Mar 10, 2015
Given the extreme Gold Bear, today’s Chapter 11 bankruptcy filing of Allied Nevada Gold Corp (ANV) is not surprising. But, what is Chapter 11 other than having a judge permit a company to buy time?
http://www.bloomberg.com/news/articles/2015-03-10/gold-miner-allied-nevada-files-for-bankruptcy
In the case of Allied Nevada, because of its debts, time is needed for the price of gold to complete its bear cycle and revert to prices that lead to profitability and their ability to meet financial obligations.
Often for the shareholders, for those who take the risk of buying shares in high-debt producers, a financial work-out is a good thing.
Who might be a loser are the creditors. They have to wait out the process before being legally able to force payment and possibly seize assets.
But, are these creditors really harmed or might bankruptcy be a part of their business? By that I mean, how many creditors to the goldminers are actually strategic lenders that intend, through market opportunity or by design, to seize the assets?
And by design, I mean those bankers who play both ends against the middle. This has been a matter of concern to me for years, particularly for companies that operate in the cyclical basic materials industry. Long-time readers will recall my writing about Stelco, and how they were raped by lenders.
Allied Nevada stock (ANV) was trading in the $35-$40 range for most of 2011-2012-2013. Like many goldminers that are good purchases, there was financial strength, solid performance, and good management. The difference, of course, lies in the financial statements. We recognized the principle that in a commodity price down-cycle debt kills.
http://finviz.com/quote.ashx?t=ANV&ty=l&ta=0&p=m&b=1
Who were Allied Nevada’s bankers and advisors?
Credit Suisse and Bank of Nova Scotia.
http://biz.yahoo.com/e/140509/anv8-k.html
http://finance.yahoo.com/news/allied-nevada-announces-revolving-credit-123000119.html
Who were the broker-dealer analysts reporting on the company?
Credit Suisse and Bank of Nova Scotia.
Now that the stock is down to 25 cents (or suspended?), who are their bankers and advisors?
Credit Suisse and Bank of Nova Scotia.
Who are major principal traders in global gold trading?
Credit Suisse and Bank of Nova Scotia.
Who are two of the most important gold price setting members of the London Bullion Dealers Association?
Credit Suisse and Bank of Nova Scotia.
Do you see the conflict?
The Dodd-Frank Act, without enacting Volcker Rule provision, enables banks to engage in proprietary trading as well as corporate lending although it claims to solve this problem. In case you don’t know my thoughts on that, I believe that overall Dodd-Frank is a most heinous financial crime, one that is destroying free capital markets, because it just muddied the waters and brought on complex bureaucracies that the big boys on Wall Street could easily avoid or manipulate.
The White House promotes Dodd-Frank as a great thing for America.
http://www.whitehouse.gov/economy/middle-class/dodd-frank-wall-street-reform
On the surface it is; in reality this situation is a disgrace. I believe Wall Street actually wrote the Dodd-Frank Act and all the press releases that followed. Moreover, I believe this law is only on the books because too many legislators have been bought-and-paid-for by bankers.
As long as Citigroup, Goldman Sachs and JP Morgan bankroll the legislators in Washington, there is no way Glass-Steagall or some representation of it such as the Volcker Rule inside Dodd-Frank, which is what free capital markets need, will ever become legislation.
And that is a disaster. Let me explain.
What is a proprietary trader if not an opportunist? The phrase “crisis leads to opportunity” may be a cliché but it is a fact of life on Wall Street.
Another common phrase, and fact of life among proprietary traders, is “You eat what you kill”.
What could be a worse scenario for any of us, having a trusted banker lend us money, secured by our assets, and then work against us by destroying our ability to meet the loan requirements?
In 1997, at the request of the Executive Director of the Ontario Securities Commission, I presented my case for a return of Glass-Steagall, to nine chairpersons of Canada’s provincial securities commissions, in formal hearing.
http://billmoyers.com/content/glass-steagall-dodd-frank-and-the-volcker-rule-a-primer-and-resources/
I asked the national securities regulators a question: “What is a broker-dealer? Is a broker not an agent? Is a dealer not a principal trader? How do you permit these agents and principals to be in the same transaction with their client? How can you permit their industry organization be both marketer and regulator? How is the owner of capital protected in this system? Is this situation not analogous to a husband and wife represented in divorce court by lawyers from the same firm, and a third lawyer from that firm being judge and jury? Well it’s actually worse!”
Months later I made the same complaint to the Senate Banking Committee of Canada, in formal hearing.
Did anybody listen? No, because they were all chattels of the same system, of laws enacted to keep their people in control. The public be damned.
I happen to be a Free Market Capitalist, an entrepreneur, and somewhat conservative (right wing) in my approach to life – except that I believe in fairness, and that is the difference.
You see, I believe as a Wall Street veteran who lived and died by commissions that you create your own opportunities. You trap your prey by whatever resources you have – whether by money or brains or contacts or whatever. Your skill and experience allows you to execute the kill, and for that you eat.
I know that if I were also the advisor/agent for the prey, I could not lose the kill. I could play both sides against the middle for my inevitable win. Of course I would not be able to look myself in the mirror without feeling the deepest shame. So I opted to speak out for fairness, clothing it in the expression “social equity”.
For that I was labelled socialist, and eccentric, and worse.
No matter; we are all on this earth only for so long and our journey should be replete with close family and friends and personal happiness. These are the values I live by.
In recent decades, corruption in capital markets has become pervasive. The industry has changed. Banks are now too big to prosecute.
As long as the law permits such conflict, where bankers can create and seize the opportunity, they will. My conscience would not allow me to do that, to play both sides against the middle. It’s unconscionable.
As for the recent Dodd-Frank revisions, Sen. Elizabeth Warren spoke out loud and clear against some of the most offensive changes, the ones that would ensure that bankers could play both sides, and in any event they lose big time would still get bailed out by Congress – just like 2008-9.
http://money.cnn.com/2014/12/10/news/economy/elizabeth-warren/
Sen. Warren spoke out against Citigroup as the major player in Washington politics behind these issues.
This statement was issued from her office:
http://www.warren.senate.gov/?p=press_release&id=667
Despite the price of gold (and perhaps the quality of the advice from bankers), Allied Nevada reported very good operating results just a few weeks ago.
http://www.alliednevada.com/wp-content/uploads/01-21-15-2014-FY-Production-and-Sales.pdf
Today, to meet the demands of the company’s secured bank lenders, the board of directors agreed to a Debtor In Possession financing:
http://www.alliednevada.com/chapter-11-reorganization-faq-2/
Regrettably, Allied Nevada has had some serious issues in recent years. I’m familiar with several of the directors, so I’ll not comment further.
http://www.sec.gov/litigation/litreleases/2014/lr23020.htm
Here is the impressive presentation made by the company at the Denver Gold Conference last September:
http://www.alliednevada.com/wp-content/uploads/DGG-2014.pdf
Note the extensive gold reserves and resources.: “Long-life asset with significant reserves of 10.6 million ozs Au and 467.1 million ozs Ag; and the Total reserve and resource base at Hycroft is in excess of 45 million ozs AuEquiv (at 12/31/13)”.
Note that the final graphic (page 42) shows an All-in Sustaining Cost of under $800/oz gold.
So how is it that this company went bankrupt, and who, at the end of the day, is going to have seized the opportunity?
I’m betting that those big banks are not coming out losers.
Looking ahead, how many more goldminer companies have these banks lined up in their cross-hairs?
For a long-term holder of goldminers, this extreme price cycle has badly hurt us. However, if we can stick it out with holdings of companies that cannot be forced into bankruptcy, and those who will not hedge future production at cycle-low prices, we will enjoy the next cyclical recovery.
Until tomorrow…
/Bill
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