IKN

a plague o both your houses

Saturday Mailbag (RIO and AUY)

Two mails this week that show your humble correspondent doesn’t have all the answers.

Firstly, after calling short on Vale yesterday, reader LR points out I’m going against Marc Faber and sends along a link to prove it. So Faber holds RIO, that’s interesting for sure. For me it’s a call on overestimating the extent of the Chinese 2009 growth season. Let’s see how it goes, but I’m still going short on it Monday if Mr Market gives me $13. I note he’s also long Nadagold, so even if he’s right by liking the junior gold sector his understanding of company fundamentals is obviously sketchy. What’s the point in holding a junior that, unless gold goes to $3k/oz never be able to produce gold with its properties? And with gold at $3k the good companies rise first. Nadagold is a heavily promoted joke that’s giftwrapped specially for people that don’t understand gold mining. Nuff said.

Second mail. After noting the good results posted by Yamana (AUY) this week, I received the following from…well let’s just call this person “market professional”. I enjoy reading a mail that takes a contrary position to mine; I especially enjoy one that comes with solid reasoning and basicaly betters my call. So here’s what market professional wrote, FYI (permission to reproduce this section was granted).

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…..in light of your recent commentary on Yamana I wanted to add a bit of colour on their fourth quarter results.

As has been the case with most of the earnings season thus far, Yamana’s results were noisy. The headline number of $0.25 included numerous one-off and non-cash items. Obviously analysts have no way of predicting the size or nature of these items so when the results are reported we back these items out to get a “truer” earnings number (an “apples to apples” if you like). Boosting Yamana’s results this quarter were foreign exchange gains ($131mln), unrealized gains on derivatives ($139mln) and proceeds from the sale of the copper hedge ($47mln). Offsetting this was a write down at Sao Francisco ($58mln), other investment writeoffs ($14mln) and provisional pricing adjustments ($74mln). Obviously deciding what items to adjust for is a subjective process and thus analysts will always report different adjusted earnings numbers. The most controversial item this quarter for Yamana was the provisional pricing adjustments. My view is that provisional pricing is always going to influence the business and thus should not be backed out. Besides, companies rarely make mention of it when they benefit from rising prices yet when prices fall all of a sudden they claim the negative impact is a one-off item!

After backing out all the noise estimates on the street ranged from $0.03 to a loss of $0.08 so the quarter could be described as a miss. Of course this makes it difficult to explain the strong share price movement on the day other than if it traded off its headline number or simply benefited from a gold price up on the day and a recent bounce in the copper price.

Anyway, I just thought I’d provide a bit of colour on the quarter and hopefully put things in perspective. If you have any questions or want any further info please let me know.

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Now that’s what I call a good mail. Thanks MP

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