Monday 11 December 2017

My simple quantitative approach to spec stocks like Garibaldi

I came across an interesting video of Eric Sprott recently.  Eric is a legend in the mining sector and I respect his knowledge and work ethic.  Eric has also been one of the supporters of Garibaldi Resources (TSXV:GGI), a company that has received significant scrutiny on this blog, IKN, and the Angry Geologist.  So, you would think that I disagree with Eric Sprott on Garibaldi.  However, that is not the case.

In the video, Eric indicates that he is looking for 10 and 20 baggers.  We all love those, don't we?  Eric has had a lot of them in his lifetime and is much wealthier than most of the rest of us.  Let's be clear, however, that investing in these types of stocks is probably not a core investment strategy.  I'm sure that Eric has also invested in many such stocks and lost money.  He is in the fortunate position that it won't have much of an impact on his overall wealth or quality of life.  My guess is that some investors in stocks like Garibaldi and Novo Resources (TSXV:NNO) have way more exposure in their portfolio to these stocks than they should.  That is fine if they bought early (high risk, high reward) and dangerous if they bought later (high risk, low reward).

Could Garibaldi have a world class discovery that is ultimately worth billions?  Sure.  The nickel grades are unusually high and large areas are yet to be tested.  Yet, it is a quantum leap to assume that this translates into a high probability of a world class discovery.  As highlighted by the Angry Geologist, the truth machine (aka the drill rig) has so far only uncovered relatively discrete zones of massive sulphide mineralization.

Rather than me getting into a pissing contest with guys like Eric Sprott, which I'd prefer not to, let's have some fun with numbers to analyze Garibaldi.  My suggestion is that you plug in your own assumptions to come up with your own values. 


  1. Probability of Garibaldi having a world class nickel project = 5%
  2. Value of Garibaldi if successful = $4.5 billion (based on the takeover value of Voisey's Bay; I actually think the value today would be lower)
  3. Probability of Garibaldi having a small project  = 95%
  4. Value of Garibaldi if E&L is not another Voisey's Bay = $50 million 
  5. Garibaldi has 105 million fully diluted shares outstanding and that number will go up to 120 million to fund additional drilling
Probability weighted value per share = (0.05x$4,500,000,000 + 0.95x$50,000,000)/120,000,000 = $2.27

Based on this calculation, GGI shares would theoretically be attractive if trading below $2.27 per share.  Personally, I wouldn't put more than 1% of my portfolio value into such a speculative position.  I'm picking numbers out of the air here, which leads to a wide margin of error, but I think the exercise is an important one to guide investment behaviour.  The odds of GGI going back to $0.42 per share (i.e. $50M/1.2M shares) seem far, far greater than the odds of the share price going to $37.50 (i.e., $4.5B/1.2M).  Like I mentioned in an earlier blog post, this is analogous to a lottery ticket or any game of chance.  The odds are that you will lose.  If you still want to invest, try to get the odds on your side and don't risk too much on these speculative investments.  You shouldn't be losing any sleep at night.

My view on GGI is that shares will drift now that the most significant drill results have been released.  Hole 14 was rushed through the lab, implying that holes 10 to 13 were less impressive, which would also explain why they have not been promoted by Garibaldi.  Winter weather has set in and we probably won't see more drill assays, other than holes 10-13, for another six months.  That is a long time to wait to get the next batch of evidence to see if the E&L deposit might be world class or not.  So, if you think Garibaldi might be onto something potentially world class, then make your assumptions and do this simple probability weighted value calculation to pick your entry point. 

It is also important to change your assumptions based on new data.  Unless you are lucky enough to possess reliable intuitive skills for spotting winners, I believe data is important and your friend when it comes to investing.  That is why this blog and others jumped on Garibaldi initially.  Stating mineralized intervals and posting selective pictures of core samples was misleading and clearly fooled some investors.  It also set a disclosure precedent that other companies like New Nadina (TSXV:NNA) started following.  Assays don't lie or exaggerate.  People do.

Do your own due diligence, make your own assumptions, and good luck!

Would you rather...

Receive one of the following:

  • $16,000 US dollars
  • 1,000 ounces of silver
  • 13 ounces of gold
  • 500 pounds of cobalt
  • 5,400 pounds of copper
  • 1 Bitcoin?
Whatever your fancy, the valuations are all currently about the same.

The pullback in Bitcoin I noted a week ago, which looked substantial at that time, now looks like a minor blip on the chart.  Exponential action!

Was Thursday's high on Bitcoin the top?  Probably not.  People don't seem to learn, so history repeats itself again and again with bubbles (lots of bubbles documented here).  Below is a chart for one of the first documented bubbles, tulip mania.  One thing I've learned from bubbles and market crashes is that the decline in price when a bubble pops is typically several times faster than the exponential rise up.  So, when the Bitcoin/cryptocurrency bubble pops, it is likely going to be mind blowing!  If 20% daily gains and losses are normal for Bitcoin, a sharp selloff is going to look like 40 or 50% in a day.  You see, many of the speculators buying Bitcoin now probably acknowledge that this is a bubble and they are betting that they can get out quickly with minimal losses.  Usually that is not the case.  Something will trigger a gap down, servers will crash, and losses will be staggering for those who jump in too late.

Bitcoin seems to have gained some legitimacy with futures now trading on the CBOE.  My view remains that Bitcoin is a bubble that will crash.  The only question is when.  Tulip bulb prices could not be justified at 10 guilders, yet they went to 60.  Bitcoin could well go to $50,000 or even $100,000.  All I know is that something unexpected will trigger a sudden and sharp collapse.  We will know the top is in when we see a 50% drop.  History repeats itself.
While Bitcoin had a stellar week, precious metal and base metal prices took a beating.  Who wants tangible assets when you can now get cyber assets?  Metals have to be mined and then stored in warehouses.  Cryptocurrencies can be "mined" using computers and stored using Blockchain.  So what if they are constantly being hacked, waste massive amounts of electricity, and if most of the computing power resides in China and Mongolia?

In classic fashion reminiscent of the dot com craze and marijuana mania, failed mining companies and even a failed biotech are rushing to become Blockchain or cryptocurrency companies.  In many cases, all it takes is just the announcement that you intend to get into the sector that can move your stock.  And, in some cases like Routemaster Capital (TSXV:RM) and Vogogo (TSXV:VGO), you don't have to mention anything publicly and you claim no material changes while your stock shoots up on volume right after you raise money at low prices.  A classic case of "investors" chasing returns, which usually does not pan out.

Call me old school, but I still like metals and mining (and fundamentals).  Bitcoin will likely be gone in a decade, but all of our electric, autonomous vehicles will still be using lots of copper, zinc, cobalt, lithium and nickel.  I especially like zinc in the short-term, as inventories are hitting critically low levels.  I think zinc prices will soon start another run up and if I had any Bitcoins I'd be selling them and buying zinc mining stocks.
Source: Scotiabank

Friday 1 December 2017

Garabaldi doesn't add up

Thanks to the BC Securities Commission, Garabaldi Resources (TSXV:GGI) has disclosed the drill hole coordinate and composite grade intervals that should have been in the drill results release.  Let's do a quick recap.  The company started making a lot of noise about a massive nickel discovery on September 1.  Assays were finally released on November 20 (more than 11 weeks after Sep. 1) in a news release that looked like it was hastily written and incomplete.  It then took another 9 days for the company to issue the full disclosure required by the BCSC.

Why would Garibaldi not want to be forthcoming with this information?  Perhaps, because the facts don't live up to the hype.  The Angry Geologist analyzes the data here and highlights that the massive sulphide intercepts are really quite small and appear to be confined to a small zone.  Stuff like this makes the Angry Geologist angry and you won't like him when he's angry!

I'd also like to point out some simple math.  In the Sep. 1 GGI news release, the company publicly stated that the first drill hole intersected two long intervals totaling 176 meters.
$16 million was raised on the back of this and other statements.  Who needs assays when you have core logging and XRF readers, right?  Well, let's see what the assay data, released almost three months later, came up with:

Add the intervals and you get 60.5+5.23+9.68+4.5=79.91 meters.  What happened to the two large intervals totaling 176 meters?  There seems to be about 96 meters of mineralization missing!  That is about the height of a 32 story building, which I would argue is not insignificant.

People lie.  Assays don't.  In this case, I doubt Garibaldi intentionally meant to mislead investors, but they should have known better than to make these statements in the first place.  Those pesky class action lawyers might start contacting the gullible investors who purchased shares at $4 or $5 per share and then the $16 million you raised might have to go to lawyers and settlements rather than into the ground.

Trying to Build a 10-Bagger

Evolve or Die This blog started as an experiment when I was toying with the idea of starting a mining newsletter.  I figured that if I was r...