Saturday, March 12, 2011

Playing Devil's Advocate

Hi guys and girls,

Sorry for the absence but I am enjoying some family holidays and just trying to keep up with what is going on is using up all my free time unless I wish to get divorced!

Lots going on and I will give my 2 cents playing devil's advocate.

Concerning complaining to the authorities: There was some suspicious trading last Monday where our sp was down about 10% before that dreaded NR. The trading there was suspicious but considering we were near the 1 year high, a retracement of 10% is not the end of the world.

The NR I agree was way over the top but after rereading it, I am not sure there is anything legally troubling in there. The crusher was actually down and the rest of the statements, even if exagerrated were not illegal IMO, but I am no lawyer.

Complaints about the theft of a Canadian asset by buying really cheap and underhanded, well, we have to wait for the offer to really assess that one now. With a competing offer coming, I cannot see this going for less than fair value. So, I do not think much will come from investigations here either.

Now, for what may potentially happen on Monday morning, an offer from WTG at 2 for 1 CMM shares for WTG shares. As a long time CMM shareholder, I want to see maximum benefit for my shares and to get that, under the current gold price, I think all I need is time.

However, there is a big perception problem in the market about CMM that has always caused us to be valued at less than our asset and cashflow projections. Having these assets in a different vehicle may help unlock that value and that is why I think it is worth looking at this from another angle.

Everyone here seems really afraid of WTG paper and no one wants to own it. Has anyone stopped to think that this is how Finskiy and company want it...that they gave us just enough info that we would run for the hills at the first sign of a good offer?

Here is my analysis of what WTG will look like post CMM buyout (assuming this happens)

WTG cash on hand: 18M left from $24M PP in December

Value of all CMM warrants and options when exercised: about $25M

CMM cash on hand: about $3M

so the new company would have about $45M in cash in the bank plus a $23M line of credit plus the DB Gold line of credit assuming DB transfers it over. So this company will be in a solid cash position.

The company will now be trading on the TSX instead of the TSX.v

The company will now have 3 working mines and adding a small 4th with projections of 200k ounces in 1 year and 1M ounces in 5 years.

Current assets of CMM include 6M ounces of gold but have heard probably closer to 8M ounces of gold. With the other assets, we will be looking at over 10M ounces of gold, a great start for a new company.

This company will be backed by big russian players and will have strong management IMO.

This company should have a valuation near 1B dollars IMO again with all those assets. Now, lets look at the share float:

WTG, currently has 114M shares fully diluted-if someone has a different number, please let me know.

CMM currently has 470M shares fully diluted. If we get a 2 for 1 offer, this will add 235M shares to the shares outstanding for a total of 349M. If we get a 3 for 1 offer, this will add 157M shares for 271M shares fully diluted.

So if the 1B MC is spread over 349M shares, you get a share price of $2.86 per WTG share or $1.43 per CMM share.

If we go the 3 for 1 deal, then the MC is spread over 271M shares for $3.69 per share giving us $1.23 per share.

From what I can tell, Finskiy needs CMM to make WTG work and I do not think he will mess around with the offer. That last NR was BS and they really tainted themselves with it but in the end, this is about getting CMM and not taking chances of it falling into someone elses hands. That NR probably gave them a few more million shares in friendly hands and they are a little closer to getting this done.

WTG with those assets and big money behind it could really do some damage in consolidating some of the gold juniors. Most people here do not like him and how he operates but I do not have to like someone to make money off of them. There is also some logic that Polyus could buy this new company out after it consolidates some of the junior gold producers. What kind of a premium would that demand? Money knows how to make money and hitching a ride here could be very lucrative. The big question is how can we trust them. The answer is I think you cannot trust them but I hope that their greed drives them and we can ride on their coatail.

I do not think Finskiy wants any retail shareholders holding WTG and if I am right, then he must be very happy at all the talk here about retail never wanting to own WTG paper. I can confirm here that he will have at least 1 retail shareholder and that is me, not for my full CMM position but probably half. I will ride this till the end of summer when Polyus is looking to have a premium listing on the London Exchange. If I am right, than I may be getting $3+ for my CMM shares.

Glorieux

17 comments:

Wingfong said...

Hi Glorieux

Interesting to read your piece. A first "for WTG shares" post. Few questions bother me somewhat:-
1) Have no clue how the sp of WTG can justify its present level at $4.55. By the daily volumes, I can't rule out the possibility those prices had been artificially propped up.
2) Assuming a 3:1 deal giving an adjusted price of WTG at $3.69 as per your deduction, my deepest concern is market (including those who has the ability to drop massive shots) sees tro the real worth of WTG and crashes it on the first ex-deal trading day to say $1.50 (or less?). If so, takers of the deal will be in a serious bind
3) In the same thread of logic, it is highly possible those who propped up the WTG's price can easily crash it at will and scope them back resulting paying $0.30(?) for each CMM share?
All in all I might consider WTG share for CMM IFF i can resolve these 3 doubts but I do not see how they can be done. Hope to have your views if U may

bigjohn37 said...

Good points, Wingfong. But there is also a fundamental issue about WTG: nearly 95% of its shares are effectively controlled by one individual; Mr Finskiy. What escapes me is how can TSX allow the listing of a company with such incredible imbalance of control. This is something I am going to write about to all our regulators. (regardless of takeover or no takeover offer for CMM).

Wingfong said...

Hi BJ37
I really like to see all the plan B's getting ready. As I see it we may need them (we may not need them if the offer is a surprice on the upside!?).. Further, if for some reason the real price discovery mechanism of the market works and WTG is brought back to earth @ say $1.00 (or worst?). In such a case Fin @ Co will still be laughing to the bank (as per Carib's, they pay $0.27 for 80million WTG shares). They seem to have a win-win-win game plan. I am very concern CMM retailers will be badly burned

dave peters said...

"What escapes me is how can TSX allow the listing of a company with such incredible imbalance of control."

I don't know the answer, but it's been done before. I'm thinking of how Magna was operated for decades, along with some other family controlled public companies.

I enjoyed reading Glorieux' analysis. What concerns me, is whether or not the market gives the combined company a 1B valuation out of the gate. To me that seems over optimistic, but I hope that I am proven wrong.

Glorieux said...

Part of what makes me hopeful here for holding WTG paper is part of the cc from last year where Scola discussed using the higher share price of CMM as a currency to buy other junior producers. The problem that occured is that they just could not move that SP up...or would not.

This new vehicle trades at a huge premium to their assets...what if that continues after the take over, we would all be winners. A 1B MC for those assets post take over sounds fair. However, they could command a bigger premium and that would permit them to raise money with less dilution or buy out other junior producers using paper again.

I cannot see an upside to them driving their SP down. They obviously have a plan and a high SP I believe is part of their plan. I could be way off of course and looking at this with rose colored glasses (which I have done many times in the past)but I see a real logic behind their plan.

They are here to make big money in the gold space and I just do not know how they do that by driving their SP down.

Attracting institutions must be part of their plan. They can only do this with a stable and strong share price.

Call me crazy but I think hooking up with these Russians could be the best move.

The offer will give us a real idea of what to expect in the future. Any deal better than 3-1 would help me forgive that awful NR of theirs.

Thanks for the feedback...I had no clue how this line of thinking would be received as it seemed contrary to what everyone was thinking.

Cheers!

production05 said...

I had mentioned previously that there were 2 primary reasons for the manner in which the last NR was written (in my opinion):

1) To abruptly stop the CMM share price from running away - knock it back down to a level that maximizes the embellishment of the fictitious percentage gain that gets written up with the NR to be published with the WTG takeover / business combination / merger offer.

2) To portray Lamaque like a useless piece of junk (aka ``crap``) in order to discourage potential competitive offerors. Competitive offerors will not be granted access the data room to determine the extent of the embellishment that was built into the last NR. I don`t think this will work. Normally, competing companies in the industry are well connected to sources that can provide the truth.


I have a 3rd primary reason for that last NR (in my opinion):

3) They were positioning the situation as one that is desperately needing a knight in shinning armor (WTG) to come to the rescue. Don`t be surprise if this upcoming NR is over the top filled with rescue reasons. You know, classic Russian strategy (in my opinion) - hammer the knee caps to cripple and then offer up a wheelchair along with wheelchair trainsit van (so far it has been almost a carbon copy of what Severstal did to HRG shareholders). These goodies are bound to be on the NR:

*TSX listing

*Greater visibity

*More institutions

*Potential for TSX index

*Greater chance of financing in a ``desperate`` situation

*``Poor performance`` - no guarantee of improvements unless you join WTG

* Greater pool of assets - aim for mid-tier status

* Greater diversity

Of course there was also a 4th primary reason for the structure of the last NR (in my opinion):

4) Get more shares in the hands of friends buying on the open market, in order to improve chances in the voting process.

Sam Brennand said...

I too have some doubts about the value of WTG shares. But when I spoke with Peter last week he made a comment that struck home a bit.

He said, "What would WTG be worth if Warren Buffet was its main financial backer?"

He has a point. The bank roll behind WTG is practically limitless, and that might explain the shareprice.

dave peters said...

About BullionBull's point, there is something called "Mongolian Growth Group" that started trading on the Canadian National Stock Exchange (and also on some U.S. exchange) a month or two back. All it has right now is cash of about 0.34 per share plus experienced / respected management and theoretical potential, yet it is happily trading at 1.81.

http://www.mongoliagrowthgroup.com/boardofdirectors.html

Carib said...

BullionBull, if the bankroll behind WTG is practically limitless, then offer us cash instead of toilet paper.

I expect the offer to be no better than 4:1 and perhaps 5:1. If at say 4:1, then the market will tell us about the value of WTG shares - not by the price of WTG which is controlled by Finiskiy, but by CMM's trading price after the offer. It should quickly rise to over $1.00/share if the WTG share price has any credibility without anyone other than the Russians.

If some other established Canadian gold mining company with a history of production and earnings made a share swap offer, Century's share price would open at a price close to that value.

WTG's assets are comparable to Century's Alaskan and NWT assets. They are not nearly as good as Century's Peru assets. Century has a market cap of $225 million. I don't know how anyone can suggest that Century's assets added to WTG's assets would assign a $1Billion market cap to WTG. Some day Century will attain a $1 bilion market cap without WTG. Why give up one share of CMM for one share of WTG - much less 4 shares.

We non-Russian shareholders have the power to say NO. Combined we hold twice as many shares as they do. We don't need regulators to protect us - just vote NO. And if our BOD recommends we accept a highly inequitable offer, then we can turf them at the next AGM.

bigjohn37 said...

Good advice, Carib. Combined, we the retail shareholders of CMM have more clout than Finskiy & Co.
It will be interesting to see what the required "Fairness Valuation/Opinion" of WTG shares will be. Any unreasonably inflated valuation (say $4.00-4.50) will reflect bad on the financial institution givng the opinion. But I guess they won't care (they will collect their fees anyway). I have yet to find any poster who thinks WTG shares are worth more than $1.50. The big unknown in what is about to unfold soon is the opinions of Mr Sheridan & Mr Campoy. My gut feeling is that their integrity is going to dictate their decision. I don't think they are in the pockets of Maxim Finskiy or Fran Scola. But we shall soon find out.

production05 said...

Ticking off Century shareholders like Finskiy did on the last NR could end up being a HUGE mistake. And, coming in with an insulting takeover / merger offer could expand on that mistake.

He has opened up the door to all types of possibilities (now made easier by EXTREMELY ticked off shareholders).

Here is only one of those possibilities:

Finskiy already has a substantial investment in Century. But, not only that, he needs Century`s assets to put something solid under his fragile paper company - WTG. There is no way around it, in my vies.

He can have Mr Major thoroughly trash Lamaque in public (in my opinion), where major news agencies (like Reuters) can magnify an already resolved non-permanent mill issue, can prepared sensationalized headings (ie. ``Century Mining shares sink on crusher failure``) and blast it all around the world with their extremely powerful blashing tools.

He can do all that, but he still needs that asset they just trashed in front of the entire world - no way around it, in my opinion.

Now, let`s take a look at the Severstal and Endeavour Financial battle for Crew Gold. I`m strictly going from high level memory hear.

Severstal needed Crew Gold for their planned London Exchange gold IPO. Endeavour knew that. Severstal bought up some Crew Gold shares in private and then made a lowball offer to the remaining Crew Gold shareholders (or were about to - I don`t remember).

Endeavour then jumps in and purchased a large amount of other Crew Gold shares in private (at potentially a higher price). Endeavour had no intentions of keeping Crew Gold, but they knew that Severstal wanted it bad and will eventually have to pay them a huge premium for the shares they bought.

At the end of the day, that is exactly what happened. Severstal had to pay Endeavour something like a 50% to 100% premium to get those shares. I don`t remember the exact percentages, but Severstal ended up paying a huge premium over what it was originally willing to offer shareholders in a takeover bid.

In my opinion, Finskiy`s recent actions has made the door open even wider for a similar scenario to unfold here. If another bidder comes in and gobbles up a large number of shares (with a decent cash offer) from all these ticked off Century shareholders, Finskiy may end up going to his boss, Prokhorov, and asking for huge sums of cash to get those shares from the competitive bidder.

Wingfong said...

I rem reading Endeavour made US$80 million in that Crew Gold tussle

Wingfong said...

Modus Operandi model F/S.. acquires n control a lightly traded listed co by paying $X. Inflate it to $16X. Use it as currency (fiat in nature) to mop up a hugely undervalued co that is about to fall within control for 3:1/4:1. Ex-deal let it crashs or crashs it to $3X (still make $2X, no way to lose but scare the hell out of most of U retailers that most of U will be willing to hand over your shares). Scoop them back at the right time and open up all the books to truly justify a real worth of $8X. Throw in some updated NI43-101s, personnel changes, etc etc n add in a little touch ups hear n there. Unload the whole package to Mr P with deep pockets for $11X (+ a little premium over the true real worth of coz) and make $10X. Oh, it is so enriching! Truly hope a strong one who is bright and shrewd enough to see the money steps in with a competing bid. Not to save us retailers but for the money

Wingfong said...

Hi Glorieux
I want to say that this post of yours is valuable partly for your views and partly it has drwan out some focused views pertaining to retailers's rights, strength & weakness, choices/action options, potential scenerios, legal matters and possible plan B's and strategies for fair play etc etc. It is said that-- as a general rule, the most successful man in life is the man who has the best information. We sure need to know all our options on this matter. Also, I do wish to read your views RE.

real_economics said...

My view is anything short of 1 to 1 is unfortunately a rip off attempt. I'm sure we'll get more clarity tomorrow but i'm not overly optimistic.

Ever since the "HEY everyone were in REALLY BAD SHAPE - SELL US" press release, I've come to believe the most bullish scenario would HAVE to involve a third party getting involved. Time will soon tell. . .

RE

Gilmourr said...

Hey Glorieux,

I don't have an Agoracom account, was just wondering if you could share your source on the 2.5 cmm: 1 WTG bid placed by Finskiy and friends.

Nothing on marketwire, bloomberg, or their official website

Thanks

Anonymous said...

How can WTG price be a consideration? 5100 traded, ~19k$ changed hands.
I would not trust these guys with a dollar. Where is the transparency? Where was it last 3 mos? Lieing like sidewalks.

Disgusting for Canada, for democracy.

Peter ~ 400k for that 5% threshold