quietly building a sizable stake, page-32

Deja: I've penned some thoughts on SKE under the appropriate thread.


Beardy,

Let's start with your key premise for wanting to buy IVA, namely:

"I just see undervalued assets".

My instant rebuttal to that is: What's the basis for you perception of "undervaluation"?

I sense you are looking at the balance sheet and thinking, "Gee someone's stuck the better part of three-quarters of a billion dollars into this business, and so the it must be worth at least half of that, which is where the company is valued currently".

My view is that it's impossible to know whether this company has converted one dollar of capital into 90c, 70c, 60c, 50c, or possibly even less.

My observation of this sector is that it's raison d'être is based 99% on little more than HOPE on the part of investors.

This HOPE I observe takes two forms:

1. HOPE that the company miraculously drills a hole into the world's next Eldorado, Escondida or Bingham Canyon (I call this the HOPE OF ELDORADO), and

2. The second derivative of the HOPE OF ELDORADO, namely a HOPE that others might also develop the HOPE OF ELDORADO

(Type 2 HOPE has also been referred to as THE GREATER FOOL THEORY)

My definition of "undervaluation" is a very narrow one. It not predicated on squiggles on a chart, on 20-day, 30-day, 90-day, or 120-day moving averages, Bollinger Bands (whatever they are), RSI (again, whatever it is), Enterprise Value per Ounces of God Resources or Reserves, Enterprise Value per Pound of Contained Copper, Enterprise Value per Click or Enterprise Value per Eyeball, or Enterprise Value versus Sunk Capital (aka Price-to-Book multiples).

My measure of valuation is based - unapologetically - on surplus capital generation, and the rate of its growth. This is the nub of the Intrinsic Value of a company.

I say "unapologetically" because I believe that's the way everyone should invest in listed equities.

The stock market is complex, risky and volatile as it is...why people actively add additional layers of complexity, risk and volatility by investing in companies that do not generate surplus capital is beyond me.

But back to IVA, and hundreds like it:

You ask are you the lucky one who gets the free carry from the "poor souls" who stumped up all the legacy capital?

I very much doubt it. The reason I say that is because of, inter alia, precedent. I'll wager anything of you could inject truth serum into the investors who bought the stock two, three or four capital raisings ago, that they would have thought exactly the same:

"Legacy investors have been the mugs; I'm the lucky new entrant."

And I'm convinced that management aren't the differentiating factors here (unless they change strategic tack completely and become a digital media business, or something less conducive to wholesale destruction of shareholder value than making Swiss cheese out of Queensland in the hope - there's that word again - of jagging the big one).

Even if this was the most technically competent management team in the world, it's the nature of what is being undertaken here that is the problem.

I see mining as a fundamentally flawed business model (and I am a mining engineer by training!):

Drilling hundred of expensive holes into the ground for many years in the hope that something of value is found, upon which hundreds of millions of dollars have to be spent over several more years in developing the "project", and once it is finally up and running after delays and capital cost blowouts, the prize is a business over which management has absolutely no control of the selling price of the product it produces and very limited control of the costs at which the product is produced. And then this happens for 10 years, and you've got no more business left because the product is gone.


Now this share price might indeed go up for a myriad of reasons - it might "pop" from being "ridiculously oversold" (a favourite chant from HotCopperites), it might go up because the copper price goes up overnight, or because the Fiscal Cliff in the US gets sorted out, or the Chinese property market takes off, or because someone starts a takeover rumour for the stock, or because it's chart has crossed some or other moving average, or has hit the bottom of its Bollinger Band. Heck, it might even go up because they do, in fact, jag the next Eldorado by reporting a "hit" of 180m @ 5% Cu and 10g/t Au.

But I am way too dumb to be able to accurately ponder these imponderables. Many try to do so, some may even be able to do so on a sustainable basis.


I guess the question you should ask yourself in relation to an investment in a company like this is: "I work hard for my money. For me to invest it into this business, what is it that I know for sure about it that will create wealth for me?"

If you can't come up with a definitive answer, then I'm afraid your motives are probably more along the lines of that "HOPING" thing.

And I'm afraid that HOPE - while pervasive on a site like HotCopper - is not an Investment Strategy.


Good luck, and apologies for what could be accused of being a "downramp"...I promise it's not; I have no vested interest whatsoever in the IVA share price.

But you did ask, and when someone asks me to get onto my soapbox about such matters, I cannot help myself.

[PS. If you want to hear me ranting on in near-nauseating full throttle about this sort of subject, I refer you to a recent thread in which I had the privilege to participate, entitled: "investing for the long term. is there a future?"]