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  • "The market can remain irrational longer than you can remain solvent" - John Maynard Keynes

    Monday, March 28, 2005


    Ivernia ( is buying out Sentient's minority interest in the Magellan mine

    Ivernia, which I wrote about here and here. Announced today that they are buying out the 49% interest held by their partners in the Magellan mine. Assuming the purchase was made entirely with cash it would add about 35% to IVW's net worth. As the purchase will be made (I'm assuming) using equity it adds about 15% to IVW's net worth. The news release does say that IVW will be paying for part in cash, but that almost certainly means selling equity and then paying in cash using the equity proceeds.

    All in all, I estimate IVW's net worth after the transaction at around 2.70 CAD per share which has about 33% price appreciation with lead at .4475 per lb (which were the assumption in my most recent run of the model with IVW as a 51% owner). This will provide a little more upside leverage to lead prices also.

    The key determinate to the upside of the acquisition will be the price that the equity is issued at. If it is issued at $2.05 then there is 17% accretion, at $1.8 it is closer to 14%.

    My model has the mine only recovering 1.1bn pounds. If in fact that recover closer to the 2.2bn pounds in proven and probable. Then the acquisition is much more accertive, as IVW is getting a decent deal assuming the current mine plan. If there are more ounces mined (and this applies even more so, if they are mined sooner) then the deal gets even better for Ivernia.

    A good move by management and possibly a great move if we hear about upgraded reserves and a new mine plan in the near future!

    Thursday, March 24, 2005


    Reader Question - Oil Sands Split Trust

    AB asked me what the relationship between Canadian oil sands and oil sands split trust was. I will answer the questions without getting into the mechanics of how it's achieved.

    Oil sands split trust units come in two types, capital units and preferred units. Each capital unit entitles the holder to double the capital appreciation of holding one share of COS. Each pref unit entitles the holder to 7% (I can't remember if it's 6,7 or 8%) interest on the redemption value and on windup to the entire amount of the windup value.

    So, if COS increases 10%, OST capital units increase 20% and the pref units don't necessarily increase at all (they're effectively bonds).

    In short this is achieved by using the pref units as debt and buying more capital units which go the capital unit holders. The capital unit holders do not receive the dividends from 2 shares of COS, they receive whatever is left over once the pref has been paid. Importantly if COS goes down 10% then the capital OST units go down 20%.

    I recommend checking out OST's SEDAR filings if you want more details.

    Wednesday, March 02, 2005


    My 25 Rules of Investing

    I forget one of these far too often so i've decided to write them down. They include many mistakes that i've made and upon consideration should have known better in the first place. If you're like me, you'll have to live through these mistakes before you can both believe me and act upon that belief. Enjoy!

    1. Do not invest more than 35% of total portfolio value into a position (it's ok if it grows to be this big or bigger)

    2. Do not invest more than 10% of total portfolio in any one trade (because if it gets cheaper you need to be able to average down)

    3. If you find an significantly undervalued opportunity just start buying and then continue buying as it becomes cheaper

    4. A stock will almost always trade at a lower price than today’s

    5. You have no idea what a stock will do in a any specific timeframe but the longer the timeframe the better an idea you will have

    6. You have no advantage in using technical indicators so don’t bother. They may or may not work but there are people who know a lot more about it than I do

    7. Have a fair value price for a stock and sell most of your position when it gets there, don’t hope it will overshoot. Sell some of your position as this price is approached. Maybe 30%/30%/30%/10% at 10% under /5% under /0%/10% over

    8. Constantly re-evaluate your portfolio and other opportunities that are not yet in your portfolio. If any other opportunity has better risk return characteristics then lighten up another position and move money into the better risk return proposition bearing in mind 1 & 2

    9. Never get yourself into a position where you can be forced to sell due to lack of funds. If you use margin, make sure you have sufficient alternative credit sources to meet 100% more than your worst case scenario or 100% of your margin debt whichever is smaller

    10. The real worst case scenario is much worse than you think

    11. You know almost nothing about aggregate indices such as the NASDAQ and S&P500. Do not invest in indices at anything but extremes and have a system for measuring extremes. Extremes may occur every 2-5 years. The fed model with average long term interest rates shows a fair value for the DOW, 20-30% below this would be an extreme. Secular Bear markets are not over until P/E ratios reach single digits. Because you know nothing about timing, don’t use any mechanism of less than 18 months in duration to take a position in indices (such as LEAPS). 850 on the S&P may be around fair value, 595 on the S&P would be a buy – that is what I mean by extremes

    12. Something like 75% of a stocks movement will follow the market. It is useful to have some thoughts on the valuation of the overall market and to hedge downside if you can make a reasonable case for overvaluation. This again should be done with LEAPS and only when significant overvaluation in the 20-30% range can be shown. Moving slowly into the hedge with a system like 1% of the portfolio every time indices x hits a new high is a good idea. Don’t invest in LEAPS if the implied volatility is too high, have a system to determine if the volatility is too high. 13%-15% is acceptable over 2 years.

    13. Investing based on the news rather than fundamental valuation will cause you to lose money

    14. Have a set of triggers which will cause you to sell a position or a portion. These triggers should list negative events.

    15. A model based on earnings is weaker than one based on cash flow which in turn is weaker than one based on dividends. You should adjust your margin of safety based on this. A margin of safety of 50% (buying dollars for 50c) based on a dividend discount model (which in turn is based on a free cash flow model) is not the same as 50% based on a cashflow model, as the company could re-invest poorly or otherwise squander the cash. A margin of safety of 50% based on earnings is almost meaningless. Model cashflow at a minimum.

    16. If you ever have cause to say that management is incompetent or dishonest or evasive then the stock will almost certainly decline. The more you find yourself saying that management is incompetent the higher the risk in the stock. Everyone makes mistakes once but not consistently. You need an incredible margin of safety to make up for this.

    17. Rosy predictions almost never come to fruition. Buying based on growth is very much riskier than assuming the status quo continues. A fundamentally undervalued company based on low growth assumptions is a much better investment than an equally undervalued company based on high growth assumptions.

    18. When a company changes key management positions be worried. When it happens a second time, within a short period of time, consider this as you would management incompetence or dishonesty. You need an incredible margin of safety to make up for this.

    19. If there is any possibility of a company defaulting on debt finance then make sure that they have at least double the interest coverage that your model says they need or the opportunity is to risky

    20. In situations where hedge funds or other big money can bring about an outcome that is unfavorable to you, assume that they will bring it about. If there is an opportunity for arbitrage between debt (long) and equity (short), realize that the smart money has an incentive to bring about bankruptcy. Why get involved in such a situation on either side.

    21. The odds are high that a US based investment will have a smaller margin of safety than Canadian, Australian, British, German and Swiss stocks. Furthermore a third tier stock exchange is even more likely to have an undervalued stock. If you don’t understand and trust a countries disclosure laws and legal system don’t invest in stocks on their exchanges.

    22. Natural resource stocks are incredibly easy to value. There is little difference between one company that mines gold and another except for their sources and uses of capital. The differences do not account for the fact that some stocks sell for a 50+% discount and others at a premium in effectively the same business.

    23. Natural resource companies are notorious net destroyers of capital. They make great money from their finds and then reinvest it all into the next great find which doesn’t materialize. Make sure that your management does not have this mindset. A huge dividend (as % of cashflow) helps to overcome this.

    24. When analyzing a company, make the effort to understand its financials and margin of safety. Then make the effort to find out about the management and dedication to shareholder value. The worse the answers to these questions, the higher the margin of safety required.

    25. If you cannot model the cash flow of a company but you see that it’s at the lower end of its valuation range (i.e. by PE values) just stay away. If you can’t value a company using a DCF or DDM then just don’t buy it. This probably applies to GE, Pfizer, Tyco etc.


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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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