The future belongs to those who seize it
Anyone who knows me knows what a modest sort I am. On occasion I refer to things I have done in the past to emphasize an important point. If you walked into my house and looked around very carefully, you might spy one tiny award hiding in a corner of our living room.
It's the one that means the most to me, my first aviation record for a non-stop flight from New York to Paris in June of 1981. I was flying a V-tailed Bonanza and it took 17 hours and 51 minutes. That sliced the old record in half. It was owned by a guy named Lindbergh who flew the 3610 miles between the two cities first in May of 1927.
I have actually held the record between New York and Paris in two different categories. But the very first aviation record I set, out of about a dozen, was for speed between two cities, New York to Paris.
I needed a competitive edge. There was a race from Paris to New York to Paris in June of 1981. 110 crews signed up in both twin engine category and single engine. I planned to fly in the single engine category knowing full well that the big money players would be in twins. You can always buy a race, even in aviation.
When you set out to beat 110 crews, it can be daunting. I'm not smart enough to beat 109 other guys so I came up with a way to win without having to outsmart 109 people. I figured I could guess who would end up #2 in my category. If I focused on beating him, I automatically would be at the head of the pack and could safely ignore the 108 crews behind him.
I picked out the guy who probably would be the #2 pilot. But there was a problem, possibly a serious problem. He was experienced and had a faster plane. Since the distance between Paris and New York is fixed and we all had about the same winds and weather, I had to out-think him, not out-fly him.
Finally I figured it out. I could gain a significant competitive advantage if I could set a important speed record on the way over to Paris for the race. I wasn't flying in the race, I was just positioning the airplane in Paris. And sure enough, the winds at 10,000 feet from New York to Paris in early June were about 40 knots so I filed for a record, before the race.
Anyone who has flown air-to-air combat or any other form of serious competition knows that the battle is almost always won before it takes place. A real warrior doesn't engage in combat without planning for and anticipating victory. The loser almost always knows in advance that he's going to lose. So the trick is to convince your opponent in advance that he's going to lose. They will make it so.
That's just what I did. The weather gods were willing, the airplane was right and I made a nice leisurely 17+ hour flight non-stop from New York to Paris to take the record and to convince the #2 pilot that he really deserved second place and I deserved first place.
And a couple of days later, in the race, exactly that happened. I didn't really win the race. I didn't do anything except fly my plane from Paris to New York to Paris. My opponent lost the race. He convinced himself that the race was over and allowed a slower plane to beat him by almost an hour overall.
When you invest, if you don't have some competitive advantage, you are going to come in second place. It's exactly like air-to-air combat, second place really sucks. You are going to hand your money to someone smarter than you who has come up with a better plan.
When I invest in any company, the first thing I look for is management. You can make a sow's ear into a silk purse, it's been done. But you can't turn a sow's ear into a profitable company. Only good management make profitable companies.
Someone called me last week about us posting a gold piece by Frank Giustra. My ears picked up. Frank Giustra (for those who are not familiar with the name) may be the single smartest guy in the gold business. Not in a million years would I have a problem posting an article by him.
Frank Giustra joined Yorkton Securities in 1980 as not much more than a kid. He opened their London office for them in 1984 and then opened new offices in Paris and Zurich. By 1990 he became President of Yorkton and in 1995 took over as Chairman and CEO. While Frank was at Yorkton the firm participated in raising over $3 billion dollars for mining companies worldwide.
In 1996, both the gold market and Bre-X blew up. The gold market due to America's strong dollar policy and Bre-X due to a giant fraud and gold salting adventure in Indonesia.
Of all the people in the industry, one person actually took intelligent action. Frank Giustra turned his back on Yorkton and the mining business and walked away to make motion pictures at his new company, Lions Gate Entertainment. He alone realized that investors severely burned by Bre-X were going to punish the entire industry for a protracted period of time.
Frank watched from the sidelines for six years as the gold mining industry imploded. It was a good move. By the spring of last year he was back with a thirst for new deals. He set up a private mining merchant banking operation named Endeavour Financial and this time, as with his Academy Award winning films from Lions Gate, Frank is going for the gold.
Few investors really understand the impact of leverage in investing in mining companies. Basically if you believe gold is going from $300 an ounce to $500 an ounce, if given the choice of investing in a mining company with costs of $200 or one with costs of $400, you are far better off mathematically to invest in the company with the $400 costs. Because when gold is well below $400, the company has no value but when gold goes over $400 it gains far more leverage to the POG than does the company with $200 costs. It may not sound logical but take my word, work out the permutations and you will realize how true it is.
But there is another area where leverage is even more important, and that's when a private placement including warrants is involved. Basically, let's say you are a mining company who needs to raise $5 million to conduct a drilling program on a particularly attractive property. You go to a company like Endeavour and they arrange financing for you. They not only take a percentage of the money raised, most of the time they also take payment in the form of warrants.
In a rising gold market, warrants are a license to steal. They carry no tax cost as do cash fees and are on the books at nothing. But when the price of the stock goes above the exercise price of the warrant, the warrants hold unlimited leverage.
If you were looking for a single investment in gold, the very best investment you could possibly make would be in a company with a high degree of leverage to a rising price of gold and if at all possible, one with top management.
Now here's where the competitive edge comes in if you are smart enough to think of the impact. It's just as slick a move as my first aviation record, back some 21 years ago. Buy a highly leveraged company with top notch management at a significant discount to its net asset value.
Back to Endeavour for just a moment. I hope I have convinced you it has top management. It doesn't show up on the radar scope of any investors for a simple reason. It was a private company until just a couple of months ago when it took over Welcome Opportunities Ltd and the combined company began trading publicly on September 10, 2002.
In the eight months prior to going public, Endeavour Mining Capital earned some $1.11 per share. Keep that number in mind. When the public shares began trading in September, they traded at about $2.50. (All figures are in Canadian dollars) So you have a company which has earned $1.11 a share trading not much more than a PE of 2. But that isn't the competitive edge you need.
On Thursday of last week, Endeavour closed at $1.72. I called on Friday to determine the Net Asset Value. Since they hold shares and warrants in all the companies they have done deals with, what you are really buying when you invest in Endeavour Mining (EDV-V and EDVMF otcbb) is a sort of closed end mutual fund. On Thursday of last week, EDV was trading at $1.72 and had a net asset value of $3.25-$3.40 per share. You are buying shares and warrants in companies such as Apollo Gold and Wheaton River at a 50% discount by buying shares in Endeavour Mining.
There is no higher leverage available in the gold mining industry. EDV has the sharpest management in the business, has been solidly profitable for the last reporting period of August 31, 2002 and is trading at a 50% discount because the stock doesn't show up yet on investor's radar screens.
No one in the industry has published anything about it yet but the entire mining business is in transition primarily due to Bre-X and gold going down to $252 in 1999. Those who doesn't discuss it are at least aware on a subliminal basis that changes are taking place. The entire industry leadership is changing. Five years ago, Barrick was considered King of the Hill, with the best management and properties. Now they are regarded as Court Jesters married to an obsolete and quaint concept of selling off their future via hedging many years in advance. With each $10 advance in the POG, Barrick loses $150 million in opportunity costs. According to their management, their hedging positions make sense because gold always comes down.
Always? Always is a mighty mighty long time.
What happens to their spreadsheet if the world changes and gold doesn't always come down? The stock market has voted on Barrick and instead of leading the pack, Barrick can be found right at the bottom of all the charts listing mining companies by stock gains.
GoldCorp is one of the new leaders with one of the richest and best managed mines in the business. CEO Rob McEwan's biggest problem is he needs leverage. With $250 gazillion dollars in cash and gold in the kitty, we can count on interesting times from GoldCorp.
18 months ago, NovaGold was a tiny 5 man company worth about $3 million with little more than a dream with a couple of interesting properties. As the result of incredible vision and drive, NovaGold President Rick Van Nieuwenhuyse has proved a 30 million ounce deposit at Donlin Creek in Alaska driving up the price of the stock by an astounding 3450% in 18 months.
In my view, this remarkable leader will be singled out as the person primarily responsible for a turn-around in the gold mining business in Alaska. I suspect, as do many others, that the 30 million ounces will grow well past 40 and 50 million ounces before all is said and done.
With the Federal Reserve only discovering this great new invention called the printing press in the past three weeks, should we really be surprised that such industry leaders (?) such as Placer Dome and Newmont and Barrick have totally failed to communicate their message via this great new invention called the Internet. Have you ever seen anything from them on the Internet?
The future belongs to those who seize it. Barrick and Placer Dome and Newmont have failed to lead the industry. The new industry leaders are going to include NovaGold, Harmony Gold, GoldCorp and right at the very front, in the thick of the action you will find Endeavour Mining Capital and Frank Giustra.
Endeavour won't be at a 50% discount for long. I watched the remarkable action this past week as gold finally shot past $350 only to see gold bugs dumping their stocks the next day. That's nothing if not snatching defeat from the very jaws of victory.
Gold bugs need a little more faith in the only solution to the world's financial problems. This action tells me our current gold rally has much further to go and the place to be betting is on the juniors.
Endeavour's Frank Giustra has my bet.
December 23, 2002
The number of mining companies is relatively small and we are investors in the precious metals and PM stocks for our own benefit. At any one time we may own 25-30 different mining stocks. It follows that often we will own stocks which we have written about.