Category Archives: Market Opinion & Analysis

Aastrom Biosciences (NASDAQ: ASTM) Sparks New Uptrend

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A bullish crossover of the MACD indicator suggests the beginning of a new uptrend for Aastrom Biosciences, Inc. (ASTM). On Tuesday volume jumped to nearly three times the 3-month average without any news from the company. Volume, often interpreted as the lifeblood of a chart, measures strength behind price movement in technical analysis. With the price breaking above its 50 day moving average line (blue), Tuesday’s share volume confirms the ‘technical breakout’ – a move through or above a significant level of resistance.
 
More specifically, Tuesday’s session lent way for shares to climb above not one, but two levels of notable resistance. The primary breakout occurred once the price broke channel resistance (pink). We made a note of that in real-time here. As mentioned, a break above the 50MA followed suit (the secondary breakout). Additionally the RSI indicator turned upwards and broke above the 50 mark, another indication of strength behind the price rally.

 
StemCells Inc. (STEM, +1.83%) and Cell Therapeutics, Inc. (CTIC, +2.36%) were among other stem-cell companies to gain in trading on Tuesday. This data leads me to believe that Aastrom Biosciences’ more-than-modest jump in stock price (+16.6%) was fueled by more than just momentum in the market. One source pointed to a newscast praising Aastrom Biosciences (ASTM) in saving the lives of two individuals using their stem cell remedies.
 
Aastrom Biosciences, Inc., a regenerative medicine company, engages in developing autologous cell therapies for the treatment of severe and chronic cardiovascular diseases. The company’s autologous expanded cellular therapy technology uses single-pass perfusion to produce human cell products for clinical use.
 
As of their last quarterly filing, Aastrom Biosciences had total cash of $14.47M. However, an offering closed on December 15th, 2010 revealed the company’s entitlement to an additional $20.5M. As the offering was chiefly responsible for the declining share price (then) it largely eliminates the risk of another offering diluting shareholder value now and in the near-term.

Xoma Ltd: Raw, Uncut, and Unrated

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Last week XOMA’s (XOMA) stock price rose roughly 200% and 54.7M shares traded hands. Excitement brewed over the company’s multi-purpose drug, XOMA 052, which investors anticipate the company will release positive phase 2 results on early in the upcoming year. Conversely, I’m not so encouraged by all the hoopla.

It brings tears to my eyes knowing that some investors have been given a false sense of hope and security in light of the rising stock price. But don’t count on that union. Arena Pharmaceuticals (ARNA) rose in anticipation of a FDA approval of their weight-loss drug, Lorcaserin, in these past summer months. Then in September shares plummeted shedding all of the previous months’ gains in less than a week.

XOMA Ltd. (XOMA) has a reputation for misbehaving – which may explain why its Chief Executive was runner up to the least-distinguished biotech CEO of the year award. Elsewhere, XOMA has been called a “one-trick pony“. But more concerning is that both claims can be substantiated and then some. Last quarter, for instance, XOMA had total revenues of $10.9M versus $27.4M during the comparable period in 2009 (1). Concurrently, Operating expenses rose 33% year-over-year, mainly due to the rise in research and development costs. However, the troubling part is not that revenues have slid or that expenses have substantially risen or that operating activities alone burned through $43M in cash, but whom XOMA will turn to in order to finance ongoing operations.

XOMA Ltd. raised more than $40M selling paper to investors in the first three quarters of 2010. You can bet they’ll be at it again in the upcoming periods. Just earlier this year the company facilitated a 1-15 reverse stock-split after diluting their share price into the pennies. And now their future largely depends on a development-stage drug that will drain tens, if not hundreds, of millions of dollars from investors’ pockets before it is even given a chance at being commercialized.

In 20+ years of operations, XOMA Ltd. has incurred an accumulated deficit of more than $835M. Not one of those years did the company show a profit or so much as breakeven. If there is one trend that has remained consistent with Xoma Ltd. throughout their years, it’s been the careless expenditure of shareholder monies.

So I ask, what could have accounted for the discrepancy between the 21.78M shares floating and the 54.7M that actually traded hands? Was it a wave of heroic day traders or devilish short sellers? I think not. To quote Benjamin Graham, “watch out for OPM (Other Peoples’ Money) addicts”.

Lastly, on the topic of share capitalization, it puzzles me how a company with a supposed blockbuster drug can have so little vested interest on the part of those on the inside. According to Yahoo Finance, insiders hold just 2.56% of the total number of shares outstanding. But I’ll leave this issue at that.

On the basis of the daily chart, three technical indicators, RSI (95), MFI (99) and CCI (398), show the stock price to be overbought. Currently, the price is considered to be overextended to the upside or ‘overbought’ relative to the position of the upper bollinger band, an indicator of price deviation from the norm. This means that the price will likely pull back to at least par with the upper BB (currently at $5.10). Another significant supporting trendline is indicated on the chart (below).

XOMA Daily Chart

1. Financial Data Taken From Quarterly Filing (10Q)

Three Upcoming Make-or-Break Biotech Approvals

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The lure of biotech has attracted droves of investors with stomachs for risk ever since the industry’s inception in the 1970s. Biotech investors continue to funnel money into fledgling enterprises–all the while enduring shareholder dilution, enormous uncertainty, and years of net losses–hoping to catch the next Amgen (AMGN) or Genentech.

The meteoric rise in the overnight share prices of modern-day Lazuruses like Vanda Pharmaceuticals (VNDA) and, most recently, Orexigen Therapeutics (OREX) have become the stuff of biotech legends. However, it is important to remember that many more biotechs crash and burn than make it big.

More often than not, biotech shareholders are left empty-handed. Below we highlight three development-stage biotechs with highly anticipated new therapies that are about to face judgment days of their own.

Vertex’s Telaprevir Aims to Revolutionize HCV Treatment

Vertex (VRTX) is close to commercializing its hepatitis C drug telaprevir, part of a new class of therapies that have the potential to revolutionize the way the disease is treated. HCV’s current standard of care requires 48 weeks of treatment, causes terrible side effects, and is still only able to cure patients 50% of the time. In contrast, telaprevir has the potential to cut treatment time in half and double cure rates. The drug is widely regarded as a major advancement, and we think telaprevir could hit the market in the first half of next year.

Vertex’s chief rival, Merck (MRK), is developing a protease inhibitor of its own. We think telaprevir’s slightly superior efficacy and convenience profile should give it an advantage with prescribers. However, Vertex has no commercialization experience, and Merck’s established salesforce and ability to package the drug with the current standard of care should help even the commercialization playing field. Vertex ranked number 1 on our 2010 biotech takeout list, and we continue to believe the firm would benefit from the sales know-how of a larger pharma player like current partner Johnson & Johnson (JNJ). The stock currently trades at a 25% discount to our fair value estimate, providing an attractive entry point for investors with a stomach for risk.

While Vertex also has a late-stage cystic fibrosis candidate and compounds in earlier-stage development, telaprevir remains the focus of investor excitement and the primary value driver of the firm. We give the drug a 70% chance of approval, 10% higher than our average Phase III drug. If telaprevir succeeds in clinching approval, our fair value estimate would rise to at least $50 (not including a takeout premium). With a drug on the market, we think Vertex could see profitability by 2013. However, a great deal is still unknown about telaprevir’s remaining late-stage data and commercialization plans. If telaprevir takes longer than expected or requires more resources to get to market, our fair value estimate would fall to under $30.

Human Genome’s Benlysta Could Break 50-Year Dearth of New Lupus Drugs

Human Genome Sciences’ (HGSI) lupus drug Benlysta could become the first lupus medication to gain approval in over five decades. The first-in-class drug has demonstrated promising Phase III data in seropositive patients–those with an autoantibody present in their bloodstream. While the drug has had issues demonstrating significant long-term efficacy, we think Benlysta could be a unique candidate to use in combination with the standard of care. With no direct treatment for lupus, any improvement to the current steroid-based treatment could make the drug very attractive, and we think Benlysta could turn into a blockbuster drug for the firm. Human Genome received a favorable advisory panel vote for Benlysta last month, with members voting 13 to 2 in favor of recommending approval and 14 to 1 that the drug’s safety profile was sufficient for approval. While the FDA has recently delayed its target decision date to March 10, 2011, we think the drug could still launch by mid-2011.

Human Genome has a robust pipeline and many drugs in clinical trials. If one product fails, the firm has other development options. However, much of the firm’s long-term value remains tied to Benlysta. If the firm’s share of Benlysta sales could surpass $1.5 billion by 2019, we would raise our fair value estimate to $27 per share. If Benlysta does not gain approval, Human Genome would be left to rely on earlier-stage pipeline candidates and two Phase III candidates that we believe have only modest commercial potential. Our fair value estimate in this case would fall to $5 per share. While we think the firm is fairly valued at current trading levels, Human Genome represents another key takeout opportunity, in our opinion. The company ranked number 3 on our 2010 list of biotech takeout targets, and we think an acquisitor like current partner GlaxoSmithKline (GSK) would make strategic sense.

MannKind’s Inhaled Insulin Faces High Hurdles

MannKind (MNKD) is developing Afrezza as an ultra-rapid-acting inhaled insulin therapy for patients with diabetes. In addition to allowing patients to forego the needle, Afrezza’s molecular structure may allow for superior disease management to injectable insulin. In trials, Afrezza achieved comparable levels of overall glucose control while also demonstrating a lower risk of hypoglycemia and weight gain than currently available products. Despite these advantages, MannKind received a complete response letter from the FDA asking for more data earlier this year. The good news for MannKind was that the FDA did not require additional Phase III trials, which likely would have been prohibitive for the unprofitable biotech.

MannKind expects to hear back from the FDA by Dec. 29, and we think there is a good chance Afrezza will be approved (we assign Afrezza an 85% chance of approval based on strong efficacy data and a clean safety record thus far). However, MannKind will face an uphill battle in its attempt to turn the product into a commercial hit. Afrezza’s predecessor in the inhaled insulin class, Pfizer (PFE) and Nektar’s (NKTR) Exubera, was removed from the market in 2007 after generating disappointing sales and being linked to a potential risk of lung cancer in former smokers. Although Afrezza’s clinical trials have yet to produce any red flags, we think Exubera’s failings will haunt MannKind’s efforts to win favor among prescribers. MannKind also trades at a discount to our fair value estimate, but we think Afrezza’s fate represents more of a binary outcome for the firm, unlike Vertex’s telaprevir or Human Genome’s Benlysta. The firm carries a very high uncertainty rating and should be regarded as a speculative investment.

Written by Lauren Migliore

Lotus Pharmaceuticals (LTUS): The Big Little Chinese Drug Manufacturer

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While speculative opportunities in small cap biotech continue to entertain investors, half-way across the world big little drug manufacturer, Lotus Pharmaceuticals, Inc. (OTCBB: LTUS), is operating to the tune of explosive growth – and out of its own pocket, too.
 
In addition to manufacturing their own branded drugs and pharmaceuticals products, Lotus Pharmaceuticals distributes over 5000 western drugs, Traditional Chinese Medicines (TCMs) and medical equipment items through wholesale and retail channels such as ten of their owned and operated pharmacies in Beijing.  
 
For the first three quarters of 2010, revenues totaled $52.5M or 31% higher than the comparable period in 2009. Wholesale revenue saw 18% growth while retail sales growth, at 83%, was the driving force behind top-line growth. This falls in line with the company’s recent announcement to forgo construction of a new facility outside of China and instead focus more on core business in Beijing.

“We have decided not to move forward with the construction of our planned facility in Inner Mongolia in order to focus our efforts and resources on expanding our core business in Beijing. We believe that selling or transferring this property will be a more effective use of our capital.”

 

In December of 2008 the company had acquired the property in Chahaer Industrial Park, Inner Mongolia for $26.3M. 
 
Assuming the property is sold on a timely schedule and at or near cost, proceeds from the sale will in part, if not wholly, finance growth and expansion plans in the upcoming period. Cash inflows from operating activities, which brought in $19M in the first three quarters of 2010, have helped balance outflows in investing activities. As a growing entity it is expected that the company will continue to invest in property and equipment. The beauty of the situation lies in that in case of a draught, the company always has the option of turning to shareholders or a low interest bank loan for quick access to capital resources.
 
Based on diluted EPS of $0.39, Lotus Pharmaceuticals currently trades at a trailing P/E ratio of 3.07. In contrast, companies in the healthcare sector boast double-digit P/E ratios. And while, in general, the recent fright over legitimacy of small-cap Chinese companies may continue to daunt investors, there are reasons beyond the scope of growth that deem Lotus Pharmaceuticals undervalued at its current price.
 
For instance, the market hasn’t taken into consideration Lotus Pharmaceuticals’ pipeline of drugs awaiting approval from China’s State Food and Drug Administration (SFDA).
 
 
 
Laevo-Bambutero, Lotus’ asthma drug, is anticipating SFDA approval by 2012. While that seems like light-years away it’s this type of inherent value that attracts large industry players to hostile takeovers.
 
Elsewhere, most recently being the PHARMCHINA 64th National Drug Fair Conference, the company continues to build its list of product distributors, which now totals 200. In the CEO’s own words, “Our participation in the PHARMCHINA conference was very fruitful, as we came away with six new contracts upstream and five downstream. We believe we are well-positioned to reach our goal of 25% top-line growth in 2011.”
 
And whether you like it or not, Lotus’ management is taking strides towards qualifying for a higher-exchange listing. More on this another time. 

The Nuggets in Great Basin Gold – GBG – Interview with CEO Dippenaar

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The Nuggets in Great Basin Gold – GBG – Interview with CEO Dippenaar

October 19, 2010

By:  Marco G.

http://goombarhsedge.blogspot.com/

Great Basin Gold’s (GBG, TSX:GBG, JSE:GBG) stock has just broken out to the high side and they have doubled their market capitalization in the short time space of two months.  See the calculations in the table following:  (click to enlarge).

Table 1:  Great Basin Gold – Market Capitalization.  At October 19th, 2010 all the warrants are in the money and debentures may be converted to shares.

What do you suppose the market is saying here?  Well, ladies and gentlemen, this is a prime example of a mining company sitting in the sweet spot of the value curve when bringing their new mine into production.  For a fuller explanation of the sweet spot for a mining Junior click here. 

Great Basin does not just have one mine coming into production but two.  Their large prime mine in the Witwatersrand Basin of South Africa, Burnstone has started milling ore, this fall.  Their smaller sister Nevada mine, Hollister has been test mining for over one year and has just recently this summer stabilized their milling operations.  The market is finally acknowledging this mining production progress and is beginning to recognize the value of Great Basin and has responded by assigning a higher share price.  This is not a trivial matter, in the creation of a $600 million valuation increase, by bringing these mining projects into production.  This is the culmination of a long time struggle with mine building and financial markets resulting in rapid revaluation of Great Basin Gold’s share price.

Interview with Mr. Ferdi Dippenaar, CEO of Great Basin Gold

The author has followed Great Basin closely, and further background may be obtained from these articles here on Seeking Alpha.  It was with surprise and pleasure, when Mr. Michael Curlook, Manager of IR & Corporate Development  called and said that Mr. Ferdi Dippenaar, President & CEO of Great Basin Gold was willing to talk to me about Great Basin’s future prospects.  The interview following is verbatim from notes and was conducted by telephone with Mr. Dippenaar in South Africa on October 19th, 2010. 

The author asked Mr. Dippenaar to brief us on Great Basin’s outlook going forward as to exploration priorities among their existing mine sites of Hollister, and Burnstone and also their green field explorations in Tanzania and Mozambique.  Note:  further information about the Tanzanian and Mozambique properties are in the March 31, 2010 Annual Information Form here.

Ferdi Dippenaar:  If we have a look at the Mozambique property.  It is in the Tsetsera  area, it is a green belt.  It is an area that has seen some mining.  What we have is… we actually have a property, which we’ve done some dirt sampling, grab sampling, we’ve looked at some trenches, and tried to get…this is even …if I qualify, this is even before we put out a drilling program. 

Marco G.:  Right.

Ferdi Dippenaar:  The whole idea was to do a lot of surface work, and the mapping.  I forgot to say we’ve done the actual mapping, which we’ve spend quite a bit of time on.  So we have the…we could have let go of the property, we’ve decided against that, because just based upon the initial results, even if it’s only from the initial surface exploration, was such that we felt that it’s definitely worth follow-up.  The follow-up would be ….probably more trenching and then first pass drilling.

Marco G.:  First pass drilling?

Ferdi Dippenaar:  First pass drilling, yes.

Marco G.:  That will be exciting for investors.

Ferdi Dippenaar:  Yeah, I think it definitely will, we are looking forward to it.  We actually think it could be extremely exciting. 

Marco G.:  Yes, you say the property is 17 square kilometers, and from the information on your site, it has been worked historically by artisanal miners and that there is exposure on the surface.

Ferdi Dippenaar:  There is definitely exposure on the surface, but it is also trying to…there is not a huge amount of ground cover.  But it is also to bring it a bit further ….to understand the extent of the mineralization. 

Marco G.:  Okay, that’s Mozambique, how about the other area, Rusaf… GBG Rusaf.

Ferdi Dippenaar:  Yes GBG Rusaf , yeah that is quite interesting.  I think if you access the actual reports, technical reports, that were placed on the web site…  did you get them.

Marco G.:  Yes, we have gone through them.

Ferdi Dippenaar:  In our minds, it is basically the two areas, and that would be the Lupa area, which we own a significant land package, which ……..definitely after the first pass drilling.  That’s basically, what we did two years ago.  It is having to firm up.  Now it is the second pass drilling because we’ve identified some target areas.

Marco G.:  Okay,

Ferdi Dippenaar:  I don’t want to repeat everything that are in the actual reports as well.

Marco G.:  I understand… I guess what we are kind of looking for, and maybe GBG plans aren’t yet there.  October 15th has just barely gone past last Friday.  What with the warrants, now there is a fresh infusion of funds into the company.

Ferdi Dippenaar:  Exactly, you are quite right.  The whole intention is…so let’s just go through the various areas in Tanzania.  We’ve discussed the…we call it the N’kuluwisi gold property in southern Tanzania.  That’s bordered the Lupa area.  I think that you’ll see the measured and indicated and inferred resource, it probably around …well let’s just take the grade of 1.5 g /ton that’s currently 67,000 ounces.  That’s with the first pass drilling, that took place.  If one has a look at the northern section, which you’ve got the Lubando area.  I don’t know if you saw that technical report? 

Marco G.:  I may have, but it is not at my fingertips presently.

Ferdi Dippenaar:  I just trying to deal with the size and the actual resource.  So, that’s nearly 200,000 ounces but the one that probably excites us more is the Imweru report, where we have the resource of 629,000 ounces.  Yeah, that’s fairly large.  And bear in mind that is just first pass drilling.  So that’s was our prioritization of target areas, it would probably be in Imweru and then the southern portion which is the Lupa target area.  And that’s in N’kuluwisi, that technical report.

Marco G.:  All right.

Ferdi Dippenaar:  So, here we are talking exploration, and the prioritization thereof.  I would put the Hollister property right on top.

Marco G.:  Wow, Okay,

Ferdi Dippenaar:  So the Hollister property is the most important, bear in mind that we’ve made three discoveries, the Hatter Graben, the Gloria veins system and the extended Gwenivere veins system… all really prospective. 

Marco G.:  Right.

Ferdi Dippenaar:  We actually believe, that even from underground, we could achieve… we’ve focused and targeted another area.  Which is probably…it is the subject of exploration, that still has to take place later this year.

Marco G.:  Okay, as soon as that.

Ferdi Dippenaar:  Yeah, as soon as that.  Each year we do a lot of infill drilling at the Hollister property.  But we do believe that …our thinking is that if we drill a fairly long hole out to the Velvet area from underground.  We actually think that we could be passing through a number of structures that could be hosting mineralization.

Marco G.:  Yes, I see that in your reports, where you hit one area and then you hit a new vein system with one drill hole.  I guess that is the advantage of going underground and drilling underground,

Ferdi Dippenaar:  Yeah, again drilling underground is of course a lot easier.  It’s the ability to drill, to put out a long hole.  It just makes a lot more sense and lot more cost effective.

Marco G.:  Right, not only are you…  sometimes you can even do the infilling and you may hit things that you were not expecting, which is great…blue sky.

Ferdi Dippenaar:  Exactly, I believe there is a significant amount of blue sky at the property.  Hollister is just so extremely prospective!  It is slightly more expensive to drill in North America, than what it would be in South Africa or Africa, but just due to the prospective nature of the property, I believe there is good pay back there.

Marco G.:  Right, to add to the existing mine life and increasing resources.  I recall reading somewhere, that you say you are looking for 3 million ounces, so that is adding 2 million before putting in your own mill. 

Ferdi Dippenaar:  Yeah, that would be the idea.  That would definitely be…expand the current operation and also the life of mine.  I think that it is a bit of both.

Marco G.:  One of the best articles that I have read about your mine was the Northern Miner article, from February  of this year.  I think it was a lady that wrote it, a Gwen Preston from a site visit to your Hollister mine.

Ferdi Dippenaar:  Oh yes, that’s right. 

Marco G.:  They went over quite a bit of exploration.  I recall that the Hatter Graben, from one of your conference calls , that one of the analysts was very interested in that.  They were asking you, I think it was earlier this year.

Ferdi Dippenaar:  You are quite right.  She did that visit.  Yes, anybody that tend to visit the site gets the …I sense….they see and they enjoy the what they see.

Marco G.:  Like from her article, it says here that GBG’s plan was to head towards that area with an underground decline .

Ferdi Dippenaar:  Yeah, that is still the plan.  The whole idea is to rather do a bit more exploration because exploration is obviously a lot cheaper than doing the development.

Marco G.:  Right, and that would serve a double purpose.  The decline would help in exploration and later it would be part of the infrastructure. 

Ferdi Dippenaar:  Exactly, that is still the thinking. 

Marco G.:  As part of this article, may I ask you are looking for the mine, a second raise it says.  Is that still happening presently?

Ferdi Dippenaar:  The second raise… oh yes, the Alimak raise, that is currently being developed as we speak.

Marco G.:  This is a vertical raise to help with ventilation and maybe other usages as well.

Ferdi Dippenaar:  Absolutely.

Marco G.:  I haven’t seen anywhere else, but this article touches upon the prospectively of the Esmeralda property that you folks were very fortunate to latch onto.

Ferdi Dippenaar:  Yeah, the Esmeralda property, we believe in terms of priority, it would be Hollister and then Esmeralda.  The principal or the main focus after we acquired Esmeralda was to get the mill up and running.  Of course after we get the mill up and running, we can then start focusing on actually …after the mill, is to try and see how… that is to look at more of Esmeralda but underground .  Bear in mind that we have a number of declines on the site, and the declines …especially the Prospectus decline …it was flooded by ordinary ground water.  It is something that could be easily be de-watered.  And they did just stop the mine, stopped mining so there is some mineable material and stopes available for mining which can contribute to production, while we are busy with more exploration.  There is production upside at Esmeralda and exploration upside

Marco G.:  Wow, okay.  I suppose I am a little bit too early.  As I’ve said your plans aren’t yet in place yet.

Ferdi Dippenaar:  Yes, it will be basically determined by the availability of funding.  So, if there is funding available, we will then go out and do the exploration at Esmeralda.  But only after we’ve allocated funding to do the exploration at Hollister.

Lastly, there is Burnstone.  At Burnstone, we have a significant ore body.  It is already in excess of 13 million ounces.  We can drill more holes and we continue to drill more holes and find more but ultimately at the end of the day you can only mine so much in the short term.  I just believe that one could do better by spending a bit more money on the …you know you get more return for your exploration dollar if it was spent at Hollister and Esmeralda in the short term. 

Marco G.:  Okay, short term it is Hollister and Esmeralda.  But what is the potential though, at Burnstone?  It’s the reef area and you are fortunate that in the Burnstone mine that it is the up lifted portion of the reef.  But there must be a deeper portion on the other side of the faults.

Ferdi Dippenaar:  No, it actually becomes shallower again.  The deepest portion of that basin is probably about 1200 to 1300 meters below surface.  That is the deepest portion; bear in mind that after 19 years of mining we only get down to 750 meters below surface.  So this is in 25 years maybe we get down to 1200 meters below surface.  There is a lot of mining to do.  A lot of shallow areas still that can be explored.   You know, we have ….remember that this ore body is extremely shallow.  We are mining on the shallowest part. 

Marco G.:  It is quite uncharacteristic of the deep South African mines.

Ferdi Dippenaar:  Very, very different.  Bear in mind … the very different basin; we own the largest land holdings in this South Rand basin.  The reef starts at 216 meters below surface. 

Marco G.:  That’s very shallow.  Mr. Dippenaar, may I enquire a little bit?  Your company is just bringing two mines on, into production and you have these mine building teams in place.  What might be the outlook going forward.  You are doing the exploration for further reserves and resources at both mines, in Hollister and Burnstone.   And Hollister is probably higher priority and more bang for the buck as you say.  Are there any thoughts as to how to further leverage these mine building capabilities of your teams.

Ferdi Dippenaar:  Yeah, I definitely think so.  If you have a look at the fact that the teams are there.  They have the necessary experience and then to  go out to expand the current operations or then build new mines.  We do have the capacity and management and the experience to actually to do that.

Marco G.:  The only thing holding you back is getting the production complete and the markets to re-rate Great Basin Gold as a Mid-Tier producer.

Ferdi Dippenaar:  Yeah, I tend to agree with that.  I just think we need to settle down both Hollister and then Burnstone.  And as soon as we settle them down, I think we are ready to go.  So, to me it’s just taking a bit of a breather.

Marco G.:  Sure.

Ferdi Dippenaar:  In terms of getting a bit of consistency at the operations. 

Marco G.:  May I ask, that Hollister, again, I read somewhere, that the main holdback for expansion isn’t mining, its actually milling capability.  For expansion of the milling circuit, you would be able to increase production.

Ferdi Dippenaar:  Exactly, that’s exactly why acquiring or ending up with a mill significantly larger than what we have would be the ideal situation.

Marco G.:  Would it be possible to continue like what you’ve done in the past, the contract milling.  Like say either at Midas or the Yukon Nevada operation, in parallel with your Esmeralda or is it just the costs don’t warrant it?  The costs and complexity.

Ferdi Dippenaar:  I wouldn’t like to send any more ore to the Midas mill, the costs of milling it there are just too expensive.  You just pay too much or lose too much by doing it.  My focus would rather be to find either a milling capacity…  If we do find milling capacity, we would be able to grow either operations, Hollister or Esmeralda.  That is the target.

Marco G.:  The target is to find milling capacity.  In previous years, I understand other companies were looking at and examining Hollister in terms of resources and in terms of …before the mine was actually where it is now.  It was three, four years ago where that they had an interest, maybe now it might the other way around.  You are working now and you have an interest in…  You have expertise in this narrow vein mining and there are probably other mines in there that could use that.

Ferdi Dippenaar:  That is true.  But as I said, let’s first get the current operation up and running and then we’ll be able to get a better idea of where it is we go in the future. 

Marco G.:  All right,  well, I want to thank you again, Mr. Dippenaar.  You are taking time, and it is the end of a very busy day for you, in the middle of your busy schedule.  This is really an exciting time for you I’ m sure, that these things are coming to fruition.  Burnstone pouring Gold and Hollister being  stabilized as an actual operation. 

Ferdi Dippenaar:  Yeah…….It is definitely an exciting time to be around.  Yeah…..it is a great time to be around.

Marco G.:  And also, certainly helps that there seem to be an increased emphasis on the Gold and precious metals.  Here you have two mines coming into full production right in the midst of that big trend.

Ferdi Dippenaar:  Yeah…it is a nice change.  We’ve been working on this extremely hard.   And it just seems like it is coming together pretty nicely. 

Marco G.:  Well, my hat’s off to you and your folks.  You folks have really brought it in.  This is probably just the beginning for Great Basin.

Ferdi Dippenaar:  I believe that.  I think we are at a very, very interesting time in the Company’s development.

Marco G.:  I kind of hear what you are saying about Burnstone, you have already 12-13 million ounces of Gold there.  The money has more bang for the buck, say elsewhere as at Hollister where it may be possible to expand production with the grades and the expertise that you have at being able to mine the narrow widths.

Ferdi Dippenaar:  Absolutely.

Marco G.:  Well, that is just great.   I hope that this interests our readers and maybe new investors.

Ferdi Dippenaar:  Thank you, I appreciate it.

Well, dear readers, there you have it, the CEO of Great Basin, that is in the process of ramping up two high quality production Gold mines. 

Outlook for Great Basin Gold in Production

The author borrows information from Great Basin’s presentation at the recent September 20th, 2010, Denver Gold Show to display the company outlook forthcoming.  The production forecast is in the chart following:  (click to enlarge).

 

Figure 1:  GBG Production Estimate.  Note the increase this year from Burnstone coming online and Hollister being stabilized.

Great Basin’s Hollister mine is now in full production with their Esmeralda mill tuned up for full recoveries.  Added to Hollister’s production is the start of milling at the Witwatersrand Burnstone mine this month.  Great Basin is estimating production of about 150,000 ounces of Gold for fiscal 2010.  That means sometime in the 4th quarter of 2010, Great Basin Gold will turn the corner into profitability. 

Then the outlook for 2011, in production is about 270,000 ounces of Gold.

Outlook for Great Basin Gold in Cash Flow

The chart following displays the estimated cash flow for the next few years:  (click to enlarge).

 

Figure 2:  GBG Cash Flow Forecast.  Note the rapid jump to almost $200 Million in 2011.

It is estimated that Great Basin after turning profitable towards the end of 2010, will now turn cash flow positive in 2011 with almost $200 million for the year.  This is due to the quick  ramp up in production of the Hollister and Burnstone mines.  This is a time of rapid change for the good in the financial affairs of the company.  As Mr. Dippenaar commented in the interview above:

                “Yeah…….It is definitely an exciting time to be around.  Yeah…..it is a great time to be around.”

Great Basin Gold is now in High Growth Stage of Cycle

Great Basin is in an opportune spot, as displayed in the classic model of a mining company along the route of mine development in the chart below:  (click to enlarge).

 

Figure 3:  Classic Mining Company Ramp Up.  Note the potential for a company that sits in the sweet spot of between point 6 and 7.  The high growth stage of GBG may be just starting.

That opportune sweet spot is just when the mining company turns the corner into profitability and is now poised for high growth.  Great Basin has just completed the mine construction and is now at the production start-up point.  As the theoretical model shows, there now appears to be great upside, as the company enters the high growth stage of its life.

Marco G.’s Opinion

The author looks to satisfy two prime criteria for investing in a mining company.  The first criteria is the quality, competence and perseverance of management.  Mining is difficult, and the results will boil down to how the management will create value for the investor.

The second criteria consists of the prospects of mining in terms of production, reserves & resources and exploration upside.  Obviously, Great Basin is increasing production with the commissioning of the Burnstone mine.  The Burnstone mine is a shallow, low cost and long life golden nugget for Great Basin Gold.

 For reserves and resources, recently in September 2010, Great Basin has released  new NI 43-101 technical  reports for both their Burnstone and Hollister mines.

As for exploration, now that the mine building emphasis may be shifted, funding for  exploration should resume.  This was what the interview with Mr. Dippenaar was about; where are the exploration opportunities for Great Basin?  There are many drilling prospects as disclosed in the interview, but the highest priority will be the underground drilling from Hollister due to be reported upon this year.  Why is Hollister the highest priority, you may ask?  The Gold mining grades at Hollister are among the highest grades in the world for a production gold mine and may be considered “bonanza” grades, as reported in the September 2010 NI 43-101 report:

At a cut-off grade of 0.25 oz/ton (8.57 g/t Au), the combined measured and indicated mineral resources contain 1.64 million gold equivalent ounces grading 1.305 oz/ton (44.73 g/t Au) for gold and 10.3 oz/ton (355 g/t) for silver

The high grade is not just a lucky hit but the calculated average over the whole resource definition.  Hollister is the second bright nugget for Great Basin Gold.

Disclosure: The author is long Great Basin Gold -GBG.

Important Disclaimer

The information and opinions contained within this document reflect the personal views of the author and should be viewed as food for thought and amusement only. The author may from time to time have a position in any of the securities mentioned. There are no guarantees of the accuracy, reliability or completeness of the information contained herein. Independent due diligence and discussions with one’s own investment and business advisor is strongly recommended. These writings are not to be construed as an offer or solicitation with respect to the purchase or sale of any security or as an endorsement of any product or service. We do not request or receive compensation in any form in order to feature companies in this publication. It is prohibited to copy or redistribute this document to any type of third party without the express permission of the author. This document may be quoted, in context, provided proper credit is given.

Great Basin Gold’s (GBG) 2600 oz/ton Gold Bonanza Grades – A Closer Look

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Great Basin Gold’s (GBG) Bonanza Grades – A Closer Look
November 9th, 2010
By: Marco G.

http://goombarhsedge.blogspot.com/

Great Basin announced the highest “Bonanza Grades” of Gold found, 2560 ounces per ton, that the author has ever encountered this morning:
Great Basin Encounters Bonanza Grades in Blanket Style Mineralization at Hollister
VANCOUVER, Nov. 9 /CNW/ – Great Basin Gold Ltd. (“Great Basin” or the “Company”), (TSX: GBG; NYSE Amex: GBG; JSE: GBG) announces that trial mining in the Blanket Zone above the Main Clementine vein (number sign)18 at its Hollister project in Nevada has encountered bonanza grades of gold and silver. The Company cautions investors and readers that we are making this announcement out of an abundance of concern over interpretation of this information and, as the information may be known locally in the region of the mine site, the Company felt obligated to make it public.
Channel sampling carried out in conjunction with trial mining in the Blanket Zone has encountered the bonanza grades over a strike distance of 170 feet (57 meters).Channel samples taken every 10 feet (3 meters) gave values ranging from a low of 1.5 oz/ton(52.0g/t) Au and 3.2 oz/ton(111.9 g/t) Ag to a high of 2,560.4 oz/ton (88,845.9 g/t) Au and 1,829.8 oz/ton (63,494.1 g/t) Ag over channel widths from 0.3 to 2 feet wide. The current stope is continuously mineralized along its 180-foot (60-meter) length. Diluted over 3.5 feet (the width of the stope development), the average sample values were 66.4 oz/ton (2,404 g/t) Au and 78.5oz/ton (2,723.9 g/t) Ag. Muck piles have also been sampled; grabs are taken over the pile to collect as representative a sample as possible (between 10-15 lb. are collected every 10 feet). The fully diluted value of the muck samples taken from the stope to date averages 22.3 oz/t (773.8 g/t) Au and 23.4 oz/ton (811.9 g/t) Ag.
The Blanket style mineralization at Hollister is typified by very fine grained disseminated gold hosted by tuffaceous horizons in the Tertiary (10-15 million years old) volcanics that lie unconformably on the basement Ordovician (~430 million year old) metasediments. These zones of mineralization are thought to be “mineralization plumes” directly related to the activity of fluid which has focused in structures that control the underlying epithermal quartz – adularia veins, and propagated into the Tertiary volcanic pile.

Blanket mineralization was previously exploited by opencast methods during 1990-1992 by the Touchstone – Galactic Joint Venture. According to historic records, 115,000 ounces of gold were produced by a heap leach operation that treated low grade ore (~0.003 oz/ton or 1 g/t Au). Great Basin modeled all 46 drill intersections above the Tertiary unconformity, and +1 g/t grade shells generally locate above known mineralized quartz – adularia veins. In general, this style has been located in the first ~30 feet (10 meters) above the unconformity, and may have dimensions in excess of 150 feet (50 meters) long and 60 feet (20 meters) wide. Grades from these 46 drill intersections average 0.45 oz/ton Au (15.4 g/t) and 1.7 oz/ton Ag (59 g/t).

Extrapolation of stope 3000N 1E to surface (approximately 200 feet or 67 meters vertically above), places this zone 300 feet (100 meters) west of the historical Clementine mercury mine. It supports the near surface working metal zonation and gold deposition model for the Hollister mine, and indicates additional exploration potential.
Ferdi Dippenaar, President and CEO, commented: “In the past, we have identified the Blanket Zone as a target area worth exploring, and trial mining at the top of vein (number sign)18 has turned out to be a great way to test the prospective nature of this style of mineralization. Although we have encountered a limited amount of this high grade material through trial stoping, drilling is underway to determine the full extent of mineralization. More information will be made available as and when it becomes available. Based on our experience in the Main Clementine vein (number sign)18, we are evaluating the possibility of returning to previously stoped out areas above the Gwenivere high grade veins.”
Great Basin Gold’s Hollister Mine in Nevada is already one of the highest grade Gold producing mines in the world, with 1.64 million ounces of Gold estimated at an average grade of measured and indicated resources at 1.3 ounces of Gold per ton. This morning’s news of such bonanza grades certainly bears some examination.
From previous background knowledge and from researching the terms within the news release, the author pieces together what this may mean. For help in understanding the basic geology, the author had his assistant “My Right Hand With Mouse” put together a rough diagram displayed following:

Figure 1: Model of Great Basin Gold’s bonanza gold grades found above their Clementine Vein.
With reference to the above diagram, Great Basin’s Hollister mine is constructed to mine the underground Gold veins. These veins are in the basement sedimentary rocks, which refers to the lower layer of rock geology, the “Ordovician” which are 439 million years old. This basement is covered with a more recent geological layer of volcanic rocks named the “Tertiary”, which are only 10 – 15 million years old. The meeting point of these two rock layers is termed the “Unconformity”, or joining between the two rock types.
The Gold veins that Great Basin are mining are formed from magmatic fluids that originated deep in the Earth’s crust and flowed through faults and fissures in the basement rocks coming up to the surface. There are two main types of deposits formed from these magma fluids, high sulphidation and low sulphidation deposits.
Great Basin’s geologists believe that Hollister is an example of low sulphidation deposits. As the fluids left the Unconformity and entered the Tertiary volcanics, the fluids encountered groundwater. The magma fluids then interacted with the ground water causing violent boiling and depositing of the metals and minerals. The act of depositing minerals seals off the fault and so the magma fluids seek another way to surface. Again, more groundwater is encountered and more furious boiling occurs. The boiling drops the minerals and seals the fissure again. These cycles of furious action results in more and more of the minerals being deposited in the fissures within this area of volcanics above the Unconformity.
Eventually the magmatic fluids reach near surface and dissipates and mixes thoroughly with the surface rocks. This results in a broad disseminated layer of mineral deposits that is termed the “Blanket Zone” at Great Basin’s Hollister mine.
In this style of low sulphidation depositing at Hollister, the minerals deposited by the repeated action of the magma encountering ground water has resulted in very high Bonanza grades of Gold and Silver that Great Basin has just announced. These high grades appear to be concentrated above the existing Hollister Gold veins, between the existing mine tunnels and the surface Blanket Zone. These high grades positioned where they are gives Great Basin a large amount of bonanza mineralization in a location where it will be easy to mine.
Another way of looking at this is the average grade of their “muck”. Muck is the broken rock ore, that will be refined in the mill circuit. Their average muck grade is spectacular at:
The fully diluted value of the muck samples taken from the stope to date averages 22.3 oz/t (773.8 g/t) Au and 23.4 oz/ton (811.9 g/t) Ag.
Compare this grade of 22 ounces of Gold per ton with anything else, you read about gold miners anywhere. Compare this with the grade at their Burnstone mine in South Africa, which has an average grade of 5 grams (.15 oz) Gold per ton, which is considered high grade. This grade is at least two orders of magnitude or 100 times higher.
Great Basin are understating in saying, that this model, ” indicates additional exploration potential”.
Disclosure: The author holds shares of Great Basin Gold (GBG).

Important Disclaimer

The information and opinions contained within this document reflect the personal views of the author and should be viewed as food for thought and amusement only. The author may from time to time have a position in any of the securities mentioned. There are no guarantees of the accuracy, reliability or completeness of the information contained herein. Independent due diligence and discussions with one’s own investment and business advisor is strongly recommended. These writings are not to be construed as an offer or solicitation with respect to the purchase or sale of any security or as an endorsement of any product or service. We do not request or receive compensation in any form in order to feature companies in this publication. It is prohibited to copy or redistribute this document to any type of third party without the express permission of the author. This document may be quoted, in context, provided proper credit is given.

Still Interested in Getting Physical With Gold?

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There are several funds available that track the price of gold (at least somewhat closely), but most don’t allow you to actually cash in your shares for actual gold. That’s why some investors prefer to buy gold bullion.

The Sprott Physical Gold Bullion Trust (PHYS), however, does make it possible to get the gold you own out of the trust and into your hands (or safe).

According to Sprott’s website (pdf):

The Trust invests in gold bullion, offers investors lower costs than traditional means of buying physical gold, and Units can be redeemed for physical gold bullion.

This redemption feature could be one reason why PHYS has sometimes traded at a significant premium to its gold value, although the fund was only launched about eight months ago.

Is this a good alternative to actually buying your own gold? That depends. If you do plan to redeem units of PHYS for gold, there’s a few things you need to know, per the fund’s prospectus (pdf).

You’re going to need a lot of dollars to get your gold

Sprott stores gold in what’s called London Good Delivery bars. Each weighs between 350 and 430 troy ounces (and must meet other criteria) per the London Bullion Market Association.

So you’d have to redeem at least enough shares for a minimum of 350 ounces, and that’s if Sprott happens to have one of the smaller bars in stock (they publish their bar list here). If gold were at $1,350 per ounce, that would be at least $470,000 worth of shares you’d need to redeem.

Delivery will cost you

Actually, you’ll need a bit more than $470,000 to get that 350-ounce bar. Sprott estimates that delivery in the US or Canada costs about $5 per ounce. That’s in addition to another $5 per ounce “in-and-out” fee plus a $50 administrative fee on top of that (sounds just like your bank, right?).

Does that include insurance? The prospectus doesn’t explicitly say one way or the other, so I’d assume not unless you get that confirmed in writing.

You won’t know how much gold you’ll actually get

Sprott must receive your redemption notice by the 15th of any month (or the next business day if the 15th falls on a holiday or weekend) to process it that month. But here’s a catch:

Units redeemed for physical gold bullion will be entitled to a redemption price equal to 100% of the NAV of the redeemed units on the last day of the month on which the NYSE Arca is open for trading for the month in which the redemption request is processed.

The price of gold could rise or fall in the roughly two weeks between your request and actual redemption.

And presumably if your notice isn’t received by the 15th of any given month, the redemption will be processed at the end of the next month.

Your gold may lose its luster

An official London Good Delivery bar stays “good” because those who keep track of it know where it’s been.

You can have your gold sent to a depository institution authorized to hold these bars, in which case it will “likely” retain its good delivery status.

On the other hand, if you have it sent to your house, it essentially becomes a hunk of yellow metal that you say is gold, but you don’t expect anyone to believe you, do you?

That means it will need to be assayed again (probably at your expense) to regain its good delivery status once again.

Don’t expect a smile

Bob Coleman posted an account of his experience in taking delivery of gold and silver from the COMEX exchange.

When you have armed guards show up at your doorstep with a shipment, they are trained to carry out a certain function. They are not there to greet you with a smile like a mailman or newspaper delivery boy.

I guess that’s better than having the neighbors hear, “Hi there! Here’s your 350 ounces of gold! Where would you like us to put it? We can bury it in the back yard if you want!”

On the other hand, an armored truck pulling up to your house would probably be a tip-off anyway.

So, still interested in getting physical with gold?

Article written by Zecco

5 Land Mines for Chinese Stocks in 2011

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A very large grain of salt. That’s what economists suggest you take when digesting Chinese economic numbers.

The country’s financial planners tend to massage key numbers to give the impression of an economy that is neither too hot nor too cold. To its credit, China’s decade-long growth spurt has been truly miraculous and policy planners seem to continually pull the right levers, even though those choices are often antithetical to Western economic dogma.

Much of China’s success has come from its status as a low-cost provider of goods and comparatively low levels of per capita GDP [1], which enabled it to grow without bumping into hurdles that often come when economies achieve world-class status.

But those days are over. China’s economy is now far larger — having recently surpassed Japan to occupy the No. 2 spot — and the government ‘s task of managing growth has become ever-more complex. Even as Chinese economic planners will continue to massage the numbers to give the appearance of a smooth-sailing ship, 2011 offers more potential pitfalls than ever. If you’re invested in China, here are five items you’ll need to watch:

1. An unhealthy bank sector. The biggest flaw of a centrally-planned economy [2] is a misallocation of resources. So when China decided to use its state-owned banks to promote a massive build out of residential and commercial real estate [3], it ran the risk that those projects would not see enough demand. That’s now become a reality as China is said to be sitting on millions of square feet of empty commercial and residential real estate.

More than likely, China will need to inject massive amounts of liquidity into those banks in 2011 to keep them afloat. At the same time, China is likely to conclude that enough is enough, and future real estate lending terms will be much stricter. And that could set the stage for a massive construction hangover, just like we’re seeing in the United States.

2. Cooling job growth. Here in the U.S., worries and anger over persistent joblessness has led to a change in political leadership. In China, no such outlet exists. Instead, Chinese workers tend to take to the streets to protest a range of labor-related concerns. Relatively high employment levels have kept any restlessness at a low boil, but Chinese leaders know that any increase in unemployment could have dire social consequences and undermine leadership’s legitimacy.

That’s why Chinese leaders have aggressively stimulated the economy, building roads, trains and skyscrapers at a break-neck pace. Yet the government has already played that hand, and policy planners know that Japan erred by building too much infrastructure that went on to be under-utilized. So these planners are hoping that the private sector can pick up the slack and hire many of the workers that may soon be laid off from public works’ programs. Navigating that path may prove bumpy.

3. The yuan dam may burst. China has done an impressive job of recycling foreign earnings back into foreign investments, which is one the reasons its currency hasn’t appreciated sharply as expected, as trade surpluses build.

In recent years, China has sought to recycle some of those foreign-earned profits elsewhere to reduce a heavy exposure to the U.S. dollar and the U.S. economy. But China’s total foreign holdings are now so massive, and its foreign earnings continue to pile up so quickly (with fewer places to go), that the country will soon have no choice but to bring some of that money back home. Yet by repatriating foreign earnings, China’s currency [4] is bound to feel the pressure to move higher.

China is keeping a lid on this by maintaining a tight band on the value of its currency, but the longer it allows the pressure to build, the greater the unforeseen effects will be when the currency finally floats freely on global markets. Chinese planners can either maintain the status quo, and set the stage for a real headache down the road, or start to shift policy soon to start to alleviate budding currency pressures. How Chinese economic planners navigate this policy will be a true test. A sharp spike in China’s currency would devastate its export-led economy, but inaction would prove to be equally harmful.

4. Increasing trade tensions. While China is keeping its currency weak by pegging it to the sinking dollar, trading partners throughout Asia are starting to grow annoyed. The Japanese yen, the Thai baht, and the Malaysian ringgit have all appreciated at least +10% against the yuan this year. And while that’s great for China’s exporters, other countries are quickly losing their competitive edge. The issue should dominate discussions to be held by the Group of 20 (G-20) nations on November 11 and 12 in Seoul, South Korea. It’s not clear how China will be able to continue avoiding this issue if it is to avoid even more anger among trading partners and neighbors in 2011.

5. A growing political rift. Lastly, the Chinese leadership is no longer moving in lock-step on key issues such as freedom of the press and corruption, and this threatens to evolve into a major internecine battle. China’s Premier Wen Jiabao noted on Newsweek columnist Fareed Zakaria’s GPS program on CNN last month that China will need to open up and develop greater transparency if economic growth is to continue. His comments were quickly denounced by other members of China’s leadership and were ultimately expunged from the public record. But other members of China’s leadership quickly came to Premier Wen’s defense. Although unlikely, this increasingly factionalized environment could ultimately lead to a major rift among key policy makers.

Action to Take –> It’s been smooth sailing for China. Yet the waters are starting to get choppy, and investors need to brace for potential problems in 2011. If you hold any Chinese stocks, keep these points in mind heading into the New Year. Depending on how these situations play out, you may want to reassess your positions.

Written by David Sterman

Cramer Contradicts Himself About Sirius XM (NASDAQ: SIRI)

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Once again, Jim Cramer has decided to bash Sirius XM (SIRI) and further seperate himself from reality. In front of the student body of Tulane University, Jim Cramer decided to humiliate himself not only on National Television but to a captive audience of tomorrow’s investors. While recommending that investors do homework on stocks they own, Jim Cramer apparently did not heed his own advice. Once again referring to Sirius XM as an overhyped stock, Jim Cramer pointed out that there are still no firms with a sell rating on Sirius XM. One of those happens to be Jim Cramer’s own TheStreet.com, which most recently upgraded Sirius XM from Sell to Hold, and reaffirmed its rating on October 17, 2010.

Without naming names, Cramer took a shot at me and those of us with a bullish position in Sirius XM. Unfortunately for Cramer, his poke at Sirius XM gets even more embarrassing on a number of levels in that he recommended BUYING Sirius XM right up until the merger was approved. At just over 3.00 a share, Cramer stated that Sirius was a BUY on his Mad Money program while telling viewers they would have a FIVE DOLLAR STOCK when the merger was approved. Cramer failed to own up to his own shortcomings and placed the blame on anyone and everyone else. If that is not bad enough, it gets a lot worse for Jim.

For those Mad Money fans out there, you know that Jim’s style includes the buying and selling of various positions. Cramer is averse to holding any stock and recommends taking profits and cutting losses when appropriate. In his blatant attempt to bash Sirius XM investors and those of us that may seem to promote the stock at times, Cramer actually went back and used an example of how astronomical the losses to investors had been since he recommended BUYING it! He explained how holding the stock, that he himself recommended, turned a $2000.00 investment into $440.00. A whopping 78% loss of principal!

Missing the mark yet again, Cramer decided to mock the investment of John Malone’s Liberty Capital, stating that it was a good deal for Malone but not retail investors. Cramer failed to point out that since the bottom in 2009 when John Malone took a stake in Sirius XM, a $2000.00 investment in SIRI would now be worth nearly $45,000 today! For the bulk of these gains that Sirius XM investors have realized, Cramer has maintained his position on Sirius XM, while his company TheStreet.com rated Sirius XM a SELL.

Honestly…Why does anyone continue to give this man an audience?

Article courtesy of SatwavesPro

Pop Culture: My Interview with Coca-Cola (NYSE: KO) CEO Muhtar Kent

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Coca-Cola (KO) has always been one of my favorite companies.They are the perennial safety play, a reliable grower that pays a 2.9% dividend and was one of the first companies we snapped up when the world went on sale in the ‘08-’09 crash. Our faith in the company was well justified in the recent earnings report. Despite weak North American sales growth (2%) and flat growth in Europe, international sales grew at a tremendous clip with 11% volume increases in the Pacific and 12% increases in Eurasia/Africa. Best of all, those growth rates are “currency neutral net revenues” – so we are comparing apples to apples here – unlike many other companies who report their earnings in declining dollars.

On the last day of the quarter, the company closed their transaction for CCE’s North American business, an acquisition that will poise the company for further growth in the years ahead. What struck me the most about the report was the way Coca-Cola looks at the world. Coke doesn’t divide the world into North or South or East and West, Coke sees two kinds of countries – the ones with PER CAPITA consumption of more than 150 eight-ounce servings of Coke-brand products per year and the ones that they need to work harder in.Also impressive is the company’s plan to repurchase $2Bn of their stock back BY THE END OF 2010. This will be fairly easy for the company to do as cash from operations has already increased 15% in the first 3 quarters of the year. Since we already know and love KO, and since we already know how to read an earnings release, I decided not to squander my time talking to Mr. Kent about clarifying product revenue steams in Guyana – that’s what conference calls are for!  

Muhtar Kent is a man as impressive as the company he runs. He’s about 10 years older than me, born in 1952 in New York City and his father was the Turkish Consul-General. Kent went to High School in Turkey, college in England with a masters in business from City University in London. He served in the Turkish military, came back to America with no money and answered a want ad for a job at the Coca-Cola Company, where he was (after gaining a quarter century of experience) appointed CEO in July of 2008. Now that’s a great American success story! Mr. Kent is also on the board of directors of the National Committee on US-China Relations, an organization he was tailor-made for.

So, if it sounds like I enjoyed the interview – yes, I did; and I don’t say this about many CEOs I talk to as I am often disappointed but there was nothing this guy wasn’t on top of, as you’ll see:I think it’s great that you adjust your earnings to remove the impact of currencies. Would that have made a big difference this quarter?

Kent: In the quarter that we just reported, there wasn’t much impact from currencies. If you’ll remember, in the summer the dollar was at a much different level and our business is “bell shaped” in the summer months. July and August are two very big months for us in the Northern Hemisphere and the value of the dollar was very different at the time to what it is today.

Most CEOs don’t want to talk about currency. It seem odd to look at earnings reports where companies report that international sales are going up without making any mention of the currency adjustments (one of my pet peeves).

Kent: The better way to put it is you share with the market your P&L that IS currency neutral and after that you show the P&L with the currency and you let the people see the impact that currency has had on your earnings and results.

There was quite a drop in September of the dollar.

Kent: For us, July and August are much bigger weights on our quarter. The impact of currency was pretty minimal on our earnings for the third quarter.

Now we have the issue with commodity prices heading up. Aside from the currency issue, you have the whole ethanol issue that is driving up the price of corn and, I would assume, corn syrup.

 Kent: Two things about commodities. First, it’s too early to say what the full year 2011 impacts are going to be on business for commodities because you still have the 2011 harvest ahead of you and none of us knows what that harvest is going to be. Everyone went into this year when the corn plants were a yard high saying they were going to have the biggest crop of the century and then suddenly you had 20 consecutive days of over 100 degrees temperature in the Midwest that really had a dampening effect on the crop, so we don’t know yet. Secondly, there’s always a correlation between the value of the dollar and the commodities because the commodities are priced in dollars. If the dollar drops, then you usually see them rising but then, if the dollar drops – it helps us in terms of currency conversion. So there’s always these checks and balances and we have to wait and see how they finally pan out. For the current year, we are obviously hedged in terms of most of our commodities.

So you generally hedge the commodities as well as the currencies? You must have a whole department for that.

Kent: No, just a couple of really intelligent people that know what they are doing.

Do you look at alternative sweeteners like beet sugar or cane sugar in your commodity planning?

Kent: We do sweeten with sugar cane and beet sugar throughout the world. There wouldn’t be enough sugar in the United States if we wanted to add sugar. The current sugar regime is not one that works well with free enterprise. We use corn sugar and, if there were a failure of the beet crops that drove up prices, perhaps there would be more freedom to import.

I’ve been very interested in the strategy where you shift the perception of Coke towards a more healthy company, pushing some of your other brands. I’m wondering where you are with that strategy and how this plays out with issues like the schools cracking down on sugary beverages and now the government restricting “unhealthy” beverages from the food stamp programs. Where do you see this within your long-term strategy.

Kent: We have about 3-400 brands in the world. We offer consumers a choice of with calories and without calories, with bubbles, without bubbles… Our business is providing quality drinks and brands of all different non-alcoholic, ready-to-drink beverage categories to our consumers worldwide. We see clearly that we need to continue to evolve, to innovate – to be part of the solution to what is referred to, generally in the world, as obesity.

Triple Play logoWe want to be and we have been part of the solution. Over the last decade we have reduced calories in our US beverages by 15%. We will continue to innovate to do that but the most important thing is to provide the right level of information to the consumer so he or she can make the right choices and that’s why we are making an effort, including our involvement in the First Lady’s “Let’s Get America Moving Again” campaign, because it is not about only what you consume but about what you expend in the terms of calories and energy balance.

I think when you look at the United States and you see that the number of daily steps that an adult takes has come down from about 5,000 plus to about 3,000, we need to make sure that people understand lifestyle and energy balance and we want to be a part of that solution. Being part of that solution means innovating to further reduce calories but also to educate better in terms of healthy, active life balance. 

I spoke to your people and I said I would love to see your company get involved in something like the old President’s Council on Physical Fitness where they pushed exercise programs in the school.Kent: I think that was a fantastic council by the way. The fact is that, unfortunately, in the United States today only one or two states mandate physical education. That’s wrong – all of that has got to change. The first programs that are cut in High School are physical education programs and that’s wrong. I call it the golden triangle – we can’t solve it alone, governments can’t solve it alone, civil society can’t solve it alone. It’s got to be that triangle that comes together with more collaboration between business, government and civil society that can solve this problem.

An example of this has been done in Australia where we incorporated so well with former Prime Minister Kevin Rudd’s government in trying to be a part of the solution and I think we have to do more in this country to insure that we can be helpful in creating more sustainable communities so that we can have a sustainable business.

Coca Cola’s “Triple Play” initiative sponsors 150 physical activity programs in 100 countries and the company has set a goal to have at least one physical activity program in every country by 2015. In Italy, the company sponsors the “Fuoriclasse Cup,” which promotes active living among young people. To date, it has reached approximately 3 million students in more than 12,000 Italian schools. “Happy Playtime” is a program supported in China which is in 22 cities and is currently reaching more than 1.7 million students in approximately 2,000 schools.

I mentioned to Mr. Kent that we had switched my kids from soda to Coke’s Vitamin Water drinks and that I’d like to see a more active program promoting healthy drink alternatives in the schools. Amazingly, there is more red tape in the United States than there is in Red China for a company that’s willing to make an effort but, as Mr. Kent said, it requires collaboration. I’m hoping parents reading this will take the time to reach out to Coke and, maybe together, you can accomplish what our Government has failed to do.So, in conclusion, KO is a good company run by a good man. The kind of stock we like to be involved with in long-term investing. The company is goal oriented and working to double revenues while improving margins over the next 10 years in what Kent calls their “2020 Vision.”

The stock is no longer cheap at $61.15 but in-line growth should make that a p/e of 16 next year. If you buy the stock for $61.15 and you are willing to buy more at a lower price, you can enter a buy/write by selling the 2012 $60 calls for $5.15 and the 2013 $50 puts for $4.35 which drops the net down to $51.65 and an average of $50.83 if the second round is put to you below $50. That’s 15.5% below the current price and don’t forget the 3% dividend so a pretty good way to get started for a long-term hold. With the company buying $2Bn worth of stock this year and likely another round next year – there should be some pretty good support along the way.

Article courtesy of Philip Davis