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Prima BioMed Ltd; Speculative Bubble or an Opportunity to Buy on a Dip?

By
ME Staff
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Stockgrowth

On May 19, 2015, junior stage development biotech company Prima BioMed Ltd (PBMD) announced the final data for its CAN-003 Phase II trial, with the data coming after five years of collection. The results seemed overwhelmingly positive, and hitting markets pretty much concurrent in the grand scheme of things to a number of other positive announcements, sent biotech investors into a frenzy. By market close, the company’s stock was up over 1000%, and a number of market analysts were not only justifying the increase, but also calling for further gains. Now the dust has settled a bit, was the increase in Prima’s market capitalization valid, what can we make of action since, and – ultimately – where is the stock likely to be headed over the coming 12 months? Let’s take a quick look.

In order to understand the data and its ramifications, we must first take a quick look at what the company does, and how the treatment in question works. The announcement reported the final data for a treatment called CVac, which is currently undergoing trials for targeting ovarian cancer. The treatment is autologous, which essentially means it is introduced to the body through a form of grafting, and it uses a patient’s T cells to stimulate the immune system into attacking of varying cancer cells. Through process called apheresis a doctors remove a patient’s blood (little over 100 mL in total) and spins it in a centrifuge. This spinning separates out the different elements of the blood and plasma, one of which is something called the dendritic cell. Dendritic cells are used in the body to present antigens to the immune system and stimulate appropriate responses to these antigens. In this instance, the dendritic cells (once removed) are combined with the something called mannan-mucin-1 fusion protein, with mucin a protein and mannan just a type of sugar that speeds up the absorption of the protein by the dendritic cells. A doctor then injects the manipulated dendritic cells into the patient, the cells combine with T cells and turn them into “killer T cells”, which then attack ovarian cancer cells.

So, with the science out of the way, what did the results show? Well, out of a group of n=20 second remission patients, the median overall survival rate for standard of care patients (with the standard of care just referring to traditional chemotherapy and radiotherapy) was 25.53 months. For patients treated with CVac, however, 42 months have gone by, the study has completed in closed, and the median has still not yet been reached. Even without this reaching, the data suggests that for CVac treated second remission patients there is a minimum of 16 months median survival advantage.

In response to the results, and alongside their announcement, Lucy Turnbull, Chairman of Prima BioMed, commented:

“This final clinical data for CVac is most encouraging for cancer patients in second remission. We sincerely thank all patients and medical staff who have participated in the trial over the last five years. Our concerted focus will now be to find a development partner to make CVac widely available to cancer sufferers around the world.”

So, it looks like the results were positive, and the science backs up the drug’s efficacy. But, as ever, with biotech, getting excited early on can be very risky. So, what do we need to see from the company before we can say it’s a good bet for the future? Well, most  standard FDA approved treatments (those granted accelerated approval aside) require a phase 3 trial which proves efficacy on a much wider scale than previous phase 1 and phase 2 trials. In order to take the CVac through this trial, Prima will need a commercial sponsor to both help fund and help manufacture the treatment on the scale required. Sometimes this will be one of the large pharma companies in the US, and sometimes not. Regardless of who the commercial partner is, we will be looking for the announcement before we can safely recommend the company longer-term.

Having said this, Prima has recently announced a partnership with NEC Corporation and Yamaguchi University, a $15 million investment from health care investor Ridgeback, and the receiving of a financial milestone payment from GlaxoSmithKline plc (GSK). All these announcements are the kinds of developments that can translate to further excitement in the markets, and – since we are now trading at around a 50% discount from highs reached as a result of the CVax announcement – Prima may present an attractive speculative allocation for the more risk tolerant investor.

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What HSBC’s Stephen King Means and Why he is not Entirely Correct

By
ME Staff
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Titanic

Last week, HSBC chief economist Stephen King reported his take on the global economy to HSBC clients. Instantly – and perhaps due to its dire nature – news media picked up on the report, and have (alongside a swathe of images of big ships) reported how the global economy is the equivalent of the Titanic and – true to the analogy – headed for an iceberg. Many of the reports have pretty much stopped there as far as an actual explanation of what Stephen King meant, so, let’s take a deeper look.

The Analogy

The analogy referenced by Stephen King is based on the idea that normally, when the economy takes a turn for the worse, federal governmental institutions have tools that they can implement in order to counter a recession. These tools are the “lifeboats” of the so-called ship. According to Stephen King, we are six years into a recovery and – as a result – likely closer to the next recession than we are to the last. However, this time around, we don’t have these tools at our disposal.

The primary tool used when an economy dips into recession is interest rates. Pretty much the sole purpose of many of the central banks across the world (the Bank of England, the Federal Reserve) is to use interest rates to maintain a steady inflation level. In a recession, inflation falls to, or falls below, zero, while in times of economic expansion, inflation expands to 2, 3, 4 or 5% in developed economies. When inflation falls and an economy suffers, a central bank will reduce interest rates in order to stimulate borrowing and dis-incentivize saving. Increased borrowing and a reduction in saving results in more spending on both a consumer level and a business level, and with more spending we get more jobs, increase wages and – once again – more spending. In addition, the central bank can introduce more money into an economy (referred to these days as quantitative easing) via a range of mechanisms but most popular at the moment via the purchase of government bonds. An increase in the money supply can also stimulate spending, boost the equities markets and increase perceived wealth. Once again, this can lead to recovery.

As Stephen King has pointed out in his latest report, however, these tools or “lifeboats” are unavailable to us. Interest rates are pretty much zero across the globe (or even negative in some places such as Europe) and government debt is so high in many developed nations that further quantitative easing is not a realistic option. Therefore, when we hit the next recession, we will not have the usual tools available to us to fight it. The recession, therefore, is the iceberg, and the global economy, the Titanic.

Potential Tipping Points

So what could cause us recession? Stephen King highlights four potential causes. First up is the idea that increasing wages in the US will translate to a reduced profit for US corporations, and in turn, negatively impact US GDP. He suggests that this will then lead to a bursting of the stock market bubble and an economic downturn. Second, he theorizes that certain non-bank financial organization such as insurance companies and pension funds will fail to meet their obligations, causing a mass sell-off in liquefiable assets and – again – an economic downturn. Third, we could see a weakening of Chinese economic expansion, leading to a decline in commodity prices and a corresponding increase in US dollar strength. This would make it difficult for outside economies to do business with the US, and impact US GDP. Finally, and perhaps most pertinent, if the Federal Reserve raises interest rates too soon, it could trigger a recession.

A Solution?

So, with all this bad news just round the corner, is Stephen King right and are we headed for a sinking ship situation, or is there something we can do when the recession finally hits? In other words, do we have any lifeboats left?

Well, back in the 30s, during the great depression, the now famous British economist John Maynard Keynes suggested to then president Roosevelt that, through paying men to dig holes in the desert, he could stimulate a recovery. This, of course, was an analogy to illustrate the suggestion that government intervention and funded structural reform could lead to economic activity and national spending increases. Roosevelt took Keynes’ advice and initiated a huge amount of public work, his so-called “new deal”, perhaps the most famous result of which is the Hoover Dam. The increase in employment that came round as a result of the new Deal translated to economic stimulus. In other words, yes we may not have interest rates at our disposal to fend off a recession, but when it comes around, if we can emulate the New Deal policies of the 1930s, we may be able to raise an otherwise sinking ship.

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As Gold Miners Consolidate, Some Juniors Reap the Benefits

By
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PershingGold

The devastating bear market in gold miners, particularly juniors since 2011, has hit gold stock investors hard. If you’ve been a buy and hold long term in this sector, then you better be young and gainfully employed or you’re in big trouble. The top majors including Barrick (ABX), Goldcorp (GG), and Newmont (NEM) have slipped an average 70% since peaking in September 2011. Junior miners (GDXJ) have been even worse, down 85% from their highs.

In the face of this devastation in the resource sector, silver (or gold) linings are now emerging which may provide an opportunity to significantly recoup losses even before this market turns around as a whole.

Gold miners have been pummeled by a deadly combination of falling gold prices and the rising costs of mining. While gold did have a “bull market” up to 2011 in the sense of rising gold prices, these prices did not rise sufficiently even at their peaks to cover the equally extreme rise in mining costs.

For Newmont, for example, all-in costs began to skyrocket in 2011, just as gold prices were topping out. They began to really spiral out of control in 2012 topping out at $1,192 per ounce just in cash costs, barely improving in 2013 to $1,105 an ounce. Barrick and Goldcorp fared a bit better in cash costs but all three still suffered massive losses after the gold bull topped. Barrick in particular had enormous impairments in 2013 of over $13B and hasn’t had a profitable year since 2011.

Newmont, on the other hand, has been weathering the gold bear relatively well, not in terms of stock price, but in terms of its bottom line. After suffering a $4.3B impairment in 2013, it somehow turned a profit of half a million in 2014, despite gold prices continuing to languish.

Part of the reason Newmont has been successful relative to its competitors since the gold bear began is that it has made a herculean effort since 2012 to consolidate its assets, focus on its core business, and not take too many risks with new ventures in order to lower per-ounce mining costs. Now, as of the end of Q1 2015, and for the first time since the last gold bull ended, Newmont has finally lowered its all-in costs on a year over year basis.

Newmont CEO Gary Goldberg reported 18% lower all-in sustaining costs in Q1 2015 over Q1 2014, down to $849 from $1,035 an ounce. Total all-in costs which taking into account new ventures together with sustaining costs for current mining projects, went down to $1,215 from $1,300 per ounce. $1,215 is even lower than its 2013 costs of $1,274 per ounce, so it seems that Newmont’s cost cutting measures are finally getting somewhere.

As for Goldcorp and Barrick, Goldcorp is likewise shaving down its all-in costs significantly since 2013 after breaking $1,660 in 2013, then down to $1,400 an ounce Q12014, much higher than Newmont which is why Goldcorp is having a harder time. All-in cost per ounce is now down to $1,210, around the same as Newmont. Barrick, however, is going in the opposite direction. All-in costs came in this quarter at $1,024, up from $938 per ounce last year, but that is still better than the $1,317 per ounce in 2013. Barrick can afford to spend a bit more on mining since $1,024 is still sufficiently below spot price to pull a profit.

Even some mid-tier miners like Sandstorm (SAND) have been successfully cutting costs, with companies like Sandstorm down to $1,140 per ounce in 2014, down from $1,281 in 2013.

Whatever the all-in cost level is for each miner, all three companies know very well that gold prices have not recovered and may not recover significantly in the near future. Though gold bugs may strongly disagree with that assumption, the safest play for all three considering the last three plus years of carnage is to assume that prices will not recover to their previous highs in the near term and cost cutting measures are absolutely imperative.

That said, cost-cutting measures have sometimes been done with blunt instrument in a rush instead of carefully with a scalpel, considering the urgency. This shedding of assets sometimes offers opportunities for newer, smaller juniors who pick them up – juniors that were never affected by the latest bear market because they didn’t exist or were not doing any significant business back before 2011.

With majors consolidating into their core business and divesting from riskier projects, a big find by a junior picking up those divestitures is bound to happen at some point. The question is finding it. It is still too early to tell for certain, but Pershing Gold (PGLC) may have a real find in the Relief Canyon Mine in Pershing Nevada, which it acquired from none other than Newmont in several stages. Newmont was looking to sublet this mine out in 2012 as it was hit by the first year of the gold bear, and Pershing took the sublease in April of that year. On January 19th, Pershing dug deeper, both financially and literally, into the real estate and put up another $6M for 1,600 more acres with other surface mining claims at Relief Canyon.

Then in March, two months after the latest deal with Newmont closed, Pershing reported finding intercepts as high as 124 grams per ton, or 3.6 ounces per ton on the acquired land.

As to why Newmont gave up these claims for cash, the answer is that, having decided to relinquish Relief Canyon in stages years ago, and having decided on a consolidation strategy as well, exploring risky assets is not its main business plan. Cutting costs is.

The next questions are, first, does Pershing have the capital to see resource production through? And second, what are the concrete plans for the mine?

In terms of the first question, Pershing is backed by billionaire Dr. Phillip Frost, who owns 15% of the company. The other main investor is Barry Honig, who owns 28.5% of the company and just purchased more shares this month. Pershing just raised $11.5M in a private placement to continue development of Relief Canyon.

As for concrete plans going forward, its most recent press release on April 27th states that completion of the regulatory resource estimate is expected next quarter.  This includes estimates of production rates, cash costs, all-in-sustaining-costs, life-of-mine, and NAV estimates.

Pershing already has all of the state and federal permits to start mining in the existing open-pits, and has submitted an expansion proposal to the Nevada mining authorities that would involve three years of mining and five years of heap leaching. Further technical details are available in the release, but judging by the timing of insider buys and a planned resource estimate next quarter, it seems that the project can very well begin next year and be ongoing for the next three years considering proposals for permits already filed.

Pershing is only one example of a junior capitalizing on the cost cutting measures of the majors. On May 5, Premier Gold (PIRGF), a midtier miner, acquired 40% of the South Arturo mine from Goldcorp, also in Nevada, after Barrick did not intervene with its right of first refusal.

When big mining interests like Newmont and Goldcorp need to consolidate, it’s the midtiers and junior exploration stage ventures that can stand to benefit if they pick the right merchandise at the fire sale.

While there is no assurance that Pershing has for certain acquired the right asset yet, the news keeps improving, and the insider buys keep coming.

 

 

 

Market Exclusive Is a financial portal geared to engaging discussion on current financial topics. Market Exclusive is not an investment advisor. Please read our full disclaimer at http://marketexclusive.com/about-us/disclaimer/

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Opko’s Frost Inks Levon Deal with Israel’s SciVac, a Hint for the Next Merger?

By
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Frost

On September 11 last year, a little-known Israeli financial magazine called Globes came out with a report that Dr. Phillip Frost, Chairman and CEO of Opko Health (NYSE:OPK), and then Chairman of Teva Pharmaceuticals (NYSE:TEVA), was interested in moving a private Israeli biotech called SciVac, 45% owned by Opko, into a corporate shell and making it public.

Today, Frost accomplished his goal, as SciVac has been officially acquired by Levon Resources (OTCMKTS:LVNVF), with 68.4% of the new company going to the former private SciVac shareholders and 31.6% going to former Levon shareholders. Since Opko already has a 45% stake in SciVac, that brings its total take in SciVac to 30.8%.

The deal still has to be voted on by current Levon shareholders in April, but is expected to pass.

Opko has had some success taking stakes in biotech companies so far this year. Its recent 8% stake in Cocrystal Pharma (OTCBB:COCP) has jumped 100% since February. Cocrystal is its second largest investment behind private Russian biotech Pharmsynthez.

SciVac’s Hepatitis B Vaccine

SciVac is the developer of a third generation hepatitis B vaccine (HBV) called Sci-B-Vac . It is approved in several countries including SciVac’s home country of Israel, where it is administered to hundreds of thousands of newborns each year. While first generation HBV vaccines are mostly effective, their effectiveness is still only 90%. In a clinical trial of over 5,000 people, Sci-B-Vac was shown to have an effectiveness of greater than 98% with higher immunogenicity, or immune response in terms of antibodies produced.

The difference between Sci-B-Vac and the current standard-of-care HBV vaccine is that Sci-B-Vac is derived from mammalian cells instead of yeast cells, and carries on it the three main HBV surface antigens instead of just one. It is believed that the 10% of people who do not respond to first generation HBV vaccines are infected with mutant versions of HBV that escape the single antigen vaccine. It is much harder for HBV to mutate all three surface antigens simultaneously to escape Sci-B-Vac.

Despite vaccines available, HBV is still a huge pandemic. According to the World Health Organization, one third of the world’s population is infected with HBV, with up to 400M people suffering chronic infections leading to chronic liver disease. 250M of those people are in the Asia-Pacific region alone.

SciVac’s next regulatory goal is approval in the United States, where 12M people are infected every year despite the current first generation vaccine available. What regulatory hurdles have to be overcome remains to be seen, given that Sci-B-Vac is already clinically tested and approved in several countries. SciVac will be aiming at the immunocompromised as well as end stage renal disease and HIV patients, as these are patient populations who have special difficulties responding to current HBV vaccines.

Context of Frost’s Latest Move Hints at Possible Future Moves

Dr. Frost’s latest move comes in the context of several other interesting stock movements that may tip off future deals in the making. In October last year, only one month after Globes reported Frost’s interest in taking SciVac public, Levon acquired 35M shares, or 10% of Pershing Gold Corporation (OTCMKTS:PGLC) another one of Frost’s pet projects of which he has a 15% stake translating to 53.7M shares. Those 35M shares of PGLC will be moving to new entity Spinco, so speculators looking out for the next Frost-related deal should keep an eye on a possible merger between Spinco and Pershing. A similar deal was inked bewteen Pershing and Continental Resources Group in February 2013 where the latter was acquired by Pershing. Continental had a substantial stake in Pershing at the time.

Cocrystal, which is fairly similar to SciVac in that it is focusing on molecularly tailored vaccines, primarily hepatitis C. Cocrystal is also 22% owned by Frost through his investment trust as well as an 8% stake through Opko. Cocrystal has skyrocketed over 100% since February but lacking any obvious catalyst for doing so. Another possible move to watch then is for a deal between Levon, now SciVac, and Cocrystal, which itself was once BioZone, also an Opko investment that was merged into Cocrystal.

With Frost’s myriad of moves and deals over the last few years things can get admittedly confusing and make your head spin. The structure of these mergers, however, repeatedly seems to start with Opko at the base and then moves out from there. Opko itself has been on a nearly 100% tear since December. As for Cocrystal’s recent 100% move, it may have investors scratching their heads but connecting the dots here could point to the beginning stages of a Frost deal at some point between Cocrystal and SciVac as both specialize in hepatitis vaccines, as well as one between Spinco and Pershing.

Call it equity consolidation with synergies in mind, it certainly is a fascinating chess game.

 Market Exclusive Is a financial portal geared to engaging discussion on current financial topics. Market Exclusive is not an investment advisor. Please read our full disclaimer at http://marketexclusive.com/about-us/disclaimer/

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Despite Cutting Rates to Negative, Sweden’s Monetary Policy Still Very Tight

By
Rafi Farber
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Krona
  • Negative Interest Rates, or NIRP for Negative Interest Rate Policy, are now the norm in the Eurozone, Switzerland, Denmark, and now Sweden
  • NIRP essentially means that depositors pay money on their savings instead of earning a return
  • This discourages savers from saving in cash, encouraging spending instead
  • The aim is to jolt the economy by encouraging people to spend more sooner, increasing price inflation
  • Despite the effort, Sweden’s money supply has not increased substantially since 2007,
  • Government spending has not increased relative to GDP either

Sweden’s Riksbank, the world’s oldest central bank founded in 1668, has for the first time in its 347-year history brought its benchmark interest rate to negative, -0.1% to be exact. Depositors at the Riksbank, consisting of other Swedish banks, now have to pay the central bank to store cash there. The effect of this will be to encourage Swedish banks not to store cash at the Riksbank since it now costs money to do so, but instead to loan it out to borrowers.

In addition to bringing its benchmark rate to -0.1%, the Riksbank has announced a trial balloon of 10 billion Krona (kr) in bond buying. While that only amounts to $1.2B, in combination with negative rates it is a very aggressive – and dangerous – money-printing strategy.

On the news, the Swedish Krona fell 1.5% against the US Dollar and the Euro.

Krona

Sweden now joins Switzerland, Denmark, and the entire Eurozone in charging depositors for their savings. For their respective governments with heavy debt loads, this is quite a boon because now if the Swedish government under -0.1% interest rates issues a bond for, say, 1000 Krona, it will only have to pay 990 back at maturity. In the twilight zone, this would be the ideal way to get out of debt – borrow yourself back to solvency with negative interest rates!

It works on paper, that is until the market overwhelms the irrationality of NIRP and people stop buying bonds altogether, forcing interest rates through the roof over the furor of central bank monetary policy.

Interestingly enough, Sweden’s money supply did not increase at all through the beginning of the financial crisis in 2008. Though the last available report was issued in 2012, Sweden’s money supply stood at 3 trillion krona from 2007 until 2012. This means Sweden, despite going into NIRP, has one of the tightest monetary policies in the world, at least until 2012. Go figure.

Sweden Money Supply

In addition to strangely having one of the tightest monetary policies – if not the tightest – in all of Europe, Swedish government debt is also quite low at just over 40% GDP.

Sweden Debt to GDPSpending is also stable relative to GDP, and has fluctuated between 51% and 55% of GDP for nearly a decade.

Sweden Spending to Gdp

Conclusion – while Sweden is now wading into NIRP, it still has one of the most conservative monetary and fiscal policies in the world.

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Patience Pays Off For Opko And Cocrystal Investors, Will It Also For Pershing Gold?

By
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Frost Opko

Teva (NYSE:TEVA) has a new chairman. As of February 5 and after four and a half years at the helm of the largest generics manufacturer in the world, Dr. Phillip Frost has resigned his position. This was announced back in June and is no surprise, and wouldn’t be all that noteworthy if not for the fact that other companies that Dr. Frost is heavily involved and invested in are suddenly making rather large upside moves.

Two of Frost’s companies in particular have been on a tear. One, Opko Health (NYSE:OPK), has increased 73% since the middle of December. Frost is both Chairman and CEO of Opko. Another, Cocrystal Pharma, (OTCBB:COCP) has increased 54% over the last 5 trading days.

Opko’s Recent Run, Patience has Paid Off

While Opko’s appreciation is at least explainable in terms of fundamentals, there is no obvious reason why Cocrystal would rise so fast and to such an extent. The fact that its rise has been almost exactly correlated with Frost’s official resignation from Teva may be coincidence, or there may be something more to it.

Frost has been Chairman and CEO of Opko since March 2007. He took over the company right on the cusp of the financial crisis, and weathered the startup through an 80% decline over a two year period. Opko’s stock didn’t get back to even under Frost’s tenure until February 2011, just under 4 years since assuming leadership of the company. From that point, it took yet another two years for the stock to finally move to a new trading range. Now, six long years later, OPK is up over 570%.

Opko is a bit of an enigma if you just look at its earnings statement. Annual losses have skyrocketed from $31M in 2012 to $114M in 2013, and look set to surpass $160M for 2014. However, the end of 2014 marked several critical milestones for the company that look to make 2015 a breakout year, with investors taking notice.

First of all, its lead product Rayaldee met endpoints in both of its Phase 3 trials reported late last year. Rayaldee is designed to treat vitamin D insufficiency in late stage chronic kidney disease (CKD) patients. These patients constitute a $12B market, and could transform Opko into a blockbuster company.

OPK Pipeline

Ironically, this very success is what is causing Opko, at this point at least, to bleed cash even faster. In March 2013, Opko acquired Cytochroma, and with it the rights to Rayaldee. With primary endpoints being met in both Phase 3 trials, the milestone payments to Cytochroma have gone up, significantly increasing Opko’s operating expenses. In other words, Opko is a victim of its own success, that is, until the point in time where Rayaldee begins break into its $12B addressable market.

As for the results themselves, Rayaldee corrected vitamin D insufficiency in 97% of treated patients versus 6% with placebo. Safety and tolerability data were comparable in both treatment groups. The reason Opko has risen so sharply of late could be a combination of these results in addition to the fact that Opko’s management, including Frost, is intimately familiar with pharmaceutical marketing channels and how to get a new product to patients by targeting physicians.

Though Opko is a startup biotech, it is not headed by a rookie executive staff by any means. It took 6 years and almost $622M in capital to get where it is, but chances look good that patience will pay off in this case.

Cocrystal Jumps 54% in a Week

Cocrystal Pharma, also one of Frost’s pet projects, is 22% owned by Frost which includes a 7.8% stake by Opko and a 14.3% holding by Frost Investments. Though Frost does not chair Cocrystal, he is a director, and is part of a team of insiders that hold approximately 72% of shares outstanding. Cocrystal is currently focusing on Hepatitis C antivirals among others, and is headed by a team that includes the founder of Pharmasset, which was acquired by Gilead (NASDAQ:GILD) for $11B in a deal that was catalyzed by – you guessed it – a hepatitis C antiviral.

COCP Chart

Cocrystal is still in the early stages of development, but has for some reason jumped from $0.50 to $0.70 in two days. While there is a chance the move could be temporary, patience and a 6-year wait did turne out well for Opko shareholders. Not to mention the precedent of an $11B acquisition of Pharmasset for a hepatitis C treatment. Having the founder of Pharmasset on your board certainly can’t hurt either.

Pershing Gold

There is yet another company that Frost is heavily invested in, but is getting much less attention, possibly because it is not in the pharmaceutical industry where Frost’s name has more influence. It is in fact a gold miner called Pershing Gold (OTCMKTS:PGLC). When people mention the name Dr. Phillip Frost, gold mining is not usually the first thing that comes to mind, and therefore his 15% ownership of the company tends to go relatively unnoticed. Neither does Frost’s name appear on the Pershing board of directors.

But unlike Cocrystal which just jumped seemingly for no reason other than possibly Frost’s resignation from Teva to concentrate on Cocrystal and Opko, Pershing does have some recent developments that could cause its stock, bouncing between $0.20 and $0.40 a share for three and a half years now, to break out of this range.

According to a February 4th press release, Pershing announced the discovery of a 2.24 ounces per ton intercept at its Relief Canyon mine in Nevada, considered extremely high grade. High grade is anything above one tenth of an ounce per ton. Nevertheless, the stock has yet to respond to the news.

Up until now, Pershing has burned through $111M in capital as a development stage gold miner. While comparing a gold miner to a startup biotech may be apples to oranges, $111M is less than 20% of what Opko spent to get to its current point. Could patience finally pay off for Pershing shareholders as well after over three years of the stock going nowhere?

 Market Exclusive Is a financial portal geared to engaging discussion on current financial topics. Market Exclusive is not an investment advisor. Please read our full disclaimer at http://marketexclusive.com/about-us/disclaimer/

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Why Greece Will Default

By
Rafi Farber
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Tsipras

Whether Greece will default in the coming weeks or whether the proverbial can will be kicked down the road again by some extension or other is uncertain. But in the end, Greece will default and leave the Eurozone. Why?

With all the hullabaloo and hoopla currently circulating about the grandstanding competition between Greece’s new government and the Troika, there are currently three realities that are not being dealt with by anybody. Not the new Syriza government, not the Troika, and not the media reporting on the fight between them.

Those realities are:

  1. The current bailout framework has not lessened Greece’s debt burden at all. Few acknowledge this.
  2. In order to survive financially, Greece has to repudiate, in some way, at least half of its existing debt.
  3. In order to continue to survive after repudiating at least some of its debt, the Greek government will have to spend less money than it did when initially getting itself into its current debt troubles.

The problem is, the Troika does not acknowledge #1. Further, nobody currently holding Greek debt wants any part of their assets impaired, making #2 impossible. The Greek government comprising the Alexis Tsipras/Yanis Varoufakis tag team has not indicated, in any way whatsoever, that they are willing to spend less money than their predecessors did while getting the country into this crisis in the first place.

Given that all three of these conditions are necessary in order for Greece to survive within the Eurozone without a Grexit, and given that not even one of these conditions is even acknowledged by both sides of the divide, means that default it inevitable and Greece is on its way out of the Eurozone.

The Crux of it – Spending versus Production

The crux of the whole problem lay in the fact that both sides – the Troika as well as the new Tsipras/Varoufakis led government –  all believe that government spending necessarily grows the economy. If Greece’s leaders are mired in the fallacy that public spending is necessary for economic growth, there is no way that they can extricate themselves from this crisis, ever, even if the bailout is extended indefinitely.

Only production can grow the economy. Not spending per se.
Only production can grow the economy. Not spending per se.

In fact, no spending of any kind ever grows an economy. It is production that grows an economy. The inherent logic of this statement is evident in the definition of the word “growth” itself. In order to grow, you need to have more things than you had before. Whether we are talking about cells in your body or people in your family or wealth in an economy, there needs to be more stuff tomorrow than there was yesterday. Otherwise, you are either static, or shrinking.

What is spending? Spending is simply the transfer of money for a good or service. It does not by itself produce anything, make anything bigger or smaller. It only transfers wealth within an economy through exchange. Whether someone, or some company or entity, produces from that point or consumes is its own choice. If consumption, then there is less stuff than before, and an economy shrinks. If production, then there is more stuff than before, and an economy grows.

In order to grow, Greece needs to produce things, not spend. Yes, spending is necessary for production, but every side in this conflict sees spending per se as necessary. And the spending that Tsipras wants is more government workers with higher pensions. Will that produce anything in the country? No, bureaucrats don’t produce anything. They only make rules. And they certainly don’t produce more by having higher pensions.

Given that nobody involved in this crisis is even talking about production, but spending, there is no way out but to start over. Once it defaults, Greece will have the option of keeping the Euro but without being able to borrow at all from anyone. The prospect of a Tsipras administration living strictly on tax income without borrowing in the debt markets is laughable.  Instead, Tsipras will leave the Euro to print his own Drachma and fund his promises that way.

From there, the front line will move to Italy, and the whole spending argument will begin again, with nobody focusing on production.

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Blackrock’s Stake in WPCS May Be Signaling an Imminent Takeover

By
Rafi Farber
-
Blackrock
  • Blackrock just took a 6% stake in WPCS International
  • WPCS is a $3 million communications company with steady revenues
  • It was once valued at over $1 billion
  • Its profit margins have never been satisfactory for its industry
  • Blackrock’s stake may be signaling a takeover by a more efficient communications firm

Blackrock (NYSE:BLK) is the largest asset manager in the world, and for some reason it just took a significant stake in a tiny $3M communications company. Using the word “large” in reference to Blackrock doesn’t begin to describe its size. Blackrock has $4.334 trillion in assets under management. That’s 25% of the national debt. Or to put it in even more surreal terms, that’s 40% of the entire circulating United States M2 money supply according to Federal Reserve statistics.

Source: Company Filings
Source: Company Filings

That means, four out of every ten dollars circulating in the American economy today is under Blackrock management.

An aside, but if you want to know why price inflation has been so low, one reason is that 40% of the money supply is stuck behind the monetary dam that is Blackrock and fed to the capital markets instead of consumer markets.

Blackrock takes major stakes in companies all the time. In fact, on February 3 alone it filed no less than 155 Form 13G’s reporting 5% or more stakes in different companies. These acquisitions don’t tend to make the headlines. If they did, the news would be pretty boring.

However, sift through it and you’ll find something strange. One day previously on February 2, Blackrock took a 6% position in a small communications company called WPCS International (NASDAQ:WPCS). WPCS is a $3.2M market cap 23 cent NASDAQ listed stock, which is an enigma in itself aside from Blackrock taking a major stake in it.

WPCS International

If you’re wondering why WPCS is listed on the NASDAQ despite its tiny market cap and share price, it’s because WPCS wasn’t always so small. At its peak, WPCS was valued at $1.3B as recently as 2007. Its problem, even back then at its highs, was that it could not keep its costs down. Gross profit margins, even in the best of times, were razor thin.

Razor thin margins is of course perfectly fine if you’re in retail or restaurants and your competitors are also clinging to the same margins. It’s not perfectly fine if you’re in communications services where your market-leading competitors gross profit margins are consistently in the 70-75% range like SBA Communications (NASDAQ:SBAC) or American Tower Corporation (NYSE:AMT).

WPCS continues to pull in respectable business and revenues as a multinational company. It just never had the economies of scale to bring costs down in the face of competition and become comfortably profitable. So why did Blackrock take a 6% stake?

Office Depot, Staples a Clue?

Back in December, a small (certainly compared to Blackrock) $3 billion hedge fund called Starboard Value took a 6% stake in Staples (NASDAQ:SPLS), at the same time raising its stake in Office Depot (NASDAQ:ODP) to 10% from 8.6%. Two months later, Staples agreed to acquire Office Depot for $6.3B.

Starboard ValueGranted, Starboard was actively encouraging the two companies to merge, and positioned itself to profit in that event. Is Blackrock similarly positioning for a takeover of WPCS by a larger communications company with the capital and efficiency to take advantage of WPCS’s revenue stream?

By the numbers, WPCS looks like an attractive buy for a communications company with bigger gross profit margins. Consider: WPCS has a market cap of just $3.2M, but has liquid assets on its balance sheet of 4.5x that at $14.4M. Add to that the fact that WPCS just eliminated all of its secured debt by shedding a failed Bitcoin venture and is on track for over $35M in revenue for 2014, close to a 66% increase over 2013, it’s still alive if still inefficient and looks ripe for someone to take it over on the cheap.

The chances of WPCS, after years of failing to get costs down even at its peak, suddenly becoming sustainably profitable are slim. Blackrock knows this, and doesn’t normally invest in microcaps of WPCS’s size. It seems likely that the $4.3 trillion manager is anticipating a takeover soon.

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Varoufakis to Germans: “We are not corrupt…not yet.”

By
Rafi Farber
-
Yanis Varoufakis

Greece’s scrappy Finance Minister Dr. Yanis Varoufakis had an interesting message for the German people in an interview with German television on February 5th. While being interviewed by Tagesschau, he was asked a simple question. “What does Greece have to offer its European partners?”

Varoufakis answered simply. “We do have one thing going for us. We are not corrupt. Not yet.”

Varoufakis’ angle on the current standoff between Greece and its creditors seems to be simply this: We’re new, we have no governmental experience, we’re not the ones who got Greece into this mess, so give us until the end of May to work out a deal and I’m sure we can work something out.

Back in 2012, before Varoufakis became a household name in financial circles, he was spreading the gospel of Greek Tragedy, namely that the current Greek recession was not simply a recession but a catastrophe.

“I do not use the word ‘crisis’ for a very simple reason. Greece has had a catastrophe. An implosion. A humanitarian crisis if you will.” His considered opinion according to earlier interviews is that the Eurozone will not survive the exit of one of its member states, and therefore must not go in that direction.

Varoufakis views the so-called Greek crisis not as one centered on Greece per se, but as a European crisis in which Greece is the canary in the coal mine.

“Imagine if we were in South Dakota in 1931, and we were talking about the South Dakota crisis. How sensible would that be? It wouldn’t be. There was a financial crisis in the United States of America, in all the Western world. This is crisis of the Eurozone. The reason you are talking to me is that Greece is the canary in the mine. It’s very weak. That’s why it dies first. But it’s not responsible for the methane in the mine that has caused it.”

Varoufakis’ ultimate plan has always been to default within the Eurozone, and in order to cushion any one holder of Greek debt against heavy losses, unify the European banking system so there are no longer any Greek banks or Spanish banks, only Eurozone-wide Eurobanks. This would bring the Eurozone one step closer to a political union that former Fed Chairman Alan Greenspan said would be necessary if the Euro is to survive as a single currency.

Who holds Greek bonds these days? Source: Forbes
Who holds Greek bonds these days? Source: Forbes

A banking union in Europe would effectively mean that Greece’s losses would be diluted by spreading them throughout the Eurozone’s financial system. In other words, it will be another form of bailout, paid for by European citizens through bank losses throughout the continent.

However this catastrophe as termed by the newly minted Greek Finance Minister is resolved, somebody will be taking hundreds of billions in losses, somewhere. The question is, will those losses result in a breakup of the single currency, or will they be diluted into the oceanic European banking system through a banking union?

And if a banking union does happen, will that lead to an ultimate political union with the Eurozone being governed by a single, mammoth central government? Headed by whom? And how?

 

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Will Regulators Destroy Office Depot Merger with Staples?

By
Rafi Farber
-
Staples vs Office Depot
  • Office Depot is a failing company by the numbers
  • Staples is a success
  • Regulatory agencies still have to decide if they can merge
  • If regulators say no, and Office Depot eventually goes bankrupt, and Staples buys the assets…
  • Isn’t that the same thing?

Office Depot (ODP) just accepted a deal by Staples (SPLS) to buy the company for $6.3B. Will the government let it go through?

Beginning in September 2006, Office Depot began falling into the Office Gutter, and has not yet extricated itself.

Office Depot Chart

In 2006, Office Depot made just over $500M in earnings and had made, as a company, $3.4B until that time. The next year its earnings tanked to $400M due to increased business expenses. In 2008 it lost $1.5B, and since then has not had a profitable year except for 2011, where it earned a paltry $60M in profit.

Staples, on the other hand, weathered the Great Recession rather well, with net income dropping 19% from 2007 but staying strongly positive at $800M. Earnings are down 37% from their peak in 2012, but unlike Office Depot, it’s still making money.

The bottom line is this: Since becoming a company, Staples has made $7.2B. Office Depot has lost $900M. With Staples’ earnings plateauing and Office Depot bleeding cash, now looks like a good time to merge.

Except, regulators have to approve the merger because it might break “antitrust” laws. Antitrust law says that companies cannot merge to create a “monopoly”. The problem is, what defines “monopoly” is entirely subjective, and will be decided by bureaucrats on a whim. An Office Depot / Staples merger has been prevented in the past. If it is prevented this time in order on the pretence of protecting consumers then Office Depot will continue losing money and could even go bankrupt.

It would be a case where the law mandates company losses, by preventing Office Depot from saving itself.

The frivolity of antitrust laws can be seen in the following hypothetical: What if Office Depot were to just suddenly announce it was disbanding and sell all its assets to the highest bidder? Are they allowed to do that? Just quit? It’s the same thing as a merger, because somebody ends up with the assets. Or are they just supposed to dynamite all their stores so as not to merge with another company and break antitrust laws?

The old joke about antitrust goes like this: Three guys are sitting in a jail cell. They start telling each other why they were arrested. One says he set his prices too high because his competitors were bad and he was arrested for price gouging. Another says he set his prices too low because his competitors were too good and was arrested for lowballing. The third says he set his prices exactly the same as his competitors and worked together with them and was arrested for breaking antitrust laws.

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