispatched to that destination without rehandling.
In addition to the traditional long-haul model, the company has implemented a regional network to facilitate its customers’ next-day and second-day delivery needs.
Development and expansion of the regional network required added labor flexibility, strategically positioned freight exchange points and increased door capacity at a number of key locations.
Through a multi-phased program, ABF’s regional network now covers the eastern two-thirds of the United States. Marketing of the regional initiative was initiated in August 2006 in the East Coast states and in January 2007 in the South and Central regions. Further operational changes, which were implemented in August 2008 and marketed beginning in September 2008, reduced transit times in the regional network and in certain of ABF’s long-haul lanes.
The expansion of the regional network to the Western region of the United States may be implemented in 2009.
Competition, Pricing and Industry Factors
The trucking industry is highly competitive. The company’s LTL motor carrier subsidiaries actively compete for freight business with other national, regional and local motor carriers and, to a lesser extent, with private carriage, freight forwarders, railroads and airlines. Competition is based primarily on personal relationships, price and service.
Competition for freight revenue, however, has resulted in discounting which effectively reduces prices paid by shippers. In an effort to maintain and improve its market share, the company’s LTL motor carrier subsidiaries offer and negotiate various discounts.
The company charges a fuel surcharge based upon changes in diesel fuel prices compared to a national index. Throughout 2008, the fuel surcharge mechanism continued to have strong market acceptance among their customers, although certain nonstandard arrangements with some of the company’s customers have limited the amount of fuel surcharge recovered.
The trucking industry, including the company’s LTL motor carrier subsidiaries, is directly affected by the state of the residential and commercial construction, manufacturing and retail sectors of the North American economy. The trucking industry faces rising costs including government regulations on safety, equipment design and maintenance, driver utilization and fuel economy. The trucking industry is dependent upon the availability of adequate fuel supplies.
The company has not experienced a lack of available fuel but could be adversely impacted if a fuel shortage were to develop. In addition, seasonal fluctuations also affect tonnage to be transported. Freight shipments, operating costs and earnings also are affected adversely by inclement weather conditions.
The company competes with nonunion and union LTL carriers. Competitors include YRC Worldwide, Inc. (Nasdaq: YRCW), FedEx Corporation (NYSE: FDX), United Parcel Service, Inc. (NYSE: UPS), Con-way, Inc. (NYSE; CNW), Old Dominion Freight Line, Inc. (Nasdaq: ODFl), SAIA, Inc. (Nasdaq: SAIA), and a Canadian company, Vitran Corporation, Inc. (Nasdaq: VTNC).
The final hours of service rules regulating driving time for commercial truck drivers, announced by the U.S. Department of Transportation (“DOT”) in April 2003, became effective in January 2009. The rules, which were implemented by the company in January 2004, allow a driver to drive up to 11 hours within a 14-hour nonextendable window from the start of the workday, following at least 10 consecutive hours off duty. The hours of service rules have been challenged in federal court, and future modifications to the rules, if any, may impact the company’s operating practices.
The operational impact of these rules on the company's over-the-road line haul relay network has been to provide modest opportunity to increase driver and equipment utilization and improve transit times. The rules also have allowed LTL carriers, such as ABF, to adjust their over-the-road line haul relay network to take advantage of the 11 hours of drive time during a tour of duty.
Impacts on the truckload industry have included a decline in driver utilization and flexibility and, as a result, truckload carriers have increased charges for stop-off and detention services, making LTL carriers somewhat more competitive on many larger shipments.
Insurance, Safety and Security
Generally, claims exposure in the motor carrier industry consists of cargo loss and damage, third-party casualty and workers’ compensation. The company’s motor carrier subsidiaries are effectively self-insured for the first $1.0 million of each cargo loss, $1.0 million of each workers’ compensation loss and generally $1.0 million of each third-party casualty loss. The company maintains insurance which it believes is adequate to cover losses in excess of such self-insured amounts.
However, the company has experienced situations where excess insurance carriers have become insolvent. The company pays assessments and fees to state guaranty funds in states where it has workers’ compensation self-insurance authority. In some of these states, depending on each state’s rules, the guaranty funds may pay excess claims if the insurer cannot due to insolvency.
There can be no certainty of the solvency of individual state guaranty funds. The company has been able to obtain what it believes to be adequate coverage for 2009 and is not aware of problems in the foreseeable future which would significantly impair its ability to obtain adequate coverage at market rates for its motor carrier operations.
Since 2001, the company has been subject to cargo security and transportation regulations issued by the Transportation Security Administration. Since 2002, the company has been subject to regulations issued by the Department of Homeland Security. The company is not able to accurately predict how past or future events
will affect government regulations and/or the transportation industry, and believes that any additional security measures that may be required by future regulations could result in additional costs; however, other carriers would be similarly affected.
Employees
As of December 31, 2008, athe company had a total of 10,512 active employees. Employee compensation and related costs are the largest components of the company’s operating expenses. In 2008, such costs amounted to approximately 60% of company revenues. Approximately 75% of the company’s employees are covered under a collective bargaining agreement with the International Brotherhood of Teamsters.
The company’s current five-year agreement with the International Brotherhood of Teamsters expires on March 31, 2013, with the current agreement providing for compounded annual contractual wage and benefit increases of approximately 4%, subject to wage rate cost-of-living adjustments, which includes company contributions to various multi-employer plans maintained for the benefit of employees who are members of the International Brotherhood of Teamsters.
Amendments to the Employee Retirement Income Security Act of 1974 (“ERISA”), pursuant to the Multi-employer Pension Plan Amendments Act of 1980 (the “MPPA Act”), substantially expanded the potential liabilities of employers who participate in such plans. Under ERISA, as amended by the MPPA Act, an employer who contributes to a multi-employer pension plan and the members of such employer’s controlled group are jointly and severally liable for their share of the plan’s unfunded vested liabilities in the event the employer ceases to have an obligation to contribute to the plan or substantially reduces its contributions to the plan, in the event of plan termination or withdrawal by the company from the multi-employer plans for example.
Three of the largest LTL carriers are unionized and generally pay comparable amounts for wages and benefits. However, certain unionized competitors of the company were recently granted wage concessions which could effectively lower their cost structures beginning in 2009 and as a result may potentially increase pricing competition in the LTL market.
Union companies typically have similar wage costs and significantly higher fringe benefit costs compared to nonunion companies. The Company believes that union companies also experience lower employee turnover, higher productivity, lower loss and damage claims and lower accident rates compared to some non-union firms.
Due to its national reputation, its working conditions and its wages and benefits, the company has not historically experienced any significant long-term difficulty in attracting or retaining qualified employees, although short-term difficulties have been encountered in certain situations.
Investment Thoughts
The stock is on the Wax Ink watch list, with a Reasonable Value Estimate of $102, a Buy Target of $51, a First Sell Target of $99, and a Close Target of $107. Going forward, we are projecting an approximate 60% decline in our Reasonable Value Estimate for 2009 based on a projected decline in Net Operating Profits.
With a recent close of $26.57, the stock is currently carrying a PE of 5.89 based on the $4.51 per share in earnings the company generated in 2008.
In addition to keeping Debt low at $0.66 per share and Cash at a reasonable level of $3.99 per share, management was able to generate a Return On Invested Capital of more than 23%, increase Free Cash Flow to $5.22 per share, and maintain Sharehold Equity at close to $25 per share, while keeping Tangible Book Value at just above $22.
In our opinion, these are outstanding achievements for which management should be commended, especially when considering that the economy during the last four months of 2008 went straight into the proverbial crapper.
While be believe that a reasonable entry point for this stock is at or about $39, we are also aware that the general economy is still near collapse. We do not believe for one second, what the Federal Reserve and the Treasury Secretary are saying, that the economy is "on the mend".
Instead, we believe that the economy will not start to improve until sometime in mid to late 2011.
Admittedly, there will be bull runs amid the current bear market, but we are anticipating that over the coming months, new lows will be tested in the general markets and as such, it is our feeling that a more reasonable entry point for this stock is between $19 and $21.
Wax
Arkansas Best Corporation Worksheet 1208
Google Analytics
Adams Golf, Inc. - A Wax Ink Raw Value Report
"At Adams Golf our most significant profitability measure is EBITDA..."
How it Got Here
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on March 11, 2009.
Executive compensation information contained in this report is based on the company's latest Form DEF 14A filing as filed with the SEC on April 15, 2009.
In addition, according to a Confidential Treatment Order certain information contained in the 10-K filing was approved for public exclusion until April 15, 2009.
The Company
Adams Golf, Inc. (Nasdaq: ADGF) incorporated in 1987, designs, assembles, markets and distributes golf clubs for all skill levels, including Speedline drivers and hybrid fairway woods, Idea Tech a4 and a4 OS I-woods and irons, Idea a3 and a3 OS I-woods and irons, Idea Pro Gold I-woods and irons and Insight Tech a4 and a4 OS drivers and hybrid-fairway woods, RPM family drivers and fairway woods and irons, the Ovation family of drivers, fairway woods and irons, and Tom Watson signature wedges. In addition, under Women's Golf Unlimited the company distributes the Lady Fairway and Square 2 brands.
Irons
In September 2008, the company launched the Idea Tech a4 and a4OS hybrid irons sets and hybrid irons and integrated sets. The a4 irons feature six forged cavity back irons integrated with two graphite-shafted hybrids. The Tech a4 OS irons are offered in three different eight piece configurations—one for men, one for women, and one for seniors. All sets have seven hybrid irons integrated into the set. The company also offers the Tech a4 OS Women’s 13 piece designer set with a bag by Keri Golf. During the year ended December 31, 2008, the Irons segment accounted for 62.5% of the company's net sales.
Drivers
The company offers different driver models based on the shape, size and material used in the club head. Adams Golf's driver heads are made of titanium, alloy and/or carbon fiber, depending on the model. The shafts of the company's drivers are generally graphite. During the first quarter of 2009, the company launched the Speedline driver line. In February 2008, it introduced its new Insight XTD series of drivers. In 2008, the Drivers segment accounted for 12.3% of the company's net sales.
Fairway Woods
During the first quarter of 2009, the Company launched the Speedline hybrid fairway woods line. The Speedline hybrid-fairway woods feature the playability of a hybrid and the distance of a fairway wood. The Speedline hybrid-fairway woods are offered in standard and draw variations with a variety of lofts and shaft flexes.
In February 2008 it introduced the Insight XTD hybrid-fairway woods. The Company offers a variety of individual hybrids in the recently introduced Idea Tech a4, a4 OS, Idea a3, a3 OS, and Idea Pro Gold lines. During 2008, the Fairway Woods segment accounted for 24.4% of the company's net sales.
Wedges and Other
As a complement to the Idea irons, the company offers the Tom Watson signature wedges with a classic profile and the Puglielli wedges. Adams Golf also offers a line of putters, golf bags, hats and other accessories. In 2008, the Wedges and Other segment accounted for 0.8% of the company's net sales.
Competition
The company competes with Callaway Golf Company, Adidas-Salomon AG, Nike, Inc., Fortune Brands, Inc., and Karsten Assembly Company (PING).
Backing Up
On February 4, 2008, the company's stockholders approved a 1-4 reverse stock split effective February 15, 2008. In addition, the stockholders approved moving the company's stock listing from the OTC Bulletin Board to the NASDAQ.
Related Party Transactions
According to company SEC filings, the company does not have a specific set of policies and procedures with respect to the approval of related party transactions, relying instead on their Code of Conduct, found in their Employee Information Guide, which governs the company's decision-making with respect to related party transactions.
The company stated that in general, related party transactions were infrequent in nature and are always disclosed to the Board,and that if a related party transaction affects a specific Board member, that Board member will be recused from voting with respect to the approval of the related party transaction. In fiscal 2008, there were no related party transactions that were reviewed for approval.
It was disclosed that Ms. Cindy Adams-Herington, the daughter of Chairman Barney Adams, owns 40% of Plano Paper and Supply and her husband, Mr. Tom Herington owns 60% of Plano Paper and Supply, and that Chairman Barney Adams, is a lender to Plano Paper and Supply.
Additionally, in June 2005, Adams Golf, in an open bid process, selected Plano Paper and Supply as a supplier of shipping boxes for their products, and during fiscal 2008, made total purchases of $359,751 from Plano Paper and Supply. This supply arrangement is subject to change at any time based on then current market conditions and an ongoing competitive bidding process.
The dollars spent with Plano Paper and Supply during fiscal 2008, was 359.75% of EBITDA.
Relationships
Two adult children of Chairman Barney Adams are employees of Adams Golf. Mr. Edwin Adams serves as General Counsel, and for fiscal 2008 received an annual base salary of $134,000 and a performance bonus of $14,500 related to second half 2007 fiscal year performance.
In addition, Ms. Cindy Adams-Herington holds the position of Vice President, Advertising and Marketing and received an annual base salary in fiscal 2008 of $168,826 and a performance bonus of $40,977 related to second half 2007 fiscal year performance.
Neither Edwin Adams nor Cindy Herington has employment contracts or change of control arrangements with the company.
The dollars spent for Mr. Adams' children during fiscal 2008 was 302.83% of EBITDA.
Executive and Director Compensation
There really isn't much reason to delve into the Directors and Named Executive Officers specific compensation and/or stock options, since there is no effective way to change it. However, what can be highlighted are the dollars spent to compensate Senior Executives and Directors over and above their standard compensation. Additional compensation that appears to have kept the company on the path to mediocrity.
Included in the 2008 compensation package for Mr. Brewer, the CEO was $24,586 for automobile expenses; $1,436 for Group Term Life insurance premiums; $21,833 for health and welfare benefits; $2,430 of non-reimbursed business expenses; $18,446 for country club memberships and $9,200 of 401k matching contributions. The dollars spent for Mr. Brewer's "additional" compensation for fiscal 2008 was 77.93% of EBITDA.
Included in the 2008 compensation package for Mr. Eric Logan, Senior VP and CFO was $455 for Group Term Life insurance premiums; $24,013 for health and welfare benefits; and $10,379 of 401k matching contributions. The dollars spent for Mr. Logan's "additional" compensation for fiscal 2008 was 34.85% of EBITDA.
Included in the 2008 compensation for Mr. Adams, Chairman of the Board of Directors, was $21,630 in automobile expenses, $6,995 in group term life insurance premiums, $18,167 for health and welfare benefits, $426 of non-reimbursed business expenses and $7,356 of 401k company matching contributions. The dollars spent for Mr. Adams' additional compensation for fiscal 2008 was 54.57% of EBITDA.
It is noted that for fiscal 2009, the company's non-employee directors, agreed to a reduction in their annual cash retainer, reducing it from $40,000 to $20,000.
In addition, CEO Brewer agreed to a fiscal 2009 salary reduction from $425,000 to $360,000, and CFO Logan agreed to a 2009 salary reduction from $215,000 to $200,000. There was no notice that Mr. Adams would reduce his $254,000 2008 salary for fiscal 2009.
Reasonable Value
Adams Golf is on the Wax Ink Watch List with a Reasonable Value Estimate of $3.99, a Buy Target of $2.00, a First Sell Target of $3.89, and a Close Target of $4.21. Based on a review of the previously referenced company SEC filings, the Buy Target has been reduced from $2.00, to $0.77.
Investment Thoughts
Management prattles on about the company's most "significant profitability measure" being EBITDA. Yet for fiscal 2008 EBITDA was 0.11% of Sales, a decrease from fiscal 2007 of just over 5.5%. So instead of reigning in a portion of Executive/Director compensation, which would have added almost $168,000 to the company's EBITDA, management kept their collective hands in the till and got what they and the company had agreed upon.
Certainly, these things were agreed to well in advance, and there was nothing noted in the company filings that mentioned employee or employee benefit reductions. Yet for a company with a market cap of $20 million, whose main asset is $6 million in cash, $5.3 million less than at the end of fiscal 2007, it just seems that management would be doing all it could to hold on to the company's most important asset. Especially in light of the current economy difficulties the world is experiencing.
Additionally, considering that the game of golf is not exactly an inexpensive game, with a set of golf clubs selling for more than $1500, not to mention golf shoes, a bag for the clubs, green fees and cart rentals, it just seems reasonable the management would be considering the future.
But, nowhere did management provide any discussion about how the consumer, strapped for cash and carrying far too much debt, was going to afford the products the company makes. It is almost as if management's plan is to simply stick its head in the sand and hope for the best.
While this is troubling, it really isn't surprising considering the management seemingly had no idea where the overall economy was going, nor apparently, did management have any plan in place, should the overall economic enter a slowing period.
We believe that an investment in Adams Golf, Inc. would be extremely ill advised, with the probability of investment loss high, and the probability that management would have a clue, even higher.
Indeed Tom Watson plays with them, and so do Aaron Baddeley, Brittany Lang, and Brittany Lincicome. Which is quite a contrast considering the only thing management seems able to play with is themselves.
Wax
Adams Golf Worksheet 1208
How it Got Here
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on March 11, 2009.
Executive compensation information contained in this report is based on the company's latest Form DEF 14A filing as filed with the SEC on April 15, 2009.
In addition, according to a Confidential Treatment Order certain information contained in the 10-K filing was approved for public exclusion until April 15, 2009.
The Company
Adams Golf, Inc. (Nasdaq: ADGF) incorporated in 1987, designs, assembles, markets and distributes golf clubs for all skill levels, including Speedline drivers and hybrid fairway woods, Idea Tech a4 and a4 OS I-woods and irons, Idea a3 and a3 OS I-woods and irons, Idea Pro Gold I-woods and irons and Insight Tech a4 and a4 OS drivers and hybrid-fairway woods, RPM family drivers and fairway woods and irons, the Ovation family of drivers, fairway woods and irons, and Tom Watson signature wedges. In addition, under Women's Golf Unlimited the company distributes the Lady Fairway and Square 2 brands.
Irons
In September 2008, the company launched the Idea Tech a4 and a4OS hybrid irons sets and hybrid irons and integrated sets. The a4 irons feature six forged cavity back irons integrated with two graphite-shafted hybrids. The Tech a4 OS irons are offered in three different eight piece configurations—one for men, one for women, and one for seniors. All sets have seven hybrid irons integrated into the set. The company also offers the Tech a4 OS Women’s 13 piece designer set with a bag by Keri Golf. During the year ended December 31, 2008, the Irons segment accounted for 62.5% of the company's net sales.
Drivers
The company offers different driver models based on the shape, size and material used in the club head. Adams Golf's driver heads are made of titanium, alloy and/or carbon fiber, depending on the model. The shafts of the company's drivers are generally graphite. During the first quarter of 2009, the company launched the Speedline driver line. In February 2008, it introduced its new Insight XTD series of drivers. In 2008, the Drivers segment accounted for 12.3% of the company's net sales.
Fairway Woods
During the first quarter of 2009, the Company launched the Speedline hybrid fairway woods line. The Speedline hybrid-fairway woods feature the playability of a hybrid and the distance of a fairway wood. The Speedline hybrid-fairway woods are offered in standard and draw variations with a variety of lofts and shaft flexes.
In February 2008 it introduced the Insight XTD hybrid-fairway woods. The Company offers a variety of individual hybrids in the recently introduced Idea Tech a4, a4 OS, Idea a3, a3 OS, and Idea Pro Gold lines. During 2008, the Fairway Woods segment accounted for 24.4% of the company's net sales.
Wedges and Other
As a complement to the Idea irons, the company offers the Tom Watson signature wedges with a classic profile and the Puglielli wedges. Adams Golf also offers a line of putters, golf bags, hats and other accessories. In 2008, the Wedges and Other segment accounted for 0.8% of the company's net sales.
Competition
The company competes with Callaway Golf Company, Adidas-Salomon AG, Nike, Inc., Fortune Brands, Inc., and Karsten Assembly Company (PING).
Backing Up
On February 4, 2008, the company's stockholders approved a 1-4 reverse stock split effective February 15, 2008. In addition, the stockholders approved moving the company's stock listing from the OTC Bulletin Board to the NASDAQ.
Related Party Transactions
According to company SEC filings, the company does not have a specific set of policies and procedures with respect to the approval of related party transactions, relying instead on their Code of Conduct, found in their Employee Information Guide, which governs the company's decision-making with respect to related party transactions.
The company stated that in general, related party transactions were infrequent in nature and are always disclosed to the Board,and that if a related party transaction affects a specific Board member, that Board member will be recused from voting with respect to the approval of the related party transaction. In fiscal 2008, there were no related party transactions that were reviewed for approval.
It was disclosed that Ms. Cindy Adams-Herington, the daughter of Chairman Barney Adams, owns 40% of Plano Paper and Supply and her husband, Mr. Tom Herington owns 60% of Plano Paper and Supply, and that Chairman Barney Adams, is a lender to Plano Paper and Supply.
Additionally, in June 2005, Adams Golf, in an open bid process, selected Plano Paper and Supply as a supplier of shipping boxes for their products, and during fiscal 2008, made total purchases of $359,751 from Plano Paper and Supply. This supply arrangement is subject to change at any time based on then current market conditions and an ongoing competitive bidding process.
The dollars spent with Plano Paper and Supply during fiscal 2008, was 359.75% of EBITDA.
Relationships
Two adult children of Chairman Barney Adams are employees of Adams Golf. Mr. Edwin Adams serves as General Counsel, and for fiscal 2008 received an annual base salary of $134,000 and a performance bonus of $14,500 related to second half 2007 fiscal year performance.
In addition, Ms. Cindy Adams-Herington holds the position of Vice President, Advertising and Marketing and received an annual base salary in fiscal 2008 of $168,826 and a performance bonus of $40,977 related to second half 2007 fiscal year performance.
Neither Edwin Adams nor Cindy Herington has employment contracts or change of control arrangements with the company.
The dollars spent for Mr. Adams' children during fiscal 2008 was 302.83% of EBITDA.
Executive and Director Compensation
There really isn't much reason to delve into the Directors and Named Executive Officers specific compensation and/or stock options, since there is no effective way to change it. However, what can be highlighted are the dollars spent to compensate Senior Executives and Directors over and above their standard compensation. Additional compensation that appears to have kept the company on the path to mediocrity.
Included in the 2008 compensation package for Mr. Brewer, the CEO was $24,586 for automobile expenses; $1,436 for Group Term Life insurance premiums; $21,833 for health and welfare benefits; $2,430 of non-reimbursed business expenses; $18,446 for country club memberships and $9,200 of 401k matching contributions. The dollars spent for Mr. Brewer's "additional" compensation for fiscal 2008 was 77.93% of EBITDA.
Included in the 2008 compensation package for Mr. Eric Logan, Senior VP and CFO was $455 for Group Term Life insurance premiums; $24,013 for health and welfare benefits; and $10,379 of 401k matching contributions. The dollars spent for Mr. Logan's "additional" compensation for fiscal 2008 was 34.85% of EBITDA.
Included in the 2008 compensation for Mr. Adams, Chairman of the Board of Directors, was $21,630 in automobile expenses, $6,995 in group term life insurance premiums, $18,167 for health and welfare benefits, $426 of non-reimbursed business expenses and $7,356 of 401k company matching contributions. The dollars spent for Mr. Adams' additional compensation for fiscal 2008 was 54.57% of EBITDA.
It is noted that for fiscal 2009, the company's non-employee directors, agreed to a reduction in their annual cash retainer, reducing it from $40,000 to $20,000.
In addition, CEO Brewer agreed to a fiscal 2009 salary reduction from $425,000 to $360,000, and CFO Logan agreed to a 2009 salary reduction from $215,000 to $200,000. There was no notice that Mr. Adams would reduce his $254,000 2008 salary for fiscal 2009.
Reasonable Value
Adams Golf is on the Wax Ink Watch List with a Reasonable Value Estimate of $3.99, a Buy Target of $2.00, a First Sell Target of $3.89, and a Close Target of $4.21. Based on a review of the previously referenced company SEC filings, the Buy Target has been reduced from $2.00, to $0.77.
Investment Thoughts
Management prattles on about the company's most "significant profitability measure" being EBITDA. Yet for fiscal 2008 EBITDA was 0.11% of Sales, a decrease from fiscal 2007 of just over 5.5%. So instead of reigning in a portion of Executive/Director compensation, which would have added almost $168,000 to the company's EBITDA, management kept their collective hands in the till and got what they and the company had agreed upon.
Certainly, these things were agreed to well in advance, and there was nothing noted in the company filings that mentioned employee or employee benefit reductions. Yet for a company with a market cap of $20 million, whose main asset is $6 million in cash, $5.3 million less than at the end of fiscal 2007, it just seems that management would be doing all it could to hold on to the company's most important asset. Especially in light of the current economy difficulties the world is experiencing.
Additionally, considering that the game of golf is not exactly an inexpensive game, with a set of golf clubs selling for more than $1500, not to mention golf shoes, a bag for the clubs, green fees and cart rentals, it just seems reasonable the management would be considering the future.
But, nowhere did management provide any discussion about how the consumer, strapped for cash and carrying far too much debt, was going to afford the products the company makes. It is almost as if management's plan is to simply stick its head in the sand and hope for the best.
While this is troubling, it really isn't surprising considering the management seemingly had no idea where the overall economy was going, nor apparently, did management have any plan in place, should the overall economic enter a slowing period.
We believe that an investment in Adams Golf, Inc. would be extremely ill advised, with the probability of investment loss high, and the probability that management would have a clue, even higher.
Indeed Tom Watson plays with them, and so do Aaron Baddeley, Brittany Lang, and Brittany Lincicome. Which is quite a contrast considering the only thing management seems able to play with is themselves.
Wax
Adams Golf Worksheet 1208
Investing in Later
The Hype
Over the past several months, we continue to read article after article about why now is the best time to put money to work in the markets.
While we happen to agree that the over the longer term, the best place for your hard won investment dollars is in the markets, we also don't believe that the information gleaned from investing television shows like Fast Money and Mad Money will ever make the average investor a penny.
How many good investing ideas have you gotten from Neil Cavuto, Maria Bartiromo, Erin Burnett, or Larry Kudlow? Granted they all have a great screen presence, but collectively they seem to know less about investing than a hog knows about the hereafter!
The Need
For example, over the past couple of weeks, we have been keeping an extremely informal track of stocks that have been recommended by the financial press, as "today" or "now" or "immediate" or "must have", investment stocks.
But what intrigued us was not one investment television show or investment website that recommended buying these stocks "at once", explained the need for urgency.
Not only did they not explain the need for urgency, none of them even attempted to hazard a guess as to what they thought a fair value for any of the stocks might be.
In other words, all of these places say buy this stock now because their wizards said so. The next thing that happens is all of the wizards head for the can, leaving the average investor standing there with his hand in his pants and his mind in Arkansas. And all the while those hard won investment dollars are becoming fewer and fewer.
Investment Consideration
So we thought we would present a few of the most recommended "immediate purchase" stocks. But instead of asking yourself what investing in these stocks "now" will do for your portfolio, we thought it might be more interesting for you to ask yourself two simple questions. The first one is why this stock? and the second one is why this stock now?
Disclaimer
We do not currently own any the stocks mentioned in this article. Our investment thoughts accompany each stock reviewed. As we have said in the past, we do not now, nor have we ever, worked in the financial services industry.
Titanium Metals Corporation
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 26, 2009.
Titanium Metals Corporation (NYSE: TIE) is one of the world's leading producers of titanium melted and mill products, and according to the company they are the only titanium producer with major facilities in both the United States and Europe, the world's principal markets for the material.
Titanium is used in many products, commercial and military aircraft, cars and trucks, chemical processes, oil and gas processes, sporting goods, and power generation equipment.
The company has been around since 1950, incorporating in 1955.
Investment Thoughts
Based on a five (5) year hold, we have the company on our watch list with a Reasonable Value Estimate of $14.66, a Buy Target of $7.33, a First Sell Target of $14.30, and a Close Target of $15.48.
It should go without saying that we are impressed that at the end of fiscal 2008, the company had no Debt, just as we are all in favor of the $0.34 per share annual Dividend, and while it isn't quite where we would like it, Free Cash Flow at $1.11 is acceptable.
A recent close of $7.67 puts the trailing twelve month PE at about 7.5 as well as making the Price to Tangible Book 1.3, and the Price to Free Cash Flow 6.9, all of which are positive attributes.
Yet we are not interested in buying at this time because we believe the current run up in the markets is not sustainable. As a result, we think the price will move lower over the coming months.
Accordingly, we have adjusted our Buy Target from $7.33 to $3.95.
Titanium Metals Corporation Worksheet
Starbucks Corporation
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending September 28, 2008, as filed with the SEC on November 24, 2008.
Starbucks Corporation (Nasdaq: SBUX) was formed in 1985 and today, according to the company, is the world’s leading roaster and retailer of specialty coffee.
The stated company objective is to establish Starbucks as one of the most recognized and respected brands in the world. To achieve this goal, the company plans to continue disciplined expansion of its retail operations, to grow its specialty operations and to selectively pursue other opportunities by introducing new products and developing new channels of distribution.
Investment Thoughts
While we think expansion can be a tremendous driver for future growth, we think if the management of Starbucks continues down this path, the company will find itself in bankruptcy court next to Chrysler LLC with General Motors Corporation (NYSE: GM) following soon.
In short, we are not impressed with management. We do not believe that management had the faintest idea that the economy was going to fall off of cliff. Nor do we believe that management, having now watched the economy fall of a cliff, has the faintest understanding of what has happened, or what to do next.
Based on a five (5) year hold, we have the company on our watch list with a Reasonable Value Estimate of $17.53, a Buy Target of $8.76, a First Sell Target of $17.09, and a Close Target of $18.50.
We are curious just how management will be able to continue the company's strategy of expansion of its retail operations, given an anemic Free Cash Flow of $0.90, Debt of $1.70, and Earnings of $1.12.
To us, it makes better sense for management to shelve expansion plans, and use the $0.42 Dividend to reduce Debt, which would then allow management to increase company cash on hand.
Because we view management as gnerally slow to react to the changes in its markets, we believe that a much lower Buy Target is in order, and have lowered ours from $8.76 to $3.37.
Starbucks Corporation Worksheet
Activision Blizzard, Inc.
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 27, 2009.
We note that on July 9, 2008, a business combination by and among Activision, Inc., Sego Merger Corporation, a wholly-owned subsidiary of Activision, Inc., Vivendi S.A., VGAC LLC, a wholly-owned subsidiary of Vivendi and Vivendi Games, Inc., a wholly-owned subsidiary of VGAC was consummated. As a result of the consummation of the Business Combination, Activision, Inc. was renamed Activision Blizzard, Inc.
Activision Blizzard, Inc. (Nasdaq: ATVI) a worldwide pure-play online, personal computer, console, and hand-held game publisher.
Through Blizzard Entertainment, Inc., they are the leader in terms of subscriber base and revenues generated in the subscription-based massively multiplayer online role-playing game ("MMORPG") category. Blizzard internally develops and publishes PC-based computer games and maintains its proprietary online-game related service, Battle.net.
Through Activision Publishing, Inc., the company is a leading international publisher of interactive software products and peripherals. Activision develops and publishes video games on various consoles, hand-held platforms and the PC platform through internally developed franchises and license agreements. Activision currently offers games that operate on the Sony Computer Entertainment PlayStation 2, Sony PlayStation 3, Nintendo Co. Ltd. Wii, Microsoft Corporation Xbox 360 console systems, the Sony PlayStation Portable, the Nintendo Dual Screen hand-held devices, and the PC.
Investment Thoughts
They had it all, the right mix of game development folks, managers that understood the company's markets, and a market niche other company's would have sold their souls to have. So what did the wizards do? They took all of the parts and pieces of several company's and divisions and merged them into one cohesive company, worth, in our opinion, about a third of what it was worth prior to the consolidation.
In the end, we don't think it is going to matter. The company simply has a business that is almost impenetrable. While of course anything is possible, we simply don't see an economic benefit for other companies attempting to get into this business.
To us, we don't find the need to purchase this stock immediately. Based on a five year hold, we have the stock on our watch list with a Reasonable Value Estimate of $11.31, a Buy Target of $5.65, a First Sell Target of $11.03, and a Close Target of $11.94.
One of the results of the recent consolidation has been to increase Cost in Excess (Goodwill) by almost 600%, from $0.94 per share to $5.56 per share. We believe that given current worldwide economic conditions, the value of this excess is going to end up Impaired, and that the company will end up adjusting its income to offset these impaired amounts.
Since we further believe the vast majority of investors have the faintest idea that this possibility even exists, much less understands it, we have adjusted our Buy Target from $5.65 to $4.15.
Activision Blizzard Worksheet
Amazon.com Corporation
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on January 29, 2009.
In our opinion, Amazon.com, Inc. (Nasaq: AMZN) has done more to revolutionize the Internet than Google, Inc. (Nasdaq: GOOG) will ever do.
The company incorporated in 1994 in the state of Washington and reincorporated in 1996 in the state of Delaware, opened its doors to the World Wide Web in July 1995, completed its initial public offering in May 1997, and according to the company, offers the "Earth’s Biggest Selection."
Investment Thoughts
Our only regret is that we passed on adding the company to our portfolio in late 1997 and again in early 1998 because at the time, the company simply didn't make any money.
Today of course, they are an investment media darling, and while we love their website, we think their stock price is extremely over valued.
We have the stock on our watch list with a Reasonable Value Estimate of $37.22, a Buy Target of $18.66, a First Sell Target of $36.38, and a Close Target of $39.39.
The stock closed recently at $73.31, which we note exceeds the 29% annual earnings growth factor the analysts are calling for making the company's PEG ratio 1.44. In addition, that recent close also places the company's trailing twelve month PE ratio at about 41 times earnings.
All of this begs the question why would anyone want to invest in Amazon.com stock at these levels? Has anyone investing in this company considered what will happen should the company miss earnings estimates? And yet the average daily volume for the stock is just above 9 million shares and we have heard repeatedly over the past month or so that now is the time to buy Amazon.com.
Excuse us when we say hooey. The only folks putting money into the stock of this company are the brain dead, the toothless, and the folks that forget to pull up their Depends.
Nobody in their right mind should even consider an investment in Amazon.com at these levels unless their understanding of investing is to buy high and sell low.
Amazon.com Worksheet
And in the End
Well there you have it. Four stocks that the wizards are saying you need to buy today, this instant, now. The only thing the wizards failed to tell you is why you need to buy these stocks now and how they know that "now" is the right time.
Hopefully a wizard that can explain economic demand will come forward and enlighten the world. But we sorta doubt it.
Wax
Over the past several months, we continue to read article after article about why now is the best time to put money to work in the markets.
While we happen to agree that the over the longer term, the best place for your hard won investment dollars is in the markets, we also don't believe that the information gleaned from investing television shows like Fast Money and Mad Money will ever make the average investor a penny.
How many good investing ideas have you gotten from Neil Cavuto, Maria Bartiromo, Erin Burnett, or Larry Kudlow? Granted they all have a great screen presence, but collectively they seem to know less about investing than a hog knows about the hereafter!
The Need
For example, over the past couple of weeks, we have been keeping an extremely informal track of stocks that have been recommended by the financial press, as "today" or "now" or "immediate" or "must have", investment stocks.
But what intrigued us was not one investment television show or investment website that recommended buying these stocks "at once", explained the need for urgency.
Not only did they not explain the need for urgency, none of them even attempted to hazard a guess as to what they thought a fair value for any of the stocks might be.
In other words, all of these places say buy this stock now because their wizards said so. The next thing that happens is all of the wizards head for the can, leaving the average investor standing there with his hand in his pants and his mind in Arkansas. And all the while those hard won investment dollars are becoming fewer and fewer.
Investment Consideration
So we thought we would present a few of the most recommended "immediate purchase" stocks. But instead of asking yourself what investing in these stocks "now" will do for your portfolio, we thought it might be more interesting for you to ask yourself two simple questions. The first one is why this stock? and the second one is why this stock now?
Disclaimer
We do not currently own any the stocks mentioned in this article. Our investment thoughts accompany each stock reviewed. As we have said in the past, we do not now, nor have we ever, worked in the financial services industry.
Titanium Metals Corporation
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 26, 2009.
Titanium Metals Corporation (NYSE: TIE) is one of the world's leading producers of titanium melted and mill products, and according to the company they are the only titanium producer with major facilities in both the United States and Europe, the world's principal markets for the material.
Titanium is used in many products, commercial and military aircraft, cars and trucks, chemical processes, oil and gas processes, sporting goods, and power generation equipment.
The company has been around since 1950, incorporating in 1955.
Investment Thoughts
Based on a five (5) year hold, we have the company on our watch list with a Reasonable Value Estimate of $14.66, a Buy Target of $7.33, a First Sell Target of $14.30, and a Close Target of $15.48.
It should go without saying that we are impressed that at the end of fiscal 2008, the company had no Debt, just as we are all in favor of the $0.34 per share annual Dividend, and while it isn't quite where we would like it, Free Cash Flow at $1.11 is acceptable.
A recent close of $7.67 puts the trailing twelve month PE at about 7.5 as well as making the Price to Tangible Book 1.3, and the Price to Free Cash Flow 6.9, all of which are positive attributes.
Yet we are not interested in buying at this time because we believe the current run up in the markets is not sustainable. As a result, we think the price will move lower over the coming months.
Accordingly, we have adjusted our Buy Target from $7.33 to $3.95.
Titanium Metals Corporation Worksheet
Starbucks Corporation
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending September 28, 2008, as filed with the SEC on November 24, 2008.
Starbucks Corporation (Nasdaq: SBUX) was formed in 1985 and today, according to the company, is the world’s leading roaster and retailer of specialty coffee.
The stated company objective is to establish Starbucks as one of the most recognized and respected brands in the world. To achieve this goal, the company plans to continue disciplined expansion of its retail operations, to grow its specialty operations and to selectively pursue other opportunities by introducing new products and developing new channels of distribution.
Investment Thoughts
While we think expansion can be a tremendous driver for future growth, we think if the management of Starbucks continues down this path, the company will find itself in bankruptcy court next to Chrysler LLC with General Motors Corporation (NYSE: GM) following soon.
In short, we are not impressed with management. We do not believe that management had the faintest idea that the economy was going to fall off of cliff. Nor do we believe that management, having now watched the economy fall of a cliff, has the faintest understanding of what has happened, or what to do next.
Based on a five (5) year hold, we have the company on our watch list with a Reasonable Value Estimate of $17.53, a Buy Target of $8.76, a First Sell Target of $17.09, and a Close Target of $18.50.
We are curious just how management will be able to continue the company's strategy of expansion of its retail operations, given an anemic Free Cash Flow of $0.90, Debt of $1.70, and Earnings of $1.12.
To us, it makes better sense for management to shelve expansion plans, and use the $0.42 Dividend to reduce Debt, which would then allow management to increase company cash on hand.
Because we view management as gnerally slow to react to the changes in its markets, we believe that a much lower Buy Target is in order, and have lowered ours from $8.76 to $3.37.
Starbucks Corporation Worksheet
Activision Blizzard, Inc.
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 27, 2009.
We note that on July 9, 2008, a business combination by and among Activision, Inc., Sego Merger Corporation, a wholly-owned subsidiary of Activision, Inc., Vivendi S.A., VGAC LLC, a wholly-owned subsidiary of Vivendi and Vivendi Games, Inc., a wholly-owned subsidiary of VGAC was consummated. As a result of the consummation of the Business Combination, Activision, Inc. was renamed Activision Blizzard, Inc.
Activision Blizzard, Inc. (Nasdaq: ATVI) a worldwide pure-play online, personal computer, console, and hand-held game publisher.
Through Blizzard Entertainment, Inc., they are the leader in terms of subscriber base and revenues generated in the subscription-based massively multiplayer online role-playing game ("MMORPG") category. Blizzard internally develops and publishes PC-based computer games and maintains its proprietary online-game related service, Battle.net.
Through Activision Publishing, Inc., the company is a leading international publisher of interactive software products and peripherals. Activision develops and publishes video games on various consoles, hand-held platforms and the PC platform through internally developed franchises and license agreements. Activision currently offers games that operate on the Sony Computer Entertainment PlayStation 2, Sony PlayStation 3, Nintendo Co. Ltd. Wii, Microsoft Corporation Xbox 360 console systems, the Sony PlayStation Portable, the Nintendo Dual Screen hand-held devices, and the PC.
Investment Thoughts
They had it all, the right mix of game development folks, managers that understood the company's markets, and a market niche other company's would have sold their souls to have. So what did the wizards do? They took all of the parts and pieces of several company's and divisions and merged them into one cohesive company, worth, in our opinion, about a third of what it was worth prior to the consolidation.
In the end, we don't think it is going to matter. The company simply has a business that is almost impenetrable. While of course anything is possible, we simply don't see an economic benefit for other companies attempting to get into this business.
To us, we don't find the need to purchase this stock immediately. Based on a five year hold, we have the stock on our watch list with a Reasonable Value Estimate of $11.31, a Buy Target of $5.65, a First Sell Target of $11.03, and a Close Target of $11.94.
One of the results of the recent consolidation has been to increase Cost in Excess (Goodwill) by almost 600%, from $0.94 per share to $5.56 per share. We believe that given current worldwide economic conditions, the value of this excess is going to end up Impaired, and that the company will end up adjusting its income to offset these impaired amounts.
Since we further believe the vast majority of investors have the faintest idea that this possibility even exists, much less understands it, we have adjusted our Buy Target from $5.65 to $4.15.
Activision Blizzard Worksheet
Amazon.com Corporation
Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on January 29, 2009.
In our opinion, Amazon.com, Inc. (Nasaq: AMZN) has done more to revolutionize the Internet than Google, Inc. (Nasdaq: GOOG) will ever do.
The company incorporated in 1994 in the state of Washington and reincorporated in 1996 in the state of Delaware, opened its doors to the World Wide Web in July 1995, completed its initial public offering in May 1997, and according to the company, offers the "Earth’s Biggest Selection."
Investment Thoughts
Our only regret is that we passed on adding the company to our portfolio in late 1997 and again in early 1998 because at the time, the company simply didn't make any money.
Today of course, they are an investment media darling, and while we love their website, we think their stock price is extremely over valued.
We have the stock on our watch list with a Reasonable Value Estimate of $37.22, a Buy Target of $18.66, a First Sell Target of $36.38, and a Close Target of $39.39.
The stock closed recently at $73.31, which we note exceeds the 29% annual earnings growth factor the analysts are calling for making the company's PEG ratio 1.44. In addition, that recent close also places the company's trailing twelve month PE ratio at about 41 times earnings.
All of this begs the question why would anyone want to invest in Amazon.com stock at these levels? Has anyone investing in this company considered what will happen should the company miss earnings estimates? And yet the average daily volume for the stock is just above 9 million shares and we have heard repeatedly over the past month or so that now is the time to buy Amazon.com.
Excuse us when we say hooey. The only folks putting money into the stock of this company are the brain dead, the toothless, and the folks that forget to pull up their Depends.
Nobody in their right mind should even consider an investment in Amazon.com at these levels unless their understanding of investing is to buy high and sell low.
Amazon.com Worksheet
And in the End
Well there you have it. Four stocks that the wizards are saying you need to buy today, this instant, now. The only thing the wizards failed to tell you is why you need to buy these stocks now and how they know that "now" is the right time.
Hopefully a wizard that can explain economic demand will come forward and enlighten the world. But we sorta doubt it.
Wax
Netflix, Inc. - A Wax Ink Raw Value Update
Company Thoughts
With more than 10 million subscribers, Netflix, Inc. (Nasdaq: NFLX) is the largest online movie rental subscription service in the United States, offering a variety of subscription plans, with no due dates, no late fees, no shipping fees and no pay-per-view fees. They provide subscribers access to over 100,000 DVD and Blu-ray titles plus more than 12,000 streaming content choices.
Not only is the company in the movie rental business, Wax Ink has discovered a very mysterious, "covert" side to the company. A side that perhaps management was completely unaware of, but, according to "wanna be" postal sleuth Norman Baccash, allegedly exists.
According to allegations made by realtor Norman Baccash, it seems the company, perhaps under cover of darkness perhaps not, attempted to save on postage by falsely certifying that the company's DVD mailers qualified as machinable under the mailing standards of the United States Postal Service and thereby avoiding $260 million in surcharges for non-machinable mail.
That the company would do this has apparently taken its toll on Mr. Baccash who is seeking monetary relief in the amount of three times the damages suffered by the United States, civil penalties of between $5,500 and $11,000 for each violation of the Act, a monetary award pursuant to the Act, injunctive relief and costs.
If Mr. Baccash can pull this off, he should be at least nominated for an Oscar.
More Company Thoughts
Additionally, in February 2009, a number of purported anti-trust class action suits were filed against the company and Walmart, Inc. (NYSE: WMT) alleging that Netflix and Wal-Mart entered into an agreement to divide the markets for sales and online rentals of DVDs in the United States, which resulted in higher Netflix subscription prices.
The complaints assert violation of federal and/or state antitrust laws and seek injunctive relief, costs (including attorneys’ fees) and damages in an unspecified amount. Attorneys' fees! Who would have thought?
There are some other lawsuits highlighted in the company's most recent SEC Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 25, 2009. Just scroll down to Note 5 in the Notes to Consolidated Financial Statements section of the filing for more information.
Investment Thoughts
We have the company on our watch list with a Reasonable Value Estimate of $39.00, a Buy Target of $19.50, a First Sell Target of $38.00, and a Close Target of $41. However, given the following reasons, we have lowered our Buy Target from $19.50 to $12.00.
While we were glad to see the company end fiscal 2008 with an almost 11% increase in Operating Revenue over fiscal 2007, there were a few things we found very troubling, especially considering today's economic climate.
The things we found most noteworthy were the company's almost 27% decline in Cash, its drop in Marketable Securities by almost 32%, the elimination of $132.5 million of Intangibles, the 25% increase in Operating Cash Flow year over year, as most importantly to us, the 400% drop in year over year Free Cash Flow.
To us, these are significant changes in financial health, and were we shareholders, which we are not, we would be very concerned.
But to show that our investment philosophy is shared by an extremely small group of investors, we note that the company's PE stood at 9 at the end of fiscal 2007, 13 at the end of fiscal 2008, and now with the current economic thud in full swing, we notice that the company's tailing twelve month PE is near 18.
Final Thoughts
While the company may earn its money renting make believe, we believe at current levels, an investment in this company will not any money make.
Wax
Buffalo Wild Wings - A Wax Ink Raw Value Update
Back in February, we did a small piece on Buffalo Wild Wings, Inc. (Nasdaq: BWLD). The post contained a bit of information about the company, and our worksheet. Now that the company has filed its SEC Form 10-K for fiscal 2008, we thought it would be a good time to update our worksheet on the company.
On the positive side, the company ended the year with $0 Debt, $34.5 million in Cash and Marketable Securities, and a 22% increase in year over year Sales. In addition, Free Cash Flow for fiscal 2008 was $2.07, compared with $1.40 for fiscal 2007, a 48% year over year increase.
On the negative side, the company's Working Capital Ratio declined by 58%, its Quick Ratio declined by 46%, and there was a negligible increase, about 5%, in Return on Invested Capital.
Accordingly we have adjusted our Reasonable Value Estimate for the stock to $35.32, setting our Buy Target at $17.66, our First Sell Target at $34.44, and our Close Target at $37.28.
However, because we believe that the greater economy has not yet seen the full impact of the current economic downturn, we think a lowered entry point for the stock is warranted. Accordingly, we have lowered our Buy Target from $17.66, to $12.24.
Like last year, we still think the PE is too high, ending fiscal 2008 at 17.44, down from 18.03 for fiscal 2007, and as we have said many times, once the PE for a stock climbs above 15, our interest wanes.
So enjoy a cold beer, a few spicy wings, and remember this. The poor guy looking in the mirror everyday...is you.
Molybdenum Companies - A Wax Ink Raw Value Report
Molybdenum. It is has been hailed as an antioxidant that prevents cancer by protecting cells from free radicals, said to be able to prevent anemia, gout, and dental cavities, not to mention it is supposed to be able to prevent sexual impotence.
Several weeks ago Wax Ink was commissioned to research companies in the Molybdenum business. Having heard the aforementioned claims, we decided, perhaps the prevention of gout would be a noble cause.
Molybdenum (Mo)
According to the U.S. Geological Survey, Molybdenum is a refractory metallic element used principally as an alloying agent in steel, cast iron, and super alloys to enhance hardenability, strength, toughness, and wear and corrosion resistance।
The material is an essential ingredient in steel alloys used in the energy industry, the aerospace industry, and the automobile industry because it strengthens steel, improves weldability, reduces brittleness, and increases steel's resistance to corrosion. It is one of the key components in catalysts used in the petro-chemical industry to reduce sulfur in gasoline and diesel fuel.
Molybdenum is recovered as a by-product of copper and tungsten mining operations and is prepared from the powder made by the hydrogen reduction of purified molybdic trioxide or ammonium molybdate.
Properties
The metal is silvery white, very hard, but is softer and more ductile than tungsten. It has a high elastic modulus, and only tungsten and tantalum, of the more readily available metals, have higher melting points. It is a valuable alloying agent, as it contributes to the hardenability and toughness of quenched and tempered steels. It also improves the strength of steel at high temperatures.
Industrial Uses
Molybdenum is used in certain nickel-based alloys, such as the "Hastelloys(R)" which are heat-resistant and corrosion-resistant to chemical solutions. Since Molybdenum oxidizes at elevated temperatures (+4750F), the metal has found recent application as electrodes for electrically heated glass furnaces and forehearths. In addition, the metal is used in nuclear energy applications and for missile and aircraft parts.
Molybdenum is also used as a catalyst in the refining of petroleum, aiding in the reduction of sulfur during the production of gasoline and diesel fuel. The metal has also found applications as a filament material in electronic and electrical applications, and is an essential trace element in plant nutrition.
Molybdenum sulfide is useful as a lubricant, especially at high temperatures where oils would decompose. Almost all ultra-high strength steels with minimum yield points up to 300,000 psi (lb/in.2) contain molybdenum in amounts from 0.25 to 8%.
Ecological Uses
Ecologically, molybdenum as a trace element is necessary for nitrogen fixation and other metabolic processes, and is an essential trace element in plant nutrition. Land that contain no measurable concentrations of molybdenum, are often barren, or able to produce little sustainable organic material.
Medical Uses
Molybdenum is a scarce mineral that is present in very small quantities in the human body. It is involved in many important biological processes, possibly including development of the nervous system, waste processing in the kidneys, and energy production in cells. There is some evidence to suggest that too little molybdenum in the diet may be responsible for some health problems, with Molybdenum currently used as a treatment in rare cases of inborn errors of metabolism (such as Wilson disease) in which the body can’t process copper.
Research will continue into the use of Molybdenum in cancer treatment if human trials continue to show that it can slow cancer growth. The material has already shown promise in animal trials in reducing the effects of certain cancer drugs on the heart and lungs.
The Molybdenum Industry
According to Yahoo Finance, there are 130 companies in the Steel and Iron Industry, 64 companies in the Copper Industry, 499 companies in the Industrial Metals and Minerals Industry, 50 companies in the Gold Industry, 8 companies in the Silver Industry, and 76 companies in the Non-Metallic Mineral Mining Industry.
Of those 827 companies, there are 109 companies that that produce Molybdenum.
Things to Consider
Molybdenum currently sells for about $9 per pound, sliding in the last quarter of 2008 from what was a relatively stable price of near $30 per pound.
Additionally, the largest production of U.S. Molybdenum comes primarily from three mines; the Henderson Mine in Colorado, owned and operated by Freeport-McMoran Copper and Gold, Inc., the Molycorp Questa Mine in New Mexico, owned and operted by Molycorp Minerals, LLC, a private company, and the Thompson Creek Mine in Idaho owned and operated by Thompson Creek Metals Company, Inc.
As an aside, the world's largest producer of Molybdenum is Codelco Corporation, a Chilean company that produced 27,200 metric tonnes in 2006.
Finally, it is important to consider that the vast majority of companies that mine Molybdenum, also mine other metals, such gold, silver, and copper. With few exceptions, most metals mining companies mine Molybdenum almost as an accident to their other mining operations.
Research Selection
Generally, the first rule that we follow at Wax Ink is we only research companies that are on our watch list, which currently consists of 2613 companies. With the exception of 24 companies, all of the companies on our watch list are domestic companies. We would like to be able to tell you that the reason we have so few foreign companies is the that their tax dollars are paid to the United States government, but the truth of the matter is we simply prefer companies whose auditors follow GAAP accounting methodology.
Researching the companies in the Molybdenum business proved to be quite difficult, since out of a total of 109 companies that produce Molybdenum, almost none of them were on our watch list because almost none of them, were domestic companies.
In the end, we decided to research only the companies in the Molybdenum business, whether domestic or foreign, whose stock was traded on either the New York Stock Exchange, the American Stock Exchange, or the Nasdaq . This criteria reduced that number of companies from 109 to 11.
The Companies
Augusta Resource Corporation - Industrial Metals and Minerals Industry
Vancouver, British Columbia
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on March 31, 2009.
Augusta Resource Corporation (AMEX: AZC) incorporated on January 14, 1937, is engaged in the exploration and development of mineral properties in Pima County, Arizona. Augusta’s property is in the development stage. As of December 31, 2008, the company’s property was non-productive and did not generate any revenues. During the year ended December 31, 2008, the company drilled 20 core holes. During 2008, the company completed groundwater monitoring well system around Rosemont project site.
Rosemont Copper Company (Rosemont) is the wholly owned subsidiary of the company. Augusta’s Rosemont property consists of approximately 15,000 acres. Rosemont is approximately 50 kilometers southeast of Tucson, Arizona.
Rosemont consists of copper/molybdenum/silver skarn deposit, as well as other exploration targets. During 2008, Augusta had mineral reserves containing 546 million tons grading 0.45% copper, 0.015% molybdenum and 0.12 ounces per tonsilver in sulfide ore, and 70 million tons at 0.17% copper in oxide ore.
Wax Ink Opinion
This one had a recent close of $1.65, which is $1.65 more than it's worth. Lots of potential and a website are fine, but at the end of the day, we prefer to invest in companies with proven management and long history of large profits. Since we found neither with this 72 year old company, we have to believe that like preventing gout, neither ever will exist.
Accordingly, based on the fundamental metrics we employ, we have no investment interest in this company at the present time.
Augusta Resource Raw Value Worksheet
_________________________________________________________________________________________________
Freeport-McMoRan Copper and Gold, Inc. - Copper Industry
Phoenix, Arizona
Financial information contained in this report is based on the company's latest SEC Form10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 26, 2009.
Freeport-McMoRan Copper and Gold, Inc. (NYSE: FCX) through its wholly owned subsidiary, Phelps Dodge Corporation (Phelps Dodge) is a copper, gold, and molybdenum mining company.
The company’s portfolio of assets includes the Grasberg minerals district in Indonesia, which contains single recoverable copper reserve and the single gold reserve of any mine; significant mining operations in North and South America, and the Tenke Fungurume development project in the Democratic Republic of Congo (DRC).
As of December 31, 2008, consolidated recoverable proven and probable reserves totaled 102.0 billion pounds of copper, 40 million ounces of gold, 2.48 billion pounds of molybdenum, 266.6 million ounces of silver and 0.7 billion pounds of cobalt.
Approximately 35% of its copper reserves were in Indonesia, approximately 31% were in South America, approximately 28% were in North America and approximately 6% were in Africa. Approximately 96% of its gold reserves were in Indonesia, with its remaining gold reserves located in South America. The molybdenum reserves are primarily in North America (approximately 85%), with its remaining molybdenum reserves in South America.
The company's mining revenues during the year ended December 31, 2008, include sales of copper (approximately 76%), molybdenum (approximately 14%) and gold (approximately 7%).
It has five operating copper mines in North America, four in South America and the Grasberg minerals district in Indonesia. It also has one operating primary molybdenum mine in North America. During 2008, approximately 60 % of its consolidated copper production was from its Grasberg, Morenci and Cerro Verde mines, and more than half of its mined copper was sold in concentrate, approximately 27% as rod (principally from its North America operations) and approximately 19% as cathodes.
Also during 2008, approximately 55% of its consolidated molybdenum production was from the Henderson molybdenum mine and approximately 45% was produced as a by-product primarily at its North America copper mines.
The company also produces gold as a by-product at its copper mines, primarily at the Grasberg minerals district in Indonesia, which accounted for approximately 90% of its consolidated gold production during 2008.
In North America, the company has five operating copper mines: Morenci, Sierrita, Bagdad and Safford in Arizona, and Tyrone in New Mexico. In addition, the Chino mine in New Mexico was placed on care-and-maintenance status in December 2008.
All of these operations are wholly owned, except for Morenci, an unincorporated joint venture, in which the company owns an 85% undivided interest. In addition to copper, the Morenci, Sierrita and Bagdad mines produce molybdenum as a by-product.
In Indonesia, PT Freeport Indonesia operates the Grasberg minerals district. The company has joint venture agreements with Rio Tinto plc (Rio Tinto), an international mining company, with respect to a portion of its mining activities in Indonesia.
The company also owns 90.64% of PT Freeport Indonesia and the Government of Indonesia owns the remaining 9.36% interest.
The company's Grasberg minerals district also produces significant quantities of gold and silver as by-products. PT Freeport Indonesia also owns 25% of PT Smelting, a smelting and refining company in Gresik, Indonesia.
The company produces molybdenum at its wholly owned Henderson molybdenum mine in Colorado. Additionally, it owns the Climax molybdenum mine in Colorado.
In addition to its operating mines, the company has mines in development. In Indonesia, it developing its underground mines. In Africa, it holds an effective 57.75% interest in the Tenke Fungurume copper and cobalt concession in the DRC.
The North America copper mines include open-pit mining, sulfide ore concentrating, leaching and SX/EW operations, with a majority of the copper produced at the North America copper mines cast into copper rod by the company’s Rod and Refining operations.
The North America copper mines division includes Morenci and Sierrita as reportable segments. The Morenci open-pit mine, located in southeastern Arizona, primarily produces copper cathodes and copper concentrates. In addition to copper, the Morenci mine produces a small amount of molybdenum concentrates as a by-product.
The Sierrita open-pit mine, located in Pima County, Arizona, primarily produces copper cathodes, copper concentrates and copper sulfate. In addition to copper, the Sierrita mine produces molybdenum concentrate as a by-product.
Other mines include the company’s other operating southwestern U.S. copper mines, Bagdad, Safford and Tyrone. In addition to copper, the Bagdad mine produces molybdenum concentrate as a by-product.
Other mines also include the company’s southwestern United States copper mines that are on care-and-maintenance status, including Miami and Chino.
The company has four operating copper mines in South America-Cerro Verde in Peru, and Candelaria, Ojos del Salado and El Abra in Chile. These operations include open-pit and underground mining, sulfide ore concentrating, leaching and SX/EW operations.
The South America copper mines division includes Cerro Verde. The Cerro Verde open-pit copper mine, located near Arequipa, Peru, produces copper cathodes and copper concentrates. In addition to copper, the Cerro Verde mine produces molybdenum concentrate as a by-product.
In the first quarter of 2009, the company announced plans to temporarily curtail the molybdenum circuit at Cerro Verde.
Other mines include the company’s Chilean copper mines – Candelaria, Ojos del Salado and El Abra, which include open-pit and underground mining, sulfide ore concentrating, leaching and SX/EW operations. In addition to copper, the Candelaria and Ojos del Salado mines produce gold and silver as by-products.
Indonesia mining includes PT Freeport Indonesia’s Grasberg minerals district. PT Freeport Indonesia produces copper concentrates, which contain significant quantities of gold and silver.
Africa mining includes the Tenke Fungurume copper and cobalt mining concessions in the Katanga province of the DRC. Construction activities are well advanced and initial production is targeted during the second half of 2009. The initial project at Tenke Fungurume is based on mining and processing ore reserves approximating 119 million metric tons with average ore grades of 2.6 % copper and 0.35 % cobalt.
The Molybdenum segment is an integrated producer of molybdenum, with mining, sulfide ore concentrating, roasting and processing facilities that produce high-purity, molybdenum-based chemicals, molybdenum metal powder and metallurgical products, which are sold to customers around the world, and includes the wholly owned Henderson molybdenum mine in Colorado and related conversion facilities.
The Henderson underground mine produces high-purity, chemical-grade molybdenum concentrates, which are typically further processed into value-added molybdenum chemical products. This segment also includes a sales company that purchases and sells molybdenum from the Henderson mine, as well as from the company’s North and South America copper mines that produce molybdenum as a by-product.
The Rod and Refining segment consists of copper conversion facilities located in North America.
Atlantic Copper, the company’s wholly owned smelting unit in Spain, smelts and refines copper concentrates and markets refined copper and precious metals in slimes. PT Freeport Indonesia and the South America copper mines generally sell a portion of their concentrate and cathode (South America) production to Atlantic Copper.
Wax Ink Opinion
Based on a five year hold, we have the company on our watch list with a Reasonable Value Estimate of $89, a Buy Target of $45, a First Sell Target of $87.50, and a Close Target of $95. While we like the company's fiscal 2008 numbers, we note that there are a couple of things that give us pause.
First is the company's effective tax rate of 21.39%. While this may seem an insignificant thing, the average corporation in the United States has an effective tax rate of near 35%. So to us, a company with an effective tax rate that is almost 14% lower than the average, bears watching.
The other thing we think is worth watching is the company's Debt to EBITDA ratio, which for fiscal 2008 was 1.54. While not an issue at this point, should the world economy continue to falter, total debt at $22.99 per share may become more costly to service.
As stated by the company; "... a copper production is expected to be reduced by 400 million pounds in 2009 and 800 million pounds in 2010 and molybdenum production is expected to be reduced by 20 million pounds in 2009 and 40 million pounds in 2010, compared with our previously announced October 2008 estimated production for 2009 and 2010. Projected copper production is expected to be 3.9 billion pounds in 2009 and 3.8 billion pounds in 2010. Projected molybdenum production is expected to be 60 million pounds in both 2009 and 2010. The affected mine sites will be idling or reducing utilization of a portion of their equipment fleets in connection with these curtailments."
Given managment's outlook for 2009 and 2010, as well as the on-going litigation as described in the notes to the financial statements (Note 15) of the company's current SEC 10-K filing, we believe a lowered entry point for this stock is appropriate.
Accordingly, based on the fundamental metrics we employ, we have reduced our Buy Target from $45 to $17.50.
Freeport-McMoRan Raw Value Worksheet
_________________________________________________________________________________________________
General Moly, Inc. - Industrial Metals and Minerals Industry
Lakewood, Colorado
Financial information contained in this report is based on the company's latest SEC Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 27, 2009.
General Moly, Inc. (AMEX: GMO), incorporated on November 23, 1925, is a development stage company engaged in the business of exploration, development and mining of properties primarily containing molybdenum.
The company’s primary asset is an 80% interest in the Mt. Hope Project (Mt. Hope Project), a primary molybdenum property, located in Eureka County, Nevada. The company owns interest in the Liberty Property (the Liberty Property), located in Nye County, Nevada.
In addition, the company owns other non-core properties and mineral rights. In February 2008, the company formed a joint venture with POS-Minerals Corporation (POS-Minerals), an affiliate of POSCO, a Korean steel company for the development of the Mt. Hope Project.
Effective January 1, 2008, the company contributed all of its interest in the assets related to the Mt. Hope Project, including the company’s lease of the Mt. Hope property, into a newly formed entity, Eureka Moly and entered into a joint venture for the development and operation of the Mt. Hope Project with POS-Minerals.
The Mt. Hope Project is owned and operated by Eureka Moly, which is a joint venture between the company and POS-Minerals. As of December 31, 2008, Eureka Moly had a 30-year renewable lease with Mount Hope Mines, Inc. (MHMI) for the Mt. Hope Project (the Mt. Hope Lease). Located in Eureka County, Nevada, the Mt. Hope Project consists of 13 patented lode claims, one millsite claim, and 1,577 unpatented lode claims, of which 109 unpatented lode claims are owned by MHMI and 1,468 unpatented lode claims are owned by Eureka Moly. The Mount Hope Project is located on the eastern flank of Mount Hope approximately 21miles north of Eureka, Nevada.
The Mount Hope deposit is a molybdenum porphyry, is classified as a low-fluorine, sub-Climax type deposit. The main form of molybdenum mineralization is molybdenite (molybdenum disulfide) and occurs within the intrusive Quartz Porphyry rocks of the Mount Hope complex and to a lesser extent in the Vinini sedimentary formation adjacent to the southern margin of the mineralized domes.
The Mt. Hope Project has been extensively drilled and all core and assay results are available. The drilling at the Mt. Hope Project has been predominately performed by utilizing diamond core methods, and subsidiary reverse circulation (RC) in areas of condemnation and water well drilling. As of December 31, 2008, 257 holes have been drilled into the property for a total of 300,901 feet of drilling; 232,189 feet of which is core, the remaining 68,712 feet is RC.
In March 2006, the company purchased the Liberty Property, an approximately 10 square mile property in Nye County, Nevada, including water rights, mineral and surface rights, buildings and certain equipment, from High Desert Winds LLC. In January 2007, GMI purchased the company that owned a 12% net smelter royalty on the Liberty Property. The company also purchased mineral claims associated with this property that were not previously owned by the company, thus giving GMI control over all mineral rights within the boundary of the Liberty Property.
The company completed two drilling programs that, combined with previous evaluation work performed by former owners, identified mineralization totaling 433 million tons averaging 0.071% molybdenum and 0.07% copper. In April 2008, it completed a pre-feasibility study outlining the project.
As of December 31, 2008, the company owned several other, small, non-cores, properties located in the western United States. These properties include additional molybdenum deposits, as well as copper, silver and gold deposits.
Wax Ink Opinion
This is another company that in our opinion offers an investor lots of potential with little chance of a potential investment return.
We believe the stock has a reasonable value of $0.27 based on a five year hold, and that the reasonable value may improve dramatically if the company will ever generate any revenues, something we could not find going back 5 years.
Accordingly, based on the fundamental metrics we employ, we have no investment interest at the present time.
General Molly Raw Value Worksheet
_________________________________________________________________________________________________
Harmony Gold Mining Co. Ltd. - Gold Industry
Randfontein, South Africa
Financial information contained in this report is based on the company's latest SEC Form 20-F filing for fiscal year ending June 30, 2008, as filed with the SEC on October 29, 2009.
Harmony Gold Mining Co. Ltd. (NYSE: HMY) is a gold producer. The company’s operations are located primarily on the Witwatersrand Basin in South Africa, including 10 underground operations, an open-pit mine and surface operations that includes four provinces, Gauteng, North West Province, Mpumalanga and the Free State.
Harmony’s exploration portfolio is focused on highly prospective areas in Papua New Guinea (PNG), including the Wafi-Golpu project, although renewed exploration activity has begun in South Africa.
During the fiscal year ended June 30, 2008 (fiscal 2008), Harmony produced 1.55 million ounces of gold, primarily from its operations in South Africa. As of June 30, 2008. Harmony’s ore reserves amounted to 50.5 million ounces of gold.
In December 2007, Dioro Exploration NL completed the acquisition of the South Kal Mine operations located near Kalgoorlie, Western Australia, from Harmony.
The Kalgold operations are located within the Kraaipan Greenstone Belt, 60 kilometer south of Mafikeng. This is part of the larger Amalia-Kraaipan Greenstone terrain, consisting of north trending linear belts of Archaean meta-volcanic and metasedimentary rocks, separated by granitoid units.
The mines of the Freegold operations Tshepong, Phakisa, Bambanani, West, Kudu, Sable, Nyala, Eland and St Helena are located to the north and west of Welkom, while Joel is situated 30 kilometer to the south. Joel is mining the shallow flat-dipping Beatrix/VS5 Reef, while the other mines primarily exploit the Basal Reef. During fiscal 2008, limited mining has taken place on Leader Reef, A Reef and B Reef in the past. Kudu, Sable, Nyala, Eland and St. Helena.
Wax Ink Opinion
It may be headquartered in South Africa, but if our perception counts for anything, this company is just as poorly managed as many companies in the United States, with one exception.
We got the impression, the management of this company wasn't really interested in their miners.
We also note that Current Liabilities exceed Current Assets, Total Debt is 2.5 times higher than EBITDA, and the company has an Operating Margin of 11.11%, which we don't believe is high enough to continue to service the company's debt as the global recessions drags on, a recent announcement by the company that it has now become "net debt free", not withstanding.
We also note that company seems to continue to face labor unrest and a newly filed lawsuit relating to the company's American Depositiry Receipts (ADR).
In addition, while the company has proclaimed it is making great strides in its safety efforts, we note that during the past 16 months the company has reported that 16 workers lost their lives in mining related accidents, 2 workers were injured, and 2 workers are, at this time, missing.
Admittedly, we are not qualified to comment on these safety reports, and we note that the company's safety record made indeed be acceptable in South Africa. Yet at the same time, we wonder just how long the company would remain "net debt free", were it to decided that worker safety is the company's first priority.
In short, we believe a Reasonable Value Estimate for this stock is $0, and in the short-term believe the stock has more potential downside risk than upside reward. Accordingly, based on the fundamental metrics we employ, we have no investment interest at the present time.
Harmony Raw Value Workshhet
_________________________________________________________________________________________________
Northern Dynasty Minerals, Ltd. - Gold Industry
Vancouver, British Columbia
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2007, as filed with the SEC on March 31, 2008 as amended on April 2, 2008.
Northern Dynasty Minerals, Ltd. (AMEX: NAK) is a mineral exploration company focused on developing the Pebble copper-gold-molybdenum mineral project (Pebble Project). The Pebble Project is located in Alaska, 19 miles from the villages of Iliamna and Newhalen, and approximately 200 miles southwest of the city of Anchorage.
The company has also located two additional porphyry copper-gold-molybdenum deposits, a porphyry copper zone, a gold-copper skarn occurrence and several high-grade gold veins. The Pebble Project deposit’s resources include copper, gold, and molybdenum. Quantities of silver, palladium, and rhenium are also contained in the deposit. Northern Dynasty has been carrying out technical programs, including drilling a full spectrum of engineering assessments, and environmental and socio-economic studies on Pebble Project.
In 2008, the company’s engineering work focused on collection of additional site and underground geotechnical data to support ongoing design work, continuation of metallurgical testwork on both Pebble West and Pebble East to optimize conventional processing systems and designs, continuation of assessments of the infrastructure elements (access road, port, and power) in order to establish the optimum alternatives, and designs for these project components, and assessment of project mine plans that would extract portions of the mineral resources.
Wax Ink Opinion
We continue to be amazed at the number of companies that remain living, when in point of fact, they are worth less than nothing, with little to no hope of bettering their station in the world of publicly traded companies.
Northern Dynasty Minerals, Ltd. is no exception. The time we spent researching this company, is, in our humble opinion, worth at least twice what this company is worth, and accordingly, based on the fundamental metrics we employ, we have no investment interest at the present time.
Northern Dynasty Raw Value Worksheet
_________________________________________________________________________________________________
Rio Tinto - Steel and Iron Industry
London, England
Financial information contained in this report is based on the company's latest SEC Form 20-F filing for fiscal year ending December 31, 2008, as filed with the SEC on April 2, 2008.
Rio Tinto plc (NYSE: RTP) operates as one business organization (Rio Tinto), a mining and exploration company.
The company’s business is finding, mining and processing mineral resources. Its major products include aluminum, copper, diamonds, energy products, gold, industrial minerals (borates, titanium dioxide, salt and talc), and iron ore.
Rio Tinto’s activities are represented in Australia and North America. There are also businesses in South America, Asia, Europe and southern Africa.
The company’s product groups comprise: Aluminum; Copper and Diamonds; Energy and Minerals, and Iron Ore.
Rio Tinto's business support groups include Exploration and Technology and Innovation.
In January 2009, the company completed the sale of its 50% equity share of the Alcan Ningxia aluminum joint venture in China to Qingtongxia Aluminium Group Co Ltd.
In April 2008, Hecla Mining Company completed the transaction to acquire the Rio Tinto subsidiaries that held a 70.27% interest in the Greens Creek silver mine and joint venture located near Juneau, Alaska. As a result of the transaction, Hecla subsidiaries hold 100% of the Greens Creek joint venture.
On September 11, 2008, Rio Tinto acquired a 14.9% stake in Kalahari, and a 10.9% stake in Extract Resources, in which Kalahari's subsidiary Kalahari Uranium Limited holds a 39.11% interest.
In October 2008, Alcan Global Pharmaceutical Packaging, a division of Alcan Packaging, a business unit of Rio Tinto Alcan, acquired the Chakan flexible packaging plant from Associated Capsules Private Limited in India.
The company’s Aluminium product group, Rio Tinto Alcan, is a primary producer of bauxite, alumina and aluminum, benefiting from a sustainable, low cost energy supply. It operates mainly in Canada and Australia, with interests in Europe, New Zealand, Africa, South America and the United States. The group is organized into four business units: Bauxite and Alumina, Primary Metal, Engineered Products and Packaging, the latter two of which are to be divested.
Rio Tinto’s Copper and Diamonds group is engaged in the copper production, comprising Kennecott Utah Copper in the United States, and interests in some copper mines and development projects, including Escondida in Chile, Grasberg in Indonesia, the Resolution and Pebble projects in the United States, the Oyu Tolgoi project in Mongolia and the La Granja project in Peru.
The Diamonds group is a primary supplier of rough diamonds, comprising interests in the Diavik mine in Canada, the Argyle mine in Australia, and the Murowa mine in Zimbabwe, served by a diamond sales office in Belgium.
The company’s Energy and Minerals group is a major supplier in its markets, represented in coal by Rio Tinto Coal Australia and Coal and Allied in Australia, and by Rio Tinto Energy America in the United States. It also includes uranium interests in Energy Resources of Australia and the Rossing Uranium mine in Namibia.
The industrial minerals businesses is engaged in the supply and science of their products, comprising Rio Tinto Minerals, made up of borates and talc operations in the United States, South America, Europe and Australia, as well as Rio Tinto Iron and Titanium, which has interests in North America, South Africa and Madagascar.
The company’s Iron Ore group is a primary contributor to the world’s seaborne iron ore trade with interests that comprise Hamersley Iron and Robe River in Australia, Iron Ore Company of Canada, Corumba in Brazil, and the Simandou, Guinea, and Orissa, India, projects.
The group includes the HIsmelt direct iron making plant in Australia, employing a new, cleaner iron making process developed largely by Rio Tinto. It also includes the Dampier Salt operations at three sites in Western Australia.
The company’s Exploration group is organized into five teams based in North America, South America, Australia, Asia and Africa/Europe and a sixth project generation team that searches the world for new opportunities and provides specialized geological, geophysical and commercial expertise to the regional teams.
The Technology and Innovation group has bases in Australia, Canada, the United Kingdom and the United States. Its role is to identify and promote operational technology best practice across the Group and to pursue step change innovation of strategic importance to the development of orebodies of the future.
Wax Ink Opinion
We are impressed enough with this company that we have added it to our watch list with a Reasonable Value Estimate of $540, a Buy Target of $270, a First Sell Target of $526, and a Close Target of $570, based on a five year minimum hold.
While those numbers are huge compared to a recent close of $155.86, they don't represent the entire picture, and it is important to realise that they are Raw Value numbers, requiring countless additional hours of research before reaching investment status.
We note that the company's Working Capital or Current Ratio, is far less than we feel comfortable with, as is the company's Quick Ratio. Both of these concern us as we wonder if further research will yield an over leveraging on the part of managment, as evidenced to some degree by noting that company's Goodwill and Intangibles make up almost 23% of Total Assets.
In addition, while close to what we like to see, we also note that the company's Debt to EBITDA number is on the high side, with Debt exceeding EBITDA by 2.2 times. But with debt exceeding $125 per share, we are not overly surprised by this number.
We caution that while things often seem great on the surface, a little digging may well reveal potential troubles, as evidenced by the company's Tangible Book Value of $0.18, and its Equity Value of $34.46.
However, all things considered, with the stock currently trading at just about 4 times Free Cash Flow, which for fiscal 2008 was $39.55 per share, and carrying a trailing twelve month PE Ratio of around 5.5, spending the time needed to dig deep into this company may be time very well spent.
Yet, just because we were somewhat impressed with the company, we have not forgotten that we are value investors, and based on our review of the company's financial statements, we have adjusted our margin of safety and accordingly our Buy Target, lowering it from $270 to $62.35.
Rio Tinto Raw Value Worksheet
_________________________________________________________________________________________________
Taseko Mines Ltd. - Copper Industry
Vancouver, British Columbia
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on April 1, 2008
Taseko Mines Ltd. (AMEX: TGB) incorporated on April 15, 1966, is a mining and mineral exploration company.
The company has one operating mine and three exploration projects, all located in British Columbia, Canada, which includes Gibraltar copper-molybdenum mine, the Prosperity gold-copper property, the Harmony gold property, and the Aley niobium property. On May 2, 2008, Taseko completed the acquisition of Oakmont Ventures Ltd.
The Gibraltar Mine site covers approximately 109 square kilometer (km) and the property consists of 249 tenures held 100% by the company. There are 30 mining leases at Gibraltar mine.
During the year ended December 31, 2008, the mill expansion was completed, which includes 34’ diameter Semi-Autogenous Grinding (SAG) mill, conversion of the rod and ball mill circuit to ball mill grinding only, and replacement of rougher and cleaner flotation cells with large cells. The rated throughput capacity increased from 36,000 tons per day to 46,000 tons per day.
The Gibraltar Mine mineral claims cover an area of gentle topography, local relief is in the order of 200 meters. The plant site is located at an elevation of approximately 1,100 meters above sea level. The Gibraltar Mine generally consists of seven separate mineralized zones, which includes Pollyanna, Granite, Connector, Gibraltar East, Gibraltar West, and Gibraltar West Extension.
Pyrite and chalcopyrite are the principal primary iron and copper sulphide minerals. Sixty percent of the copper occurs in fine-grained chalcopyrite. Coarser grained chalcopyrite also occurs, usually in quartz veins and shear zones. Small concentrations of bornite (a sulphide mineral of copper and iron), associated with magnetite and chalcopyrite, is present on the extremities of the Pollyanna and Sawmill deposits.
Oxide copper mineralization is also present between the Gibraltar East and Pollyanna open pits in the Connector Zone.
Molybdenite (molybdenum sulphide mineral) is a minor but economically important associate of chalcopyrite in the Pollyanna, Granite, and Sawmill deposits.
The Gibraltar Mine is a typical open pit operation that utilizes drilling, blasting, cable shovel loading, and large-scale truck hauling to excavate rock.
The Prosperity project consists of 124 mineral claims covering the mineral rights for approximately 121 square km. The property is located in the Clinton Mining Division, approximately 125 kilometers southwest of the City of Williams Lake, British Columbia. The Prosperity Project hosts porphyry gold-copper deposit. Pyrite and chalcopyrite are the principal sulphide minerals in the deposit. They are uniformly distributed in disseminations, fracture fillings, veins, and veinlets and may be accompanied by bornite and lesser molybdenite and tetrahedrite-tenantite. Native gold occurs as inclusions in and along microfractures with copper-bearing minerals and pyrite.
The Harmony Gold Project is located in the Skeena Mining Division, on Graham Island, Queen Charlotte Islands (also known as Haida Gwaii), on the northwestern coast of British Columbia, Canada. The Harmony project comprises of 58 mineral claims and 177 square km. The Harmony project hosts the Specogna epithermal gold deposit, controlled by the Sandspit fault.
The Aley Niobium Project is located in the Omineca Mining Division in British Columbia, Canada. It consists of 13 contiguous claims that cover 5,668 hectares.
Wax Ink Opinion
There are certain things that just make us go hmmmmmm, and this company was one of those things.
We at first felt pretty good about the company and what it does to earn its money, and that continued as we started to go through the numbers. It wasn't until we had taken a step back and considered what we had found, that we realized an investment in Taseko Mines was not in our future.
There were three distinct items that skewered any investment thoughts for this company. The first one was the effective tax rate of 4%. While most people would think this a great thing, we think it's a sign of indecision on the part of management, continually trying one thing or another, in an effort to grow the business. In othere words, there is no defined business plan.
The second thing was the company's lack of free cash flow. We simply are not interested in investing in company's with low, or in this case no, free cash flow. Again, we believe this points to a lack of cohesion on the part of management.
The third thing that made us sit up and take notice, was the company's debt. When you think about the business the company is in, $45 million in debt is really not that big a deal. But when you consider that the company's market cap is $197 million, the debt number looks pretty ominous. It became an even bigger number when we noticed that the company's average interest rate was over 15%.
Granted, we did not take the time to read through all of the debt obligations the company has, but we highlight this number because given today's interest rate market it seemed stageringly high.
In addition, we had to ask ourselves if the company is paying this sort of average interest rate in the low rate interest environment we have today, what is the interest rate going to be in the future, as interest rates climb to battle inflation?
Accordingly, based on the fundamental metrics we employ, we have no investment interest at the present time.
Taseko Mines Raw Value Worksheet
_________________________________________________________________________________________________
Teck Cominco Limited - Industrial Metals and Minerals Industry
Vancouver, British Columbia
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on March 24, 2008
Teck Cominco Limited (NYSE: TCK) formerly Teck Cominco Limited, is engaged in the exploration for and development and production of natural resources.
The company’s principal products are copper, metallurgical coal, zinc and gold. Lead, molybdenum, various specialty and other metals, with chemicals and fertilizers as by-products produced at its operations.
The company also sells electrical power that is surplus to its requirements at the Trail metallurgical operations and owns a 20% interest in the Fort Hills oil sands project and a 50% interest in other oil sands leases in the Athabasca region of Alberta, Canada.
The company owns, or has interests in, 15 mines in Canada, United States, Chile and Peru, as well as one metallurgical complex in Canada.
In February 2009, the company announced the sale of its 50% interest in the Hemlo Operations, located in northwestern Ontario. In February 2009, it also announced the sale of its 50% interest in the Williams and David Bell mines in Ontario.
In August 2008, the company acquired the Relincho copper project from Global Copper Corp. On October 30, 2008, the company completed the acquisition of Fording Canadian Coal Trust (Fording), which primarily consists of Fording’s 60% interest in the Elk Valley Coal Partnership.
The company’s copper business unit includes its interests in Highland Valley Copper in south central British Columbia, the Antamina mine in the north central Peruvian Andes, the Quebrada Blanca and Carmen de Andacollo mines in Chile, and the Duck Pond copper-zinc mine in Newfoundland. The by-products produced at these mines include molybdenum and zinc. During the year ended December 31, 2008, the company produced a total of 313,000 tones of copper.
During 2008, Teck Cominco Limited acquired the Relincho copper project in Chile through its acquisition of Global Copper Corp. The company has a 97.5% interest in Highland Valley Copper, located in south central British Columbia. and a 22.5% interest in the Antamina mine, a copper and zinc mine at high elevation in Peru.
The company owns a 76.5% interest in Quebrada Blanca Mine, and has a 90% interest in Carmen de Andacollo mine in Chile.
The Duck Pond copper-zinc operation is located in central Newfoundland. Teck Cominco Limited’s other operations include Galore Creek Project, Relincho Project, Mesaba Project, Carrapateena Project and Petaquilla.
The company’s coal business unit includes six metallurgical coal mines in British Columbia and Alberta. It also exports seaborne metallurgical hard coking coal. Through October 29, 2008, its coal business included a 52% direct and indirect interest in the Teck Coal Partnership.
The company increased its ownership to 100%, effective October 30, 2008, with the purchase of the assets of Fording Canadian Coal Trust.
The company’s zinc business unit includes its Trail refining and smelting complex in south central British Columbia, the Red Dog Operations in northwest Alaska and the Pend Oreille mine in Washington State. The products produced at these operations are zinc and lead concentrates at its mines, and refined zinc and lead at Trail. Trail Operations also produces various precious and specialty metals, fertilizers and chemicals, and owns the Waneta dam, which produces electricity for the metallurgical facilities and for sale to third parties.
The company’s gold business unit includes its 40% interest in the Pogo mine located southeast of Fairbanks, Alaska; a 78.8% interest in the Morelos project in Mexico, and several gold exploration properties. The Pogo gold mine is located 145 kilometers southeast of Fairbanks, Alaska. The Hemlo operations, which consist of the Williams and David Bell mines, are located approximately 350 kilometers east of Thunder Bay, Ontario. During 2008, Pogo and Hemlo operations produced approximately 269,000 ounces of gold.
The company’s energy division includes its 20% interest in the Fort Hills oil sands project and 50% interest in various oil sands leases that it jointly owns with UTS Energy Corporation (UTS). All of these properties are located in the Athabasca region of Alberta, Canada.
The Fort Hills oil sands project includes approximately 24,720 contiguous hectares of oil sands leases located about 90 kilometers north of Fort McMurray in Northern Alberta. The Equinox oil sands project consists of approximately 2,890 hectares of oil sands leases (Lease 14) and is west of the Fort Hills Project.
Wax Ink Opinion
We ended up with a Reasonable Value Estimate for this company of $30.74, a Buy Target of $15.37, a First Sell Target of $29.97, and a Close Target of $32.45. But as you wil see, things change.
We do not like the company's Current Ratio at 0.44 as it tells us Current Liabilities exceed Current Assets, meaning, in our opinion, management has not been paying attention.
Further, we note the company's quick ratio, a test of the company's immediate liquidity, is at 0.30, which tells us that in an emergency, the company does not have sufficient cash reserves to cover it's current (due within one year) liabilities. Again we ask, where is management?
We also highlight the company's cash conversion cycle of 159 days, meaning it is simply taking to long to convert new inventory into cash.
Additionally, we note that the company's Days Receivables Outstanding number is 100 days and the company's Days Payables Outstanding number is 59 days. Again we ask, where is management, since they are allowing the company to finance the company's suppliers on an interest rate free basis.
Accordingly, based on the metrics we employ, we have adjusted our margin of safety for this company, making our revised Buy Target $6.99, even though we have no investment interest in this company at the present time.
Teck Cominco Raw Value Worksheet
_________________________________________________________________________________________________
Thompson Creek Metals Company Inc. - Industrial Metals and Minerals Industry
Toronto, Ontario
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on April 9, 2008.
Thompson Creek Metals Company Inc. (NYSE: TC) is a Canadian molybdenum mining company with vertically integrated mining, milling, processing and marketing operations in Canada and the United States.
The company’s operations include the Thompson Creek Mine (mine and mill) in Idaho, the Langeloth Metallurgical Roasting Facility in Pennsylvania and a 75% joint venture interest in the Endako Molybdenum Mine Joint Venture (Endako Mine) (mine, mill and roaster) in British Columbia.
In addition, the company has two high-grade underground molybdenum development projects, the Davidson molybdenum property (Davidson Project), located in British Columbia, and the Mount Emmons molybdenum property, located in Colorado.
Thompson Creek Mine and mill are located near Challis, in central Idaho. The total property position is approximately 21,000 acres. The mill has a capacity of approximately 30,000 tons per day and operates with a crusher, SAG mill, ball mill and flotation circuit.
The company has a 75% interest in the Endako open-pit mine, mill and roaster, which is located near Fraser Lake, British Columbia. The total property position covers approximately 19,100 acres. The mill has a capacity of approximately 31,000 tons per day and a 30,900 to 35,300 pound per day multiple-hearth roaster. Its 75% share of molybdenum production at the Endako Mine increased to 2.9 million pounds during the year ended December 31, 2008.
The company operates the Langeloth Metallurgical Facility located near Pittsburgh, Pennsylvania. Operations at Langeloth include roasting of molybdenum sulfide concentrate into molybdenum oxide, upgrading molybdenum oxide to pure sublimed oxide, oxide briquettes, ferromolybdenum, as well as the roasting of other metal products. Langeloth also processes molybdenum and certain other metals for other third parties on a tolling, or cost-per-unit processed, basis.
The Davidson Project is an undeveloped molybdenum deposit in Canada. Blue Pearl Mining, a subsidiary of Thompson Creek Metals, focuses on building and operating a molybdenum mine producing an average of 2,000 metric tons of ore per day.
In August 2008, the company signed an option with United States Energy (USE) to acquire up to 75% of an underground molybdenum project in the United States in Colorado. The Mount Emmons Project is an undeveloped molybdenum deposit.
Wax Ink Opinion
The company is one of the few pure play Molybdenum producers and we believe a Reasonbable Value Estimate for the stock is $49.00, with a Buy Target of $24.50, a First Sell Target of $$48.00, and a Close Target of $52.00.
All of this sounds good, and when we look at the metrics we employ, we find that indeed many of them look good. We note however, that the company's free cash flow for fiscal 2008 was an anemic $0.04. Looking forward, this, to us, is extremely troubling.
As noted eariler, Molybdenum is currently selling in the $9 per pound range, down from $30 per pound. Common sense should dictate that in order for a company to be willing to invest the hundreds of millions of dollars necessary to develop a new Molybdenum mine, certain benchmark criteria must be in place.
For example, in the oil field development world a barrel of crude oil must average a certain amount of money per barrel in order for the field development to be profitable. If, because crude prices are low, a sufficient average price per barrel can be maintained, or the company through their forecasting efforts does not believe pricing can be maintained, then field development will be placed on hold. The mining business is no different.
We remind investors that senior management at Freeport-McMoran Copper and Gold noted in their most recent SEC 10-K filing; "... molybdenum production is expected to be reduced by 20 million pounds in 2009 and 40 million pounds in 2010. ...Projected molybdenum production is expected to be 60 million pounds in both 2009 and 2010. The affected mine sites will be idling or reducing utilization of a portion of their equipment fleets in connection with these curtailments."
We question why for fiscal 2009 and fiscal 2010, Thompson Creek an $800 million company, thinks it will fair any better than Freeport-McMoran, a $16 billion dollar company, especially since we agree with the prospects outline for fiscal 2009 and fiscal 2010 by FreeportMcMoran's management.
Accordingly, based on the metrics we employ, we have adjusted our margin of safety for Thompson Creek, lowering our Buy Target from $24.50, to $17.07, and remind investors that we have no investment interest in this company at the present time.
Thompson Creek Raw Value Report
_________________________________________________________________________________________________
US Energy Corporation - Industrial Metals and Minerals Industry
Riverton, Wyoming
Financial information contained in this report is based on the company's latest SEC Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on March 13, 2009 and as amended on April 2, 2009.
US Energy Corporation (Nasdaq: USEG) acquires and develops energy-related and other mineral properties. The company is primarily involved in the acquisition of mineral properties, the exploration and development of those properties, and from time to time the sale and lease of mineral-bearing properties and production and/or marketing of minerals.
During 2008, the company completed its multifamily apartment project serving the residential market in Gillette, Wyoming.
The company is focused on developing the Mount Emmons molybdenum project (Mount Emmons) into a major operating mine with Thompson Creek Metals Company (USA).
The Mount Emmons Project includes a total of 25 patented and approximately 612 unpatented mining and mill site claims, which together approximate 7,427 acres, or over 8 square miles of claims. Thompson Creek Metals Company (USA) has an option to acquire up to a 75% interest in the Project.
Wax Ink Opinion
When the dust settles and the air clears, this company simply doesn't make any money, and in our opinion is just too small a company at $52 million to be a real player in this sector. Nor do we see the company as a take over target since the company simply doesn't own anything worth taking over.
One thing we do note, is that management should decide if the company is in the apartment development business or the mining business and fully develop the chosen business before it delves into another business.
It is our opinion that the company is worth somewhere close to $1.80 per share from a liquidation perspective, and as an on-going business concern, we think the company is fairly valued at its recent close, $2.24.
However from an investment perspective we think a Reasonable Value Estimate for the company is $0, and accordingly, based on the metrics we employ, we have no investment interest in this company at the present time.
US Energy Raw Value Report
_________________________________________________________________________________________________
Yamana Gold, Inc. - Gold Industry
Toronto, Ontario
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on March 31, 2009.
Yamana Gold, Inc. (NYSE: AUY) is a Canada-based gold producer engaged in gold mining and related activities, including exploration, extraction, processing and reclamation. The company has significant properties involved in gold production, gold development, exploration and land positions throughout the Americas, including Brazil, Argentina, Chile, Mexico and Central America.
The company is producing gold and other precious metals at intermediate company production levels in addition to significant copper production.
During the year ended December 31, 2008, total production from all mines totaled approximately one million gold equivalent ounces.
During 2008, the company’s projects included Chapada Mine (Brazil), El Penon Mine (Chile), Gualcamayo Mine (Argentina), Jacobina Mine (Brazil), Minera Florida/Alhue Mine (Chile), Fazenda Brasileiro Mine (Brazil), Sao Vicente Mine (Brazil), Sao Francisco Mine (Brazil), San Andres Mine (Honduras), C1 Santa Luz (Brazil), Ernesto/Pau-a-Pique (Brazil), Pilar (Brazil) and Mercedes (Mexico).
Chapada is located in northern Goias State, Brazil. The project encompasses a series of mining and exploration licenses totaling 8,369 hectares. Chapada is Yamana’s original flagship operation. Chapada is an open-pit copper and gold mine in Brazil with milling facilities that produce a copper/gold concentrate, and is Yamana's largest property. As of December 31, 2008, proven and probable reserves totaled 345 million tons containing 2.5 million ounces of gold.
El Penon is a high-grade gold/silver mine located in the Atacama Desert in Region II of northern Chile. During 2008, the company received permission to increase throughput to 3,600 tons per day. As of December 31, 2008, proven and probable reserves totaled 8.9 million tons. During 2008, the company focused exploration on the North Block leading to the discovery of Bonanza North.
Gualcamayo is located in the northern San Juan province of Argentina. The main Gualcamayo block consists of one Cateo (exploration concession) and 57 Minas (mining property interests), covering 7,128 hectares of ground. The three main mineral deposits at Gualcamayo include the main Quebrada del Diablo (QDD) deposit, the Magdalena and Amelia Ines satellite deposits (AIM) and the QDD Lower West underground zone. It has a total reserve and resource base of approximately 3.9 million ounces of gold, including 2.9 million ounces in reserves.
The Jacobina complex of underground mines is located in the state of Bahia, in north eastern Brazil near the Serra do Jacobina mountains. It has a total reserve and resource base of more than 4.7 million] ounces of gold. At December 31, 2008, proven and probable reserves increased to approximately 1.4 million ounces of gold. At December 31, 2008, measured and indicated gold resources totalled 16.6 million tons containing 1.5 million ounces of gold.
Minera Florida is a gold, silver and zinc producing mine Located 73 kilometers south of Santiago in central Chile. As of December 31, 2008, Minera Florida had proven and probable reserves of 4.2 million tons containing 746,000 ounces of gold.
Fazenda Brasileiro is an underground gold mine. It is located in northeast Brazil, 180 kilometers north northwest of the state capital of Salvador.
Sao Vicente is located in west central Brazil. It is located close to the Bolivian border approximately 50 kilometers north of Yamana’s São Francisco mine.
Sao Francisco (Brazil) mine is located within the Guapore Gold Belt, a greenstone belt with numerous gold deposits and occurrences along its almost 200 kilometer strike length. The property is an open-pit, heap leach gold mine that involves three different streams of processing, including crushing-gravity-heap leach, crushing-heap leach, and run-of-mine heap leach.
Located in northwest Argentina, Yamana maintains a 12.5% equity interest in the Alumbrera mine. Alumbrera is a copper and gold mine.
The C1 Santa Luz project (Brazil) is located within Yamana’s 180,000 hectares of mineral claims on the Rio Itapicuru Greenstone Belt, approximately 140 kilometers north of Fazenda Brasileiro. It is planned as a conventional open-pit mine with throughput of 2.5 million tons per year or 6,800 tons per day.
The Ernesto/Pau-a-Pique project (Brazil) is located in the Guapore Gold Belt property, which covers 450,000 hectares. It is home to Yamana’s Sao Vicente and Sao Francisco Mines. Pau-a-Pique is planned as an underground bench and fill mine and Ernesto is planned to be mined both open-pit and cut-and-fill underground.
Located 80 kilometers south of Chapada (Brazil), the Pilar exploration concessions comprise 590 square kilometers overlying the Archean Greenstone Belt. Pilar is located on a greenstone belt known to host at least 38 gold occurrences.
The Mercedes project is located in northern Sonora, Mexico, approximately 200 kilometers south of Tucson, Arizona. It is planned as a bench and fill mine with throughput of 1,500 tons per day. At December 31, 2008, proven and probable reserves totaled 2.65 million tons containing 604,000 ounces of gold and 6.2 million ounces of silver.
Jeronimo is located in northern Chile approximately 30 kilometers south southwest of El Salvador at an elevation of 3,800 meters above sea level. The project is subject to a joint venture with Codelco, pursuant to which Yamana holds a 57% interest and acts as operator.
The La Pepa project lies within the prolific Maricunga Belt, a region in the Andean Cordillera of northern Chile containing gold and silver prospects. As of December 31, 2008, measured and indicated resources totaled 149 million tons containing 2.8 million ounces of gold.
Amancaya is located 120 kilometers southwest of Yamana’s El Penon mining operations in the Atacama Desert of northern Chile. The property is host to a low-sulphidation epithermal vein deposit that has been outlined along 1,200 meters of strike length and 250 meters of dip length.
Yamana owns 100% of the Agua Rica (Argentina) copper, gold and molybdenum deposit, a large feasibility-stage copper and gold project located just 34 kilometers from Alumbrera.
Wax Ink Opinion
It is a $5.9 billion dollar company with an Enterprise Value of $8.55, an Equity Value of $7.49, a Tangible Book Value of $8.81, a PE Ratio of slightly less than 15, and for fiscal 2008, it generated $1.63 in Free Cash Flow, and we think a a Reasonable Value Estimate for the stock is $10.13, with a Buy Target of $5.07, a First Sell Target of $9.88, and a Close Target of $10.69.
We also think that management appears so intent on new project development, it may not be keeping its eye on the company the way it should.
What has us a bit concerned is that Net Operating Profit After Taxes for fiscal 2008 was almost 38%, yet short-term debt actually increased year over year.
And while we did notice that on a year over year basis, Accrued Liabilities were reduced, Long-Term Debt was reduced, and Defered Taxes were reduced, for which management deserves a high five, we also noticed that shareholders saw their positions diluted through the addition of about 300 million shares of stock to the total shares outstanding.
This increase in the number of shares outstanding increased the company's dividend payout from $17.2 million in fiscal 2007, to $69.9 million in fiscal 2008. Normally we would find this very rewarding news, but given the current state of the economy, we believe that paying a dividend at all is pure bluster on the part of management, especially when the company ends the fiscal year with more than $500 million of debt on its books.
While we have no investment interest in this company at the present time, we are aware that other investors may have investment considerations forthe company. Accordingly, based on the metrics we employ, we have adjusted our margin of safety for Yamana Gold, lowering our Buy Target from $5.07, to $2.34.
Yamana Gold Raw Value Worksheet
_________________________________________________________________________________________________
In Closing
To be a successful long-term investor requires, in our opinion, a minimal amount of luck and a hell of a lot of research, with, more often than not, the results of all of those countless hours of digging, leading to a company that may not be investment quality.
For example, we spent slightly more than 100 man-hours producing this report, a report we know from past experience will be scanned by many and fully read by few.
And as expected when we started, we have ended up with companies that require additional research before we would consider them investment opportunities.
So while we hope that this report offers some assitance to its readers, we are far more hopeful that just one person will take the time to fully investigate their investment choice before they actually invest their hard earned capital.
I mean we are talking about an end to impotence, cavities and gout.
Wax
Several weeks ago Wax Ink was commissioned to research companies in the Molybdenum business. Having heard the aforementioned claims, we decided, perhaps the prevention of gout would be a noble cause.
Molybdenum (Mo)
According to the U.S. Geological Survey, Molybdenum is a refractory metallic element used principally as an alloying agent in steel, cast iron, and super alloys to enhance hardenability, strength, toughness, and wear and corrosion resistance।
The material is an essential ingredient in steel alloys used in the energy industry, the aerospace industry, and the automobile industry because it strengthens steel, improves weldability, reduces brittleness, and increases steel's resistance to corrosion. It is one of the key components in catalysts used in the petro-chemical industry to reduce sulfur in gasoline and diesel fuel.
Molybdenum is recovered as a by-product of copper and tungsten mining operations and is prepared from the powder made by the hydrogen reduction of purified molybdic trioxide or ammonium molybdate.
Properties
The metal is silvery white, very hard, but is softer and more ductile than tungsten. It has a high elastic modulus, and only tungsten and tantalum, of the more readily available metals, have higher melting points. It is a valuable alloying agent, as it contributes to the hardenability and toughness of quenched and tempered steels. It also improves the strength of steel at high temperatures.
Industrial Uses
Molybdenum is used in certain nickel-based alloys, such as the "Hastelloys(R)" which are heat-resistant and corrosion-resistant to chemical solutions. Since Molybdenum oxidizes at elevated temperatures (+4750F), the metal has found recent application as electrodes for electrically heated glass furnaces and forehearths. In addition, the metal is used in nuclear energy applications and for missile and aircraft parts.
Molybdenum is also used as a catalyst in the refining of petroleum, aiding in the reduction of sulfur during the production of gasoline and diesel fuel. The metal has also found applications as a filament material in electronic and electrical applications, and is an essential trace element in plant nutrition.
Molybdenum sulfide is useful as a lubricant, especially at high temperatures where oils would decompose. Almost all ultra-high strength steels with minimum yield points up to 300,000 psi (lb/in.2) contain molybdenum in amounts from 0.25 to 8%.
Ecological Uses
Ecologically, molybdenum as a trace element is necessary for nitrogen fixation and other metabolic processes, and is an essential trace element in plant nutrition. Land that contain no measurable concentrations of molybdenum, are often barren, or able to produce little sustainable organic material.
Medical Uses
Molybdenum is a scarce mineral that is present in very small quantities in the human body. It is involved in many important biological processes, possibly including development of the nervous system, waste processing in the kidneys, and energy production in cells. There is some evidence to suggest that too little molybdenum in the diet may be responsible for some health problems, with Molybdenum currently used as a treatment in rare cases of inborn errors of metabolism (such as Wilson disease) in which the body can’t process copper.
Research will continue into the use of Molybdenum in cancer treatment if human trials continue to show that it can slow cancer growth. The material has already shown promise in animal trials in reducing the effects of certain cancer drugs on the heart and lungs.
The Molybdenum Industry
According to Yahoo Finance, there are 130 companies in the Steel and Iron Industry, 64 companies in the Copper Industry, 499 companies in the Industrial Metals and Minerals Industry, 50 companies in the Gold Industry, 8 companies in the Silver Industry, and 76 companies in the Non-Metallic Mineral Mining Industry.
Of those 827 companies, there are 109 companies that that produce Molybdenum.
Things to Consider
Molybdenum currently sells for about $9 per pound, sliding in the last quarter of 2008 from what was a relatively stable price of near $30 per pound.
Additionally, the largest production of U.S. Molybdenum comes primarily from three mines; the Henderson Mine in Colorado, owned and operated by Freeport-McMoran Copper and Gold, Inc., the Molycorp Questa Mine in New Mexico, owned and operted by Molycorp Minerals, LLC, a private company, and the Thompson Creek Mine in Idaho owned and operated by Thompson Creek Metals Company, Inc.
As an aside, the world's largest producer of Molybdenum is Codelco Corporation, a Chilean company that produced 27,200 metric tonnes in 2006.
Finally, it is important to consider that the vast majority of companies that mine Molybdenum, also mine other metals, such gold, silver, and copper. With few exceptions, most metals mining companies mine Molybdenum almost as an accident to their other mining operations.
Research Selection
Generally, the first rule that we follow at Wax Ink is we only research companies that are on our watch list, which currently consists of 2613 companies. With the exception of 24 companies, all of the companies on our watch list are domestic companies. We would like to be able to tell you that the reason we have so few foreign companies is the that their tax dollars are paid to the United States government, but the truth of the matter is we simply prefer companies whose auditors follow GAAP accounting methodology.
Researching the companies in the Molybdenum business proved to be quite difficult, since out of a total of 109 companies that produce Molybdenum, almost none of them were on our watch list because almost none of them, were domestic companies.
In the end, we decided to research only the companies in the Molybdenum business, whether domestic or foreign, whose stock was traded on either the New York Stock Exchange, the American Stock Exchange, or the Nasdaq . This criteria reduced that number of companies from 109 to 11.
The Companies
Augusta Resource Corporation - Industrial Metals and Minerals Industry
Vancouver, British Columbia
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on March 31, 2009.
Augusta Resource Corporation (AMEX: AZC) incorporated on January 14, 1937, is engaged in the exploration and development of mineral properties in Pima County, Arizona. Augusta’s property is in the development stage. As of December 31, 2008, the company’s property was non-productive and did not generate any revenues. During the year ended December 31, 2008, the company drilled 20 core holes. During 2008, the company completed groundwater monitoring well system around Rosemont project site.
Rosemont Copper Company (Rosemont) is the wholly owned subsidiary of the company. Augusta’s Rosemont property consists of approximately 15,000 acres. Rosemont is approximately 50 kilometers southeast of Tucson, Arizona.
Rosemont consists of copper/molybdenum/silver skarn deposit, as well as other exploration targets. During 2008, Augusta had mineral reserves containing 546 million tons grading 0.45% copper, 0.015% molybdenum and 0.12 ounces per tonsilver in sulfide ore, and 70 million tons at 0.17% copper in oxide ore.
Wax Ink Opinion
This one had a recent close of $1.65, which is $1.65 more than it's worth. Lots of potential and a website are fine, but at the end of the day, we prefer to invest in companies with proven management and long history of large profits. Since we found neither with this 72 year old company, we have to believe that like preventing gout, neither ever will exist.
Accordingly, based on the fundamental metrics we employ, we have no investment interest in this company at the present time.
Augusta Resource Raw Value Worksheet
_________________________________________________________________________________________________
Freeport-McMoRan Copper and Gold, Inc. - Copper Industry
Phoenix, Arizona
Financial information contained in this report is based on the company's latest SEC Form10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 26, 2009.
Freeport-McMoRan Copper and Gold, Inc. (NYSE: FCX) through its wholly owned subsidiary, Phelps Dodge Corporation (Phelps Dodge) is a copper, gold, and molybdenum mining company.
The company’s portfolio of assets includes the Grasberg minerals district in Indonesia, which contains single recoverable copper reserve and the single gold reserve of any mine; significant mining operations in North and South America, and the Tenke Fungurume development project in the Democratic Republic of Congo (DRC).
As of December 31, 2008, consolidated recoverable proven and probable reserves totaled 102.0 billion pounds of copper, 40 million ounces of gold, 2.48 billion pounds of molybdenum, 266.6 million ounces of silver and 0.7 billion pounds of cobalt.
Approximately 35% of its copper reserves were in Indonesia, approximately 31% were in South America, approximately 28% were in North America and approximately 6% were in Africa. Approximately 96% of its gold reserves were in Indonesia, with its remaining gold reserves located in South America. The molybdenum reserves are primarily in North America (approximately 85%), with its remaining molybdenum reserves in South America.
The company's mining revenues during the year ended December 31, 2008, include sales of copper (approximately 76%), molybdenum (approximately 14%) and gold (approximately 7%).
It has five operating copper mines in North America, four in South America and the Grasberg minerals district in Indonesia. It also has one operating primary molybdenum mine in North America. During 2008, approximately 60 % of its consolidated copper production was from its Grasberg, Morenci and Cerro Verde mines, and more than half of its mined copper was sold in concentrate, approximately 27% as rod (principally from its North America operations) and approximately 19% as cathodes.
Also during 2008, approximately 55% of its consolidated molybdenum production was from the Henderson molybdenum mine and approximately 45% was produced as a by-product primarily at its North America copper mines.
The company also produces gold as a by-product at its copper mines, primarily at the Grasberg minerals district in Indonesia, which accounted for approximately 90% of its consolidated gold production during 2008.
In North America, the company has five operating copper mines: Morenci, Sierrita, Bagdad and Safford in Arizona, and Tyrone in New Mexico. In addition, the Chino mine in New Mexico was placed on care-and-maintenance status in December 2008.
All of these operations are wholly owned, except for Morenci, an unincorporated joint venture, in which the company owns an 85% undivided interest. In addition to copper, the Morenci, Sierrita and Bagdad mines produce molybdenum as a by-product.
In Indonesia, PT Freeport Indonesia operates the Grasberg minerals district. The company has joint venture agreements with Rio Tinto plc (Rio Tinto), an international mining company, with respect to a portion of its mining activities in Indonesia.
The company also owns 90.64% of PT Freeport Indonesia and the Government of Indonesia owns the remaining 9.36% interest.
The company's Grasberg minerals district also produces significant quantities of gold and silver as by-products. PT Freeport Indonesia also owns 25% of PT Smelting, a smelting and refining company in Gresik, Indonesia.
The company produces molybdenum at its wholly owned Henderson molybdenum mine in Colorado. Additionally, it owns the Climax molybdenum mine in Colorado.
In addition to its operating mines, the company has mines in development. In Indonesia, it developing its underground mines. In Africa, it holds an effective 57.75% interest in the Tenke Fungurume copper and cobalt concession in the DRC.
The North America copper mines include open-pit mining, sulfide ore concentrating, leaching and SX/EW operations, with a majority of the copper produced at the North America copper mines cast into copper rod by the company’s Rod and Refining operations.
The North America copper mines division includes Morenci and Sierrita as reportable segments. The Morenci open-pit mine, located in southeastern Arizona, primarily produces copper cathodes and copper concentrates. In addition to copper, the Morenci mine produces a small amount of molybdenum concentrates as a by-product.
The Sierrita open-pit mine, located in Pima County, Arizona, primarily produces copper cathodes, copper concentrates and copper sulfate. In addition to copper, the Sierrita mine produces molybdenum concentrate as a by-product.
Other mines include the company’s other operating southwestern U.S. copper mines, Bagdad, Safford and Tyrone. In addition to copper, the Bagdad mine produces molybdenum concentrate as a by-product.
Other mines also include the company’s southwestern United States copper mines that are on care-and-maintenance status, including Miami and Chino.
The company has four operating copper mines in South America-Cerro Verde in Peru, and Candelaria, Ojos del Salado and El Abra in Chile. These operations include open-pit and underground mining, sulfide ore concentrating, leaching and SX/EW operations.
The South America copper mines division includes Cerro Verde. The Cerro Verde open-pit copper mine, located near Arequipa, Peru, produces copper cathodes and copper concentrates. In addition to copper, the Cerro Verde mine produces molybdenum concentrate as a by-product.
In the first quarter of 2009, the company announced plans to temporarily curtail the molybdenum circuit at Cerro Verde.
Other mines include the company’s Chilean copper mines – Candelaria, Ojos del Salado and El Abra, which include open-pit and underground mining, sulfide ore concentrating, leaching and SX/EW operations. In addition to copper, the Candelaria and Ojos del Salado mines produce gold and silver as by-products.
Indonesia mining includes PT Freeport Indonesia’s Grasberg minerals district. PT Freeport Indonesia produces copper concentrates, which contain significant quantities of gold and silver.
Africa mining includes the Tenke Fungurume copper and cobalt mining concessions in the Katanga province of the DRC. Construction activities are well advanced and initial production is targeted during the second half of 2009. The initial project at Tenke Fungurume is based on mining and processing ore reserves approximating 119 million metric tons with average ore grades of 2.6 % copper and 0.35 % cobalt.
The Molybdenum segment is an integrated producer of molybdenum, with mining, sulfide ore concentrating, roasting and processing facilities that produce high-purity, molybdenum-based chemicals, molybdenum metal powder and metallurgical products, which are sold to customers around the world, and includes the wholly owned Henderson molybdenum mine in Colorado and related conversion facilities.
The Henderson underground mine produces high-purity, chemical-grade molybdenum concentrates, which are typically further processed into value-added molybdenum chemical products. This segment also includes a sales company that purchases and sells molybdenum from the Henderson mine, as well as from the company’s North and South America copper mines that produce molybdenum as a by-product.
The Rod and Refining segment consists of copper conversion facilities located in North America.
Atlantic Copper, the company’s wholly owned smelting unit in Spain, smelts and refines copper concentrates and markets refined copper and precious metals in slimes. PT Freeport Indonesia and the South America copper mines generally sell a portion of their concentrate and cathode (South America) production to Atlantic Copper.
Wax Ink Opinion
Based on a five year hold, we have the company on our watch list with a Reasonable Value Estimate of $89, a Buy Target of $45, a First Sell Target of $87.50, and a Close Target of $95. While we like the company's fiscal 2008 numbers, we note that there are a couple of things that give us pause.
First is the company's effective tax rate of 21.39%. While this may seem an insignificant thing, the average corporation in the United States has an effective tax rate of near 35%. So to us, a company with an effective tax rate that is almost 14% lower than the average, bears watching.
The other thing we think is worth watching is the company's Debt to EBITDA ratio, which for fiscal 2008 was 1.54. While not an issue at this point, should the world economy continue to falter, total debt at $22.99 per share may become more costly to service.
As stated by the company; "... a copper production is expected to be reduced by 400 million pounds in 2009 and 800 million pounds in 2010 and molybdenum production is expected to be reduced by 20 million pounds in 2009 and 40 million pounds in 2010, compared with our previously announced October 2008 estimated production for 2009 and 2010. Projected copper production is expected to be 3.9 billion pounds in 2009 and 3.8 billion pounds in 2010. Projected molybdenum production is expected to be 60 million pounds in both 2009 and 2010. The affected mine sites will be idling or reducing utilization of a portion of their equipment fleets in connection with these curtailments."
Given managment's outlook for 2009 and 2010, as well as the on-going litigation as described in the notes to the financial statements (Note 15) of the company's current SEC 10-K filing, we believe a lowered entry point for this stock is appropriate.
Accordingly, based on the fundamental metrics we employ, we have reduced our Buy Target from $45 to $17.50.
Freeport-McMoRan Raw Value Worksheet
_________________________________________________________________________________________________
General Moly, Inc. - Industrial Metals and Minerals Industry
Lakewood, Colorado
Financial information contained in this report is based on the company's latest SEC Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 27, 2009.
General Moly, Inc. (AMEX: GMO), incorporated on November 23, 1925, is a development stage company engaged in the business of exploration, development and mining of properties primarily containing molybdenum.
The company’s primary asset is an 80% interest in the Mt. Hope Project (Mt. Hope Project), a primary molybdenum property, located in Eureka County, Nevada. The company owns interest in the Liberty Property (the Liberty Property), located in Nye County, Nevada.
In addition, the company owns other non-core properties and mineral rights. In February 2008, the company formed a joint venture with POS-Minerals Corporation (POS-Minerals), an affiliate of POSCO, a Korean steel company for the development of the Mt. Hope Project.
Effective January 1, 2008, the company contributed all of its interest in the assets related to the Mt. Hope Project, including the company’s lease of the Mt. Hope property, into a newly formed entity, Eureka Moly and entered into a joint venture for the development and operation of the Mt. Hope Project with POS-Minerals.
The Mt. Hope Project is owned and operated by Eureka Moly, which is a joint venture between the company and POS-Minerals. As of December 31, 2008, Eureka Moly had a 30-year renewable lease with Mount Hope Mines, Inc. (MHMI) for the Mt. Hope Project (the Mt. Hope Lease). Located in Eureka County, Nevada, the Mt. Hope Project consists of 13 patented lode claims, one millsite claim, and 1,577 unpatented lode claims, of which 109 unpatented lode claims are owned by MHMI and 1,468 unpatented lode claims are owned by Eureka Moly. The Mount Hope Project is located on the eastern flank of Mount Hope approximately 21miles north of Eureka, Nevada.
The Mount Hope deposit is a molybdenum porphyry, is classified as a low-fluorine, sub-Climax type deposit. The main form of molybdenum mineralization is molybdenite (molybdenum disulfide) and occurs within the intrusive Quartz Porphyry rocks of the Mount Hope complex and to a lesser extent in the Vinini sedimentary formation adjacent to the southern margin of the mineralized domes.
The Mt. Hope Project has been extensively drilled and all core and assay results are available. The drilling at the Mt. Hope Project has been predominately performed by utilizing diamond core methods, and subsidiary reverse circulation (RC) in areas of condemnation and water well drilling. As of December 31, 2008, 257 holes have been drilled into the property for a total of 300,901 feet of drilling; 232,189 feet of which is core, the remaining 68,712 feet is RC.
In March 2006, the company purchased the Liberty Property, an approximately 10 square mile property in Nye County, Nevada, including water rights, mineral and surface rights, buildings and certain equipment, from High Desert Winds LLC. In January 2007, GMI purchased the company that owned a 12% net smelter royalty on the Liberty Property. The company also purchased mineral claims associated with this property that were not previously owned by the company, thus giving GMI control over all mineral rights within the boundary of the Liberty Property.
The company completed two drilling programs that, combined with previous evaluation work performed by former owners, identified mineralization totaling 433 million tons averaging 0.071% molybdenum and 0.07% copper. In April 2008, it completed a pre-feasibility study outlining the project.
As of December 31, 2008, the company owned several other, small, non-cores, properties located in the western United States. These properties include additional molybdenum deposits, as well as copper, silver and gold deposits.
Wax Ink Opinion
This is another company that in our opinion offers an investor lots of potential with little chance of a potential investment return.
We believe the stock has a reasonable value of $0.27 based on a five year hold, and that the reasonable value may improve dramatically if the company will ever generate any revenues, something we could not find going back 5 years.
Accordingly, based on the fundamental metrics we employ, we have no investment interest at the present time.
General Molly Raw Value Worksheet
_________________________________________________________________________________________________
Harmony Gold Mining Co. Ltd. - Gold Industry
Randfontein, South Africa
Financial information contained in this report is based on the company's latest SEC Form 20-F filing for fiscal year ending June 30, 2008, as filed with the SEC on October 29, 2009.
Harmony Gold Mining Co. Ltd. (NYSE: HMY) is a gold producer. The company’s operations are located primarily on the Witwatersrand Basin in South Africa, including 10 underground operations, an open-pit mine and surface operations that includes four provinces, Gauteng, North West Province, Mpumalanga and the Free State.
Harmony’s exploration portfolio is focused on highly prospective areas in Papua New Guinea (PNG), including the Wafi-Golpu project, although renewed exploration activity has begun in South Africa.
During the fiscal year ended June 30, 2008 (fiscal 2008), Harmony produced 1.55 million ounces of gold, primarily from its operations in South Africa. As of June 30, 2008. Harmony’s ore reserves amounted to 50.5 million ounces of gold.
In December 2007, Dioro Exploration NL completed the acquisition of the South Kal Mine operations located near Kalgoorlie, Western Australia, from Harmony.
The Kalgold operations are located within the Kraaipan Greenstone Belt, 60 kilometer south of Mafikeng. This is part of the larger Amalia-Kraaipan Greenstone terrain, consisting of north trending linear belts of Archaean meta-volcanic and metasedimentary rocks, separated by granitoid units.
The mines of the Freegold operations Tshepong, Phakisa, Bambanani, West, Kudu, Sable, Nyala, Eland and St Helena are located to the north and west of Welkom, while Joel is situated 30 kilometer to the south. Joel is mining the shallow flat-dipping Beatrix/VS5 Reef, while the other mines primarily exploit the Basal Reef. During fiscal 2008, limited mining has taken place on Leader Reef, A Reef and B Reef in the past. Kudu, Sable, Nyala, Eland and St. Helena.
Wax Ink Opinion
It may be headquartered in South Africa, but if our perception counts for anything, this company is just as poorly managed as many companies in the United States, with one exception.
We got the impression, the management of this company wasn't really interested in their miners.
We also note that Current Liabilities exceed Current Assets, Total Debt is 2.5 times higher than EBITDA, and the company has an Operating Margin of 11.11%, which we don't believe is high enough to continue to service the company's debt as the global recessions drags on, a recent announcement by the company that it has now become "net debt free", not withstanding.
We also note that company seems to continue to face labor unrest and a newly filed lawsuit relating to the company's American Depositiry Receipts (ADR).
In addition, while the company has proclaimed it is making great strides in its safety efforts, we note that during the past 16 months the company has reported that 16 workers lost their lives in mining related accidents, 2 workers were injured, and 2 workers are, at this time, missing.
Admittedly, we are not qualified to comment on these safety reports, and we note that the company's safety record made indeed be acceptable in South Africa. Yet at the same time, we wonder just how long the company would remain "net debt free", were it to decided that worker safety is the company's first priority.
In short, we believe a Reasonable Value Estimate for this stock is $0, and in the short-term believe the stock has more potential downside risk than upside reward. Accordingly, based on the fundamental metrics we employ, we have no investment interest at the present time.
Harmony Raw Value Workshhet
_________________________________________________________________________________________________
Northern Dynasty Minerals, Ltd. - Gold Industry
Vancouver, British Columbia
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2007, as filed with the SEC on March 31, 2008 as amended on April 2, 2008.
Northern Dynasty Minerals, Ltd. (AMEX: NAK) is a mineral exploration company focused on developing the Pebble copper-gold-molybdenum mineral project (Pebble Project). The Pebble Project is located in Alaska, 19 miles from the villages of Iliamna and Newhalen, and approximately 200 miles southwest of the city of Anchorage.
The company has also located two additional porphyry copper-gold-molybdenum deposits, a porphyry copper zone, a gold-copper skarn occurrence and several high-grade gold veins. The Pebble Project deposit’s resources include copper, gold, and molybdenum. Quantities of silver, palladium, and rhenium are also contained in the deposit. Northern Dynasty has been carrying out technical programs, including drilling a full spectrum of engineering assessments, and environmental and socio-economic studies on Pebble Project.
In 2008, the company’s engineering work focused on collection of additional site and underground geotechnical data to support ongoing design work, continuation of metallurgical testwork on both Pebble West and Pebble East to optimize conventional processing systems and designs, continuation of assessments of the infrastructure elements (access road, port, and power) in order to establish the optimum alternatives, and designs for these project components, and assessment of project mine plans that would extract portions of the mineral resources.
Wax Ink Opinion
We continue to be amazed at the number of companies that remain living, when in point of fact, they are worth less than nothing, with little to no hope of bettering their station in the world of publicly traded companies.
Northern Dynasty Minerals, Ltd. is no exception. The time we spent researching this company, is, in our humble opinion, worth at least twice what this company is worth, and accordingly, based on the fundamental metrics we employ, we have no investment interest at the present time.
Northern Dynasty Raw Value Worksheet
_________________________________________________________________________________________________
Rio Tinto - Steel and Iron Industry
London, England
Financial information contained in this report is based on the company's latest SEC Form 20-F filing for fiscal year ending December 31, 2008, as filed with the SEC on April 2, 2008.
Rio Tinto plc (NYSE: RTP) operates as one business organization (Rio Tinto), a mining and exploration company.
The company’s business is finding, mining and processing mineral resources. Its major products include aluminum, copper, diamonds, energy products, gold, industrial minerals (borates, titanium dioxide, salt and talc), and iron ore.
Rio Tinto’s activities are represented in Australia and North America. There are also businesses in South America, Asia, Europe and southern Africa.
The company’s product groups comprise: Aluminum; Copper and Diamonds; Energy and Minerals, and Iron Ore.
Rio Tinto's business support groups include Exploration and Technology and Innovation.
In January 2009, the company completed the sale of its 50% equity share of the Alcan Ningxia aluminum joint venture in China to Qingtongxia Aluminium Group Co Ltd.
In April 2008, Hecla Mining Company completed the transaction to acquire the Rio Tinto subsidiaries that held a 70.27% interest in the Greens Creek silver mine and joint venture located near Juneau, Alaska. As a result of the transaction, Hecla subsidiaries hold 100% of the Greens Creek joint venture.
On September 11, 2008, Rio Tinto acquired a 14.9% stake in Kalahari, and a 10.9% stake in Extract Resources, in which Kalahari's subsidiary Kalahari Uranium Limited holds a 39.11% interest.
In October 2008, Alcan Global Pharmaceutical Packaging, a division of Alcan Packaging, a business unit of Rio Tinto Alcan, acquired the Chakan flexible packaging plant from Associated Capsules Private Limited in India.
The company’s Aluminium product group, Rio Tinto Alcan, is a primary producer of bauxite, alumina and aluminum, benefiting from a sustainable, low cost energy supply. It operates mainly in Canada and Australia, with interests in Europe, New Zealand, Africa, South America and the United States. The group is organized into four business units: Bauxite and Alumina, Primary Metal, Engineered Products and Packaging, the latter two of which are to be divested.
Rio Tinto’s Copper and Diamonds group is engaged in the copper production, comprising Kennecott Utah Copper in the United States, and interests in some copper mines and development projects, including Escondida in Chile, Grasberg in Indonesia, the Resolution and Pebble projects in the United States, the Oyu Tolgoi project in Mongolia and the La Granja project in Peru.
The Diamonds group is a primary supplier of rough diamonds, comprising interests in the Diavik mine in Canada, the Argyle mine in Australia, and the Murowa mine in Zimbabwe, served by a diamond sales office in Belgium.
The company’s Energy and Minerals group is a major supplier in its markets, represented in coal by Rio Tinto Coal Australia and Coal and Allied in Australia, and by Rio Tinto Energy America in the United States. It also includes uranium interests in Energy Resources of Australia and the Rossing Uranium mine in Namibia.
The industrial minerals businesses is engaged in the supply and science of their products, comprising Rio Tinto Minerals, made up of borates and talc operations in the United States, South America, Europe and Australia, as well as Rio Tinto Iron and Titanium, which has interests in North America, South Africa and Madagascar.
The company’s Iron Ore group is a primary contributor to the world’s seaborne iron ore trade with interests that comprise Hamersley Iron and Robe River in Australia, Iron Ore Company of Canada, Corumba in Brazil, and the Simandou, Guinea, and Orissa, India, projects.
The group includes the HIsmelt direct iron making plant in Australia, employing a new, cleaner iron making process developed largely by Rio Tinto. It also includes the Dampier Salt operations at three sites in Western Australia.
The company’s Exploration group is organized into five teams based in North America, South America, Australia, Asia and Africa/Europe and a sixth project generation team that searches the world for new opportunities and provides specialized geological, geophysical and commercial expertise to the regional teams.
The Technology and Innovation group has bases in Australia, Canada, the United Kingdom and the United States. Its role is to identify and promote operational technology best practice across the Group and to pursue step change innovation of strategic importance to the development of orebodies of the future.
Wax Ink Opinion
We are impressed enough with this company that we have added it to our watch list with a Reasonable Value Estimate of $540, a Buy Target of $270, a First Sell Target of $526, and a Close Target of $570, based on a five year minimum hold.
While those numbers are huge compared to a recent close of $155.86, they don't represent the entire picture, and it is important to realise that they are Raw Value numbers, requiring countless additional hours of research before reaching investment status.
We note that the company's Working Capital or Current Ratio, is far less than we feel comfortable with, as is the company's Quick Ratio. Both of these concern us as we wonder if further research will yield an over leveraging on the part of managment, as evidenced to some degree by noting that company's Goodwill and Intangibles make up almost 23% of Total Assets.
In addition, while close to what we like to see, we also note that the company's Debt to EBITDA number is on the high side, with Debt exceeding EBITDA by 2.2 times. But with debt exceeding $125 per share, we are not overly surprised by this number.
We caution that while things often seem great on the surface, a little digging may well reveal potential troubles, as evidenced by the company's Tangible Book Value of $0.18, and its Equity Value of $34.46.
However, all things considered, with the stock currently trading at just about 4 times Free Cash Flow, which for fiscal 2008 was $39.55 per share, and carrying a trailing twelve month PE Ratio of around 5.5, spending the time needed to dig deep into this company may be time very well spent.
Yet, just because we were somewhat impressed with the company, we have not forgotten that we are value investors, and based on our review of the company's financial statements, we have adjusted our margin of safety and accordingly our Buy Target, lowering it from $270 to $62.35.
Rio Tinto Raw Value Worksheet
_________________________________________________________________________________________________
Taseko Mines Ltd. - Copper Industry
Vancouver, British Columbia
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on April 1, 2008
Taseko Mines Ltd. (AMEX: TGB) incorporated on April 15, 1966, is a mining and mineral exploration company.
The company has one operating mine and three exploration projects, all located in British Columbia, Canada, which includes Gibraltar copper-molybdenum mine, the Prosperity gold-copper property, the Harmony gold property, and the Aley niobium property. On May 2, 2008, Taseko completed the acquisition of Oakmont Ventures Ltd.
The Gibraltar Mine site covers approximately 109 square kilometer (km) and the property consists of 249 tenures held 100% by the company. There are 30 mining leases at Gibraltar mine.
During the year ended December 31, 2008, the mill expansion was completed, which includes 34’ diameter Semi-Autogenous Grinding (SAG) mill, conversion of the rod and ball mill circuit to ball mill grinding only, and replacement of rougher and cleaner flotation cells with large cells. The rated throughput capacity increased from 36,000 tons per day to 46,000 tons per day.
The Gibraltar Mine mineral claims cover an area of gentle topography, local relief is in the order of 200 meters. The plant site is located at an elevation of approximately 1,100 meters above sea level. The Gibraltar Mine generally consists of seven separate mineralized zones, which includes Pollyanna, Granite, Connector, Gibraltar East, Gibraltar West, and Gibraltar West Extension.
Pyrite and chalcopyrite are the principal primary iron and copper sulphide minerals. Sixty percent of the copper occurs in fine-grained chalcopyrite. Coarser grained chalcopyrite also occurs, usually in quartz veins and shear zones. Small concentrations of bornite (a sulphide mineral of copper and iron), associated with magnetite and chalcopyrite, is present on the extremities of the Pollyanna and Sawmill deposits.
Oxide copper mineralization is also present between the Gibraltar East and Pollyanna open pits in the Connector Zone.
Molybdenite (molybdenum sulphide mineral) is a minor but economically important associate of chalcopyrite in the Pollyanna, Granite, and Sawmill deposits.
The Gibraltar Mine is a typical open pit operation that utilizes drilling, blasting, cable shovel loading, and large-scale truck hauling to excavate rock.
The Prosperity project consists of 124 mineral claims covering the mineral rights for approximately 121 square km. The property is located in the Clinton Mining Division, approximately 125 kilometers southwest of the City of Williams Lake, British Columbia. The Prosperity Project hosts porphyry gold-copper deposit. Pyrite and chalcopyrite are the principal sulphide minerals in the deposit. They are uniformly distributed in disseminations, fracture fillings, veins, and veinlets and may be accompanied by bornite and lesser molybdenite and tetrahedrite-tenantite. Native gold occurs as inclusions in and along microfractures with copper-bearing minerals and pyrite.
The Harmony Gold Project is located in the Skeena Mining Division, on Graham Island, Queen Charlotte Islands (also known as Haida Gwaii), on the northwestern coast of British Columbia, Canada. The Harmony project comprises of 58 mineral claims and 177 square km. The Harmony project hosts the Specogna epithermal gold deposit, controlled by the Sandspit fault.
The Aley Niobium Project is located in the Omineca Mining Division in British Columbia, Canada. It consists of 13 contiguous claims that cover 5,668 hectares.
Wax Ink Opinion
There are certain things that just make us go hmmmmmm, and this company was one of those things.
We at first felt pretty good about the company and what it does to earn its money, and that continued as we started to go through the numbers. It wasn't until we had taken a step back and considered what we had found, that we realized an investment in Taseko Mines was not in our future.
There were three distinct items that skewered any investment thoughts for this company. The first one was the effective tax rate of 4%. While most people would think this a great thing, we think it's a sign of indecision on the part of management, continually trying one thing or another, in an effort to grow the business. In othere words, there is no defined business plan.
The second thing was the company's lack of free cash flow. We simply are not interested in investing in company's with low, or in this case no, free cash flow. Again, we believe this points to a lack of cohesion on the part of management.
The third thing that made us sit up and take notice, was the company's debt. When you think about the business the company is in, $45 million in debt is really not that big a deal. But when you consider that the company's market cap is $197 million, the debt number looks pretty ominous. It became an even bigger number when we noticed that the company's average interest rate was over 15%.
Granted, we did not take the time to read through all of the debt obligations the company has, but we highlight this number because given today's interest rate market it seemed stageringly high.
In addition, we had to ask ourselves if the company is paying this sort of average interest rate in the low rate interest environment we have today, what is the interest rate going to be in the future, as interest rates climb to battle inflation?
Accordingly, based on the fundamental metrics we employ, we have no investment interest at the present time.
Taseko Mines Raw Value Worksheet
_________________________________________________________________________________________________
Teck Cominco Limited - Industrial Metals and Minerals Industry
Vancouver, British Columbia
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on March 24, 2008
Teck Cominco Limited (NYSE: TCK) formerly Teck Cominco Limited, is engaged in the exploration for and development and production of natural resources.
The company’s principal products are copper, metallurgical coal, zinc and gold. Lead, molybdenum, various specialty and other metals, with chemicals and fertilizers as by-products produced at its operations.
The company also sells electrical power that is surplus to its requirements at the Trail metallurgical operations and owns a 20% interest in the Fort Hills oil sands project and a 50% interest in other oil sands leases in the Athabasca region of Alberta, Canada.
The company owns, or has interests in, 15 mines in Canada, United States, Chile and Peru, as well as one metallurgical complex in Canada.
In February 2009, the company announced the sale of its 50% interest in the Hemlo Operations, located in northwestern Ontario. In February 2009, it also announced the sale of its 50% interest in the Williams and David Bell mines in Ontario.
In August 2008, the company acquired the Relincho copper project from Global Copper Corp. On October 30, 2008, the company completed the acquisition of Fording Canadian Coal Trust (Fording), which primarily consists of Fording’s 60% interest in the Elk Valley Coal Partnership.
The company’s copper business unit includes its interests in Highland Valley Copper in south central British Columbia, the Antamina mine in the north central Peruvian Andes, the Quebrada Blanca and Carmen de Andacollo mines in Chile, and the Duck Pond copper-zinc mine in Newfoundland. The by-products produced at these mines include molybdenum and zinc. During the year ended December 31, 2008, the company produced a total of 313,000 tones of copper.
During 2008, Teck Cominco Limited acquired the Relincho copper project in Chile through its acquisition of Global Copper Corp. The company has a 97.5% interest in Highland Valley Copper, located in south central British Columbia. and a 22.5% interest in the Antamina mine, a copper and zinc mine at high elevation in Peru.
The company owns a 76.5% interest in Quebrada Blanca Mine, and has a 90% interest in Carmen de Andacollo mine in Chile.
The Duck Pond copper-zinc operation is located in central Newfoundland. Teck Cominco Limited’s other operations include Galore Creek Project, Relincho Project, Mesaba Project, Carrapateena Project and Petaquilla.
The company’s coal business unit includes six metallurgical coal mines in British Columbia and Alberta. It also exports seaborne metallurgical hard coking coal. Through October 29, 2008, its coal business included a 52% direct and indirect interest in the Teck Coal Partnership.
The company increased its ownership to 100%, effective October 30, 2008, with the purchase of the assets of Fording Canadian Coal Trust.
The company’s zinc business unit includes its Trail refining and smelting complex in south central British Columbia, the Red Dog Operations in northwest Alaska and the Pend Oreille mine in Washington State. The products produced at these operations are zinc and lead concentrates at its mines, and refined zinc and lead at Trail. Trail Operations also produces various precious and specialty metals, fertilizers and chemicals, and owns the Waneta dam, which produces electricity for the metallurgical facilities and for sale to third parties.
The company’s gold business unit includes its 40% interest in the Pogo mine located southeast of Fairbanks, Alaska; a 78.8% interest in the Morelos project in Mexico, and several gold exploration properties. The Pogo gold mine is located 145 kilometers southeast of Fairbanks, Alaska. The Hemlo operations, which consist of the Williams and David Bell mines, are located approximately 350 kilometers east of Thunder Bay, Ontario. During 2008, Pogo and Hemlo operations produced approximately 269,000 ounces of gold.
The company’s energy division includes its 20% interest in the Fort Hills oil sands project and 50% interest in various oil sands leases that it jointly owns with UTS Energy Corporation (UTS). All of these properties are located in the Athabasca region of Alberta, Canada.
The Fort Hills oil sands project includes approximately 24,720 contiguous hectares of oil sands leases located about 90 kilometers north of Fort McMurray in Northern Alberta. The Equinox oil sands project consists of approximately 2,890 hectares of oil sands leases (Lease 14) and is west of the Fort Hills Project.
Wax Ink Opinion
We ended up with a Reasonable Value Estimate for this company of $30.74, a Buy Target of $15.37, a First Sell Target of $29.97, and a Close Target of $32.45. But as you wil see, things change.
We do not like the company's Current Ratio at 0.44 as it tells us Current Liabilities exceed Current Assets, meaning, in our opinion, management has not been paying attention.
Further, we note the company's quick ratio, a test of the company's immediate liquidity, is at 0.30, which tells us that in an emergency, the company does not have sufficient cash reserves to cover it's current (due within one year) liabilities. Again we ask, where is management?
We also highlight the company's cash conversion cycle of 159 days, meaning it is simply taking to long to convert new inventory into cash.
Additionally, we note that the company's Days Receivables Outstanding number is 100 days and the company's Days Payables Outstanding number is 59 days. Again we ask, where is management, since they are allowing the company to finance the company's suppliers on an interest rate free basis.
Accordingly, based on the metrics we employ, we have adjusted our margin of safety for this company, making our revised Buy Target $6.99, even though we have no investment interest in this company at the present time.
Teck Cominco Raw Value Worksheet
_________________________________________________________________________________________________
Thompson Creek Metals Company Inc. - Industrial Metals and Minerals Industry
Toronto, Ontario
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on April 9, 2008.
Thompson Creek Metals Company Inc. (NYSE: TC) is a Canadian molybdenum mining company with vertically integrated mining, milling, processing and marketing operations in Canada and the United States.
The company’s operations include the Thompson Creek Mine (mine and mill) in Idaho, the Langeloth Metallurgical Roasting Facility in Pennsylvania and a 75% joint venture interest in the Endako Molybdenum Mine Joint Venture (Endako Mine) (mine, mill and roaster) in British Columbia.
In addition, the company has two high-grade underground molybdenum development projects, the Davidson molybdenum property (Davidson Project), located in British Columbia, and the Mount Emmons molybdenum property, located in Colorado.
Thompson Creek Mine and mill are located near Challis, in central Idaho. The total property position is approximately 21,000 acres. The mill has a capacity of approximately 30,000 tons per day and operates with a crusher, SAG mill, ball mill and flotation circuit.
The company has a 75% interest in the Endako open-pit mine, mill and roaster, which is located near Fraser Lake, British Columbia. The total property position covers approximately 19,100 acres. The mill has a capacity of approximately 31,000 tons per day and a 30,900 to 35,300 pound per day multiple-hearth roaster. Its 75% share of molybdenum production at the Endako Mine increased to 2.9 million pounds during the year ended December 31, 2008.
The company operates the Langeloth Metallurgical Facility located near Pittsburgh, Pennsylvania. Operations at Langeloth include roasting of molybdenum sulfide concentrate into molybdenum oxide, upgrading molybdenum oxide to pure sublimed oxide, oxide briquettes, ferromolybdenum, as well as the roasting of other metal products. Langeloth also processes molybdenum and certain other metals for other third parties on a tolling, or cost-per-unit processed, basis.
The Davidson Project is an undeveloped molybdenum deposit in Canada. Blue Pearl Mining, a subsidiary of Thompson Creek Metals, focuses on building and operating a molybdenum mine producing an average of 2,000 metric tons of ore per day.
In August 2008, the company signed an option with United States Energy (USE) to acquire up to 75% of an underground molybdenum project in the United States in Colorado. The Mount Emmons Project is an undeveloped molybdenum deposit.
Wax Ink Opinion
The company is one of the few pure play Molybdenum producers and we believe a Reasonbable Value Estimate for the stock is $49.00, with a Buy Target of $24.50, a First Sell Target of $$48.00, and a Close Target of $52.00.
All of this sounds good, and when we look at the metrics we employ, we find that indeed many of them look good. We note however, that the company's free cash flow for fiscal 2008 was an anemic $0.04. Looking forward, this, to us, is extremely troubling.
As noted eariler, Molybdenum is currently selling in the $9 per pound range, down from $30 per pound. Common sense should dictate that in order for a company to be willing to invest the hundreds of millions of dollars necessary to develop a new Molybdenum mine, certain benchmark criteria must be in place.
For example, in the oil field development world a barrel of crude oil must average a certain amount of money per barrel in order for the field development to be profitable. If, because crude prices are low, a sufficient average price per barrel can be maintained, or the company through their forecasting efforts does not believe pricing can be maintained, then field development will be placed on hold. The mining business is no different.
We remind investors that senior management at Freeport-McMoran Copper and Gold noted in their most recent SEC 10-K filing; "... molybdenum production is expected to be reduced by 20 million pounds in 2009 and 40 million pounds in 2010. ...Projected molybdenum production is expected to be 60 million pounds in both 2009 and 2010. The affected mine sites will be idling or reducing utilization of a portion of their equipment fleets in connection with these curtailments."
We question why for fiscal 2009 and fiscal 2010, Thompson Creek an $800 million company, thinks it will fair any better than Freeport-McMoran, a $16 billion dollar company, especially since we agree with the prospects outline for fiscal 2009 and fiscal 2010 by FreeportMcMoran's management.
Accordingly, based on the metrics we employ, we have adjusted our margin of safety for Thompson Creek, lowering our Buy Target from $24.50, to $17.07, and remind investors that we have no investment interest in this company at the present time.
Thompson Creek Raw Value Report
_________________________________________________________________________________________________
US Energy Corporation - Industrial Metals and Minerals Industry
Riverton, Wyoming
Financial information contained in this report is based on the company's latest SEC Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on March 13, 2009 and as amended on April 2, 2009.
US Energy Corporation (Nasdaq: USEG) acquires and develops energy-related and other mineral properties. The company is primarily involved in the acquisition of mineral properties, the exploration and development of those properties, and from time to time the sale and lease of mineral-bearing properties and production and/or marketing of minerals.
During 2008, the company completed its multifamily apartment project serving the residential market in Gillette, Wyoming.
The company is focused on developing the Mount Emmons molybdenum project (Mount Emmons) into a major operating mine with Thompson Creek Metals Company (USA).
The Mount Emmons Project includes a total of 25 patented and approximately 612 unpatented mining and mill site claims, which together approximate 7,427 acres, or over 8 square miles of claims. Thompson Creek Metals Company (USA) has an option to acquire up to a 75% interest in the Project.
Wax Ink Opinion
When the dust settles and the air clears, this company simply doesn't make any money, and in our opinion is just too small a company at $52 million to be a real player in this sector. Nor do we see the company as a take over target since the company simply doesn't own anything worth taking over.
One thing we do note, is that management should decide if the company is in the apartment development business or the mining business and fully develop the chosen business before it delves into another business.
It is our opinion that the company is worth somewhere close to $1.80 per share from a liquidation perspective, and as an on-going business concern, we think the company is fairly valued at its recent close, $2.24.
However from an investment perspective we think a Reasonable Value Estimate for the company is $0, and accordingly, based on the metrics we employ, we have no investment interest in this company at the present time.
US Energy Raw Value Report
_________________________________________________________________________________________________
Yamana Gold, Inc. - Gold Industry
Toronto, Ontario
Financial information contained in this report is based on the company's latest SEC Form 40-F filing for fiscal year ending December 31, 2008, as filed with the SEC on March 31, 2009.
Yamana Gold, Inc. (NYSE: AUY) is a Canada-based gold producer engaged in gold mining and related activities, including exploration, extraction, processing and reclamation. The company has significant properties involved in gold production, gold development, exploration and land positions throughout the Americas, including Brazil, Argentina, Chile, Mexico and Central America.
The company is producing gold and other precious metals at intermediate company production levels in addition to significant copper production.
During the year ended December 31, 2008, total production from all mines totaled approximately one million gold equivalent ounces.
During 2008, the company’s projects included Chapada Mine (Brazil), El Penon Mine (Chile), Gualcamayo Mine (Argentina), Jacobina Mine (Brazil), Minera Florida/Alhue Mine (Chile), Fazenda Brasileiro Mine (Brazil), Sao Vicente Mine (Brazil), Sao Francisco Mine (Brazil), San Andres Mine (Honduras), C1 Santa Luz (Brazil), Ernesto/Pau-a-Pique (Brazil), Pilar (Brazil) and Mercedes (Mexico).
Chapada is located in northern Goias State, Brazil. The project encompasses a series of mining and exploration licenses totaling 8,369 hectares. Chapada is Yamana’s original flagship operation. Chapada is an open-pit copper and gold mine in Brazil with milling facilities that produce a copper/gold concentrate, and is Yamana's largest property. As of December 31, 2008, proven and probable reserves totaled 345 million tons containing 2.5 million ounces of gold.
El Penon is a high-grade gold/silver mine located in the Atacama Desert in Region II of northern Chile. During 2008, the company received permission to increase throughput to 3,600 tons per day. As of December 31, 2008, proven and probable reserves totaled 8.9 million tons. During 2008, the company focused exploration on the North Block leading to the discovery of Bonanza North.
Gualcamayo is located in the northern San Juan province of Argentina. The main Gualcamayo block consists of one Cateo (exploration concession) and 57 Minas (mining property interests), covering 7,128 hectares of ground. The three main mineral deposits at Gualcamayo include the main Quebrada del Diablo (QDD) deposit, the Magdalena and Amelia Ines satellite deposits (AIM) and the QDD Lower West underground zone. It has a total reserve and resource base of approximately 3.9 million ounces of gold, including 2.9 million ounces in reserves.
The Jacobina complex of underground mines is located in the state of Bahia, in north eastern Brazil near the Serra do Jacobina mountains. It has a total reserve and resource base of more than 4.7 million] ounces of gold. At December 31, 2008, proven and probable reserves increased to approximately 1.4 million ounces of gold. At December 31, 2008, measured and indicated gold resources totalled 16.6 million tons containing 1.5 million ounces of gold.
Minera Florida is a gold, silver and zinc producing mine Located 73 kilometers south of Santiago in central Chile. As of December 31, 2008, Minera Florida had proven and probable reserves of 4.2 million tons containing 746,000 ounces of gold.
Fazenda Brasileiro is an underground gold mine. It is located in northeast Brazil, 180 kilometers north northwest of the state capital of Salvador.
Sao Vicente is located in west central Brazil. It is located close to the Bolivian border approximately 50 kilometers north of Yamana’s São Francisco mine.
Sao Francisco (Brazil) mine is located within the Guapore Gold Belt, a greenstone belt with numerous gold deposits and occurrences along its almost 200 kilometer strike length. The property is an open-pit, heap leach gold mine that involves three different streams of processing, including crushing-gravity-heap leach, crushing-heap leach, and run-of-mine heap leach.
Located in northwest Argentina, Yamana maintains a 12.5% equity interest in the Alumbrera mine. Alumbrera is a copper and gold mine.
The C1 Santa Luz project (Brazil) is located within Yamana’s 180,000 hectares of mineral claims on the Rio Itapicuru Greenstone Belt, approximately 140 kilometers north of Fazenda Brasileiro. It is planned as a conventional open-pit mine with throughput of 2.5 million tons per year or 6,800 tons per day.
The Ernesto/Pau-a-Pique project (Brazil) is located in the Guapore Gold Belt property, which covers 450,000 hectares. It is home to Yamana’s Sao Vicente and Sao Francisco Mines. Pau-a-Pique is planned as an underground bench and fill mine and Ernesto is planned to be mined both open-pit and cut-and-fill underground.
Located 80 kilometers south of Chapada (Brazil), the Pilar exploration concessions comprise 590 square kilometers overlying the Archean Greenstone Belt. Pilar is located on a greenstone belt known to host at least 38 gold occurrences.
The Mercedes project is located in northern Sonora, Mexico, approximately 200 kilometers south of Tucson, Arizona. It is planned as a bench and fill mine with throughput of 1,500 tons per day. At December 31, 2008, proven and probable reserves totaled 2.65 million tons containing 604,000 ounces of gold and 6.2 million ounces of silver.
Jeronimo is located in northern Chile approximately 30 kilometers south southwest of El Salvador at an elevation of 3,800 meters above sea level. The project is subject to a joint venture with Codelco, pursuant to which Yamana holds a 57% interest and acts as operator.
The La Pepa project lies within the prolific Maricunga Belt, a region in the Andean Cordillera of northern Chile containing gold and silver prospects. As of December 31, 2008, measured and indicated resources totaled 149 million tons containing 2.8 million ounces of gold.
Amancaya is located 120 kilometers southwest of Yamana’s El Penon mining operations in the Atacama Desert of northern Chile. The property is host to a low-sulphidation epithermal vein deposit that has been outlined along 1,200 meters of strike length and 250 meters of dip length.
Yamana owns 100% of the Agua Rica (Argentina) copper, gold and molybdenum deposit, a large feasibility-stage copper and gold project located just 34 kilometers from Alumbrera.
Wax Ink Opinion
It is a $5.9 billion dollar company with an Enterprise Value of $8.55, an Equity Value of $7.49, a Tangible Book Value of $8.81, a PE Ratio of slightly less than 15, and for fiscal 2008, it generated $1.63 in Free Cash Flow, and we think a a Reasonable Value Estimate for the stock is $10.13, with a Buy Target of $5.07, a First Sell Target of $9.88, and a Close Target of $10.69.
We also think that management appears so intent on new project development, it may not be keeping its eye on the company the way it should.
What has us a bit concerned is that Net Operating Profit After Taxes for fiscal 2008 was almost 38%, yet short-term debt actually increased year over year.
And while we did notice that on a year over year basis, Accrued Liabilities were reduced, Long-Term Debt was reduced, and Defered Taxes were reduced, for which management deserves a high five, we also noticed that shareholders saw their positions diluted through the addition of about 300 million shares of stock to the total shares outstanding.
This increase in the number of shares outstanding increased the company's dividend payout from $17.2 million in fiscal 2007, to $69.9 million in fiscal 2008. Normally we would find this very rewarding news, but given the current state of the economy, we believe that paying a dividend at all is pure bluster on the part of management, especially when the company ends the fiscal year with more than $500 million of debt on its books.
While we have no investment interest in this company at the present time, we are aware that other investors may have investment considerations forthe company. Accordingly, based on the metrics we employ, we have adjusted our margin of safety for Yamana Gold, lowering our Buy Target from $5.07, to $2.34.
Yamana Gold Raw Value Worksheet
_________________________________________________________________________________________________
In Closing
To be a successful long-term investor requires, in our opinion, a minimal amount of luck and a hell of a lot of research, with, more often than not, the results of all of those countless hours of digging, leading to a company that may not be investment quality.
For example, we spent slightly more than 100 man-hours producing this report, a report we know from past experience will be scanned by many and fully read by few.
And as expected when we started, we have ended up with companies that require additional research before we would consider them investment opportunities.
So while we hope that this report offers some assitance to its readers, we are far more hopeful that just one person will take the time to fully investigate their investment choice before they actually invest their hard earned capital.
I mean we are talking about an end to impotence, cavities and gout.
Wax
Subscribe to:
Posts (Atom)