Dave, I want to clear up a problem in your last post:
You said,
"You have to remember that all the Mutual Funds that hold Bre-x already discounted
them on the unit price...these funds don't speculate and will sell until all there BXM
in there portfolio are gone."
First of all, mutual funds speculate just as much as any educated investor does. They make money by creating value for their fundholders.
Second, even though I believe you are right that they probably would sell off anything that causes them to negatively question their original estimates of market valuation, the reason why they "wrote down"(it's not called discounting) their market value to $2.00/share has less to do with their own personal beliefs than you think. It has to do with getting their own financial statements audited.
As per Canadian Accounting guidelines(CICA handbook s. 3060 par.43), when there are conditions that "suggest" that an asset's carrying value is less than the asset's "expected" future net cash inflow(which are not discounted),an impairment in value should be recognized. An impairment is treated as an adjustment in the carrying value of an asset on a company's records.
Because accountants are required to be as conservative as possible, the mutual fund companies were obligated to write their Bre-X holdings down to the estimated market value. It would not be appropriate for a mutual fund company keeps its assets stated at %15.00/share when people are speculating that it's worth nothing. If these funds had December 31 year ends, they would have waited the 4 weeks until there was certainty that Bre-X was really worth something, if anything, at all. Therefore, the write down was a reporting requirement, not necessarily linked to what the final outcome will be.
A little trick that can be played is to write the value of an asset down far below what an asset is really worth in a situation like this. A fund company will recognize a large loss in the current period, and when the share price goes back up in subsequent periods, they will be able to report improved results. It's sort of like buying a car for $10, telling everyone it's only worth $4, and then later selling for $12. People see you as earning $8 instead of only $2. And why not if every other person in the business is doing the same thing? Since all funds will have more or less the same write down, and since people expect it, the fund managers will not be highly criticized for poor performances in the current period.
Dave, I believe there were a tonne of factors(besides gold!) that have resulted in the current market reaction. I don't have any shares in Bre-X, so I haven't suffered a big loss, even though other juniors that I've invested in, have dropped. I wish I knew all the facts behind de Guzman's death, what went on with the assays of Bre-X, and whether there is any gold in Busang at all. If you say there is no gold, you are making an inference about the validity of FCX's sampling methods, as well as ascertaining that the same valuation will hold true for all other subsequent tests on Bre-X's property. It's a really, really, really, bad sign that all 6 twin holes and the 3 scissor holes came up insignificant. But statistically speaking, 9 holes are far too few to make an assumption that the rest of the property has no gold.
Even if there was only 25-30 million ounces of gold, the market should still value Bre-X around $10/share. IMO, I will wait for the dust to settle and get some more news before even considering a speculative investment.
My point to you, David,is to take into consideration the facts, the nature of the events, the timing, as well as the impact which these events have on financial statements, not to mention the effect that financial statement presentation has on the market. Reading the market is not as easy as most people think, and I doubt that anyone out there is able to confidently predict market outcomes. There are way too many things to consider.
shaun. |
