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Why the price couldn’t move
POSITION EXITS
Cornerstone Resources (CGP:CA)
We entered Cornerstone Resources in January 2020. The firm was an underfollowed holding company of mineral properties in South America. Our interest in the company was driven by its ownership stake in SolGold (SOLG:CA), a London-listed copper and gold developer focused on Ecuador, and the firm's ownership percentage of the land package on which SolGold's crown jewel asset, Cascabel, is located. We owned the stock with an average price of CAD 4.5 and sold out at CAD 3.2 for a loss of 28%.
The investment goal was to benefit from an expected sale of the company, with the value derived from CGP's stake in the Cascabel asset. We expected that the sale would take place within two years. On October 7, 2022, the firm announced it was merging with SolGold. Our timeline proved roughly correct, but we lost money.
Our first misstep was the timing of the purchase. We started accumulating shares in January 2020, expecting SolGold to release an updated technical report on the asset sometime during the first quarter. We expected that the asset would improve with the release of this technical report. Rather than release new technical information, the firm reconfirmed the existing technical report and then delayed the release of a pre-feasibility study that had already been delayed once. As SolGold and Cascabel were the assets on which CGP traded, it fell on this news.
The delays should have been a red flag, and we should have exited, but at the same time, Nick Mather, the CEO of SolGold, stepped down. Nick had been forward-looking in building SolGold, having ventured into Ecuador and staked out large land packages that were highly prospective long before Ecuador became a hot spot for exploration. We are unaware of any shareholders who liked him. Liking management is not necessary as long as they are competent. Still, Nick was sufficiently disliked (in part because of his lack of a particular type of competence) that 44% of shareholders voted against him at the December 2020 AGM.
Nick was hell-bent on building the Cascabel mine. We viewed this as a problem. The deposit is fantastic, but only if you want to build a large, deep block cave mine. Block cave mining is a very complex method of monetizing an asset. It has a substantial upfront cost and requires tremendous expertise, which SolGold did not have. We viewed his departure as a positive, opening the way for the asset to be sold alongside Cornerstone's stake in both the deposit and the SolGold. Within that context, a delay in the PFS release, giving the new management team time to reassess options, was not an obvious red flag.
Cont ….
The new management team that was put in place was headed by Darryl Cuzzubbo, the past president of Olympic Dam and veteran of 24 years at BHP. This seemed an excellent fit for an eventual sale of the asset to BHP, already an owner of 13% of SolGold. It never came to pass though, and Cuzzubbo was shown the exit in November of 2022. Meanwhile, as the SolGold soap opera played out on the London Stock Exchange, Cornerstone was either range-bound or slowly bleeding, and copper prices were strong. Cornerstone management, late in 2022, got an opportunity to exit the asset on decent terms, and given the drama at SolGold, we can hardly fault them for that. They made a decent profit for the company (and they were all large owners of the company), even if it was not necessarily a good return for Massif Capital. In the end, the Cornerstone management team sold their stake in SolGold and the Cascabala asset for $0.04 per pound of copper in the ground vs. the $0.06 to $0.07 per pound we expected as a result of our review of 21 precedent transactions dating back to 2010.
We were not sure we would have made any different decisions based on our information. Our expectation that Cornerstone was a seller and that SolGold would eventually need/ want to consolidate the asset was correct. Our timeline was accurate, and our read on management incentives was roughly correct. Still, our read on the magnitude of return needed to justify a sale in management's eyes was off by ~50%. We played our hand well, but we should have been playi
ng the management team's hand when we thought through the prices at which the transaction could be acceptably completed in the context of their incentives. If we had done that, we might have been more cautious with our entry point.
DBW - who exactly is making this statement and what is their conclusion???
Z
Zoros, ........Massif Capital.
Thanks Copper
Here’s the link
https://seekingalpha.com/article/4573222-massif-capital-fourth-quarter-2022-letter-to-investors
‘ Nick was sufficiently disliked (in part because of his lack of a particular type of competence) ’
Anyone care to guess what particular type of competence?
Good morning Ortherncopper I think Nick lacked the competence to sell us cheaply to BHP.
Copperpot and DBW - many thanks. I'm no longer interested in the day to day machinations of this dreadful company (Solg), as I was this time last year. I 'pop in' occasionally to see if the 'paint has dried' but alas, nothing / nobody has changed......yawn.
My holding has been consigned to the bottom drawer for better or worse in future.
Regarding this article - it tells us more about what is/was going on inside Solg than the last 10,000 posts! Very interesting - and puts a number of issues to bed for me.
What it doesn't do (obviously - because Maxit Capital have pulled out now) is tell us what could/may happen in the aftermath of the CGP/Solg combine. Damn!
A very good find - thanks again.
Z
Shame....
Shame, I was honestly thinking of loading up here but I'll leave it to Q4 2023
Zoros …. It’s Massif not Maxit but I’m sure you already knew that
Ray we’ll miss you …. See you in Q4
I predicted there will be no bid in 2022 and I was correct. Can't see one in 2024 either - although opportunity to trade later in the year perhaps?
2023*
Not sure who Massif Capital are but they to get out at CAD 3.2 means they sold post the news of the failed funding round in late July as CGP price was around 3.3cad for a while before dropping as low as 2.7cad in the October wash out. It's been around 4.1 cad on average basis for last few months.
So these numpties sold at the worst time possible and just shows you that being impatient costs you big time.
Amateurs.
Fort this was the bit that made me laugh
“We played our hand well, but we should have been playing the management team's hand when we thought through the prices at which the transaction could be acceptably completed in the context of their incentives. If we had done that, we might have been more cautious with our entry point”
Just had a look at their website.... my goodness... both look barley out of nappies. These guys should not be allowed to play with money unless it's
1. Monopoly money
2. Made from chocolate
DBW - Agree with you. That tickled me too. An audacious attempt to save face.
I suppose though, if I had to offer them a defence, it would be that they couldn't take the gamble that we could as SOLG shareholders that the company would bottom out.
That's part and parcel of trading illiquid stocks in size.
I'd also caution that we haven't won the battle yet either, there's a couple more bridges to cross, but things look much better now than they did 3-4 months ago.
DBW, thanks for this report, it makes for interesting reading, particularly as it relates to NM. He was not a popular bloke, was he?
Add … No he wasn’t but that’s largely because he wouldn’t roll over for the likes of BHP …. Our interests are very much aligned….. something will pop soon and when the RNS drops there will be no more room for speculation
Best wishes DBW
NM is still popular with me addicknt .
He is not popular with the people that wanted Solgold sold below it's true value.
Q, I think there were also other reasons for his unpopularity.
DBW, I agree that he appears to have completely revised his thinking and is now aligned with us. The problem was that for a few years he veered away from the original strategy and this has cost us three years of wasted time, money and dilution. It cost him his job and reputation.
As far as I'm aware, the only person on here to have met him is Jerry, who found him to be rude and arrogant. The rest of us base our opinions upon whether he's singing from the same hymn sheet.