(B)(N) Extreme Economics – The (New) Canadian Mines

Figure 1: Is that an investment?

Drama. Investors are beginning to dig the Canadian mines and more than half of them (26 companies) are up by more than +20% since the end of December. The problem that we have is that the market plowed or shoveled $26 billion of new money into the losers (the above 26 companies plus another five companies with price gains in excess of +10%) which lost $15.4 billion last year and earned only $435 million among them; and they pulled-out $4 billion from the other twenty-six companies that almost broke even in aggregate last year; these companies lost only $5 billion and earned $3.3 billion and at these low prices, the current dividend yield is 3.7% and they paid $2.5 billion in dividends to their shareholders whereas, in contrast, the market winners paid only $1.9 billion to their shareholders and the current dividend yield is only 1.8%.

What happens next?

What are we to make of a market in which the earnings winners (relatively speaking) are stock market losers and the earnings losers (big time) are stock market winners (also big time)?

We’ve decided to call the first group of companies (31 companies) “NADA” meaning that there’s really nothing there and there’s no reason for the big boost in their stock prices this year (notwithstanding that investing might not be as much about reason as a lot of people like to think); these companies include such heavy hitters as ABX Barrick Gold Corporation which lost ($3.6 billion) last year, following on a loss of ($12.7 billion) the year before, yet its stock price is up +78% since December; and K Kinross Gold Corporation which lost ($1.8 billion) last year following on losses for four years in a row for a total of ($11.7 billion) and yet its stock price is up +46% this year.

The other group of companies (26 companies) is the “Lesser NADA” because there’s also nothing there but maybe their stock prices can’t go any lower without going to zero and they paid $2.5 billion in dividends last year and the current dividend yield is 3.7% at these low prices and there appears to be a reasonable chance that they might do it again.

However, zero is a real possibility for any of these companies because a mine can easily be a “minefield” and there’s a significant liability attached to mine tailings, toxic waste, and damage to the watershed, and the employee pensions are probably underfunded (The Huffington Post, March 4, 2016, Picher, Oklahoma Is America’s ‘Most Toxic City’).

It was the only law that he understood.

If you’re beginning to think that this market in the Canadian Mines is being “manipulated” by the Gold Bugs and “Savvy Traders” on Bay Street and Wall Street, you’re probably right, and our job today is to manipulate the manipulators and see if we can’t make a buck at their expense and that’s the only law that they understand.

NADA and Lesser NADA

The excavation started a couple of months ago with silver and platinum, and then some gold, and maybe eventually copper, diamonds, and iron ore, and there’s been some talk about a price recovery in commodities (The Financial Post, December 2, 2015, Are commodities poised for a recovery in 2016?) but the problem is much bigger than Canada and resources companies all over the world are in competition for a diminishing market.

Moreover, the amounts of money that we’re talking about here are pathetic – a new word in investments – because more than half of them are up by 20% or more but that took just CAD$20 billion to do (and we’ll use CAD throughout) and boosted the aggregate market value to $170 billion which is still $150 billion less than Facebook Incorporated (which, by the way, earned almost as much as they did).

One way to work this industry is to just buy the whole thing – a piece of almost every company in it – because the long-suffering, long-term investors have been waiting for this day for more than four years; last year, they collected $4.5 billion in dividends against positive earnings of $4.9 billion and losses of ($12.8 billion) and the current dividend yield at these “elevated” prices is down to 2.6%, but their stock is worth, roughly, 20% more today than last month and they’re not selling it yet.

But, as we noted in Figure 1 above, that has already happened four times since 2012 and despite all of that, the aggregate value of the Canadian mines has declined by $250 billion and 60% from $420 billion in 2012 to the current $170 billion (or $150 billion just last month).

In the (B)-class portfolio, we can make money on volatility and right now twenty-six of the thirty-one companies in the NADA class are trading in the (B)-class and twenty of those are a B+ so we know that our portfolio can’t be worth less than it is now at the stop/loss prices.

In contrast, only eight of the twenty-six companies in the Lesser NADA class are also in the (B)-class and only one of those (CG Centerra Gold Incorporated) is trading as a B+; all of the others (18 companies) are in the (N)-class and that contrasts with just five of thirty-one companies in the NADA class with NADA a profit among them, so to speak; please see Exhibit 1 and 2 below for more details (and click on them and again to make them larger as required).

Exhibit 1: The New Canadian Mines – NADA Class

Exhibit 2: The New Canadian Mines – Lesser NADA Class

For more information and examples of the Free Market Yield and the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“ and for an introduction to The Barometer “(B)(N) What’s A Girl To Do” or “(P&I) The Swiss Franc Debacle“.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

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Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”). The Canada Pension Bond®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.