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Monday, September 8, 2014

Playing private placements in natural resources recovery @Mineweb

From @SprottGlobal
Rick Rule believes that if you’re able to take part in these transactions, they could be attractive ways to take advantage of a recovery in natural resources, Henry Bonner writes.


Playing private placements in natural resources recovery
Author: Henry Bonner
Posted: Thursday , 04 Sep 2014 

(Sprott Global) - 
Some investors are able to participate in private placements, where a company raises money by offering new shares. For US investors to participate in a private placement, they must be suitably qualified for the offering. Suitability depends on the exemptions under the Securities Act of 1933 through which the company is able to offer new shares. This loosely means that the investor must meet a certain threshold of net worth, income, or investable assets in order to participate.
Private placements may be done by private or publicly trading companies. When a public company issues shares in a private placement, the new shares are not freely tradable, but must be held for a specified period of time, and must have their trading restriction lifted by the issuer’s legal counsel before they can be sold.
Rick Rule believes that if you’re able to take part in these transactions, they could be attractive ways to take advantage of a recovery in natural resources:
Let’s define what a private placement is: a private issuance of new equity, new debt, or new warrants, from the treasury of a public or private issuer. It’s not a secondary market transaction of securities that have already been issued, but rather an issue of new treasuries that isn’t registered as a public offering.
The advantage of private placements to the participant, in a traditional equity private placement, is that you often acquire an amount of stock that would be difficult to buy in the market for a small cap stock. You get to acquire the stock on terms that are set with the issuer, and not set by the vagaries of the bid and ask in the market. You may also be able to acuqire a warrant or a half-warrant along with your shares. A warrant is the right but not the obligation to buy more shares at a fixed price. It’s this leverage in the warrant that has made Sprott Global an active participant in private placement markets for 30 years.
Increasingly, other forms of private placements have become interesting to the people who run Sprott, myself included. We have found that, particularly in the United States, the costs of running a public company are so extraordinary that for ventures requiring less than $50 million in capital, we are better off funding private companies who avoid many of these costs.
So, increasingly, at Sprott, we are investing by way of private equity transactions, or we’re doing business in unincorporated joint ventures or partnerships. That’s particularly true where our goal is income. We find that the public 'wrapper' -- with the ongoing expense of a public listing, including legal, audit, and Sarbanes-Oxley fees -- is inefficient and reduces the amount of income that can be distributed by the company to the investor.
So one of the things that Sprott customers will be seeing with increased frequency in the next 5 years, particularly with regards to income-generating transactions, will be privately placed debt instruments from public issuers, oil and gas income opportunities, and infrastructure income from opportunities like terminals and pipelines. Theses are not publicly-trading equities, but rather, they are either shares in limited liability companies or in limited partnerships designed to funnel money directly to investors and that are exempt from filing fees, Sarbanes-Oxley, and registration statements.
Readers should know that in order to participate in placements generally, they need to have a certain level of assets based upon the type of exemption the offering utilizes. Often, investors need to have $1 million in investable assets; in some cases, the investor must be a Qualified Purchaser, meaning they have $5 million in investable assets. It will be important for investors to understand, when analyzing private placements for their own portfolios, which of these classifications they are in. That’s of course a function of their investable capital.



Playing private placements in natural resources recovery - GOLD NEWS - Mineweb.com Mineweb





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Sunday, September 7, 2014

Should #Venezuela Default? by Ricardo Hausmann and Miguel Angel Santos - Project Syndicate

Excellent piece on the predicament of Venezuela as it faces a cash crunch. More than $6 billion are due by the end of the year, an amount that would devastate its foreign reserves, currently at just over $9 billion. 

Should Venezuela Default?

By Ricardo Hausmann and Miguel Angel Santos

Ricardo Hausmann, former Venezuelan Planning minister and chief Economist at the IADB, and Miguel Angel Santos are professors at Harvard University.  

CAMBRIDGE – Will Venezuela default on its foreign bonds? Markets fear that it might. That is why Venezuelan bonds pay over 11 percentage points more than US Treasuries, which is 12 times more than Mexico, four times more than Nigeria, and double what Bolivia pays. Last May, when Venezuela made a $5 billion private placement of ten-year bonds with a 6% coupon, it effectively had to give a 40% discount, leaving it with barely $3 billion. The extra $2 billion that it will have to pay in ten years is the compensation that investors demand for the likelihood of default, in excess of the already hefty coupon.
Venezuela’s government needs to pay $5.2 billion in the first days of October. Will it? Does it have the cash on hand? Will it raise the money by hurriedly selling CITGO, now wholly owned by Venezuela’s state oil company, PDVSA?
A different question is whether Venezuela should pay. Granted, what governments should do and what they will do are not always independent questions, because people often do what they should. But “should” questions involve some kind of moral judgment that is not central to “will” questions, which makes them more complex. 
One point of view holds that if you can make good on your commitments, then that is what you should do. That is what most parents teach their children.
But the moral calculus becomes a bit more intricate when you cannot make good on all of your commitments and have to decide which to honor and which to avoid. To date, under former President Hugo Chávez and his successor, Nicolás Maduro, Venezuela has opted to service its foreign bonds, many of which are held by well-connected wealthy Venezuelans.
Yordano, a popular Venezuelan singer, probably would have a different set of priorities. He was diagnosed with cancer earlier this year and had to launch a social-media campaign to locate the drugs that his treatment required. Severe shortages of life-saving drugs in Venezuela are the result of the government’s default on a $3.5 billion bill for pharmaceutical imports.
A similar situation prevails throughout the rest of the economy. Payment arrears on food imports amount to $2.4 billion, leading to a substantial shortage of staple goods. In the automobile sector, the default exceeds $3 billion, leading to a collapse in transport services as a result of a lack of spare parts. Airline companies are owed $3.7 billion, causing many to suspend activities and overall service to fall by half.
In Venezuela, importers must wait six months after goods have cleared customs to buy previously authorized dollars. But the government has opted to default on these obligations, too, leaving importers with a lot of useless local currency. For a while, credit from foreign suppliers and headquarters made up for the lack of access to foreign currency; but, given mounting arrears and massive devaluations, credit has dried up.
The list of defaults goes on and on. Venezuela has defaulted on PDVSA’s suppliers, contractors, and joint-venture partners, causing oil exports to fall by 45% relative to 1997 and production to amount to about half what the 2005 plan had projected for 2012.
In addition, Venezuela’s central bank has defaulted on its obligation to maintain price stability by nearly quadrupling the money supply in 24 months, which has resulted in a 90% decline in the bolivar’s value on the black market and the world’s highest inflation rate. To add insult to injury, since May the central bank has defaulted on its obligation to publish inflation and other statistics.
Venezuela functions with four exchange rates, with the difference between the strongest and the weakest being a factor of 13. Unsurprisingly, currency arbitrage has propelled Venezuela to the top ranks of global corruption indicators.
All of this chaos is the consequence of a massive fiscal deficit that is being financed by out-of-control money creation, financial repression, and mounting defaults – despite a budget windfall from $100-a-barrel oil. Instead of fixing the problem, Maduro’s government has decided to complement ineffective exchange and price controls with measures like closing borders to stop smuggling and fingerprinting shoppers to prevent “hoarding.” This constitutes a default on Venezuelans’ most basic freedoms, which Bolivia, Ecuador, and Nicaragua – three ideologically kindred countries that have a single exchange rate and single-digit inflation – have managed to preserve.
So, should Venezuela default on its foreign bonds? If the authorities adopted common-sense policies and sought support from the International Monetary Fund and other multilateral lenders, as most troubled countries tend to do, they would rightly be told to default on the country’s debts. That way, the burden of adjustment would be shared with other creditors, as has occurred in Greece, and the economy would gain time to recover, particularly as investments in the world’s largest oil reserves began to bear fruit. Bondholders would be wise to exchange their current bonds for longer-dated instruments that would benefit from the upturn.
None of this will happen under Maduro’s government, which lacks the capacity, political capital, and will to move in this direction. But the fact that his administration has chosen to default on 30 million Venezuelans, rather than on Wall Street, is not a sign of its moral rectitude. It is a signal of its moral bankruptcy.




Should Venezuela Default? by Ricardo Hausmann and Miguel Angel Santos - Project Syndicate



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