I should start off with thanking bourbaki for taking the time to send Norm an email about our concerns. His responses, however, have not been entirely reassuring to me.
For those who think Norm is a genius, or who think he knows something we don't, I have a few comments to make about his comments. In response to a query about the prospectivity of non-Palmerejo tenements:-
A question for the Independent Expert but we have drilled 77 holes at El Realito with what could best be described as modest results and we have landowner access issues at Yecora.
Is that right, Norm? Hmmm....I seem to remember reading quite a few releases about these two projects and (pre-CDE bid) they were both highly prospective kickers to Palmerejo. Now, they're either low-grade fizzers, or inaccessible? Nice definition of "continuous disclosure", mate! Wonder what you said to CDE about them.
Norm said:-
I believe the Kensington tailings treatment issue is capable of resolution.
This project is dead. See my post here. If you want to figure out exactly how dead it is, download GoogleEarth and type in "Johnson Creek, Alaska" and tell me how you access the mine site without barges.
BTW, our company is supposedly valued at around $1.1bn and so is their's. Do you think Norm and the boys actually went and had a look at Kensington, or did they just take Dennis Wheeler's word for it? I actually wonder how many of our directors have Canada and Bolivia on their passports in recent times.
Do you reckon any of them went to have a look at the operations before they sold us down the river? Ha!
Oh, that's right, Norm says, "In our view this is not a critical project."
[That would be Kensignton. Well, what the hell did they bother spending $206m on it for, if it's not "critical"? that's about a quarter of their entire capitalization.]
Now, "Turning to Bolivia," as Norm says, "Since the deal was announced there have been two very positive developments,"
[Positive developments? There are positive developments in CDE's Bolivia project? This should be good.]
Norm: "Firstly President Morales issued a Presidential Decree which grandfathered existing foreign owned mineral titles and confirmed that foreign investment would be required “…to meet the Economic and Social programs” of the government."
[Hmmm...alrighty, this seems promising. Let's have a look and see what this means. There are two points here.
[First, Morales grandfathered existing titles. Hooray! So, something which every reasonable person assumes (ie. that your company actually has tenure over the land it's spending hundreds of millions of dollars on) has actually been confirmed. Phew! That's a relief.
[Will that actually add anything to the share price? Or will it simply ensure that it won't fall? Would you call that a positive, negative, or a neutral development?
[Norm seems to think it's a positive, but I find it hard to see how it adds substantial new value for us - it just means that there's no new negative value for us and an asset which is recorded at cost on the balance sheet (and a project which was already factored into the share price) does not need to be written down. Well...I guess it's a positive when your acquirer isn't writing down assets within a few weeks of buying you!
[OK, so one of the two major projects owned by CDE is not about to be nationalized in the next few weeks. That's "good", I guess. However, Norm has more "good news" for us.
He goes on to say that,
"Then about a week ago a new tax regime was introduced to parliament. This proposes a new additional mining tax of 12.5% of profits, compared with market expectations of a 10% gross revenue royalty."
Now we discover that our Chairman can't even understand basic concepts like "significance" and "margins".
Let's say that the silver from Bolivia earns $13/oz. A 10% profits tax would take $1.3/oz. Now, let's assume (from CDE's website) that the Bolivian silver costs $4/oz to extract.
That would be a $9/oz profit. $9/oz x 12.5% = $1.125/oz tax. Now, if you take the difference of $1.3/oz - $1.125/oz = $0.175/oz and multiply that by the expected 8m oz/p.a. production from Bolivia, that equals $1.4m p.a. increase.
Wow, Norm - in the context of a company which is supposedly worth $2bn + post-takeover, that's just compelling, isn't it?
Finally, let me go over Norm's bullet points, one by one:-
1. The merger will create the world's largest silver company.
[Without the merger, BSG would have been almost as big as CDE within 2-3 years. Also, CDE will not be the biggest silver company until both Palmerejo and Bolivia come on stream and, unless both do so (at expected rates), it never will be.]
2. It will be the lowest cost producer.
[Adding BSG into the mix, CDE drop their cash costs by around $1/oz. One could equally say that, "Without CDE, BSG would be the lowest cost producer." Nuff said.]
3. Both parties are currently selling on (third party broker calculated) NAV multiples of 1.1 times.
[NAV is an extremely nebulous thing in the mining industry and CDE has capitalized Kensington at around $200m. Conversely, BSG's entire NAV dreives from Palmerejo, so that's probably reasonable.]
4. The average NAV multiple for the silver peer group is 2 times, with outliers up to 2.4 times.
[So, a long-term, established producer is trading at around the same NAV as a Johnny-come-lately explorer from Australia. What does that tell you about the producer, versus the explorer?]
5. CDE's Total Enterprise Value divided by 2008E silver production is $48. The industry average is $153.
[In other words, the prospective shareholders look at CDE...and buy something else. Our Norm thinks they're wrong. Millions of investors around the World think Norm is wrong.]
6. CDE's 2008E price/ C is 7.1 times, versus industry average of 16.7 times.
[What is, / C? If it's price/earnings, I could mention: flat to falling existing mine production; no mine in Alaska anytime soon; Bolivia 10-12.5% less profitable than a few months ago; Bolivia possibility of being nationalized higher than average.]
7. TEV to measured and indicated resources is 28% of the industry average.
[I am led to believe that TEV is market cap, minus cash and debt. In other words, for the average mining company TEV equals all the things which they write off at a furious rate, once they're in production - exploration, development, plant and equipment, etc. So, TEV is what the market assesses the value of a company at, based on its market cap, less cash and debt. Hands up, who has ever assessed a company based on this metric? Is Norm the only one...ever?]
Norm also asks us:-
"What do you think the institutional shareholders of Pan American Silver, Apex Silver, Silver Standard et al are going to do when they are holding shares valued at +2 times NAV and they see the emergence of a new number 1 silver company (currently) selling at 1.1 times NAV?"
[If CDE is such a dog that it requires a highly prospective, but non-producing, company such as BSG to make its mark on institutional shareholders, doesn't that mean that CDE alone is crap, but added to BSG it's an institusional investor's dream? If that's the case, doesn't that mean CDE is a chain around our necks and, without it, we might be the next best thing?
After all, we haven't ever needed CDE to make us look good in the past. However, it looks like CDE need us a lot more than we need them. After after all, they've gone from $7 to $3.60 in the last year, whereas we've gone from over $7.50 in early 2004 to less than $3.70 now, while we've gone from less than $0.50 to over $3.00 in the same time.
And what's happened to our share price since the takeover announcement? It's like Rocky bounding up the steps on a training run, looking up just before he reaches the top and getting nailed by Mike Tyson. Ouch!
As it is (and given my assessment above), I'm changing my disclosure from Buy/Hold to Buy/Sell, but waiting until the gold/silver market turns up within the next few weeks to get out.
Sorry, all, but Norm and his partners in extending the takeover deadline by 14 days without any good explanation, have shown me that they are determined to rid themselves of BSG. If that's the case, why should we hold fast? Last straw.
Good luck to all who hold, and I haven't always been right in the past, so I might be wrong this time.
BSG Price at posting:
0.0¢ Sentiment: LT Sell Disclosure: Held
