Little more than a month following Sprott Molybdenum Corporation’s (MLY) announcement that it would be liquidating all of its assets, two firms significantly increased their ownership in the fund.
First, it was announced on February 10 that Weiss Capital LLC acquired 6.9 million shares of MLY at C$1.58 per share in a private transaction with Corriente Master Fund Lp (the seller), increasing its total ownership interest to 14.9 million shares or approximately 37.9% of the issued and outstanding shares. A week later, K2 Principal Fund L.P. announced that it had acquired 2.8 million shares of MLY in the open market at about C$1.59 per share, and now owns a total of 5.4 million shares or approximately 18.37% of the issued and outstanding shares.
These accumulations aren’t entirely surprising since Sprott’s net asset value has held steady at about C$1.70 since January 30, 2009, of which about C$1.51 per share is held in cash and short-term securities*. In other words, these funds may simply be hoping to make money on the spread between the market price and the NAV, i.e. hoping Sprott can liquidate its assets in an orderly-enough manner so as to capture more than C$0.08 for the remaining securities (such as Inca Pacific) currently valued at about C$0.20 in NAV.
*We aren’t confident that these NAV numbers take into account Sprott’s unrealized losses from its molybdenum sales during the period October through December 2008. MLY contracted to sell its physical molybdenum over a six-month period at average market prices in mid-2008, and had about 300,000 lbs. to sell as of September 30, 2008. Assuming this physical molybdenum was sold in equal amounts over the period October through December, we estimate that MLY has accumulated a payable of about US$4.4 million to the purchaser of the molybdenum because of the sharp decline in molybdenum prices beginning in late October. This would take the NAV down by about $0.14 per share, in which case the current share price seems to fairly accurately reflect the true NAV.
In any case, the involvement of these two funds should help further assist Sprott in finding buyers for its large share positions over the next several months without having to drive down prices too far by forced selling in the open market.
A Breakdown of Sprott Molybdenum’s Investment Portfolio
The chart below is only current as of September 30, 2008, and Sprott Molydenum has sold a portion of its investment portfolio subsequent to this date. We know this because MLY publishes an updated NAV on its website, which currently consists of $1.51/share in cash and securities. As of September 30, 2009 its cash and securities position only accounted for about $1.19/share of value, meaning that some asset sales must have taken place. However, until MLY releases its year-end numbers, this is as accurate a picture as we are capable of drawing. We plan to update the chart once the new financials are released.
The utility of this graph is to show where the price impact of Sprott’s liquidation is likely to be greatest. That is, we would expected the potential price declines to be greatest where MLY holds a substantial position in the underlying company. In other words, NER, TTQ, VGM, PBX, TCR, WRY, and IPR seem the most vulnerable to adverse price movements if Sprott Molybdenum is unable to find a large buyer for its position given that MLY’s ownership interest is greater than 10% in each of these companies. In contrast, CYU, TVC, and CBS are unlikely to experience much adverse price movement due to MLY’s liquidation since its remaining ownership interest in these companies is insubstantial.
For a detailed break-down of Sprott’s securities portfolio as of September 30, 2009, see the table below:
Investors may be able to purchase shares of companies in Sprott Moly’s portfolio (especially NER, TTQ, VGM, PBX, TCR, WRY, and IPR) at stink-bid prices over the coming months if MLY has trouble finding large buyers as it continues to liquidate its ownership positions. Alternatively, one could take the view that the market has already reacted to this information by selling the companies where MLY has a high ownership interest, expecting selling pressure to dominate until MLY fully liquidates. In this case, investors should watch for any news and/or large intra-day volume spikes that might indicate that Sprott was able to carry out a large cross-trade. These indicators could precede a rally in these companies’ stock prices since this would signal to the market that the large overhang of shares owned by MLY have found a home.
Disclosure: This is not a recommendation to buy or sell. This information is for instructional purposes only. We own shares in several of the companies mentioned, but we have never received compensation in any form from any of these companies.