Arbitrage! Primero Mining and First Majestic

Mark Twain once said: “A gold mine is a hole in the ground with a liar standing on top of it.”  I think mining is more like a rusty, leaky bucket that you need to pour capital so as to keep the bucket filled.

A better description: mining is a capital intensive business that must be constantly replenishing its depleting reserves which are hard to find much less extract economically.

However, if you buy Primero Mining (PPPMF) say this morning 9:40 AM at 18 cents you will receive 0.03325 shares of First Majestic Silver (AG) that you short at $6.00, for example.   For each share of Primero bought at 18 cents allows you to own ($0.18/.03325) a proportional share of First Majestic at $5.41.  The difference between your short sale of First Majestic at $6 and 5.41 is ($6 – 5.41)/5.41 is about 10.9%.

Or the short sale of $6 of First Majestic converts at 0.0335 into a share price of Primero Mining of ($6 x 0.03325) or $0.1995.   The difference between the 18 cents that you paid for Primero and 19.95 cents received upon the closing of the transaction is (1.95 cents/ 18 cents) or 10.8%. The deal should close within the next twenty days.   The annual return if the deal closes in the next 10 to 20 days is over 100%.  March 13th is Primero’s shareholder meeting to approve the deal.

I believe there is a 98% chance of the deal going through thanks to all three parties benefiting. Wheaton precious metals’ (WPM) stream was restructured so there is now an economic mine and opportunity for WPM to receive cash flow. Primero shareholders are no longer faced with bankruptcy, and First Majestic has the money and the expertise to handle underground mining to expand their reserves and cash flows.  https://www.gurufocus.com/forum/read.php?10,622803,622803,report=1

Also, the proxy advisor has given the go ahead for the MARCH 13th meeting.  http://www.primeromining.com/English/investors/news/press-release-details/2018/Leading-Independent-Proxy-Advisory-Firms-Recommend-Primero-Shareholders-Vote-in-Favour-of-Proposed-Arrangement/default.aspx

If the deal would fall through, then let’s imagine your 18 cents is now worth $0 (PPPMF probably drops to 5 cents, but let’s be cruel) and AG spikes up 50 cents. On the deal announcement, AG fell 30 cents. Every dollar in PPPMF goes to $0 and every short dollar in AG loses about 10%.  A 2% chance of the deal not closing causes a loss of $1.10 for every dollar invested–which means an expected loss of 2.2 cents vs. making about 10 cents to 11 cents on each dollar invested in the arbitrage.  I have an expected value of about 8 to 9 cents on each dollar invested in this arbitrage within the next month.  Not bad considering my alternatives today.

See below 

Mexico-focused company First Majestic Silver has signed a definitive arrangement agreement to acquire all of the issued and outstanding common shares of Primero Mining for $320m.

Under the agreement, every Primero shareholder will receive 0.03325 First Majestic common shares in exchange for one Primero common unit.

Primero owns the San Dimas silver-gold mine in the Mexican state of Durango.
Primero has identified more than 120 epithermal veins with exploration potentiality throughout its production history.

In parallel with the deal, First Majestic has entered separate agreements with Wheaton Precious Metals International (WPM) to terminate the existing silver streaming interest at the San Dimas mine.

You can use Google Alerts to send to your email notices of buyouts, mergers, etc. Then do your homework.  These tiny, obscure deals are out there.

This is NOT a recommendation for you to do this arbitrage, but follow the logic or the lack thereof.   

The Falling Marginal Productivity of Debt

However, we can look at how much additional GDP is added for each newly-borrowed dollar. This is called marginal productivity of debt. This shows a clear picture, a secular decline over many decades. To produce this graph, take change in GDP divided by change in debt.

I encourage you to read: https://monetary-metals.com/falling-productivity-of-debt-gold-and-silver-report-15-oct-2017/

Add to the above this concerning article on the lack of US savings:

https://www.project-syndicate.org/commentary/america-low-saving-rate-weak-fundamentals-by-stephen-s-roach-2018-02

The LAST Value Investor

Changes in the Finance Industry; A Hatchet Job on Buffett

Structural Changes in the Finance Industry for Junior Miners

https://www.youtube.com/channel/UCyjyUPbLw38tG9iAw0p7nxg

Hatchet Job on Buffett

Special Investigation: The Dirty Secret Behind Warren Buffett’s Billions
America’s favorite investor loves monopoly, not free markets.
By David Dayen

Surprise!  Buffett craves monopolies.  Who wouldn’t want to invest in them?   How about helping citizens by doing away with government controlled monopolies like the US Post Office or the Fed?

https://www.thenation.com/article/special-investigation-the-dirty-secret-behind-warren-buffetts-billions/

Buffett Interviewed on the Financial Crisis–a Good Review of Buffett’s Thoughts on Investing

BUFFETT INTERVIEW on FINANCIAL CRISIS and MOODY’s Moody Analysis and Transcript-of-Warren-Buffett-Interview-With-FCIC

The Above Book is a good primer on investing.   See course by the author.

http://www.advancedvalueinvestingworkshop.com/register.html

 

Understanding Interest Rates

https://monetary-metals.com/category/supply-demand-report-public/

What could help you with Mr. Market

The first line of Epictetus’ manual of ethical advice, the Enchiridion—“Some things are in our control and others not”—made me feel that a weight was being lifted off my chest. For Epictetus, the only thing we can totally control, and therefore the only thing we should ever worry about, is our own judgment about what is good. If we desire money, health, sex, or reputation, we will inevitably be unhappy. If we genuinely wish to avoid poverty, sickness, loneliness, and obscurity, we will live in constant anxiety and frustration. Of course, fear and desire are unavoidable. Everyone feels those flashes of dread or anticipation. Being a Stoic means interrogating those flashes: asking whether they apply to things outside your control and, if they do, being “ready with the reaction ‘Then it’s none of my concern.’ ”

https://www.newyorker.com/magazine/2016/12/19/how-to-be-a-stoic

Barrons-interview-Bruce-Greenwald-13052017 (1)

 

 

 

 

Lecture on Studying Financial History (Russell Napier)

Russell Napier’s Lecture

on Financial History   (60 minutes)

https://event.on24.com/eventRegistration/console/EventConsoleApollo.jsp?&eventid=1568744&sessionid=1&username=&partnerref=&format=fhaudio&mobile=false&flashsupportedmobiledevice=false&helpcenter=false&key=7381A6A8D270C66A75C736D44257317E&text_language_id=en&playerwidth=1000&playerheight=650&overwritelobby=y&eventuserid=190902439&contenttype=A&mediametricsessionid=156958791&mediametricid=2247562&usercd=190902439&mode=launch

A good lecture on integrating past lessons into today’s current conditions.

A CFA composite book on Financial History: Financial History CFA Institute

If you do study financial history like the period of the Internet Boom then collect books and articles from many perspectives AND look at supply as well as demand. Also, incentives rule.

For example, read several books from different perspectives and the history of interest rates, the history of commodity prices, other equities, interest rate spreads, etc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acq. Multiple, Yog Berra and Financial Satire, and Hedge Fund Quiz

While at all times Wall Street analysts try to justify the valuations, here is a fun quote (via Bloomberg) from 2002 looking back from Scott McNeely, the CEO of Sun Microsystems, one of the darlings of the 2000 tech bubble:

“At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes.

What were you thinking?”

An educational, savagely satirical view of our current market conditions and lessons on valuation.   I read about 40 investment letters a quarter and this is about the best I have read in five years. Hilarious! Mark McKinney – Its Like Deja Vu All Over Again – Final and his prior letter: I Dont Get It – Mark McKinney – Final 8292017 New

An excellent interview by Tobias Carlisle.   CHEAPNESS not quality wins!  Yes, I was somewhat shocked.   Why?

http://www.valuewalk.com/2018/01/tobias-carlisle-talks-acquirers-multiple-valuetalks/

ACKMAN INTERVIEW

Ackman’s embattled Pershing Square hedge fund laid off 18 percent of its staff on Friday — a total of 10 pink slips that brought head count down to 46.

Investors have suffered in Pershing Square (PSHZF) vs. S&P 500:

He wants to hire an analyst who can THINK INDEPENDENTLY.  You walk into his office and he asks you, “Can you think independently as an analyst?”

How do you reply.   Be careful…………think for awhile before you reply.  What proof can you give?

If you are struggling to answer, then  https://www.newyorker.com/magazine/2015/11/23/conversion-via-twitter-westboro-baptist-church-megan-phelps-roper

will provide clues.


What determines the price of gold:

How the price of gold is determined Monetary Metals 2018

A Case study on Cognitive Dissonance

I only hear what I wanna hear and disregard the rest.

I have my righteous rage and pointless point of view–The Angry Young Man by Billy Joel

Often wrong but never in doubt–Chicago Slim

You will learn more about investing (or clear thinking) than weeks of hearing investment pundits, or I will send you a check.   Without a point of view, just listen carefully to the above interview.  If necessary stop the video and think after each question how you might respond in that situation.   What techniques is the interviewer using?  What is going on?   There are many levels of psychology and level 1 and level 2 thinking exhibited here.

What did YOU learn?   Even after multiple views, I need to review.  Ignore politics and focus on the logic of the questions and answers.  How does one’s psychological point of view and beliefs devastate a person’s ability to think critically?

Interviewer, Cathy Newman, “So what YOU are saying……………………….”

Jordan Peterson: “I DID NOT say THAT, because I am VERY, VERY, VERY CAREFUL with my words.”

If you only have two minutes to spare, then click on the 22 minute mark of the above video.   Interviewer: “Why should YOUR right to FREEDOM of SPEECH trump a trans-person’s right not to be offended?”   Remember that a “journalist” is asking this question in a Western liberal democracy.

Articles about the interview:Jordan Peterson Interview

Another analysis of the interview

Sandstorm Back of the Napkin Valuation

We last discussed Sandstorm (SAND) here: http://csinvesting.org/2017/11/01/sanstorm-gold-analysis-other-readings/

I did a back of the envelope valuation here: Sand Report

Buffett on Start-Up Investing

CS of Buffett Filter on Catastrophic Risk

The above is an example of how Buffett would approach a “start-up”.  You can assume that he would almost 99.9999999999999999% pass on all opportunities.

Gold Allocation

Performance_Update_2017_12

Today the Fed reports it holds 8133 tonnes of gold, worth $349.4  billion at $1,330 an ounce, which equals 7.9$ of the Fed’s reported $4.4 TRILLION in liabilities.  The current model suggest a 56% weighting of gold to 44% holding of S&P 500.