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The Hardest Decision to Make in a Wonderful Market

January 07, 2014 | About:
Someone recently told me that the bear market in precious metals and precious metals stocks has been the most painful one ever for investors. Whether this statement is true or not does not matter. What matters is that the current and past pain represents an opportunity of a lifetime, or maybe 10 lifetimes, to make a lot of money. In other words, this is a wonderful market.

I already said that this bear market has turned my life upside down. As a result, I am mentally and physically worn out. With that being said, I know that I have to keep buying these opportunities. However, I have been struggling mentally with one investment position – Veris Gold.

I have held this company since 2010 and took a tremendous beating both financially and mentally. What I am struggling with the most with is whether Veris Gold (TSX:VG) is undervalued enough in relation to other alternatives. Here is what I mean.

This bear market has been so awful that there are opportunities out there that will go up 20, 30, and even 100 times from the current levels. I have outlined some of them in my newsletter, and some have gotten even cheaper than they were when I wrote about them. Or, look at Goldgroup (TSX:GGA). I said in my previous post that when I was buying it several weeks ago, the market cap was $6 million, and I was buying value that was anywhere between $100 and $400 million. And, if gold goes up, this company could be worth $1 billion, which would be a 166-bagger. I am not writing this for anyone to dispute the math or potential future valuation. All I am saying is that the opportunities are so huge that Veris Gold might not even stand a chance to have a spot in my portfolio.

This is extremely hard for me to say this publicly because I am emotionally invested in the company, and I highly respect the management who is trying their best to turn the company around. The management did everything they promised. Yes, it was late but they did everything. They increased production, lowered costs, and signed tolling agreements. But, the problem is that the low price of gold and the debt is killing them. They are constantly running out of money and have to keep diluting. If the price of gold never did what it did in April 2013, the turnaround would have been completed.

Right now, the company has about 200 million shares fully diluted, and if the value of the company is $700 million, the value per share is $3.50. This is not bad. It is a 10-bagger from the current levels, but this is today. We know that there will be more dilution because there was just a fire in the company’s plant and the Deutsche Bank loan is suffocating them. Until it is refinanced, there will be constant dilution. But, this is not news. We all know this. The only question is how many more shares will be issued, because this will determine future return. So, instead of being a 10-bagger, Veris Gold might be 5 or even 3-bagger. Again, it will all depend on the future dilution.

Now, the question is considering that Veris Gold will only be a 3- or 5-bagger, does it belong in my portfolio? In normal circumstances, it absolutely belongs there, but considering that I can buy 30- or 100-baggers, I am afraid it has to go.

I am seriously considering liquidating my entire position in Veris Gold. Again, this is very hard for me to say publicly because I wanted to hold it all the way through, but Mr. Market is offering me opportunities of a lifetime and Veris Gold does not fit this anymore.

About the author:

Mariusz Skonieczny
Mariusz Skonieczny is the founder and president of Classic Value Investors, LLC, an investment management firms that builds and manages customized investment portfolios for its clients. He is the author of Why Are we So Clueless about the Stock Market? Learn How to Invest Your Money, How to Pick Stocks, and How to Make Money in the Stock Market. Email: mskonieczny [at] classicvalueinvestors [dot] com. Webpage: www.classicvalueinvestors.com

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