The BarkerLetter

Thursday, November 27 — I think Teck Cominco Ltd. is going to either get a lot bigger or a lot smaller in the coming months. This poses a dilemma for the investor. Namely, which will it be? The trouble with Teck is its debt …  some $9 billion and change … most of it short-term associated with their takeover of Fording Coal. To date the company has raised some $2.4 billion by scaling back its capital budget and selling some gold assets, plus calling in a hefty tax rebate for the 2nd Qtr. of ‘09. Those are all good things! But the question in my mind is whether or not the firesale will continue.  The trouble with divestiture as a way of paying down debt is it ultimately reduces the company´s ability to make money, compounded by the fact that the money raised is not going into capital projects but down the ceramic bowl. Logically, the company will be worth less, not more, as a result. Investors want to know where the future growth is going to come from.

The worry going forward is dwindling global steel demand. Teck has said it will dispute (that’s my word, the company actually said ´discuss´) the desire of some customers to defer contracted coal volumes for the current year. Not a good sign! Meanwhile, it has said it will pursue other asset sales. Also not a good sign. The company would make an attractive candidate for a merger if it were relatively debt free, but it isn´t, so I don’t think we´ll see the usual Saturday night swains lining up to dance.  Owww major shrinkage there!  In fact, I´d go so far as to say it’s in imminent danger of being viewed by the industry as a bit of a pariah. I’m not ruling out the possibility of a friendly merger with an asset poor but cash rich rival though. It’s an outside chance but it’s not impossible … nothing is impossible in this market! .. in which case Teck could indeed get bigger.

The worse case scenario I can envision is a hostile takeover by a syndicate or investment consortium who will take the wrecking ball to its portfolio, although I can´t see that happening because the company´s share structure is very well-buttressed. So are Tck.A and Tck.B shares worth their current valuation of $9.75 and $6.25 respectively? Somebody believes so: Yesterday (Wednesday) they were at $9 and $4.55.

I think the rally was a wake up call, but that the shares will go lower before they go higher from here. We’re in a bear market after all. It’s risky business, but I rate the B shares a buy if they fall back below this week’s lows.

Careful out there.

A few weeks ago I suggested the biggest gains will accrue not to the strong, but to the weak who get strong to avoid perishing. Surprises can and will happen in this market, both to the upside and downside. I expect we’ll see spectacular failures and successes.

For one thing, everyone is going to work harder, and anyone who has held off drilling their best holes will bring them out of the closet as fast as they can. I wouldn’t be surprised to see a major discovery occur as the industry pulls out all the stops to right itself, and that would definitely help everyone. There is still speculative capital out there, floating around, looking for a place to land.
For another, companies are going to become more creative, especially when it comes to financing. Most will fail, but those who succeed will be here to stay.

I don’t think even those in a position to take advantage of the new pricing regime for mineral juniors are all that gleeful. Nobody in the mining business likes to see a good project clank because of some small technicality like money. Unfortunately that’s a very important technicality at the current time. As much as we’d all like to help, it’s every man for himself. We’re all struggling.

Tirex Resources Ltd. (TXX.TSX-V)

TXX is still pulling killer grades from drilling at Mirdita, its polymetallic project in Albania. Oddly enough, I like the fact that the project is in Albania, even though it’s the last undeveloped country in Eastern Europe. Why? Because it qualifies them for EU money. The European Union wants to industrialize the Albanians as quickly as possible and get them into the fold.

To that end, Tirex has just received the first tranche of C$9 million in funding from the European Bank for Reconstruction and Development (EBRD) - woo hoo! They need to match the amount for tranche two and three from the commercial sector, thereby bringing the combined financing to a total of C$15 million. That’s far from a slam dunk but they’ve certainly got a good start. Meanwhile, TXX is reporting 7.10 metres of 5.9% copper, 3.4g/t gold and 37.5g/t silver from the second set of drill assays at the Gurthi South No.2 Zone on the Mirdita Project. Like I said, surprises will happen in this market! The stock trades in the $0.40 range.

Western GeoPower Corp. (WGP.TSX-V)

This Vancouver renewable energy company has just received a US$11 million secured loan, plus the first tranche of a C$25 million placement announced last summer, so they’re sitting pretty for now. To date the company has secured 50% of the steam required for a planned 35 MW plant at The Geysers Geothermal Field in California, and and they’re still drilling! The three wells to date have established a power capacity of 19.7 MW (gross) or 17.8 MW (net).

WGP tore up a previous power purchase agreement with utility giant PG/E and recently signed a new one with Northern California Power Agency valued at some $26 million per annum over 20 years. That totals about half a billion dollars in revenues over the life of the contract. The stock trades at C$0.16.
Kb

I rather doubt it. He reportedly shies away from companies that rely on a single commodity, unless there is something very distinctive about them. He also seems to avoid cyclicals, steel and forest products, etc.

He does invest in commodity plays though: I´ve seen oil and gas companies on Berkshire’s list.

I think it’s more likely that he knows something about the oil industry, but doesn’t know anything about mining. Investors, the good ones, avoid getting involved in something they know little about, and that includes entire industries as well as sectors.

So this beggars the question: Why doesn´t Warren Buffett know enough about mining to invest? Or by extension, why do the majority of investors out there know nothing about it? Probably because nobody ever bothers to explain it to them.

I think we missed the boat here. I think if someone had called him up, or written him a letter 20 years ago with a list of 10 or 12 investment criteria specific to the industry, he may have become interested enough to learn something about it. I’m sure he’s had lots of pitches. I guess none of them cut it.

And you know what? I’ve never understood that rationale of not investing in something you don’t know. What, like you just never go there? Whenever I stumble on something I know nothing about I’m always interested in learning it.

I suppose Berkshire Hathaway looks at mining as a flavour of the month. Sure, lots of uninformed investors will invest in it when the market is high, and when it’s down, they flee. So you get ups and downs. Only the elite stay in during a market like this because there is no margin for error.

But the last time I looked at a long term chart for metals, the general trend was up. Do you think these guys are just plain wrong?

I think it’s a shame that mining hasn’t been a part of the biggest public investment story of the 20th century. I’m going to take one more kick at the cat by printing this letter and sending it to him - via the mail - complete with a coffee stain and handwritten address scrawled over the envelope, and postmarked Costa Rica. You’d open that wouldn’t you, if you got it in the mail? Anyway, I’ve heard that things are changing at B.H. Things are changing everywhere.

Meanwhile, there´s no reason why we shouldn´t be pitching the next Warren Buffett, wherever he may be.

On an upbeat note…

I got a letter recently from a guy who did a presentation at the Cambridge Show in Toronto, Canada last month, a day or so before the big melt down. Three hours before kick off he tore it up (I bet a lot of presentations were torn up that week) and just pitched a series of questions that joe investor needs to be asking about the companies they want to buy. He says he saw people who were leaving turn around and come back to listen. Ha! Talk about thinking on your feet. We all need to do that nowadays.

Moreover, his company, Northland Resources (NAU.TSXV) is doing some of the right things in my view. They have a handful or advanced base and precious metals projects - notably iron - going on over in Scandinavia. The company has developed a long term policy with respect to both those projects and the region, to the extent of moving their entire operational base to Europe. Best of all, they’re publicly stating it.

If I were a stakeholder there, I’d roll out the carpet for a company with $150 million in the bank and a stated desire to contribute to the local tax base and employment for the foreseeable future. Especially with banks melting and pensions in peril and the unemployment lines growing. I think this sort of commitment is going to be weighed very carefully around the world in the months and years to come.

The other thing Northland has going for it is the guy at the helm, Simon Ridgway. People, when you buy management you have to do more than look at resumes - you need to look at where the principals are in the trajectory of their careers! I know for a fact that Berkeshire Hathaway does this, even though they don’t share it with the rank and file investors (but I will!). The serious players in the mining business are not interested in staying where they are - they want to move up and on.

Back in the ’90s, Ridgway made a name for himself by discovering the 1.5 million ounce San Martin deposit in Honduras, which was later acquired by Glamis. Do you think he wants to find another one? Well sure. But Ridgway seems more interested right now in what Northland has cooking over in Finland and Sweden, so I’m tempted to think that’s going to be the locale for the next move in his career. My best guess is that he sees himself at the helm of the next Boliden in a few short years. Frankly, I think he has a pretty good shot at it.

Bottom line: When you watch the parade to the post, try and pick the horse that looks like it will go the distance. Mining is a tortoise and the hare thing. It doesn’t matter when the race gets finished, as long as it does.

Kb