Macro Tsimmis

intelligently hedged investment

Archive for February, 2009

Golden Star Resources (GSS) update #10

Posted by intelledgement on Wed, 25 Feb 09

Variety is the spice of life, and along with the quarterly dose of castor oil we have come to count on from our profits-challenged gold mining play, Golden Star Resources (GSS)—an eighth straight money-losing quarter, this time a record $86.8 million of red ink—there was a golden glimmer of hope: cost per ounce for 4Q08 was $637, down from $897/ounce in 3Q08 and the lowest figure achieved in 2008.

This cost number is still too high. The losses looked worse than they really were, due to a $59.1 million impairment write-off and a $16.4 million of transition ore stockpile inventory adjustments. But that still means we legitimately lost $11.3 million in 4Q08, as selling gold at $808/ounce—the lowest figure for 2008—evidently doesn’t answer for GSS when their costs are running at $637/ounce. However, at least the vector—a quarter-over-quarter decrease of 29%!—is a happy one.

And production continues to improve. Gold sales for the full year totaled 295,926 ounces, a new record…although it did fall short of management’s projection of 315-to-350 thousand ounces (the failure of the second milling unit at Wassa in the third quarter is the main reason for the shortfall). 2008 revenues amounted to $257.4 million, another all-time record. GSS ended 2008 with $33.6 million cash, up from $25.3 million at the end of 3Q08. Management anticipate that in conjunction with income generated from operations, that $33.6 million suffices to meet cash requirements for 2009.

Management have lowered their guidance for 2009; they now project production of 400,000 ounces of gold—down from their prior projection of 460,000-to-520,000 ounces—at a cost of $550/ounce.

Another ill effect of the higher costs of production in 2008 was the need to reclassify mineral reserves—estimated gold reserves that can be economically mined—to mineral resources (which may not be economically recoverable). According to the press release (click here and then on “Golden Star Reports Record Annual Gold Sales and Financial Results for Fourth Quarter and Year-End 2008”), “Mineral Reserves, after mining depletion, decreased by 1.65 million ounces, or 33%, during 2008 to 35.5 million tonnes grading 2.87 grams per tonne (g/t) for contained gold of 3.28 million ounces at year end. The decrease was the result of a combination of factors including depletion, increased costs associated with mining and processing, and design and engineering changes resulting in increases of cut-off grades…. Measured and Indicated Mineral Resources, exclusive of Mineral Reserves, increased to 27.0 million tonnes grading 2.76 grams per tonne of gold while Inferred Mineral Resources decreased slightly to 19.0 million tonnes grading 3.94 grams per tonne gold.” It is likely that if the company succeeds in reducing costs to $550/oz, some mineral resources could be reclassified to mineral reserves.

Golden Star continued to conduct exploration activities, to the tune of $15.8 million in 2008. Most activity was in Ghana near the existing operations and “We have had encouraging results during the year and a number of these targets merit follow-up work in 2009,” according to the press release. Other exploration actvities are ongoing in Sierra Leone, Côte d’Ivoire, Burkina Faso, Niger, Suriname, French Guiana and Brazil.

All-in-all, GSS has been a major disappointment. Many other gold mining companies have done much better over the last couple of years. We calculated that Golden Star’s relatively challenging operational environment in Ghana had been discounted and that they would gain outsize benefits from the run-up in bullion prices. Alas, it seems everyone including us underestimated their challanges. At this point, we are looking to take advantage of the increased price of gold and—we still hope—late-but-better-than-never improved operational performance by Golden Star to drive the stock price northwards from here. We are willing to give it another quarter or two, and then we will re-evaluate.

Previous GSS-related posts:

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Vertex (VRTX) update #24

Posted by intelledgement on Wed, 18 Feb 09

Our speculative biotech developer, Vertex Pharaceuticals (VRTX), today announced a surprise secondary offering of ten million shares priced at $32/share. The move was unexpected, in view of the company’s $832 million cash position as of 4Q08. Vertex conducted two secondary offerings in 2008, including one for $288 million in notes and $113 million in stock last February, and one for $217 million in stock just last September.

Our projections—which included what we felt to be a conservative 10% projection for annual dilution through the first profitable year of 2011—forsaw 160 million shares to be outstanding as of the end of 2009…but here we are in February looking at 183 million, which is running at a 17.5% level of dilution (since 2007 when 132 million shares were outstanding). Our model projects a price/sales ratio of 9 for VRTX in 2014, presuming sales of telaprevir ensue in 2011. At a rate of 10% annual dilution, our market valuation projection gave us a stock price of $161 in 2014 which, discounted 25% per year, meant we could reasonably expect VRTX to be at $38 by the end of 2009. However, at a rate of 17.5% annual dilution (dropping to 5% dilution after the company goes into the black), the 2014 value drops to $124…which yields a fair end-2009 value of $29.

If we presume that there will be no more secondaries in 2009—hopefully, with the company having $1B in cash, that should be a reasonable presumption—and that the dilution in 2010 will not exceed 10%, then we have a 2014 target of $148 and an end-2009 fair value of $35 (here is a revised price projections spreadsheet). The price is around $32 here, so we are getting close to the edge on this play. If the projected ROI declines further from here, we will have to cash in our chips.

Previous VRTX-related posts:

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Ron Paul’s “What if…?” speech

Posted by intelledgement on Wed, 18 Feb 09

Last week, Ron Paul delivered a brief speech to the House which every concerned American should peruse. Here is the full text:

Madam Speaker, I have a few questions for my colleagues.

What if our foreign policy of the past century is deeply flawed and has not served our national security interest?

What if we wake up one day and realize that the terrorist threat is the predictable consequence of our meddling in the affairs of others, and has nothing to do with us being free and prosperous?

What if propping up repressive regimes in the Middle East endangers both the United States and Israel?

What if occupying countries like Iraq and Afghanistan and bombing Pakistan is directly related to the hatred directed toward us?

What if someday it dawns on us that losing over 5,000 American military personnel in the Middle East since 9/11 is not a fair tradeoff with the loss of nearly 3,000 American citizens no matter how many Iraqi, Pakistanian, Afghan people are killed or displaced?

What if we finally decide that torture, even if called “enhanced interrogation technique”, is self-destructive and produces no useful information and that contracting it out to a third world nation is just as evil?

What if it is finally realized that war and military spending is always destructive to the economy?

What if all war-time spending is paid for through the deceitful and evil process of inflating and borrowing?

What if we finally see that war-time conditions always undermine personal liberty?

What if Conservatives who preach small government wake up and realize that our interventionist foreign policy provides the greatest incentive to expand the government?

What if Conservatives understood once again that their only logical position is to reject military intervention and managing an empire throughout the world?

What if the American people woke up and understood that the official reasons for going to war are almost always based on lies and promoted by war propaganda in order to serve special interests?

What if we as a nation came to realize that the quest for empire eventually destroys all great nations?

What if Obama has no intention of leaving Iraq?

What if a military draft is being planned for for the wars that would spread if our foreign policy is not changed?

What if the American people learned the truth, that our foreign policy has nothing to do with national security, that it never changes from one administration to the next?

What if war in preparation for war is a racket serving the special interests?

What if President Obama is completely wrong about Afghanistan and it turns out worse than Iraq and Vietnam put together?

What if Christianity actually teaches peace and not preventive wars of aggression?

What if diplomacy is found to be superior to bombs and bribes in protecting America?

What happens if my concerns are completely unfounded?


But what happens if my concerns are justified and ignored?

Nothing good.

And I yield back the balance of my time.

Click here to see a video of the speech.

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BUY ProShares Short QQQ (PSQ) & Short Dow30 (DOG)

Posted by intelledgement on Thu, 12 Feb 09

It was only a question of when, not if, we would move to primarily short here. While strategically we expect things to get a lot worse, we had been holding off going in whole hog on the down side in the expectation that the new administration would generate some powerful optimism—or, if you will, “obtimism”—with a fresh and credible-seeming approach to the problem.

Unfortunately, what we have so far is a “stimulus” package that is more a hodge podge of liberal social spending measures than an expression of coherent strategic policy…and worse still, Tuesday’s underwhelming the-dog-ate-my-homework presentation by new Secretary of the Treasury Timothy Geithner of his “plan”—more accurately, his concept for a plan—to address the insolvancy of our banks does not appear to advance the ball beyond Hank Paulson’s original concept of bailing them out by buying the so-called toxic assets at sweetheart-deal prices.

We were hoping for a stimulus package that would focus on the housing market, which is the linchpin of the asset deflation that is driving the downturn, and we were hoping for a financial system overhaul that would usefully harness some righteous Democratic rage to nationalize the zombie banks that have so egregiously failed both themselves and us and take their good assets and launch new, better managed institutions. And we were hoping for some appreciation that government regulation—on an international basis—needs to be extended to the credit derivatives “shadow” markets.

Strike one, strike two, strike three.

We may be too pessimistic here. The new administration has only been in power for three weeks (although it’s not as if Geithner has not been intimately involved in the crisis all along). Things could still get better here, with respect to administration policies. Never-the-less, even if we are taking these positions early, we are confident—sad to say—that the market is overvalued here, and has still not properly appreciated the depth of the problems we face. So even if we start getting better policies (and the market rallies from here afterall), the world economy’s inertia to the downside will ultimately drag the short positions we are taking today into the black.

And so far, the opportunity we now have to change that dynamic that is dragging us down and limit the damage is not being well handled, and if that continues, we will—unfortunately—do better on these positions than we expect.

Consistent with our recent analysis indicating that 1x inverse funds outperform 2x inverse funds in conditions of heavy volatility, we are going with the Proshares Short QQQ (PSQ) ETF, whose managers “seeks daily investment results, before fees and expenses, that correspond to the inverse (opposite) of the daily performance of the NASDAQ-100 Index,” and their Short DOW 30 (DOG) ETF, aimed at achieving daily investment results, before fees and expenses, that correspond to the inverse (opposite) of the daily performance of the Dow Jones Industrial Average Index.” From June 2006 to 31 December 2008, PSQ was +21% while its 2x cousin, QID (started a month later), was -6%; the NASDAQ was -26% since June 2006. Similarly, DOG was +19% since June 2006 while the 2x flavor fund, DXD, was only +4% since July 2006; the DJIA was -21% since June 2006. N.B.: as we are announcing this purchase prior to the open, the basis will be today’s opening price for these funds.

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Activision Blizzard (ATVI) update—4Q08 results

Posted by intelledgement on Wed, 11 Feb 09

Our interactive entertainment company, Activision Blizzard, today announced their full year 2008 and 4Q08 results and the bottom line was…well…it depends.

The results are somewhat muddied by the Activision-Vivendi merger that was announced late in 2007 and which closed last July. On a generally-accepted-accounting-principles (GAAP) basis, the combined company had $3.0 billion in revenues for the year, and a loss of $200 million; the figures for 4Q08 were $1.6 billion in revenues and a loss of $72 million. However, the company also reported non-GAAP numbers which excluded the effects of the merger, and those were materially sunnier: full year revenues of $5.0 billion (which edged out the estimate of $4.9 billion) and earnings of $1.2 billion (in line with estimates). Non-GAAP revenues for 4Q08 amounted to $2.3 billion (again edging out the estimate of $2.2 billion) and earnings were $429 million or 31 cents per share (beating out the estimate of 29 cents per share).

Aside from the fact that the stock was down 42%, 2008 was a pretty good year. Of course the highlight was the merger that added Blizzard’s World of Warcraft massively multiplayer online role-playing game to the stable. On that front, Activision Blizzard CEO Robert Kotick commented, “[W]e successfully achieved our merger restructuring goals, including the elimination of unprofitable product lines, right sizing our organization and integrating disparate accounting and IT systems, all with minimal disruption to our business.” But there was a lot more to the year:

  • #1 third-party console and handheld software publisher in North America for 2008
  • #1 best-selling title on the Nintendo® DS, Guitar Hero® On Tour™ in the USA for 2008
  • #1 console, handheld, and PC publisher in the U.S. and Europe for 4Q08
  • Guitar Hero® III: Legends of Rock™ became the first video game ever to surpass $1 billion in sales
  • World of Warcraft® is now played by more than 11.5 million subscribers worldwide
  • $126 million—13 million shares—of common stock were repurchased at an average price of $9.68 under the $1 billion share repurchase program announced in November

As for 2009, ATVI management are projecting For calendar 2009, revenues of $4.2 billion, and a profit of 22¢ per share, including $860 million of revenues and 8¢ of profits in 1Q09. They also expect to release two games in March: Guitar Hero® Metallica® and Monsters vs. Aliens™, based on DreamWorks Animation’s (DWA’s) forthcoming 3D movie.

Previous ATVI-related posts:

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Vertex (VRTX) update #23

Posted by intelledgement on Mon, 09 Feb 09

Our biotech play, Vertex Pharmaceuticals (VRTX), announced their 4Q08 and full 2008 results today, and provided guidance for 2009. Excluding stock-based compensation and restructuring and other non-recurring charges and gains, the company lost $397.5 million, or $2.83 per share in 2008, compared to a loss of $324.8 million, or $2.52 per share, for 2007. The increased loss is largely attributable to decreased total revenues, an increase in total operating costs and expenses to support telaprevir’s global Phase 3 registration program and commercialization, and a reduction in net interest income. In 2009, the company expects a loss in the range of $400-to-$435 million, excluding restructuring charges and stock-based compensation expense.

Results from two of the three Phase 3 currently-underway trials of telaprevir, the company’s Hepatitis C drug, are due by mid-2010. Those trials involve treatment-naive patients while the third study focuses on patients who have failed to respond to the current standard of care treatment; results from that study are expected in the latter half of 2010. Phase 2 results obtained in 2008 indicate that treatment with telaprevir in combination with the current SOC regimen improves the cure rate from 40%-to-50% achievable with the current SOC to around 70% while potentially decreasing the course of treatment from 48 weeks to 24—important because the treatment is debilitating and more patients are likely to complete a 24-week course than would tolerate 48 weeks. Also ongoing in Europe in conjunction with partner Tibotec is a Phase 2 study testing twice-daily telaprevir dosing (the USA Phase 3 trials are all based on thrice-daily dosing regimens).

The company also expects to begin Phase 3 trials of their cystic fibrosis CFTR potentiator compound by mid-2009. Phase 2 results last year were promising, but the market here is limited—there are 30,000 cystic fibrosis patients in the USA and this Phase 3 trial is focused on those who carry the G551D mutation, present in approximately 4% of patients.

Previous VRTX-related posts:

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Vertex (VRTX) update #22

Posted by intelledgement on Thu, 05 Feb 09

The founder of our biotech speculative play Vertex Pharmaceuticals, Joshua Boger, is stepping down as president, and plans to retire from day-to-day management in three months, the company announced today.

“I founded Vertex in 1989 with a vision to pursue a new approach in drug discovery and develop medicines that would fundamentally change the treatment of serious diseases. I am very proud of what Vertex has accomplished, and we now stand on the cusp of great clinical and medical success,” Boger stated.

Vertex’s board elevated one of their own, Matthew Emmens, a director since 2004, to replace Boger. Emmens was appointed president, and will take over from Boger as CEO and board chairman in May. Emmens previously served as CEO of Astra Merck, Inc., and of Shire plc where he continues as chairman of the board.

“It is a great privilege to be asked to lead Vertex at this important time in the company’s evolution,” stated Emmens. “I look forward to working with Joshua to enable a smooth transition as the Company prepares for its next stage of growth, and the commercial launch of important medicines for serious diseases. We have a rare opportunity to create a world class commercial enterprise that complements Vertex’s excellence in R&D innovation. In the area of hepatitis C, and also in cystic fibrosis, Vertex has the potential to transform patients’ lives and build tremendous value, and together with the employees my goal is to make this vision a reality.”

Previous VRTX-related posts:

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Neurocrine Biosciences (NBIX) update #11

Posted by intelledgement on Tue, 03 Feb 09

Yet another quarter is in the books for our biotech play Neurocrine Biosciences (NBIX), and once again not much has changed: the company is still conducting three phase 2 trials of their GnRH antagonist candidate drug for fighting endometriosis, elagolix, still supposedly looking for a partnership for completing the development of—and then marketing—that drug, still awaiting FDA feedback on their failed insomnia remedy drug, indiplon so they can officially put it to sleep, and still producing red ink—$28.9 million in 4Q08 compared to $128.0 million in 4Q07 and a loss of $88.6 million in 2008 compared to a loss of $207.3 million in 2007. According to today’s press release, “[t]he decrease in net loss is primarily the result of a one-time write down in 2007 of $94.0 million for asset impairment related to a prepaid royalty, coupled with the fourth quarter of 2007 restructuring and ongoing cost control measures throughout 2008.”

They now have $118MM of cash and are anticipating spending between $50 and $55 million in 2009, by the end of which all the Phase 2 trials should be completed. If the results are good enough to warrant Phase 3 trials, they will need more funding for those and to get them through 2011. Possibly some of that may come from the elusive partnership with a Big Pharma company they are still seeking, but most likely more stock will have to be sold.

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