2 Struggling Miners That Will Payoff BIG TIME, Assuming They Don’t Go Bust First.
Feb 11
These Two Struggling Miners Will Payoff BIG TIME!
(Assuming They Don’t Go Bankrupt First)
As the saying goes, playing with debt is like playing with fire! It’s something you generally want to avoid in the interests of your financial and emotional health.
Fire – humanity couldn’t have gotten on without it. I’m not sure if the world could have gotten on without debt, either – many say it’s the lifeblood of the financial system (we’ve seen what can happen when it stops flowing, and it isn’t pretty).
So we’re in agreement here – fire and debt are incredibly important. They are powerful tools but must handled with care and used wisely.
History is filled with examples of companies and entrepreneurs that have used debt successfully and scaled their efforts massively (President Trump is a name that comes to mind). Debt is an amazing financial tool – it can be used to acquire assets when none previously existed. Little or nothing can be turned into something with debt, almost like magic.
Debt can also burn you, big time! It has a due date. And the piper must be paid, eventually. History is also filled with examples of great fortunes and empires that were reduced to nothing (or less than nothing) because of debt. General Motors is a name that comes to mind. Even $19 billion in federal handouts wasn’t enough to keep the “world class” automaker out of bankruptcy court.
Teetering On The Edge!
Throughout history there’s also a third place where debt can lead (somewhere in between riches and ruins). Families and companies alike can find themselves walking a thin financial line, teetering on the edge of bankruptcy.
Historically speaking, there’s a ton of money to be made at precisely that spot!
There’s a ton of money to be made there because you can also lose it all. However, in exchange for the risk the markets will reward you royally! Because at this point it’s life or death. If the company survives, the market reprices it for survival (typically multiples higher!). And if it dies, well, game over.
Maximum Leverage!
Teetering on the edge of bankruptcy is the point of maximum leverage. And the stakes don’t get much higher than when dealing in commodities. Unlike with most other businesses, an entirely new variable is introduced with commodity producers because they don’t control the price of their product.
Rising commodity prices can bail almost the most indebted and inefficient producer out of jail. Falling prices will only serve to bury them faster.
Question Being, What’s Your Call On Gold and Copper Prices?
If you believe Gold is heading higher, as I do, an indebted California-based miner called Golden Queen (GQM, TSX) offers massive upside. Of course, that statement presumes the company doesn’t go bankrupt first.
And it’s teetering on the edge of that right now!
Golden Queen’s situation looks pretty dire, doesn’t it? And to think GQM was a $4 stock back in 2011.
…not the kind of chart you generally want to be buying, and the balance sheet looks kind of scary (albeit not as scary as the chart).
But wait, let me stop you right there!
Who’s the lender? – when you’re evaluating a business that’s teetering on the edge of bankruptcy, like Golden Queen, one of the most important questions to ask is, “Who’s the lender?”
If you’re only looking at the balance sheet, as most people do, you could miss a variable of critical importance. Ultimately, the lender is going to decide if and when to foreclose on your property, call the note, pay the piper! So therein often lies the make or break factor.
Meet Thomas and The Clay Family!
He seemed like a nice enough young fella – we talked face-to-face for about 20 minutes in Vancouver a few weeks ago.
Since the Clay family has so much money tied up in the deal – they’re the largest equity and debt holder (Thomas is CEO by the way) – I couldn’t help but wonder, where did the Clay family get its wealth to begin with?
“Not in the mining business,” Thomas replied with a grin!
By the sounds of it, the Clay family accumulated much of its fortune in banking/finance. I believe it was via an investment in one of the large asset managers (the name escapes me). Anyhow, aside from Gold prices and operational execution, as the largest lender to Golden Queen the Clay family will ultimately decide whether to grant financial leniency or not. Golden Queen’s fate largely rests in their hands.
I got the impression, from Thomas, that the Clay family really wants GQM to avoid bankruptcy and stay alive.
Golden Queen has the assets to support its debt, and a $25 million rights offering underway (with Clay family participation) will reduce the debt substantially. But the company has got to get its production costs down, and fast!
All-in-sustaining costs last quarter were $1,502 per ounce. And you can’t stay in the Gold mining business forever producing at a price above spot. Lately, recoveries and grades coming from the Soledad Mountain mine have been really disappointing (but there’s hope!).
In an urgent attempt to stop the bleeding, Golden Queen and the Clay family are shifting their chips to the “East Pit”. They need to access what’s hoped to be higher grade ore from the East Pit, asap! If grades from there are indeed higher, and costs start coming down (Gold prices up?), GQM cold become a huge turnaround story.
…”could” being the key word, of course.
Here’s a link to Golden Queen’s presentation if you want to dig deeper into this situation.
Finally, on GQM, I’d be remiss not to mention the company/Soledad Mountain mine have kind of a kinky ownership structure. Half the mine is owned by a private corporation (Golden Queen Mining Corp., 50%) in which the Clay family also owns a big stake, so I can see how that could confuse the situation further for some people.
GQM closed at 18.5 cents today as it continues to hover near all-time lows.
Imperial Metals (III, TSX) – Was $2.25 The Bottom?
Only time will tell, but $2.25 looks pretty solid at the moment. And volume has really been drying up over the past few weeks, possibly a sign that urgent sellers have left the building. As a trade, if one wanted to speculate on this highly-indebted (and highly-levered) Copper miner I’d suggest placing a sell stop at $2.14. That way emotions are removed from the equation.
Therefore, downside risk from the current price of $2.44 is 10%, and upside potential is multiples.
…that’s the type of risk/reward equation sophisticated speculators are looking for.
The conventional wisdom is arguably that Imperial Metals will go bankrupt. However, if it doesn’t, and Copper prices continue higher, III could be a HUGE score (this was an $18 stock a couple of years ago).
An acquisition isn’t out of the question, either – I’m not sure where else a major could buy roughly 100 million pounds of Copper production for a little over $1 billion. The capex on most projects is more than $1 billion for a fraction of the production. Another company may believe it could run Red Chris much better.
Looking at this press release, you’ll see Imperial really seems to be turning things around (via high-grading?). Copper grades were up 37% and Copper production was up 59%.
Finally, regarding Imperial’s survival – the billionaire factor!
Upon completion of the rights offering, 44,246,623 shares are held by Canadian billionaire Murray Edwards and his affiliates, representing approximately 38.6% of the company’s shares. Edwards’ financial wherewithal should go a long way in terms of financial negotiations, which will be a critical component (along with operational success) for Imperial going forward.
Either way, III is going to be a BIG win or a BIG loss for Mr. Edwards.
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