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Monthly rollup | February 2022

Stocks Mentioned: Credit Acceptance Cop (CACC), Danaos Corp (DAC), ZIM Integrated Shipping (ZIM), Dorian LPG (LPG), Alexco Resource (AXU), Sabina Gold & Silver (SBB.TO), Integra Resources (ITRG)

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February 01 2022

February 02 2022

CACC: Relative to financial leverage, historically we've repurchased more stock when we're lowly leveraged than we're highly leveraged. So I would expect that stock repurchases perhaps may not be as strong in the next couple of quarters as they were in the last half of this past year.

Lower repurchases imply less support for share prices. Bullish for our short trade.

DAC has gone parabolic ahead of the earnings release next Monday. Containership sector showing massive strength. Norway listed MPC Container Ships declared a 3 NOK quarterly dividend, the first of many to come this year. This single dividend payment represents a ~10% dividend yield. I expect ZIM to announce a similarly crazy dividend, which explains the strength in DAC compared to other containership lessors (GSL being my second favourite). Recall that DAC owns 7,186,950 ZIM shares and has set up a special tax-exempt company just to receive ZIM dividends.

February 03 2022

Cathie Woods sold PYPL into yesterday's crash. Meta may be next. A broad sell-off like this isn't going to rebound sharply imo. I'm reducing my allocation to gold explorers, which tend to react negatively to any withdrawal of liquidity.

ZIM at ATH today notwithstanding market weakness. All shipping stocks holding up well today, including the tankers. CORZ is the only bitcoin miner up significantly for the day. SWBI and CIA.TO looking good as well. The losses are mainly in the gold exploration segment.

ITRG is due to publish a PFS any day now. I'm looking to sell the pop once the study is released. Low-grade deposits aren't going to make the cut for me in inflationary periods. Unless they really stress test the capex and opex estimates (not likely for a PFS, and the promoter has stated in public that he likes to put out studies which are already obsolete. To quote - "As crazy as it sounds, try to ensure that whatever economic study, resource estimate, etc, you put out is stale-dated by the time it is made public, because of what you are about to do next and what’s to come.") So I wouldn't put too much faith into the long-delayed PFS numbers. There's "value" in ITRG, but I can find a dozen stocks at random and make the case for why there's "value". I want to see improving fundamentals and better price action before I contemplate buying back in.

I still like all the other explorers - SBB.TO, DSV.V, MOZ.TO, VZLA.V, SKE and GSV. If I were high grading my portfolio, I'd cut VZLA for DSV in order to lower my overall Mexico risk. And I'd cut SBB in favor of VGCX.TO and AXU. SBB suffers from having a project high up in the Arctic, the same weakness faced by VGCX and AXU. Unlike SBB, these two companies are already in production. While SBB needs a takeover offer in order to unlock value, just cash flows and better news flow can do it for VGCX and AXU. I still like all the stocks I mentioned here; these are just suggestions for moves to make if you expect prolonged weakness and want to cut exposure.

February 04 2022

Dorian LPG (LPG) reported 90 cents in EPS for nine months ended Dec 2021 and will commence a $100 million share buyback program. This on top of the $1 in special dividends paid out in Sep '21 and Jan '22. Trades at 0.52x book value. Stock was down for the day on results announcement so I held off. But with results out of the way, the company can now commence the buyback and that's going to be a major catalyst, especially considering the market cap is a mere $489M. I'd use a stop just below the 1/25 low of $11.19 (it shouldn't go that low when the buying volume kicks in). This is purely a technical trade, I have no fundamental view on VLGC rates.

Update on Alexco (AXU):

The combined M&I resource at Bermingham and Flame & Moth increased from 59.8 M ounces to 74.1 M ounces of contained silver. Mill throughput in Q4 was under 80 tpd, as against design capacity of 400 tpd. Since commissioning in Nov 2020, the company has yet to declare commercial production (CP). Finding more ore is great, but it’s useless unless the ore makes it through the mill and gets converted into cash flow. The stock is cheap (MCap $205.7M), but for good reason. Covid measures by the provincial govt make it difficult to source labor. Soaring inflation and the flood situation in BC causing logistics bottlenecks doesn’t help any. If the company does manage to declare CP this quarter, something they guided in their Q3 earnings call, the past would be forgiven and the stock could promptly double. However, the fact that it’s now February and there has been no news from the company except for the closing of a C$9.2 million financing makes it likely that CP will be delayed. Heck, they may even curtail operations citing covid, as Agnico has done with its Nunavut operations. I’m holding for now, but I don’t see a reason to average down given there’s a fundamental reason shares are weak. This is a crappy miner which is only worth buying for a pop higher on good news or an up move in silver, not a long-term holding.

EURN reported a net loss of $72.56M for Q4 2021 and $339.16M ($1.68/share) for full year 2021. With 44 newbuild VLCCs expected to be delivered in 2022, the supply picture looks bleak. Spot rates for both VLCCs and Suezmax are below P&L breakeven in Q1. VLCC rates are currently negative, with one vessel being fixed for a TCE of -$23,500/day (link). This sector is similar to offshore drill rigs in a way, where scrap values are high but owners refuse to scrap and thus prolong the misery all around. Thankfully, there are no more slots left at shipyards, so tanker companies can't go about ordering more newbuilds and adding to the supply glut. I like the value in EURN, but this situation is exactly why not all my trades are based on value. The bottoming process can last a lot longer than the most pessimistic estimate.

Sell Sabina Gold & Silver (SBB.TO)

I've been thinking about cutting back on the exploration picks, and Sabina didn't make the cut. Sabina was supposed to announce the terms of a project financing facility and streaming agreement in Jan 2022. From the company's 12/7/21 press release:

"An indicative project finance term sheet was signed earlier this year and commercial due diligence has now been completed.The proposed project finance facility has also received investment committee approval, subject to completion of legal due diligence and approval of definitive documentation. Concurrently, the Company has also negotiated a streaming term sheet for the Goose Mine.

The Company is currently advancing definitive documentation in connection with both the project finance facility and the streaming transaction. Final definitive documentation is expected to be concluded in January 2022, which would enable construction to commence in the new year."

While 4 days isn't much of a delay, the longer the announcement drags on the more investors are going to bail on the shares. It's always in management's interest to put out good news fast and delay the bad news. The 2021 updated FS called for initial capex of C$610 million. Given that Argonaut has announced cost overruns (leading to the firing of the founder CEO) and Artemis was unable to close an EPC deal with Ausenco on previously agreed terms, plus the fact that AEM is struggling with its Nunavut mines, I wouldn't be shocked if SBB's lenders and streaming partners decided to hold off on a deal. While a blockbuster deal can send shares shooting higher, I'm not willing to take a binary bet like that, especially given how other explorers have reacted to project financing deals (see Adventus Mining's (ADZN.V) stock chart). It's time to sell Sabina and wait out the deal terms. Maybe I'm being too cautious, but given the broader market weakness we're seeing and rising yields, I don't want to take blind risks. Stocks gap down on bad news in precisely such an environment, and I'd rather avoid the risk of losing big at the risk of missing a 10-20% gain. Our entry on 10/1/21 was at C$1.45 so I expect to just about breakeven on this trade.

February 05 2022

UK energy household energy bills will increase by more than 50% in April 2022 to a whopping £1,971 ($2700) as the energy regulator Ofgem hiked the country’s price cap amid soaring gas prices.

February 07 2022

Danaos Corp (DAC) reports earnings after market close today. I expect them to blow consensus estimates out of the water, and we may see a spike today in anticipation. If not, it's extremely likely pre-open tomorrow. I'm closing the trade at that point. DAC has gone parabolic on both the daily and weekly chart. More important to me, it is the only containership stock showing such a move (check MPCC.OL, ZIM, ATCO, GSL and CMRE charts). Trading parabolic moves has never been my thing. At this point, the quick and easy gains have been made. I'd rather get out and sidestep the rest of the move. A more systematic way of exiting would be using a a parabolic stop and reverse (SAR) indicator. Will update on this after market open today.

Time to exit DAC. The risk/reward just isn't there for holding any longer.

February 08 2022

DAC reported blow out GAAP EPS of $8.05 for Q4 and $51.15 for 2021. Adjusted mainly for the gain on ZIM shares, adjusted EPS was $6.1 for Q4 and $17.6 for 2021. Our exit for AAO was at around $96 on Monday around the open and shares closed at $98.49 in after-hours trading. Entry was on Jan 12 at $74, for a gain of $22/share or 30% in under a month.

A friend who is part of the group asked me why I'm recommending selling his best performing holding. Is it worth my while to try riding a parabolic move to the very top? I think not. I like riding uptrends but when I see such an obvious blow-off top, I'm out. Unlike futures, stocks can have nasty gaps up and down around earnings. More so in the current earnings season. Everyone thinks they are smart enough to get out at the top, but it's a really, really hard thing to do psychologically. Better a day early than a day late. That extra 5% you think you can squeeze by holding on isn't worth it. Far easier to just move on to the next trade. I didn't spot an opportunity like DAC by watching every tick and day trading it, and I'm not going to do that on my exit either. My time horizon is at least three weeks on a short term trade. I have no edge in predicting the day to day, so I'm better off trading this way.

That said, we will re-enter DAC at some point, maybe after it goes ex-dividend and the coupon clippers and momentum chasers are out. NAV/share should be close to $180-$200 now and the contracted backlog ensures steady cash flows and profitability even if freight rates earned by the ocean liners (like ZIM) drop.

Sabina (SBB.TO) closed its US$520 million financing package, consisting of $225 million in senior secured debt (positive), $75 million gold prepay facility (positive), $125 million gold stream with Wheaton Precious Metals (WPM), and a $95 million private placement of common shares priced at C$1.3/share. The streaming deal is for 4.15% of the gold production from the project, dropping to 2.15% after delivery of 130,000 ounces and dropping to 1.5% after delivery of 200,000 ounces. WPM will make ongoing payments equal to 18% of the spot gold price, until the $125 million initial deposit has been reduced to zero, thereafter increasing to 22% of the spot gold price upon delivery.

This is as good a deal as can be expected. The private placement adds 26.5% to the share count which is actually quite minimal dilution given the capex heavy nature of Sabina's project. If this is all there was to the deal terms, Sabina would have actually pulled off quite a coup at the negotiating table. The US$520 million financing is ample to cover the FS initial capex estimate of C$610 million (US$480 million). But the lenders are worried about cost overruns, as they should well be.

Towards the end of the press release, there's a clause added which reads: "Prior to the advance of funding under the Orion credit facilities and the Wheaton stream arrangement, Sabina to fund at least US$105 million in additional third-party equity investment and repay the previously announced US$20 million Sprott bridge loan in accordance with its terms."

Bingo. We get an additional 22.2% equity dilution, assuming the company manages to raise the additional US$105 million at C$1.3/share, or the same terms offered by Orion and Wheaton. Put another way, Sabina is going to raise 53% of current market cap in fresh equity, at C$1.3/share. At that level of dilution, the base case NAV/share drops from C$3.23 to C$2.18, purely from the equity raise, without considering the effects of the stream, debt or gold prepay agreement. Since Jan 2017, Sabina shares have spent most of their time above the C$1.3 level, going as high as C$3.53 last April. Most long term shareholders should be underwater on their holdings at this point, and this coming equity raise would make it so they remain underwater for a long time to come. This is how value gets destroyed.

Now that the deal terms are out, does it make sense to buy back in to this position? SBB expects first pour by Q1 2025. That's a long time during which shareholders will be exposed to construction risk and capex overruns, not to mention inflation and risk of lockdowns/inability to source labor. Although shares are trading below NAV, I'd just steer clear of Sabina.

Our entry for AAO on 10/1/21 was at C$1.45 and exit was at C$1.32 on 2/4/2022, a loss of 9%.

This content was originally published as part of Against All Odds Research.

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