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Bits and Pieces: Predictive Attributes for Outperformance


giofranchi
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Please, find the February 2013 Horizon Kinetics Market Commentary in attachment.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Bits_and_Pieces_Feb_2013.pdf

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Very interesting. I was looking into micro-cap resource companies on the TSX Venture not long ago, and noticed that many of them hold shares of each other as part of property deals, etc.

 

I suspect that there may be some major value discrepancies in that area, and it would just be a matter of correlating all the balance sheets. I intend to find if there is an easy way of doing so.

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A lot of resource companies own shares in each other because they are undercapitalized.

 

It takes a lot of money to build a mine... typically several hundred millions, if not more.  The reason why it costs a lot is because higher capex gives two benefits:

- Economies of scale.  A bigger mining machine still only needs 1 operator.

- Mining faster yields a higher rate of return (up to a point).

 

To bring a deposit to a production decision takes tens of millions of dollars.  Very, very few juniors have that kind of money.  Even if they find something, they often won't have the money to prove that the deposit is economic and to bring it close to production (where a senior miner will want to buy the deposit).  This is one reason why they always need to raise money.  It makes sense for them to buy properties with shares, not cash.

 

The second reason is greed.  A lot of the part-time CEOs and CFOs and directors in the junior mining space are overpaid.  They mine high-net worth "investors".  Their salaries have to come from somewhere... that's another reason why they always want to raise money.

 

Most of the Venture exchange is garbage.  The companies that aren't involved with mining have similar problems, though maybe to a lesser extent.  The business models often don't make sense (their small size means that the overhead of a public listing is very high).

 

2- Look at Northfield Capital, Pinetree, and Aberdeen.  Pinetree and Aberdeen have some very serious "corporate governance" issues.  All three sell for less than liquidation value (I'm not sure if Aberdeen does).  I own Northfield.  It's extremely illiquid though.

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