True Gold taps new sources to raise capital

Mark O’Dea has to be the envy of every of nearly every junior mining CEO in the country.

As the executive chairman of True Gold Mining Inc., Mr. O’Dea has signed off on deals to raise $33.5-million of fresh capital since the start of May. That equates to more than half of True’s $60-million market value.

It is an enormous amount of money for a junior gold miner to raise at this point in time. Juniors are suffering through some of the worst market conditions seen in decades, as risk capital has fled the sector and equity financing opportunities have dried up due to lack of demand. The recent drop in gold prices only made matters worse.

Mr. O’Dea, a well-known mining entrepreneur, said he recognized the equity markets were a non-starter for raising capital. That caused him to take a different approach and look for strategic investors. His success demonstrates that money is available for quality junior companies, but they have to work a little harder for it than they used to.

“We’ve really tried to target a different style of niche investor, and different pools of capital from the traditional resource sector funds which have been really beat up,” the 45-year-old said in an interview.

Many juniors like to talk about how they are courting various “strategic” investors (particularly in Asia) but almost none are able to raise substantial amounts of money that way.

True Gold, however, was able to tap two different sources. Back in May, the Vancouver-based miner raised $10-million through a private placement with Canadian giant Teck Resources Ltd. And on Thursday, the company announced it is receiving a $23.5-million investment from Liberty Metals & Mining Holding LLC, a subsidiary of Liberty Mutual Insurance and a very long-term investor in the resource space.

True Gold was helped by the fact that Mr. O’Dea has a strong track record. He was the CEO of Fronteer Gold Inc., which made a discovery in Nevada and was sold to Newmont Mining Corp. for $2.3-billion in 2011. He also has a relationship with Teck that dates back to his days at Fronteer.

But on its own, that would probably not be enough to raise significant funds in this market.

Mr. O’Dea said the key was to match the project he wanted to build with the right kind of long-term investors. He said that Liberty was interested in True Gold’s Karma project in Burkina Faso because it has low capital intensity, with a construction cost of less than $150-million. That is a must in a market where capital is so scarce, and provides a useful lesson for juniors trying to tackle more ambitious projects.

“As the market began to turn, we recognized that projects with low capital costs, that can get into production relatively quickly, and can withstand downward pressure on the gold price are the projects you want to be in,” he said.


Is gold’s rally over?

long rally has been called into question lately as the Federal Reserve’s talk of possibly unwinding its four-year quantitative easing “experiment” has caused investors to tire of the yellow metal.

In addition to the QE unwinding, other explanations that have been offered include the relation between gold prices and Japanese government bond volatility as well as the general unwinding of dollar shorts as the U.S. shifts from an economy where consumption is funded by debt, to one where consumption is funded by income. We concern ourselves less with the theories behind gold’s decline and focus instead on the metal’s price/volume action.

Chart 1 — Gold weekly chart, 2001-present. The long-term trend is just barely intact.

Chart 1, the weekly chart of the gold index, reveals that this is the first time since the big bull rally in gold began in 2001 that gold has broken below the lows of a consolidation of “basing” pattern as it reaches a critical price point. We’ve drawn a long-term lower trend line on the gold index chart to show that gold is certainly at a crossroads as its long-term trend approaches a potential tipping point. A breach of this trendline could send gold back to major support at around the $1,000 price level.

The question most on investors’ minds is whether such a decline would set up a major buying opportunity for those who still believe that over the longer-term, holders of fiat currencies will move to seek a more reliable alternative. Given gold’s historical and cultural acceptance as money, gold is viewed as an alternative currency. Worries that an unwinding of QE will cause gold’s ultimate demise rely on the erroneous belief that gold’s price move has been driven solely by quantitative easing, which is not the case. Chart 1 shows that gold’s move began in earnest in 2001, long before the Federal Reserve’s creative QE liquidity machine was conceived and put into action in 2009, but well after the Fed’s easy money policy became well-entrenched during the Greenspan era of the late-1990s and early 2000s, leading to the longer-term devaluation of the dollar.

Chart 2 — Gold daily chart, 2001-present. A retest of the April lows may be critical for gold.

Our view is that investors should simply let the current decline in gold run its course, at least until a technical low can be discerned. Chart 2, the daily chart of the gold index, provides one example of a potential bottoming formation as the metal retests its April low, an area that also coincides with gold’s long-term uptrend line as shown in Chart 1. The question is what could trigger a recovery and rally in gold?

Aside from all the other theories that have been offered, we consider the fact that the paper gold market, consisting of futures contracts and exchange traded funds such as the SPDR Gold Trust GLD +1.93% , is about 100 times the physical market. Recent declines in the price of gold have been met by huge surges in demand for physical gold which has proven much more difficult to get ahold of than paper gold which has been figuratively tossed out the window. Thus the paradox of declining paper gold prices versus surging physical demand where steep drops in gold have not led to the wholesale dumping of physical metal. Rather the opposite has occurred. This has resulted in relatively high premiums for physical precious metals, in particular for the “poor man’s gold,” silver.

In pondering this, we have to wonder whether the selling in precious metals is due to the realization that when a currency dislocation occurs, whether in the U.S. dollar, the euro, the yen, or some other currency, paper metals will do you no good — you must have physical. Therefore, the current selling could simply be an unwinding of the paper precious metals trade in anticipation of this. We find some indication of investors looking to alternative, less “printable” currencies, such as Bitcoin and the phenomenon of some U.S. states and municipalities creating their own local currencies. Thus, in such a realm, investors may decide that paper gold is not the solution.

In our view, the Fed is in no position to begin unwinding QE as the U.S. economy remains much weaker than most pundits and government statisticians and number massagers would have you believe, and the Japanese have taken a stance we like to refer to as “Kamikaze QE” as they go all in on the ill-fated delusion that they can suddenly jumpstart their decades long economic stagnation with some sort of steroidal version of what they’ve been doing for about the last 30 years. Meanwhile, Europe remains between a rock and a hard place. This is illustrated when even a small dislocation such as was seen recently in Cyprus, finds no other solutions other than the rote financial engineering and money-printing as bailouts persist as the rule of the day.

Our general view is that a major buying opportunity in gold may be at hand, but because we rely on price/volume action, in other words, market facts, we shun a reliance on theories of all stripes. If gold is able to successfully test its April low and mount a rally from here, then the yellow metal may be able to shine once again.

Gil Morales and Dr. Chris Kacher are both principals and managing directors of MoKa Investors LLC and Virtue of Selfish Investing, LLC, cofounders of and co-authors of “Trade Like An O’Neil Disciple: How We Made 18,000% in the Stock Market” (Wiley, August, 2010) and their newest book, “In the Trading Cockpit with the O’Neil Disciples,” (Wiley, December 2012). Both are former internal portfolio managers for William O’Neil + Co., Inc., where Dr. Kacher also served as a senior research analyst and co-authored an in-house proprietary book “The Model Book of Greatest Stock Market Winners”, while Mr. Morales also served as Chief Market Strategist, Vice-President and Manager of the firm’s Institutional Services group, and co-authored with William J. O’Neil a book on short-selling, “How to Make Money Selling Stocks Short” (Wiley, 2004) .


Alleged Ponzi Scheme Perpetrators Speak Out Against Use of Words “Ponzi Scheme”

Posted by Kathy Bazoian Phelps

What is it with alleged Ponzi scheme perpetrators these days? They seem to have a heightened sensitivity to the use of the words “Ponzi scheme.” In 2012, two cases were decided against two governmental agencies – the SEC and the IRS–in connection with their use of the words “Ponzi scheme.”

Also Read: Biggest Ponzi Scheme

In a case brought by the SEC against Small Business Capital Corp. and its principal, Mark Feathers, Feathers filed a Motion for Restraining Order (“TRO“), Preliminary Injunction, Sanctions, and Special Damages against the SEC, arguing that the SEC used “fighting words” in certain publications related to the case. SEC v. Small Business Capital Corp., 2012 U.S. Dist. LEXIS 178392 (N.D. Cal 2012). Feathers based his motion on the argument that the SEC’s use of the works “Ponzi-like” and “swindler” are “fighting words” which violated that his First Amendment rights. The court, in denying Feathers’ motion, noted:

The problem with Plaintiff’s request in the context of this action, however, is that claims under the First Amendment are not at issue in this case. Indeed, the classic issue presented by “fighting words” is whether such speech is constitutionally protected; in other words, whether the challenged speech is “likely to produce a clear and present danger of a serious substantive evil that rises far above public inconvenience, annoyance, or unrest.”City of Houston v. Hill

, 482 U.S. 451, 462 (1987). Any party’s right to free speech is not implicated by the claims brought by Plaintiff, which involves only violations of securities law. Absent such a free speech issue, the court is unable to analyze whether Defendant could prevail on the merits of a First Amendment claim.The court found that “fighting words” lose First Amendment protection only if they constitute “words that by their very utterance inflict injury or tend to incite an immediate breach of the peace.” Id. at *5 (citing Hill, 482 U.S. at 461-62). After denying Feathers’ request for a TRO and preliminary injunction, the court cautioned:

With that said, however, the court expects all parties to this case to act in a dignified and appropriate manner. The language utilized in press releases, pleadings or other documents should be carefully chosen so as not to denigrate others or unnecessarily jeopardize the viability of the investment assets, especially when this case remains at the initial stages of litigation.Id. at *6.
In a separate case brought against the IRS, Plaintiffs Emerging Money Corporation, Emerging Administrative Services, LLC and Emerging Actuarial Designs, LLC alleged that the IRS had wrongfully disclosed information when it asserted to certain taxpayers that the transactions that the “Plaintiffs had promoted to them were ‘sham transactions’ and part of a ‘Ponzi scheme.’” Emerging Money Corp. v. United States, 873 F. Supp. 2d 451 (D. Conn. June 4, 2012).

The Plaintiffs’ “claim was based on 26 U.S.C. § 7431, which permits plaintiffs to recover damages when an officer of the United States knowingly or negligently discloses returns or return information in violation of Section 6103. Plaintiffs seek, inter alia, $1,000 for each unauthorized disclosure of their return information.” Id. at *6. The IRS filed a motion for summary judgment, arguing that it was permitted to make those statements under the Internal Revenue Code.

The facts in the case were that the IRS had investigated the Plaintiffs’ “Stock to Cash” program in which a client would transfer shares of stock to a lender and the lender would make an upfront cash payment called a “loan.” The IRS concluded that the program was a Ponzi scheme and delivered letters to the clients who had participated in the program which included the following information: “(1) identification of Plaintiffs as possible ‘lenders’ or administrators of the Stock to Cash program (the ‘identification of Plaintiffs’); (2) the statement that the IRS was conducting an investigation of the Stock to Cash program (the ‘investigation assertion’); (3) the IRS‘s position that the Stock to Cash transactions were ‘sham transactions’ (the ‘sham-transaction assertion’) and (4) the assertion that those transactions were ‘built into a Ponzi scheme’ (the ‘Ponzi-scheme assertion’).” Id. at *4-5.

The IRS contended that it was entitled to disclose the information under the “Own Information” exception under 26 U.S.C. § 6103(e)(7). The court reviewed relevant case law and concluded that most of the information disclosed was the recipients’ own information because it “consisted of facts that directly impacted the Recipients’ tax liabilities.” However, the court noted, “But the Ponzi-scheme assertion did not directly impact the Recipients’ tax liabilities. Their ‘loans’ would have been considered sales of stock whether or not the program was a Ponzi scheme. The fact that the transactions were ‘shams’ was enough to establish to the Recipients that they were invalid, without a contextual reference to a larger Ponzi scheme.” Id. at *13.

The court reviewed several other exceptions, such as the “Administrative Proceeding” Exception, the “Investigative Purposes” exception, and the “Erroneous Information” issue, and ultimately concluded that the IRS did not violate Section 6103 when it sent out the letters regarding most of the information contained in the letters. However, the court found that the “exceptions did not cover the IRS’s assertion that the Stock to Cash program was a Ponzi scheme.” Id. at *23. The court instructed the Plaintiffs to file a statement and explanation of the damages they were seeking if they wanted to proceed to trial. The Plaintiffs filed a supplemental statement asking for $69,000 in statutory damages, or in the alternative, actual and punitive damages, plus attorneys’ fees and costs. The Plaintiffs’ statement is attached here.

Two alleged Ponzi scheme perpetrators, two governmental agencies, two courts, and two decisions – all involving the use of the words “Ponzi scheme.” If nothing else, these cases are a reminder that we are in this country innocent until proven guilty, so we should tread carefully when using those two little words.