Musings on Investing

The US is doomed without Trump

Value-traps

I recently had a discussion with Crux Investor on a variety of issues: why the US is doomed without Trump, why the West is regressing, why democracy is the evilest system of government, why 98% of the five-billion people living in the Third World will soon have no economic value, and why they are doomed to a future of savagery and barbarism, particularly when the US can no longer police the world:

On investments…

Gold has been doing well over the last few days. Unfortunately, it seems that investors in the junior mining sector are using this opportunity to look for the exits. Why?

Several people have asked me why two companies that I earlier considered to be good investments—Ascot Resources (AOT) and Amarillo Gold (AGC)—have fallen. Here is my response.

At the end of 2018, AOT share price was C$1.32, and it had C$5.7 million in working capital. Despite good cash, it raised US$10 million in January 2019. Early last month, for no justification, they announced a raise of another C$15 million, which was later up-sized. The issue price was C$0.70, 50% lower what it was trading at not too far in the past, and at a multi-year low. To make the situation worse, they issued warrants at C$0.95.

Now, if you were invested in AOT, you might have decided to participate in the financing, hoping you would sell your current holding while getting free warrants. This sounds all good except that you would have encouraged a way of operating that harms the preexisting shareholders and the process of wealth-creation. And, in your greed, you would have ignored that you would likely face the same predicament in the future. You would also have relied on a myth that your warrants would ever be in the money and moreover that such shares would perform.

In another case, on 15th May, AGC announced financing at its multi-year low. The financing is at C$0.20, with a full warrant at C$0.30. With gold rising, instead of quickly closing the financing, the company up-sized it to C$6 million. A year back, they did a large financing at C$0.28 per unit, with a warrant at C$0.38. Now, one should ask if the C$0.38 warrants will ever be in the money given that a trainload of new, cheap shares and warrants are being issued, and the preexisting shareholders are getting increasingly tired.

If warrants of “investors” who participated in the above financings never come in the money, and their share prices fall when the gold price goes up, they might want to consider that it is they who helped create value-traps.

I continue to have large positions in both AOT and AGC, but as information changes, I change my mind. I no longer look at them as investments.

Warm regards,

Jayant Bhandari

Associate: Rajni Bala

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