That Glitters Is Not Gold By VITO J. RANCANELLI
- April 13, 2009
Royalty rallied on the reputation of CEO James Sinclair. But
the gold guru's actions cast doubt on the exploration company's
GOLD EXPLORER TANZANIAN ROYALTY EXPLORATION
HAS NO revenue, no earnings and no proven gold, as well as
some accounting issues. So why do its shares trade at a premium
to peers that seem to be in much better shape?
It helps that its chairman and chief executive, James E.
Sinclair, is famous for correctly forecasting gold prices,
and he is very bullish on the metal on his avidly followed
newsletter-style Website, www.jsmineset.com. Over the years,
Sinclair's views on gold have been sought out by newspapers
like the New York Times and on cable-TV networks like CNN.
Barron's has interviewed him and run his advertising.
Jim Sinclair, shown on the U.S. Rare Coin
Investments Website, is bullish on gold prices. He expects
them to rise to about $1,650 an ounce by 2011.
So it is surprising to learn
that the widely known bull on gold has been a steady seller
of shares of his own gold-related company.
Tanzanian Royalty (ticker: TRE) is a small-cap Canadian
outfit (including its predecessor) that has been looking
for gold for a decade. None of its properties, all in
Tanzania, have yet shown economically viable mineral
reserves, as defined by regulators. Were it valued more
like rivals with similar cash and gold reserves, its
share price would be substantially lower than the current
TRE's market capitalization is $370 million. Some rival
miners with more cash on their balance sheets than TRE
and actual gold have market caps one-sixth that size.
Dubbed Mr. Gold by the media for prescient calls on gold
in the late 1970s and 1980s, Sinclair ran his own precious-metals
trading firm in those days. On his Website and in interviews,
a bullish Sinclair today says gold will trade as high as $1,650
an ounce by January 2011 and says he would wager $1 million
that it will. Gold was trading at about $881 an ounce Friday.
In an interview with Barron's last week, Sinclair disputed
the view of TRE's shares as overvalued, saying the market
cap was due to its less-capital-intensive structure and the
potential of its properties. Moreover, he promised that a
third-party evaluation of its important Kigosi property in
Tanzania would be ready in "about six months."
While TRE puts out press releases on his share purchases,
the CEO says he isn't required to put out press releases on
his share sales.
In addition to Sinclair's devoted following -- he is sometimes
referred to as "Uncle Jim" on Yahoo!'s TRE message
boards -- shareholders could be speculating that he will sell
TRE to a big miner. Though he was ousted as chairman of Sutton
Resources in 1995, some remember that Sutton was bought by
Canadian gold giant Barrick Gold (ABX) in April 1999 for its
Tanzanian properties. Not everyone credits Sinclair for the
deal, but some do.
There is no question that Tanzanian shares have done extremely
well since Sinclair and his family became its largest stockholders
in April of 2002 (as a result of a merger they ended up with
about 25% of the shares, which trade on the American Stock
Exchange, and on the Toronto Stock Exchange under the ticker
TNX.Canada). TRE shares have soared about 711% since then.
That trounces the 218% rise in the metal itself over the same
period, though TRE has no gold reserves. Meanwhile, the American
Stock Exchange Gold Bugs Index (HUI) composed of companies
involved in gold mining -- many of which have gold in hand
-- is up much less, just 198%. Since last summer, the credit
crisis has hurt the juniors, as the small prospectors are
called, on worries that they won't be able to get the financing
needed to develop mines. In that time, TRE has fallen less
than its peers.
Yet TRE faces the same business risks that rivals do, and
continued financing is among the most important. TRE's financing
is accomplished by the unusual method of private placements
of its stock with CEO Sinclair, who then sells his shares
into the market.
In a March 5 press release on this subject from the company,
TRE reported that Sinclair has purchased another 189,036 shares
for one million Canadian dollars (US$810,000) and that Sinclair's
"total share placements to date aggregate C$22 million."
TRE doesn't put out releases on his sales of millions of shares
of the stock, though he has steadily sold TRE shares into
the open market. He sold stock more than 50 times in 2008.
Over the years, as the stock price soared, Sinclair and his
family have reduced their TRE stake from 25% in 2002 to less
than 3% now, company documents show. According to Canada's
System for Electronic Disclosure by Insiders, or SEDI, his
TRE stake has dropped to about 2.3 million shares as of March
12, from 3.9 million in October 2004.
Though company announcements claim he is financing TRE, ultimately
the main financiers are mostly the retail shareholders who
buy from Sinclair. In his interview, he repeated that he is
a strong backer of the company and that he recently agreed
to another $2.43 million private placement for TRE shares.
But if Sinclair is unwilling or unable, for any reason, to
continue these private placements, how will TRE finance its
activities? With the credit crunch, the environment has become
tougher for juniors dealing in speculative endeavors to get
traditional financing through selling equity directly into
the stock market. That is especially true for a company without
any proven reserves, like TRE.
Barron's asked why he was selling TRE shares, Sinclair replied
that it was for personal liquidity. Asked why he didn't put
out a press release on the stock sales, Sinclair replied,
"Is it required?...I take no salary, no options, no warrants.
I have purchased more than I have sold." But when asked
to furnish that data, he refused and referred Barron's to
the SEDI Website. The selling trend shown by SEDI insider-trading
records is seconded by TRE documents: Sinclair had 3.17 million
shares in August 2008 and 2.88 million in January.
Sinclair has declared he won't go to the public markets to
finance the company, but it is probable that TRE couldn't
easily get an investment bank to underwrite its shares because
of that lack of economically viable mineral resources.
There is little institutional interest -- roughly 17% of
TRE's 89 million shares are held by mutual funds, according
to Bloomberg. TRE filings report that 83% of its shareholders
are American, most of them individual shareholders who, unless
they are familiar with Canada's SEDI, are perhaps unaware
that Sinclair is selling shares after buying them.
These TRE shareholders might not know that Sinclair is listed
as a "disciplined person" on the Website of the
Canadian Securities Administrators, an organization of provincial
securities regulators. On July 22, 1998, Sinclair was ordered
by the British Columbia Securities Commission to pay $2,000
to settle a violation of "misrepresentation" in
a press release having to do with Sutton. Sinclair called
it a small "misunderstanding."
Unlike many peers, TRE doesn't appear to be followed by any
sell-side analysts from brokers specializing in Canadian miners,
so third-party information is scarce. TRE is an Alberta-registered
corporation with headquarters in South Surrey, B.C., while
Sinclair himself is based in Sharon, Conn.
If analysts looked at TRE, they would find its finances are
stretched. For example, as of Nov. 30, the company had about
$1.2 million in cash, not much more than the $1.17 million
in salaries and fees paid to its directors for the fiscal
year ended Aug. 31, 2008.
As Sinclair makes clear, TRE is a royalty company, not a
mining firm. That means it will find lands with potential,
then sell them off to bigger miners in exchange for royalties
from mine production, if that occurs. As Sinclair noted, royalty
firms need less capital than a junior miner, but $1.2 million
is hardly enough. Even royalty firms must drill on properties
to entice partners.
According to a TRE filing for the year ended last Aug. 31,
TRE spent $2.37 million for exploration in fiscal 2008, just
$267,000 more than fiscal 2007. For the past three years TRE
has spent less than $8 million in exploration and written
off roughly half of that in mineral-property value. By comparison,
Barrick eventually spent some $400 million to develop its
Buzwagi mine in Tanzania.
On its Website's projects-description page, TRE often promotes
its own properties in Tanzania that are near Barrick developments
and continues to list Barrick as a joint-venture partner in
an Itetemia prospect. Barrick says it has no JV partnership
Sinclair disputes that TRE doesn't have the cash for its
drilling program: "We have our own drills and team."
Sinclair also said the firm has one rig for all its properties,
similar to some other companies. None of them, however, has
the market cap of TRE.
Moreover, David Duval, a Vancouver-based mining technologist,
says that before a gold mine can be developed, $20 million
to $30 million in drilling and exploration costs are typical,
depending on the property. Duval called Barron's, saying he
had done so at the behest of Sinclair and that he is a consultant
to TRE. Duval is also listed as a contributor and co-founder
of Sinclair's Website: www.jsmineset.com.
Something else that might trouble investors is that TRE has
been cited by its auditor KPMG for a "pervasive material
weakness" in accounting controls. In TRE's annual report
for the year ended last Aug. 31, KPMG, gave an adverse opinion
on the effectiveness of TRE's internal controls: "The
company has limited accounting personnel with expertise in
generally accepted accounting principles to enable effective
segregation of duties with respect to financial reporting
matters and internal control over financial reporting."
The company says it is attending to that.
But the greatest risk to TRE shareholders is its lack of
gold reserves. TRE has put out many positive-sounding press
releases since 2002 about its properties, but it hasn't discovered
any economically viable gold resources as defined by a National
Instrument 43-101-compliant document. The document -- established
by Canadian authorities after the giant BRE-X Minerals fraud
in 1997 -- is an officially sanctioned disclosure measure
of "mineralization," or the presence of minerals
An NI 43-101 reports whether the property has "proven"
minerals -- the highest measure of geological confidence --
or lesser reliability, like "probable," or "inferred,"
the least strong. No miner is likely to get substantial mine-development
financing without such a document, and TRE doesn't have one.
Instead, press releases are issued about preliminary drilling
results, but no gold mines follow. For example, TRE reported
Oct. 13, 2004, a "significant gold discovery" in
the Luhala property in the Lake Victoria Goldfields area.
On Oct. 19, 2005, another "significant gold discovery"
was announced in the Tulawaka region. Three to four years
later, there is no news of any commitments to develop these
properties into gold mines, or any of Tanzanian's leaseholds.
Sinclair is upbeat about TRE's probability of finding economically
viable gold soon: "We have discovered about four grams
per ton in Kigosi....We are going to have an NI 43-101 on
Kigosi in about six months -- as soon as consultants finish
their work," he says. "It could fall apart...[BUT]if
all goes well, from the time the report is completed there
will be a mine within 18 to 24 months."
"All of our extremely positive results are on the Website.
If gravels continue to show the grades that are indicated
now, I would move immediately to an open pit and underground
mine," Sinclair vows.
That sounds optimistic, since gold mines often take three
or more years to build after the finding of economically viable
Despite having resource prospects that don't measure up to
peers', TRE's valuation is golden compared with many. (See
nearby table.) For example, TRE has its $1.2 million in cash,
no gold reserves and its $370 million market cap. Meanwhile,
rival MDN (MDN) whose market cap is $55 million, also has
prospects in Africa, but $14.6 million in cash and 100,000
ounces of gold resources, according to broker Canaccord Adams.
Semafo (SMF) has a market cap similar to TRE's but also has
4.8 million ounces of gold reserves.
Another way to benchmark TRE is to look at the S&P/TSX
Metals & Mining Index (STMETL) of 35 stocks, many with
real revenue and cash flow. The index's average price/book
ratio is 1.35, but TRE, which is in the index, trades at about
17 times its book value of 24 cents a share.
Membership in such indexes and the International Stock Exchange
Gold index (HVY) may boost TRE shares higher than they would
be otherwise. In both indexes, TRE's weightings are equivalent
to companies with many times its market cap and actual gold,
like Eldorado Gold (EGO), which has 7.6 million ounces of
proven or probable gold.
Speaking with Barron's, Sinclair repeatedly said that TRE's
market cap is due to its less-capital-intensive royalty structure
and the value of its leaseholds. "It's not me, it's the
underlying assets. The company assets will have to stand on
their own two feet and I think that it can." When it
was pointed out that TRE has no NI 43-101, yet its valuation
was much higher than companies with 43-101- compliant gold
and actual gold, he replied: "I will come after you,"
and ended the phone call.
Rising gold prices have boosted TRE's stock value lately,
but it needs to find some gold soon. Otherwise, its exploration
failures so far and its dependency on Sinclair's financing
methods will catch up with the shares.
While Sinclair has had success predicting gold prices, TRE
doesn't have a good track record of finding gold in economically
viable amounts. Without Sinclair, it is likely TRE's market
cap and share price would be significantly less golden.
The Bottom Line If you apply the same metrics to Tanzanian Royalty
that are used for its peers, the stock looks substantially overvalued.
And Tanzanian has less cash on its books than most.