Sunday, February 26, 2012

Passing on Sandstorm

Over at Above Average Odds Investing, Ryan O'Connor has a very good write up of Sandstorm Metals and Energy.

I read the write-up (which also appears on Value Investors Club, as Above Average Odds Investing is a member) and my interest was piqued.  My mouth even watered.  But the more I read about the company the less enthusiastic I got.  Put simply, Ryan sets out the case for an incredibly cheap company with the potential to be an absolute giant.  You pay nothing for its potential, and get the current cashflows very cheap.  I can't do it justice, so you should just read his post.

But here's what I found when I started looking that bothered me:

  • I can’t give myself a plausible but overstated or wrong reason why it’s cheap.
  • The CEO Nolan Watson’s Wikipedia page is incredibly promotional.  The editor is “Denvyboy”, who seems to only write about sandstorm and Nolan.  Denvyboy is probably Denver Harris, the investor relations manager for Sandstorm.  I’d prefer if they spent more time on the company than on investors.
  • In his youtube video about due diligence, Sandstorm Executive Vice President, David Awram uses the phrase “going forward” five times in less than three minutes.
  • The only analyst coverage is from two organisations: National Bank Financial and Cormark Securities.  When you look at their management, one Executive VP is a former VP at National Bank Financial, and another Director is currently Vice Chairman of Cormark Securities.  Seems like they’re only giving analyst coverage to the stock because of the firms’ relationship with management. 
  • If Nolan Watson is such a boy genius (with all his contacts from being CFO of a billion dollar company) he should easily be able to find investors.  Furthermore, current investors would trust him and wouldn't be selling shares at the current price.  This is effectively just a restatement of the first bullet point: there's no plausible reason why this stock is undervalued.
  • Note that Watson's main trumpeted achievement in his time at Silver Wheaton is raising a billion dollars in debt and equity.  That's a skill, but it's a promotional skill (an important but dangerous one).
  • In the Donner deal announced July 13, 2011, Sandstorm provided $25m senior finance to Donner, and in return got the right (and obligation) to purchase 17.5% of the copper and precious metals from the Bracemac-McLeod mine, for the price of US$0.80 per pound (if the market price of copper is above US$2.75 per pound).  If the price is below $2.75 per pound, they can purchase for the lesser of US$0.55 or the prevailing spot price.  That seems like a great deal, but I know nothing about loan financing or mining.  I do know a tiny bit about buying stocks (that's not understatement, I truly mean I know a tiny amount as compared with loan finance and mining, where I know nothing).  And Sandstorm also purchased 6,200,000 Donner common shares for CDN$0.35, for a cost of $2,250,000.  Donner shares last traded at 0.25, for a loss of 28% since purchase.  That's a bad trade so far.
  • There are absurd amounts of warrants and options.  There are 155 562 490 warrants outstanding, with an exercise price of US$0.70 and expiry date of December 23, 2012.  That puts a bit of a cap on the stock this year, and the whole concept of having 150 million warrants outstanding when you only have 300 million shares seems a bit crazy – what’ll they do next year?  Any massive increase in the stock price has a pretty heavy ceiling, and no doubt they’ll just issue more warrants if the current ones are exercised.
  • I feel like I can’t pinpoint a specific risk that exists.  But it just might be that the business is unsustainable.  Perhaps the unique business model/financing structure allows plenty of room to creatively report assets/income.  I think the market may be pricing this in and that’s why the share price languishes.
So I'm not going to be buying any.  To be honest, it could be a huge mistake.  The bull case from Above Average Odds Investing is compelling, but it just doesn't fit right with me.  I'll be following progress.

Saturday, February 25, 2012

Notes on Buffett's letter to shareholders

Geoff Gannon has put together some excellent notes on Buffett's letter to shareholders - released yesterday.  I was going to make some notes, but Gannon does it better than I could.

Thursday, February 9, 2012