Tuesday, September 10, 2013
A quick comment on Gabriel Resources
The deposit has been known since antiquity and was worked by the Romans (presumably using slaves) and later by the foreign-exchange starved communists using the modern equivalent of slaves (which the commies called "workers" or the owners of the revolution).
Slaves have a habit of removing most high-grade ore...
The mine was closed as uneconomic (loss-making) after the iron curtain fell. It just wasn't a very good gold mine - at least it wasn't after the slaves had picked over the ore body.
The company used to have a multi-billion dollar market cap based on an old deposit with no working mine - and which was only recently deemed not worth even running...
This was unusual and warranted further attention.
And we gave it more-than-the-usual amount of attention.
We paid a law student in Romania to pull the Communist Party archives to work out what the commies thought the grades of the mine were and to compare them to the (seemingly optimistic) statements of the company. [Yes - you know a hedge fund does original research when it is poking about in the Romanian Communist Party archives...]
The reported grades were lower than claimed by the company (enough reason to be short) but the difference was only about 20 percent - not that dramatic. Indeed this could be a genuine sampling error and there is little reason to assume that the difference is deliberate.
If there had been a dramatic difference in grades we would have taken a much larger position and danced about in joy. We are short sellers at heart - and investigative stock picking is fun.
With minor grade differences and more than a few environmental doubts about the mine we maintained a modest short position.
This worked well. The Romanian Prime Minister Mr Victor Ponta - after mass protests - has decided to advise Parliament to reject approval for the mine. This is hardly surprising as the company proposed an environmentally nasty - indeed toxic - method for extracting the gold.
And so yesterday the stock entered the final-phase of its collapse - it fell a little over 50 percent - but it still has more than a quarter of a billion in market cap! The stock is down to 68 cents.
And the company response. They plan on suing Romania for "multiple breaches of international investment treaties".
But they don't mention what treaties. Indeed I am for the most part unaware of what treaties might pertain. A google search for the term "breaches of international investment treaties" but without the world "Gabriel" produces roughly zero results.
For this reason I suspect Gabriel's legal case is modestly overstated.
Like their gold grades.*
*The overstatement of the gold grades is my guess. As stated above the difference in the gold grades was not large. However I believe the grades in the archives for good reason: the Commies did a rather big bulk sample on the mine by actually mining it. It is however not outside the realms of possibility that the Communists were so incompetent at extracting gold that they underestimated the grades in their own mine. In which case Gabriel's estimates may be accurate. I report: you decide.
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