Bulletin #66, January 6, 2001, 12:47 PM4 pages
Personal Note: My father died very suddenly and unexpectedly (though peacefully) less than a week before Christmas. He was an honest, hard-working and frugal man, and a devoted family man. His sacrifices sent me to a private school in England. He is already sorely missed by his children and grandchildren. I would ask your prayers for the repose of his soul.
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It's been nearly a month since our last bulletin, as well as being the start of a new year. So I am sending a list of all current recommendations, as well as a complete list of all of our closed positions. Sure, we sold some too soon, but he investor who always wants to sell right at the top usually rides his stocks all the way down again. Overall, though, we are satisfied with this record, where all our sales have achieved gains from virtually 10% to nearly 50% and most in a matter of only a few months. Given the declines
in the overall markets in the U.S. and abroad this past year, that's not too bad. Of course, some of our open positions are trading at lower prices than those we paid, and indeed many represent strong buys right now. Please refer to the complete list to follow for current recommendations and price limits.
Given the onset of a new year, it might be appropriate to review briefly each of our open positions to remind ourselves why we own them, and update where necessary. I'll cover half the list in this bulletin, and complete the list over the next week or so.
American Capital (ACAS, Nasdaq) makes loans to small and medium-sized businesses. It is not a venture firm, but invests in established businesses that need capital for growth or change of control. Loans are typically fairly large, with ACAS having board representation or even control. The defining features of ACAS are its emphasis on credit Quality, its growth profile and its high dividend yield (currently 9.5%). In addition to its regular quarterly dividend--boosted in December to 52 cents--ACAS paid a special year-end bonus dividend of 22 cents, bringing the total for 2000 to $2.17. Also in early December, the company raised an addition $67 million in equity enabling it to make additional loans.
Subscriber D. W. perceptively asks how much the company would be at risk in an economic downturn At first blush, there is clearly some risk. In a downturn, small business might have difficulty repaying loans or might even go bankrupt. ACAS would not be immune to this. This risk is mitigated both by the type of companies in which ACAS invests (successful business, not start-ups or turnarounds) as well as its very strong credit ethos. The average American Capital portfolio company has been in business for over 40 years, surviving several recessions.
Moreover, ironically, economic downturns present great opportunities for future growth. During downturns, banks and other sources of credit for small business tend to dry up, enabling well- financed companies like ACAS to be more selective and achieve better terms than during ill competitive marketplace. So we are very comfortable with ACAS's ability to withstand an economic downturn, and should macro or micro events provoke a sell-off in the stock, we would see that as a great long-term buying opportunity. American Capital is a core holding for us, and a very good buy at the current price.
Franco-Nevada (FN. Toronto) is another core holding. It owns a broad portfolio of royalties on gold and other mining properties, providing high margins and low risk. It is run by two of the savviest people in the business, has a great balance sheet, and has managed to grow steadily even during the past several years of a gold bear market. More recently, the company has announced its desire to merge with an operating company in order to increase its leverage in a rising gold market, which it sees ahead.
The proposed merger with Goldfields--which was turned down by the South African government--may still yet be revived; the parties are known to be trying. But there are government obstacles to overcome, and South Africa's AngloGold is also lurking in the wings, eyeing some of Goldfields' key assets. There has been no definitive development in recent weeks, however, and the outcome is uncertain. I would expect some "deal" involving Goldfields in the very near future, and, if Franco is not involved, a Franco dea1later this year.
For long-term investors who do not own Franco, this is a good price to be buying. However, given the uncertainty, as well as the 35% jump in the stock price in the last two months, I would hope to buy additional shares somewhat cheaper. (Please note, ref. Dr. Y and others, our recent "sell" recommendation was very definitely only for the additional shares of Franco we had acquired specifically as a short-term trade. In absolutely no way were we suggesting you sell your core position, and I hope I had made this clear.)
Correctional Properties Trust (CPV, NY) owns prison facilities that it leases to private operators. We own the stock as a high-yielding REIT (current yield over 14%) that is immune from an economic downturn. The risks are a small balance sheet--inhibiting growth and making the company vulnerable to any set-back--as well as an interest rate risk (not all of its debt is matched against its lease terms).
As stated when we first recommended the stock, it is valid as part of an overall income portfolio, and we remain comfortable with that view. We are watching the company carefully, however--yearly results and an analyst call will be held later this month--for any indications of trouble, as well as ongoing improvements in its balance sheet. In the meantime--and given a 12% jump in the stock price over the past month--we will hold.
Pan American Silver (PAAS.Nasdaq) is the premier silver stock, a pure play with current production, near-term growth, and exposure to exploration properties. It is run by extremely capable and straightforward people, led by chairman Ross Beaty. The company has just emerged from a harrowing two-year experience in Russia, which leaves it with a 20% carried interest (of uncertain value) in one of. the world's largest silver deposits.
A combination of the Russian experience and a low silver price have seen the Pan American stock under extreme pressure, trading at $2 5/8--and even lower--for most of the past month, until a jump in the last two trading days to $2 7/8. On any recovery in the silver price, Pan American will be a certain winner, with tremendous upside leverage. In the meantime, progress on two new properties (in Peru and Mexico) and other growth prospects, as well as the gradual fading from memory of the Russian experience, will see the stock move back up.
Subscriber W. G. has asked whether, in view of the low silver prices, the company will be able to obtain financing for its new La Colorada mine in Mexico. That's a valid question. Clearly, low prices make the project less attractive to potential lender, but I am confident the project will proceed. The mine should
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produce over 4 million ounces of silver a year at projected total production costs (not just cash costs) of $3.53. That still leaves a healthy margin, even at current depressed prices. Pan American has signed a mandate letter with the IFC (an affiliate of the World Bank) to arrange financing, and we should hear something early in this quarter.
So, there's no question these are difficult times for a silver mining company, and Pan American has the added baggage of its Russian experience. But we are confident that the company will not only survive during these depressed times, but going forward will grow steadily, while providing tremendous leverage to any move up in the silver price.
Great Basin Gold (GBGLF, O-T-C) is exploring a large property in the northern end of Nevada's prolific Carlin Trend. It is a well-financed outfit offering high-potential exploration, with a company buy-out the expected end result of further success.
Exploration takes time, and, in the current environment, few are interested. As discussed, the company has continued to hit gold mineralization, but has yet to find a significant, rich vein that would make the project economic. The company continues to drill aggressively, however, and success here is as likely as on any exploration project. If an economic ore body is proved, the company should have no difficulty finding a buyer, given the excellent address.
But investors are impatient, and GBG was badly hit by tax-loss selling at the end of the year, driving it down from $1 3/8 in early autumn to as low as 65 cents. With the lifting of that tax-loss selling pressure, the stock has since recovered (84--92 cents), but it still a very strong buy for investors who can tolerate the risk of exploration. You might even want to add on to your position here, for a quick run to the $11J4 level, in order to bring down your average cost.
Leisure Canada(LCN.CDNX) is developing three tourist resorts in Cuba, but progress has been painfully slow, with deadlines coming and going, and anticipated developments failing to materialize. Once again, the company assures me construction on the fIrst site will begin soon ("definitely by early summer"), so we will be watching progress carefully. In the meantime, the company is well financed (US$10 million in the bank). With the removal of tax-loss pressure, any real developments should see the stock respond.
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We'll complete the list in coming days. In the meantime, please see the list of all open positions, with current recommendations. Let me also take this opportunity to wish everyone health, happiness and prosperity in the coming year.
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