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Nate Anderson presents short thesis for New Pacific At ValueWalk Conference

Nate Anderson presents short thesis for New Pacific At ValueWalk Conference

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New Pacific

During ValueWalk’s first annual Contrarian Investor Virtual Conference, Nate Anderson of Hindenburg Research presented his short thesis for New Pacific Metals Corp  (OTCMKTS: NUPMF).

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Red flags for New Pacific

He said New Pacific CEO Rui Feng is also Chairman and CEO of Silvercorp. The company is backed by Pan American Silver and Silvercorp. He believes unprecedented central bank moves are buying silver prices as investors hope the company's Bolivian silver projects could be world class assets. The company has only one supposedly active mining claim in Bolivia called Silver Sand. However, it may not even have any control over that claim, and investors seem unaware of this.

He explained that New Pacific's stock has been helped along by paid promotions. GoldNewsLetter was paid $200,000 to promote the stock and the company, calling it a "world-class silver project." Proactive Canada was paid $25,000 per year to promote the stock. In a newsletter, Stansberry Research declared the project to be "the biggest silver opportunity in 50 years," containing a "mountain of silver.

Anderson noted that New Pacific is 85% fundamentally overvalued compared to its peers.

new pacific

He also called attention to a number of management red flags. He said they are especially litigious and have used state influence and litigation to pressure critics. A short-seller in British Colombia was jailed for speaking out against New Pacific.

He emphasized the relationship between New Pacific and Silvercorp. The two share board members, office space and contacts. According to SEDAR, they even shared a mailing address and contact name. Silvercorp owns about 29% of New Pacific. Further, the supposedly independent geologist who prepared New Pacific's report for its flagship Silver Sand property is a former Silvercorp employee.

New Pacific supposedly acquired concessions to the Silver Sand project in mid-2017. However, it isn't actively exploring or developing any properties other than Silver Sand. The project is estimated to be 10 years away from production, but New Pacific shares are up nearly 400% since the purchase was announced.

Strong legal start for New Pacific

The company was off to a strong start legally. It acquired Bolivian mining entity Alcira in 2017 for $45 million from its Chinese owners. The deal was focused on a 3.17-kilometer core area now referred to as the Silver Sand project.

In January 2019, New Pacific announced it had reached a major deal with state mining company COMIBOL and signed a contract for a much larger area of surrounding land. With that deal, New Pacific became the first foreign company to sign a new contract with COMIBOL since President Evo Morales entered office in 2006.

It seemed as if the company was on track to win legislative approval to secure and begin exploiting its new, expanded mining areas. However, the Morales administration New Pacific was working with was ousted in a coup in November 2019. In Potosi where the company's mining operations are based, the electoral court was burned to the ground, illustrating just how violent the coup was.

New political risk

The new administration accused the Morales administration of acts of corruption in relation to New Pacific's project. After the coup, Morales and his minister of mines, Cesar Navarro, fled to Mexico. Just days before he fled, the new minister of mines accused Navarro of corruption in connection to the Alcira deal.

Anderson believes the political risk facing New Pacific remains high. Hindenburg hired local consultants to perform checks with local sources and officials. Based on their findings, Anderson's base case is that New Pacific's deal for the expanded mining area will never be ratified. He also expects the Silver Sand property to be contested. If any deal is ever approved, he expects the economics to be worse than the company has advertised. He also said multiple sources have said that there's a potential for graft in the kind of deal Navarro's ministry was putting together with Alcira.

Former COMIBOL chairman Hector Cardova said New Pacific's Silver Sand contract is currently suspended. While it's been signed by COMIBOL and the company, it doesn't have parliamentary approval, so it doesn't go into effect. Without framework regulation, he doesn't believe parliament will approve it.

A political advisor to the new Bolivian government said that according to the current mining minister, a government-based group had an economic interest in obtaining money from Alcira. The former mines minister described Navarro as "one of the most corrupt ministers there has been" and "always open for business."

New Pacific's mining concession may have violated Bolivian law

Anderson also believes New Pacific's purchase of the mining concession may even have violated Bolivian law. The country doesn't permit the sale or purchase of mining areas privately. All transactions must be state-approved. The key legal question relates to the company's $45 million purchase of Alcira, the Bolivian entity that controlled its Silver Sand property. Anderson questioned whether New Pacific paid to be able to acquire its concessions, which would probably be illegal, or whether the price tag was purely to acquire Alcira's assets.

He said the answer seems clear because the circular detailing the Alcira acquisition indicated that the entity's total assets were worth only $84,131 before the acquisition. He added that New Pacific paid about 85 times more for Alcira than its previous owners, China-based Ningde Jungie, which paid $530,000.

Nate also pointed out that New Pacific's flagship property is in a state of legal limbo. The previous owner of Alcira allegedly bought them in violation of the constitution. Thus, the state stripped the mining areas. Navarro initially supported their revocation but then conveniently moved to reinstate the concessions before the sale to New Pacific.

The Mines Ministry ruled in January 2016 to overturn AJAM's appeal ruling about the revocation of the Silver Sand concessions. However, that ruling doesn't appear to have overturned the May 2015 decision to revoke Alcira's 17 concessions.

That means that while the appeal upholding the revocation was tossed out, the original revocation of the mining concessions was never actually reversed. New Pacific announced the deal to acquire Alcira on Apr. 10, 2017.

They spoke with one Bolivian lawmaker who seemed like he may have been willing to accept a bribe in relation to New Pacific. When Hindenburg asked about the company, he offered what sounded like an unsolicited offer to help pass or block the contract between New Pacific and COMIBOL. When asked if that would come at a price, he said yes.

Anderson doesn't believe the new Bolivian administration will sign off on the dealings of the old regime. He offered three possible scenarios. The first is total revocation of contracts and mining areas. The second is a renegotiated deal with COMIBOL and the legislation, which would likely be on far less favorable terms. The third is that the deal somehow passes through Bolivia's congress as it is.

Management accused of inflating silver grades

He also said New Pacific management has been accused of inflating silver grades. In 2011, fraud researcher Jon Carnes, who has one of the best track records in the industry in identifying irregularities with China-based companies, issued a report on related company Silvercorp.

The report alleged that the company's technical reports were based on a two-man team that used resource estimates provided by Silvercorp and hadn't visited the site in years. The report also said the quality and resource estimates of its mines were overstated and that a related third-party transaction enriched a relative of CEO Rui Feng.

Valuing New Pacific

Anderson added that New Pacific's balance sheet shows 30 cents per share in liquidation value excluding the mining interests. He said the company had about C$43 million in current liquid assets, including C$33.6 million in cash and C$8.7 million in bonds.

He said technical analysis indicates that the company's Silver Sand project is only worth about 29 cents per share (Canadian). Nate added that the Potosi region is well-known for its world-class silver deposits, especially the Cerro Rico mine. Over 2 billion ounces of silver have been mined from there since 1545.

However, the sheer quantity and grade of the silver there has resulted in decades of exploitation and abuse by the Spanish empire and other foreign entities since the discovery, resulting in the deaths of about 8 million people. Due to the history and social and political backdrop, silver deposits in Potosi need to be "world-class" for it to be worthwhile for mining companies and their investors to try to develop the deposits.

Thus, Anderson argues that there was 90% downside to New Pacific shares before today's presentation, resulting in a price target of 37 cents per share (Canadian) for the stock. Hindenburg is short both New Pacific and its related entity Silvercorp.

The post Nate Anderson presents short thesis for New Pacific At ValueWalk Conference appeared first on ValueWalk.

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Industrial Production Increased 0.1% in February

From the Fed: Industrial Production and Capacity Utilization
Industrial production edged up 0.1 percent in February after declining 0.5 percent in January. In February, the output of manufacturing rose 0.8 percent and the index for mining climbed 2.2 p…

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From the Fed: Industrial Production and Capacity Utilization
Industrial production edged up 0.1 percent in February after declining 0.5 percent in January. In February, the output of manufacturing rose 0.8 percent and the index for mining climbed 2.2 percent. Both gains partly reflected recoveries from weather-related declines in January. The index for utilities fell 7.5 percent in February because of warmer-than-typical temperatures. At 102.3 percent of its 2017 average, total industrial production in February was 0.2 percent below its year-earlier level. Capacity utilization for the industrial sector remained at 78.3 percent in February, a rate that is 1.3 percentage points below its long-run (1972–2023) average.
emphasis added
Capacity UtilizationClick on graph for larger image.

This graph shows Capacity Utilization. This series is up from the record low set in April 2020, and above the level in February 2020 (pre-pandemic).

Capacity utilization at 78.3% is 1.3% below the average from 1972 to 2022.  This was below consensus expectations.

Note: y-axis doesn't start at zero to better show the change.


Industrial Production The second graph shows industrial production since 1967.

Industrial production increased to 102.3. This is above the pre-pandemic level.

Industrial production was above consensus expectations.

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Fuel poverty in England is probably 2.5 times higher than government statistics show

The top 40% most energy efficient homes aren’t counted as being in fuel poverty, no matter what their bills or income are.

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Julian Hochgesang|Unsplash

The cap set on how much UK energy suppliers can charge for domestic gas and electricity is set to fall by 15% from April 1 2024. Despite this, prices remain shockingly high. The average household energy bill in 2023 was £2,592 a year, dwarfing the pre-pandemic average of £1,308 in 2019.

The term “fuel poverty” refers to a household’s ability to afford the energy required to maintain adequate warmth and the use of other essential appliances. Quite how it is measured varies from country to country. In England, the government uses what is known as the low income low energy efficiency (Lilee) indicator.

Since energy costs started rising sharply in 2021, UK households’ spending powers have plummeted. It would be reasonable to assume that these increasingly hostile economic conditions have caused fuel poverty rates to rise.

However, according to the Lilee fuel poverty metric, in England there have only been modest changes in fuel poverty incidence year on year. In fact, government statistics show a slight decrease in the nationwide rate, from 13.2% in 2020 to 13.0% in 2023.

Our recent study suggests that these figures are incorrect. We estimate the rate of fuel poverty in England to be around 2.5 times higher than what the government’s statistics show, because the criteria underpinning the Lilee estimation process leaves out a large number of financially vulnerable households which, in reality, are unable to afford and maintain adequate warmth.

Blocks of flats in London.
Household fuel poverty in England is calculated on the basis of the energy efficiency of the home. Igor Sporynin|Unsplash

Energy security

In 2022, we undertook an in-depth analysis of Lilee fuel poverty in Greater London. First, we combined fuel poverty, housing and employment data to provide an estimate of vulnerable homes which are omitted from Lilee statistics.

We also surveyed 2,886 residents of Greater London about their experiences of fuel poverty during the winter of 2022. We wanted to gauge energy security, which refers to a type of self-reported fuel poverty. Both parts of the study aimed to demonstrate the potential flaws of the Lilee definition.

Introduced in 2019, the Lilee metric considers a household to be “fuel poor” if it meets two criteria. First, after accounting for energy expenses, its income must fall below the poverty line (which is 60% of median income).

Second, the property must have an energy performance certificate (EPC) rating of D–G (the lowest four ratings). The government’s apparent logic for the Lilee metric is to quicken the net-zero transition of the housing sector.

In Sustainable Warmth, the policy paper that defined the Lilee approach, the government says that EPC A–C-rated homes “will not significantly benefit from energy-efficiency measures”. Hence, the focus on fuel poverty in D–G-rated properties.

Generally speaking, EPC A–C-rated homes (those with the highest three ratings) are considered energy efficient, while D–G-rated homes are deemed inefficient. The problem with how Lilee fuel poverty is measured is that the process assumes that EPC A–C-rated homes are too “energy efficient” to be considered fuel poor: the main focus of the fuel poverty assessment is a characteristic of the property, not the occupant’s financial situation.

In other words, by this metric, anyone living in an energy-efficient home cannot be considered to be in fuel poverty, no matter their financial situation. There is an obvious flaw here.

Around 40% of homes in England have an EPC rating of A–C. According to the Lilee definition, none of these homes can or ever will be classed as fuel poor. Even though energy prices are going through the roof, a single-parent household with dependent children whose only income is universal credit (or some other form of benefits) will still not be considered to be living in fuel poverty if their home is rated A-C.

The lack of protection afforded to these households against an extremely volatile energy market is highly concerning.

In our study, we estimate that 4.4% of London’s homes are rated A-C and also financially vulnerable. That is around 171,091 households, which are currently omitted by the Lilee metric but remain highly likely to be unable to afford adequate energy.

In most other European nations, what is known as the 10% indicator is used to gauge fuel poverty. This metric, which was also used in England from the 1990s until the mid 2010s, considers a home to be fuel poor if more than 10% of income is spent on energy. Here, the main focus of the fuel poverty assessment is the occupant’s financial situation, not the property.

Were such alternative fuel poverty metrics to be employed, a significant portion of those 171,091 households in London would almost certainly qualify as fuel poor.

This is confirmed by the findings of our survey. Our data shows that 28.2% of the 2,886 people who responded were “energy insecure”. This includes being unable to afford energy, making involuntary spending trade-offs between food and energy, and falling behind on energy payments.

Worryingly, we found that the rate of energy insecurity in the survey sample is around 2.5 times higher than the official rate of fuel poverty in London (11.5%), as assessed according to the Lilee metric.

It is likely that this figure can be extrapolated for the rest of England. If anything, energy insecurity may be even higher in other regions, given that Londoners tend to have higher-than-average household income.

The UK government is wrongly omitting hundreds of thousands of English households from fuel poverty statistics. Without a more accurate measure, vulnerable households will continue to be overlooked and not get the assistance they desperately need to stay warm.

The Conversation

Torran Semple receives funding from Engineering and Physical Sciences Research Council (EPSRC) grant EP/S023305/1.

John Harvey does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Southwest and United Airlines have bad news for passengers

Both airlines are facing the same problem, one that could lead to higher airfares and fewer flight options.

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Airlines operate in a market that's dictated by supply and demand: If more people want to fly a specific route than there are available seats, then tickets on those flights cost more.

That makes scheduling and predicting demand a huge part of maximizing revenue for airlines. There are, however, numerous factors that go into how airlines decide which flights to put on the schedule.

Related: Major airline faces Chapter 11 bankruptcy concerns

Every airport has only a certain number of gates, flight slots and runway capacity, limiting carriers' flexibility. That's why during times of high demand — like flights to Las Vegas during Super Bowl week — do not usually translate to airlines sending more planes to and from that destination.

Airlines generally do try to add capacity every year. That's become challenging as Boeing has struggled to keep up with demand for new airplanes. If you can't add airplanes, you can't grow your business. That's caused problems for the entire industry. 

Every airline retires planes each year. In general, those get replaced by newer, better models that offer more efficiency and, in most cases, better passenger amenities. 

If an airline can't get the planes it had hoped to add to its fleet in a given year, it can face capacity problems. And it's a problem that both Southwest Airlines (LUV) and United Airlines have addressed in a way that's inevitable but bad for passengers. 

Southwest Airlines has not been able to get the airplanes it had hoped to.

Image source: Kevin Dietsch/Getty Images

Southwest slows down its pilot hiring

In 2023, Southwest made a huge push to hire pilots. The airline lost thousands of pilots to retirement during the covid pandemic and it needed to replace them in order to build back to its 2019 capacity.

The airline successfully did that but will not continue that trend in 2024.

"Southwest plans to hire approximately 350 pilots this year, and no new-hire classes are scheduled after this month," Travel Weekly reported. "Last year, Southwest hired 1,916 pilots, according to pilot recruitment advisory firm Future & Active Pilot Advisors. The airline hired 1,140 pilots in 2022." 

The slowdown in hiring directly relates to the airline expecting to grow capacity only in the low-single-digits percent in 2024.

"Moving into 2024, there is continued uncertainty around the timing of expected Boeing deliveries and the certification of the Max 7 aircraft. Our fleet plans remain nimble and currently differs from our contractual order book with Boeing," Southwest Airlines Chief Financial Officer Tammy Romo said during the airline's fourth-quarter-earnings call

"We are planning for 79 aircraft deliveries this year and expect to retire roughly 45 700 and 4 800, resulting in a net expected increase of 30 aircraft this year."

That's very modest growth, which should not be enough of an increase in capacity to lower prices in any significant way.

United Airlines pauses pilot hiring

Boeing's  (BA)  struggles have had wide impact across the industry. United Airlines has also said it was going to pause hiring new pilots through the end of May.

United  (UAL)  Fight Operations Vice President Marc Champion explained the situation in a memo to the airline's staff.

"As you know, United has hundreds of new planes on order, and while we remain on path to be the fastest-growing airline in the industry, we just won't grow as fast as we thought we would in 2024 due to continued delays at Boeing," he said.

"For example, we had contractual deliveries for 80 Max 10s this year alone, but those aircraft aren't even certified yet, and it's impossible to know when they will arrive." 

That's another blow to consumers hoping that multiple major carriers would grow capacity, putting pressure on fares. Until Boeing can get back on track, it's unlikely that competition between the large airlines will lead to lower fares.  

In fact, it's possible that consumer demand will grow more than airline capacity which could push prices higher.

Related: Veteran fund manager picks favorite stocks for 2024

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