April 9, 2006
Jean-Pierre Boileau of Man Financial's Montreal office has provided the following special situation, which merits serious and timely consideration for a few reasons.
Firstly, gold is in a massive secular bull market. Secondly and thirdly, while SKC seeks and involves itself with highly leveraged precious metals situations, the following provides a discounted equity play, under the umbrella of Rob McEwen, who is well known for his magic in wealth creation in the world of exploration.
Fourthly, Jean-Pierre and I go back to the Nikkei wars over sixteen years ago. Then I forecast and identified the Nikkei's secular peak, using Nikkei put warrants that were trading in Europe for two-fifth's the cost of the North American counterpart (this was due to the inaccessibility to Americans of the European warrants, due to the US Securities Act of 1933).
Apart from being negative on Japan and its valuation, J-P was the one who had found the put warrants.
His look into US Gold as a special situation, including arbitrage possibilities, follows.
Sid Klein
Few gold fans need an introduction to Rob McEwen. Between 1996 and 1999 he increased Goldcorp's production tenfold, from 50,000 ounces per annum to over 500,000 ounces. Looking for new challenges on the exploration front he left Goldcorp and in August 2005 took a controlling stake in U.S. Gold (USGL).
McEwen's direction today? Looking at Nevada's Carlin Trend, where 180 million ounces of gold has been found in the past 25 years, he has cast his eyes 20 miles to the west, to the Cortez Trend. In 2003, Placer Dome, with a joint venture partner, discovered an ore body worth more than $3 billion on the Cortez Trend. McEwen's work came to convince him that all geological signs pointed to Cortez being another Carlin.
McEwen followed up his investment in US Gold, a company with 2,800 holes drilled on their Cortez property. Last fall, U.S. Gold made a substantial investment in four juniors with Cortez land holdings: White Knight Resources (WKR.V), Nevada Pacific Gold (NPG.V) Coral Gold (CGR.V) and Tone Resources (TNS.V).
According to the company, with these properties consolidated along the Cortez Trend, they would aspire to have the property size of a major gold company, the market liquidity of an intermediate size equity, all while having the upside potential of an exploration company.
On March 6, 2006, U.S. Gold Corp. issued a press release, in which it communicated that it intended to acquire all of the outstanding common shares of the above mentioned four companies that are exploring the Cortez Trend in Nevada.
*U.S. Gold offered an all stock deal. U.S Gold would issue .35 share of USGL for all the shares of White Knight, .23 shares of USGL for each outstanding share of Nevada Pacific, .63 shares of USGL for the shares of Coral Gold, and .26 share of USGL for each share of Tone Resources.
Here lies opportunity. Several of these shares are trading at sharp discounts to the USGL offer (see table below).
For example: White Knight (WKR.V) closed Friday (April 7, 2006) at $2.62 CDN. Again, USGL's offer is to exchange .35 shares of USGL for each share of WKR. USGL closed at Friday at $9.25 USD.
All this translates into the following calculation: $9.25 USD x .35 = $3.41 USD. At today's US/CDN exchange of $1.15, this equals $3.72 CDN worth of USGL stock, for WKR. This results in a discount to exchange value of 42%.
The FX deals with the fact that USGL trades on the OTC Bulletin Board in US dollars (Toronto Stock Exchange listing pending), while the four stocks in question trade in Canada in Canadian dollars.
Of course, the above does not contribute a buy recommendation, since such a decision could be made best in the context of one's global asset allocation and disciplines. Seeking appropriate professional collaboration is usually wise. Therefore, one should always perform one's own due diligence. As well, such deals can disappoint during any given time frame, as the acquisition is digested, all things being equal.
The reason I am an owner is that I do not perceive all things as being equal. There is Rob McEwen, a massive secular precious metals bull market, and discounts that, while also providing arbitrage possibilities for some, simply underpin the basic drivers.
JP Boileau
LEGAL NOTICE: On this 5th day of February, 2005, Mr. Sidney Klein has donated this market letter to the public domain.
DISCLAIMER: This market letter is intended to assist in the dissemination of information to private subscribers. The information contained herein represents Mr. Klein's best efforts in good faith to advance knowledge to his clientele, but there can be no implied guarantee as to its accuracy or completeness. The information is given as of the date appearing on this market letter, and Mr. Klein assumes no obligation to update the information or advise on further developments relating to the information provided herein. No solicitation to buy or sell securities is intended, and none should be inferred. Investments are inherently risky, but investment risk itself is a function of individual preferences. Thus any opinions, recommendations, or judgments expressed in this market letter are of necessity abstract and general. They must be modified, accepted, or rejected by individual subscriber/investors whose risk averseness cannot be known to Mr. Klein.