ASA Ready to Rock?
David Walker
April 22, 2002
I love special situations. That is when we as gold investors have the opportunity to make the most money. After all, it is not just being about being in the #1 sector, it is about being in the top of the heap in the #1 sector!
There is a particular satisfaction I get by bringing special situations to your attention. Firstly, it is because I beat the hoard of gold analyst on the draw. Secondly, people are able to benefit and likely profit handsomely from my efforts.
Before I get to the meat of this essay however, I am going to take a minute and shamelessly toot my horn. Back on 11/19/2001 I wrote Which Gold Price?
In that essay, I recommended that gold share investors overweight their South African exposure with unhedged miners HGMCY and GOLD, as the rand devaluation was going to deliver bonus profits. At the same time, I also strongly recommended dumping PDG. The following chart shows the benefits of having made such a move.
In round two, I spied another special situation with the Harmony warrant and penned Currency Play!on 12/8/2001. Investors moving on that one are showing gains in excess of 400%! I believe that this one still has a little play left in it. The chart is a sight to behold.
Special Situation #3
Now it is time for special situation #3. That's right, I am going for 3 out of 3. Enter American South African, otherwise known as ASA.
ASA is a Closed End Fund (CEF) that specializes in SA gold shares. It is likely the oldest CEF gold fund around, as it was incorporated in the Republic of South Africa way back in 1958, as a vehicle to allow US investors to participate in the SA gold shares.
There are currently over 500 CEFs for investors to choose from. CEFs are like mutual funds except for one big distinction that separates it from the standard, run of the mill mutual fund. That distinction is the fact that it can trade at a discount or a premium to Net Asset Value (NAV).
Now I am going to go into a little detail here on CEFs and NAV, in consideration for the less experienced investors who are picking this stuff up for the first time. Besides, I have found that doing so saves me from a slew of e-mails later.
NAV Explained
NAV is derived, by totaling all the stocks, bonds and cash held by the fund. The total is divided by the number of outstanding shares, and the NAV is thus determined. In other words, it is how much your shares are worth with a typical mutual fund.
Normal Mutual Fund vs. CEF
In a normal mutual fund, you buy and sell your shares based on the NAV. With a CEF fund, you buy and sell your shares at prices based on market forces. What this means is that the shares can trade at a discount or even a premium to NAV, determined by current demand.
There is another distinct advantage that a CEF gold fund has over a normal gold mutual fund. With your normal fund, you are stuck with end of day pricing. That's right, if there is a terrorist attack and it looks like gold is headed up $20 an ounce or more and you place an order for shares, you bought your shares after the run up, at the end of the day. Inversely, if Joe Blow central banker opens his mouth and casually mentions "GOLD SALES," you could be stuck in a major downdraft. Again, you are stuck with end of day pricing.
Therefore, a CEF gold fund gives you trading flexibility, the means to change your position instantly should the need arise.
You can obtain further information on closed end funds at the CEF Association's web site at cefa.com or Site-By-Site!'s CEF center
ASA's new website is supposed to be up this week, the old site has been discontinued.
How to Buy a CEF
It trades just like a stock. ASA is listed on the NYSE. Enter a buy order and presto! It is yours! You sell the same way.
The ASA Advantage
ASA has a small float. There are only 9.6 million shares outstanding with a float of 9 million shares. That's roughly 4 million fewer shares in the float than Royal Gold (RGLD). When the masses finally discover that gold is in a bull run, this will work to your advantage. Limited supply in a high demand situation works wonders for the share price. One peep out of CNBC and it is "fasten your seatbelt" time!
ASA: Discount vs. Premium
ASA normally trades at a discount to NAV. During the bear market in gold, sometimes it would trade at a discount as high as 22%, but generally in the 11-17% range. Since the gold market has started to turn around, the discount had generally tightened up a bit, as would be expected, averaging more in the 8-15% range. In previous bull markets, ASA has traded at a premium as high as 10% over NAV.
The situation
Back in February of this year, it came to ASA investor's attention that there was an unresolved capital gains tax dispute with the SA government to the tune of $1.89 per share. The stock value of the fund immediately tanked and somewhat recovered the following day.
With the inability to produce a solid NAV, the fund decided not to issue one at all until they could resolve the NAV issue.
As a result, the NAV remained a mystery. No NAV in Barons or the Wall Street Journal. To top it off, the CEF web sites removed ASA from the fund rankings! Not having any access to judge the discounted value of the shares was driving me crazy.
I started working some numbers off an old holdings statement. Now aside from primarily being invested in SA gold shares with a smattering of assorted NA producers, the annual report showed approximately 20% of holdings were in Amplats and Impala Platinum. Interesting, as platinum has been on a tear lately, rising over $50 per ounce since the cessation of the NAV reporting.
After having painstakingly worked all the numbers, I came up with what I thought was an approximate NAV. Now I had a new dilemma! I had to know whether I was right, and how close I was with my numbers compared to the current NAV. The suspense was now worse for me than before I started the exercise!
Next came a campaign of e-mails and phone calls. I finally got ahold of the right people but they would not give me a NAV until 10am the following day. 10am turned into 12 and then finally shortly after 2pm I got what I wanted. As the numbers came though over the phone my jaw dropped.
The share price as of the close of business on 4/18 was $28.07 while the NAV was $35.61, for a difference of a whopping $7.54 per share! ASA was trading at a 21% discount!
Here we are in the beginning of what appears to be a certified long-term bull market and ASA is trading at a 21% discount. Here is the kicker though. At some point in the bull, the public is likely to once again become overly exuberant in the gold shares and ASA will likely be trading in a premium of 10% over NAV once again.
Now that the tax issue to my understanding is not incurred unless they sell some of the holdings, as it was explained to me over the phone. I would figure on the discount shortening up to around the 11% range or lower. Using the values of 4/18, that would add over $3.50 per share. In addition, the CEF sites will be reinstating ASA, which will now be reappearing in the #1 spot in the NAV return category and possibly even in the total return category. As you know, everybody loves a winner.
Finally and most important, earnings season is starting for the SA golds. ASA's largest holding, Gold Fields Ltd., will finish it up for the big four on the 2nd of May. I have high expectations that both Gold Fields and Harmony will have blowout quarterlies that will bring further attention to the SA mining scene. Such attention can only bode well for a fund that hits heavy with the SA miners.
The plays
The simple play is to just purchase shares, knowing that from a historical bull market perspective, you are getting them at a deep discount. This is pretty much a no brainer. Buy them for the long term or in the event you have more of a trading style, sell them when the discount tightens up.
The real potential for profit here lies in the options arena. Option players are always trying to fill an order by shaving a dime off the bid and ask. Here we have a situation where we could correct upwards within a fairly short period by a few bucks, knocking off the premium and throwing your position to the plus side.
The May 30's look very doable and the next set out is in August. This situation also works well for those experienced in writing put options.
Disclaimer: All investments carry risk and this play is likely very dependant on the movement in the price of gold as well as currency fluctuations. Purchasers of call options can lose 100% of their investment and put writers can be subject to a loss greater than the premium received. Information provided is believed to be accurate however investors should do their own research prior to making an investment decision.
Happy Trading, let's make it 3 out of 3!
David Walker
oneandthesame@hotmail.com
4/22/2002 |
