Robert Moriarty: “Novo Stumbles, Market Panics”
I have covered the Novo saga for almost a decade now and have even written a book covering the story right up to the first gold pour eight weeks ago. I was part of the story going all the way back to 1977 when I took a Rockwell 685 from Florida to Australia for Lang Hancock, the 2nd richest man in the country. I had with me the son-in-law of Hancock who managed to bore me for 75 hours of flight talking about how the Pilbara had 29% of the world’s iron reserves. The deposits were the richest in the world. The banded iron formations precipitated iron out of salt water about 2.8 billion years ago when single cell creatures began to produce oxygen. Gold does the same thing.
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I love Bob and generally agree with about 90% of what he writes and puts on 321gold.com. 321gold.com is one of the best news and resources sites on the web today. I skim his content daily – if you don’t, you definitely should.
I don’t take any issue with the concept that mistakes are natural. It’s not easy to put a mill back into production – I expected challenges with the entire process. Tons of moving parts, new processes, and there’s going to be hiccups on the way to a smoothly operating mill. I’m not upset to hear of small delays, equipment issues, weather issues, etc. as I would expect to hear about these and the company should know and plan to have reserves/buffer for these “expected unexpected” challenges.
The reason I am a frustrated shareholder in Novo this week is not because of operational challenges or delays. It’s because the company sold itself short. It sold/diluted ownership in the crown jewel assets (the Pilbarra land package, along with an operating mill) at a dirt cheap price (aka – very expense cost), when they had other options to raise money at this point.
Since many people who spend time on Erik’s great site are investors, I thought it might be helpful to frame this concept in the mind of an stock investor, since being a stock investor is not dissimilar to the capital allocation process of a board of directors of an operating company.
Let’s say you have a stock portfolio of 5 companies. A smart, rational investor would allocate more of their capital to the cheapest stocks/highest upside/most valuable companies, and allocate less money to the less valuable companies. Let’s say Company 1 is the best value/highest upside/highest conviction investment. And let’s say Company 5 is the least valuable/lowest upside/least conviction investment.
Now, let’s say you run into the unfortunate situation of needing more cash. Just like Novo, you’re going about your life, but all of a sudden something unexpected happens and you need to raise some cash as a buffer. As Bob said, life happens right? So, faced with the difficult decision of needing cash, you have the option of selling any of the 5 stocks you own. Which stock would you sell first, and which stock would you sell last? That answer should be quite obvious – you would sell Company 5 first (the least valuable/lowest conviction/lowest upside) and then you would move to Company 4, then 3, then 2, and you would only sell shares in Company 1 at the very end and only if you absolutely had to.
Unfortunately, Novo sold their “Company 1” first – their most valuable, crown jewel asset – ownership in the Pilbarra land and an operating mill. What they should have done is looked for lower cost capital sources in order to retain as much ownership of “Company 1” (aka the Pilbarra) as possible.
Novo should have pursued (1) an additional flex credit facility or borrowings under Sprott loan; (2) a term loan facility; (3) a modest issuance of notes/debentures; (4) preferred stock issuance with a fixed coupon (aka – debt); (5) non-core investments, in order of least upside to the most upside (i.e. – NFG would be the last investment sold in this group); (6) common stock in Novo. The Board, as capital decision makers, should know what the rough costs are each of these sources of cash and should employ logic and reasoning to make these decisions (e.g. if the company can’t service a high interest rate on debt, maybe preferred stock would be better? Or, if loans and preferreds are not an option in the market, then sell some non-core investments).
Because Novo conducted this capital raise in haste, it’s clear the board received terrible advice and did not think through their cost of capital sources. Because they went right to #6 on the list and sold ownership in the most valuable asset in the portfolio for dirt cheap. And this is what Bob and others, along with Novo’s board, does not seem to understand.
Letting emotion and prior investment decisions get in the way of making the right decision TODAY is dangerous when it comes to capital decisions because recurring mistakes in this department can erode significant shareholder value over time. It should upset any shareholder that the company diluted its crown jewel this past week when it didn’t have to, and this is why shareholders should be frustrated.
“Unfortunately, Novo sold their “Company 1” first – their most valuable, crown jewel asset – ownership in the Pilbarra land and an operating mill.”
Management’s decision to sell Novo shares first makes me wonder if they really believe their Pilbara land and operating mill are their crown jewel assets. They may prize those New Found Gold shares more than they do their own. That’s the way they are acting, at least.
I am still confused on how they expect to drill for grade since the whole reason for making mini-pits was to get confidence in what the sample was telling you ie you need a big sample which a drill normally will not give you. Hence the plan was to operate like a lawyer walking down the hall backwards – mine and project forward. Has this changes?
If the idea is to drill – are we now talking about 3′ diameter drill holes followed by subsurface radar? I would have thought the really smart guys at Novo would have considered this. So can anybody tell me what sort of sampling (other than pits) we are talking about? A tunneling machine? horizontal large diameter drilling (does Australia even have slant rigs?).
Inquiring minds need to know.
Iron Banded formations
Apparently there are 29 banded iron formations around the world – who has looked at finding gold in these areas. I recall some work done in the ?1980s on Baffin Island but I am thinking there are probably others. And if Novo has worked out the sampling, perhaps these paleo deposits should have a redo on them.