On October 20th 2008, Wellington West’s analyst Paolo Lostritto sang the praises of Novagold (NG) in a report for clients. Canada’s National Post picked up on the Lostritto call and published these two reports on consecutive days. We get to hear how NG’s Rock Creek plant is now generating cash flow and how costs will drop and how the revolving credit line looks good and how the company will generate $900m in EBITDA earnings in 2016. The stock was trading around $4 at the time, and Lostritto decided to slap a $7 target on the stock.
Was this the most incompetent analyst’s call of 2008? Quite possibly. Some points:
- Lostritto’s report came out the exact same day that company insider Greg Johnson started selling his shares. The precise, same day! I sincerely hope that’s a coincidence for Paolo’s sake. I mean, do these people know each other, and if so when did they last meet or talk on the phone? It’d be nice to hear about the OSC chasing up such things, but they’re surely too busy with their “state of the art market tracking programs that detect any erroneous trade patterns immediately”. If it weren’t true it’d be funny, people.
- Rock Creek has never generated cash flow. It had serious plant issues from the beginning of its commissioning phase, something that Lostritto decided not to mention.
- This was almost certainly because Lostritto simply didn’t know. It is obviously too much bother for an overpaid senior mining analyst to go out and visit a mineworks before writing on it. If Lostritto had bothered getting on a plane and visiting the mine he’d certainly have seen red flags everywhere.
- He’d also have had chance to talk to local environment officers, the same people that were mentioned in NG’s press release on November 24th and that wanted much more compliance from the company on several regulations. But he didn’t. So he never knew. So this game-changing fact wasn’t mentioned in his note to clients that was then disseminated to a wider public.
- It’s quite incredible how Lostritto claims to be able to forecast Novagold’s earnings for the year 2016 when he doesn’t have the first clue about the state of the company just one month later! Lostritto obviously realizes how much he screwed up, because in a classic example of closing the door after the horse has bolted, on November 25th (the day after the big drop in NG) he cut his price target from $7 to $1. Subtle difference, no?
Lostritto has been with Wellington West since April 2008. Before that he worked at Scotia and TD Sec for an aggregate of 11 years. He’s “senior mining analyst” at WW, (along with Catherine Gignac, remembered with mirth as the serial Crystallex pumper for so many years) so only the good Lord knows how bad the junior analysts there must be.
PS: On the subject of bad analysis, here’s a link that shows just how stupid GATA must be feeling right now. Not only did they urge their members to reject Barrick’s $17 bid for Novagold back in 2006, the list of reasons they give shows how little these people really know about gold mining. A little knowledge is a dangerous thing, especially when it comes from a shrill voice.
UPDATE: From regular reader “PL”: “Otto, you’re being a bit unfair here. They’re all bad*, not just Lostritto and Wellington”.
*that’s not the exact phrase used by PL, but for the sake of cleanliness the change was made