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Regarding 'Optionality' and the First Mining Finance/Clifton Star deal. And old men (from IKN353)

Here's one of the segments in IKN353 out last Sunday evening. It got a bit ranty


A rant on and from the First Mining Finance (FF.v) Clifton Star (CFO.v) deal

On the blog on Monday I published (23) a quick line on sourced intel about Keith Neumeyer;

He's looking to run a equity placement in First Mining (FF.v) to raise cash. In the very near future. So now you know.

In the end I was only half-right, or maybe three-quarters right, because come Friday the imminent deal became fact and First Mining Finance (FF.v) announced its latest deal (24) to buy Clifton Star (CFO.v) for 48.2m in shares. And yes, of course I had a personal comment on the deal on the blog that day, too (25). Let’s be clear as we possibly can, CFO’s development assets are plain awful. For sure it can talk up its projects and point to the fact it has over 900k ounces of gold (all categories, including inferred) under 43-101 compliance. But these are the type of BS moose pasture calculations that got the industry, especially the Canadian industry into trouble. I have no adjective strong enough, plus we know that nearby Osisko has already picked over their projects carefully and handed them back, but the definitive word on the “quality” of CFO and its exploration stage projects came from an e-mail pal (who will remain nameless and, on hearing of the deal, remarked, “Clifton Star, you’ve got to be joking! It’s an arsenic mine with a refractory gold by-product.”. When that popped into my inbox I was in a taxi. I had to explain to the taxi driver why I had burst out laughing so hard.
The “assets” are not that, they’re liabilities. They’ll never be taken seriously by any mining company worth its salt, the ounces will never be mined (unless, as my friend noted, somebody finds an amazing new use for arsenic and the market price for that element skyrockets), they will cost the holder of those concessions far more than they’ll ever make.
Which brings us to the real reason FF.v bought out CFO.v, as a different mailpal “K” noted:

This acquisition is for the Agnico and Yamana shares that CFO obtained after suing Osisko in the twilight hours of the Acquisition of Canadian Malartic Saga. Long story short, Osisko had promised a loan to CFO.V under certain conditions. Osisko respectfully disagreed as they were being acquired and didn't care. Yamana, afraid of damaging their new asset with lawsuits, wanted Canadian Malartic cleaned up and convinced its dance partner to issue some shares to settle everything up.

$11M (was over $14M only 12 months ago!) in very liquid shares is like cash in these markets.

Easy as pie.
So yes easy as pie K, but at what cost? Paying 48.2m in shares for fixed assets worth zero zip squat nada, but a company with C$11m in cash, means FF.v is getting a tad under 23c in cash for each of those shares it’s emitting. When your share price is 41c and 44c and you’re willing to do such a deal, you’re sending a clear message to people who know that CFO’s projects are worthless (i.e. the serious end of the investment community, not the people FF.v is trying to rope in). That’s seriously dilutive and surely it would have been better to go the route I’d heard about on Monday and simply run a equity placement to raise cash at, let’s say, 35c or 40c?
Which brings us to the way in which FF.v has been operating this last year, aggressively buying up fixed assets of very dubious quality (aside from the Coastal Gold acquisition, which it snatched from under the nose of Stan Bharti and comes with a deposit that has a shot at becoming a real mine). To give an idea of the changes in less than one calendar year, consider these datapoints:

  • On April 2nd 2015, when FF.v started trading as a public company, it had 73.767m shares out and a closing day market cap of C$36.14m.

  • Today, less than a year later, FF.v has lost 19.4% in share price, but these days (if we go pro-forma on this CFO.v acquisition) has 356.1m shares out and a market cap of C$140.64m.

  • And as this chart shows unless you were willing to trade in and out of the stock (notice the spikes, caused by paid promotional pumping via the contract FF.v has with stock promoter Daniel Ameduri at “Future Money Trends”), a started holder of FF.v is now 19.4% in the red on his position, despite having watched his charge almost quadruple its market cap.

Or are supposed to change, because I have serious doubts that optionality of the type being marketed to us by FF.v, a Mineral Bank full of subprime, is going to work this time around. It looks to me as though it’s an old man’s strategy, looks tired and won’t be able to contend with the growing sophistication of the investment community. I would agree there’s plenty of space to pick up decent quality assets at cheap prices and hey, that’s exactly what I’m trying to do as I sniff around Almaden’s Ixtaca property for my idea of a great entry price. But the FF.v type of optionality, the Greater Fool variety, is an error and it’s already showing up as the market bifurcates. We’re already seeing the good stuff rising and the bad stuff failing to catch a bid, being completely left behind. When the market turned, was it better to be holding a company with a portfolio of marginal properties, or better to be holding a company with world class assets that produces gold at an operating profit? Here’s a hint to help answer that question:
Wasn’t that the idea behind FF.v, that you the shareholder would benefit from the renewed interest in metals mining assets? Instead, your share price fails to budge and you get further diluted by “value” deals.

We live in an age in which information is far more freely available, which means known moose pasture properties with no chance at all of ever becoming mines will be known as such by more and more people. Not only that, but the peddlers of this tripe have already picked up reputations for being scammy operators and these days, just mentioning Name X as being associated with a company, a trade or a promotion is enough to scare people away. Add in the far greater choice of investment vehicles for (just as our small sector example) mining, such as triple-leveraged gold ETF tickers that give you all the gambler’s trade-rush you can handle (and if not, play the call and put options on those things instead). I contend that the playing field is changing rapidly but people stuck in the past with models that used to work (so they think they still will) such as Neumeyer are making a serious mistake with their money. I just hope you don’t let them make that mistake with your money as well, let them regress to the mean all by themselves.