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Weekly rollup | March 21-27 2022

Stocks Mentioned: ApeCoin (APE), Alexco (AXU), Artemis Gold (ARTG.V), Adventus Mining (ADZN.V), Sabina (SBB.TO), MPC Container Ships (MPCC.OL)

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March 21 2022

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”

– Ernest Hemingway

Canada freezing bank accounts, inflation, usage of bitcoin rather than gold for capital flight, TIME magazine honoring Vitalik, various crypto bills in US states and the push for legal tender status, Swiss Lugano making USDT and BTC legal tender. With so much bullish news, the price has barely managed to move higher. This may all change tomorrow, but for now, I see this as bearish for bitcoin, which is money, and crypto, which is early stage tech. And I'd definitely not be buying ETH which failed to pump over the TIME magazine cover or the $APE token launch.

NFT trading volumes in steep decline

Alexco (AXU) reported 2021 net loss of $3.1 million. The loss was expected, since the company is still struggling as a producer. The good news is that management finally guided on when commercial production will be achieved - Q3 2022. While a long way away, at least there's now hope that this struggling producer will manage to turn a profit for 2022 and beyond. Working capital is a bit iffy, so there might be an equity raise ahead, but this stock should offer high leverage to silver, and there are crappier silver miners (EXK, GATO) trading at even more ridiculous valuations, so I think downside risk is minimal compared to the upside and am willing to let it ride. AXU is a <2% position for me; I wouldn't go any higher until I see an improvement in the fundamentals.

Looks like Trafigura was also a recipient of the LME's generous bailout of short nickel positions.

March 22 2022

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%.

Sabina announced another bought deal financing for C$110 million with a 15% overallotment option, at C$1.55/share. Since our exit at C$1.32 last month, shares rallied along with gold to a high of C$1.825 yesterday, only to open at C$1.55 today on news of the latest financing. This additional dilution can be interpreted as management knowing they would need more liquidity for mine construction than anticipated just a month ago. I'd continue to steer clear of Sabina, and broadly steer clear of exploration companies trying to raise capex for development, like Adventus Mining ($ADZN.V) and Artemis Gold ($ARTG.V). This is just not the right environment for buying mine developers, the single mine gold producers are a better bet since they can actually benefit from inflation.

March 23 2022

"Russia was one of the biggest long bets for the hedge fund at the start of February, with 9% of its gross assets invested in the country’s shares, after a research trip to the country in January, the document shows. Sam Vecht, head of the team that manages the fund, told investors he raised the bet further when the invasion began, one of the people said. The fund currently has zero exposure to Russia, after writing down all its positions, two people said."

Despite Russian stocks losing the most for the fund in January, exposures were kept and later raised.

Adding to losers is an easy way to lose a lot of money really quickly.

March 25 2022

MPC Container Ships (MPCC.OL) took a hit yesterday on news of a block sale by a large shareholder. 2021 PE of 6.8x based on 2021 EBITDA of US$290 million. Company guided 2022 EBITDA of US$450-470 million. From 2022-25, based on fixed charters, the company has a revenue backlog of US$1.4 billion and EBITDA of US$1.1 billion, with fixed TCE rates improving from $27,541/day in 2022 to $39,172 in 2025. While only 8% of fleet operating days remains to be fixed for 2022, 88% of available fleet operating days are yet to be fixed for 2025. This means the company should earn excess returns as the available trading fleet gets fixed at higher and higher rates (think of it as backloading oil deliveries when the oil futures are in a steep contango).

Stock is cheap PE-wise, with visibility into future earnings which look even better. The Harpex index, which tracks container ship charter prices, hit a fresh high this week. The news-driven selloff in MPCC is the kind of dip I like to buy, since I believe the fundamentals support a long term bull market in rates. and when adjusted for dividends, the primary trend is up.

March 26 2022

Threat to Black Sea shipping from floating Ukrainian mines. Best case scenario, ships will exercise caution and slow steam, reducing global shipping capacity. Re-routing to avoid sea mines (a phrase I never thought I'd use!) will also increase voyage time, reducing capacity. Airlines are already facing this problem since they can no longer fly over Russian airspace.

Worst case scenario, there's supply destruction. Insurance can pay for a hole in the hull, but the ships will probably be taken off the market for a long while since shipyards are already backed up.

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