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Commodity & Stock Trading
A commodity is a good for which there is demand, but which is supplied without qualitative differentiation across a market. Commodities are substances that come out of the earth and maintain roughly a universal price. It is fungible, i.e. equivalent no matter who produces it. Examples are petroleum, notebook paper, milk or copper. The price of copper is universal, and fluctuates daily based on global supply and demand. Stereo systems, on the other hand, have many aspects of product differentiation, such as the brand, the user interface, the perceived quality etc. And, the more valuable a stereo is perceived to be, the more it will cost.
In contrast, one of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, ethanol, salt, sugar, coffee beans, soybeans, aluminium, copper, rice, wheat, gold, silver, palladium, and platinum. Soft commodities are goods that are grown, while hard commodities are the ones that are extracted through mining.
There is another important class of energy commodities which includes electricity, gas, coal and oil. Electricity has the particular characteristic that it is either impossible or uneconomical to store, hence, electricity must be consumed as soon as it is produced.
Commoditization occurs as a goods or services market loses differentiation across its supply base, often by the diffusion of the intellectual capital necessary to acquire or produce it efficiently. As such, goods that formerly carried premium margins for market participants have become commodities, such as generic pharmaceuticals and silicon chips.
Merchant Bank Becomes Gold Producer
As a general rule, the most successful man in life is the man who has the best information
For the last decade, Endeavour Mining Corperation (EDV:TSX) has been the architect of numerous equity financings and acquisitions in the junior gold sector. Over the years, the company has proven to be a savvy dealmaker, participating in M&A transactions valued at over US$28 billion.
In October 2009, Endeavour Mining Corperation (EDV:TSX) paid US$58.3 million for 55% ownership (average cost of C$0.33/share) of Etruscan Resources (EET-TSX) – a West African gold miner.
A few months later, Endeavour Mining Corperation (EDV:TSX) had acquired 43% of Crew Gold (CRU-TSX) for approximately $135 million at an average cost of 15 cents, whose primary asset is the LEFA Gold mine in Guinea, West Africa. Last September they sold it for $215 million to Serverstal.
On August 24th, 2010 the Supreme Court of Nova Scotia approved EDV’s purchase of the remaining 45% of Etruscan common shares.
Suddenly the wily merchant bank is looking like a gold producer but the market seems unsure how to assimilate this news. All summer the stock has oscillated around $2.20 as the institutional investors ask themselves: what does a merchant bank know about running a gold mine and can a leopard change its spots?
From the early evidence, the answers appear to be: quite a bit and yes it can.
The former Etruscan’s producing Youga mine in Burkina Faso has total reserves of 474,000 oz and is currently producing at an annual rate of 80,000 oz with a life of mine (LOM) of 5 years.
- Replace underperforming drill and blast contractor
- Better grade control
- Fuel savings from improved operating efficiencies
- Lower power costs with grid power vs. gensets
- Solve CIL tank sanding problems
- Improve inventory and supply of machine parts
- Higher mill throughputs
- Upgrade management team
- Tighter control on requisitions and spending
According to a July 27, 2010 OB Research report, Endeavour "is viewed and priced by the market today as a merchant bank...this view is no longer valid. We are of the view that the Etruscan assets alone justify most of the current EDV market cap of $220 million."
If this research report is correct, and the increased operational efficiencies at Etruscan are not a mirage, then the current valuation of EDV offers the following assets for free:
- 46.21 million shares of Crew Gold (43.2% of the company), sold in September for $215 million to Serverstal.
- The book value of the merchant banking business is worth about $90 million.
Endeavour Mining Corporation will release its financial results for the year ended June 30, 2010 on Wednesday, September 8, 2010. Endeavour currently has a P/E of less than one - the market always assumes that a leopard can't change its spots. I guess time will tell.
Is this merchant bank AND gold producer on your radar screen?
If not, maybe it should be.
Legal Notice / Disclaimer:
This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Jan Aleman has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Jan Aleman makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Jan Aleman only and are subject to change without notice. Jan Aleman assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Jan Aleman, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.
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