IKN

Win us with honest trifles

Understanding risk, New Found Gold (NFG.v) edition

Before getting to the point of this post, context is required: For what it’s worth, I am strictly neutral and an outside observer of New Found Gold (NFG.v) and it’s going to stay that way. I have no intention of buying, selling, recommending or dissing the stock because there are too many unknowns, I don’t understand the trade and life is too short. You don’t need “an opinion” on every single junior mining company to work the sector and sometimes, it’s best just to stick with one’s knitting and focus on companies you understand a little more. So don’t get disappointed if you came over for a rant on the shady Collin Kettell or drill hole shenanigans, this post isn’t about the past or possible future of either him or the NFG stock price. Instead it’s about how risk management and how asymmetric risk can, could, or might affect a company’s pathway and your own portfolio.

The news yesterday, that Eric Sprott has re-done his recent $48m financing to make it a flow-thru instead of a straight shot placement, makes for an interesting case study. Go check the newsflow at your leisure, but in a nutshell the change of deal came after NFG.v announced problems and issues with QA/QC during its current drill program which may, might, could have resulted in upward bias in its recent set of drill assays. With my financial hat on, it’s only right to applaud Eric Sprott for the rearranged deal because, by moving his $48m into flow-thru shares at the same ticket price, he has de-risked his position in one fell swoop.

Eric Sprott speculates on gold stocks, we all know that and while I tend to play with numbers that only need one comma to be grammatically correct, his investment numbers need two or even three. But sizes of bets aside, he’d be the first to agree that his strategy is indeed speculation, funding a large number of smallfry companies in the hope that at least some of them become big ones. He knows he won’t win them all, so do we and we also know he’s a very successful investor. Why so? Because he is good at numbers, too! That ability showed up this week; NFG has problems, the PPS dumped but Eric Sprott found and executed an elegant way to continue supporting his speculation while, at the same time, improving his side of the deal terms. As a result, he’s bought himself a capital gains credit for 2021 during a year in which he’s probably done very well, a $48m tax credit and he won’t have to pay the Canadian tax people $48m in capital gains.

His lower risk is a result of NFG’s new circumstances, the price drop due to NFG’s own NR on suspect QA/QC. Therefore, we can state that Eric Sprott’s risk has decreased at the same time that NFG’s risk increased. That’s smart risk management from Eric Sprott and its why I applaud his move, BUT THE RISK HAS NOT DISAPPEARED, it’s simply been transferred. The risk that the assay problems are worse, not better still exists and will continue until NFG finds out more, so the fully intact and unchanged financial risk has transferred from Eric Sprott’s back pocket to NFG, both conceptually (NFG is, in effect, paying Eric’s tax bill) and in real terms and if you don’t believe me on that, wait for the flow-thru liability to show up on the NFG balance sheet. It may be a “non-cash item” but the line item is very real, as any CFO will tell you.

Other shareholders need to be aware of this because their investment suddenly added downside risk potential. We know that the jury is out on whether the grade issues picked up at NFG are going to be a big, small or zero problem in the long term. If (as all longs surely hope) the upside bias assay results turns out to be a minor matter, the stock price is bound to recover to previous levels. Eric will still have the same number of shares at the same price as before, so if NFG gets over this doubtful and risky moment he’ll win the same way as before (and so will other longs). But, if the issues spotted recently turn out to be more serious, watch out! Not only will NFG’s price drop on negative news, it will be pulled lower (and FWIW I’d vouch a LOT lower) by the yoke of $48m on its liabilities ledger which would suddenly change, from a theoretical burden that gets burned off via the flow-thru rules to a real world large lump of cash demanded of the company by Canada.

Successful junior speculation is all about risk management, Eric Sprott knows that and has demonstrated his high-level ability to reduce risk (and therefore add upside) this very week. However, other shareholders of NFG who think things are the same or even better than they were for their own portfolios (not Eric’s…yours) need to think again. Feel free to take your risks, but be aware when they change against you and act accordingly.

9 Comments

    A small point; i wrote “tax credit” to help the narrative but, as a moneybrain friend has already pointed out to me, Eric in fact benefits from a deduction against income, which is different but washes out the same.

    I may or may not write a follow-up post to this, there are a few other points to make specifically about the NFG case. However NFG isn’t really the subject of the post (and neither is Eric S). It’s about risk mgmt.

    Reply

    “And you try to tell the young people of today that … they won’t believe you”

    Reply

    Posts like this and your post on Fortuna are the reason why I keep coming back for more. Thank you.

    Reply
    Bull Whitehorse 13/11/21 10:17 am

    We used to write “NFG” on broken equipment to warn others that it was No Fucking Good…

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    I’m still surprised when people invested in a Junior celebrate like winning the jackpot when Eric invests in that Junior. You need to learn that – ask Mark writes – he is good at numbers, but his interests are not necessarily aligned with yours. I learned this the hard way years ago when I was holding some USA. TO and Eric supported a merge with RX Gold a Silver, better known as the Drumlummon gold mine FIASCO, destroying value for USA shareholders.

    Reply

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